It is sad to see a once-thriving city deserted. The heart-breaking sight of a handful of forlorn stragglers and struggling businesses remaining from what once was a bustling community makes us wonder, “why, why?” Only the most cold-hearted could be indifferent to the painful legacy of broken families, the receding memories of what once was, and hopelessness among the young. Take this city in China, for example. Oh wait…sorry….scratch that. The city in that video has never been inhabited in the first place. It was constructed by central planners to contain around one million people, but no one bothered to move there. The video contains eerie shots of a few solitary construction workers driving down the empty streets between never-occupied buildings.
This is an example of why I am a skeptic of the China growth story. A lot of the so-called GDP growth is spending by central planners that has no real economic value. The reporter says that “a country can raise its GDP by spending more”, which is almost a tautology, since GDP counts spending. But GDP growth does not necessarily mean real economic growth. Real growth can only be accomplished by expanding the capital base, and that requires economic calculation by entrepreneurs who are risking loss of their own capital. Just building a lot of physical stuff and counting the amount you spent is not the same thing.
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I too share this skepticism. We must remember that the Soviet Union also ‘enjoyed’ big GDP numbers, which were praised by the likes of Samuelson. The Keynesians gleefully predicted Soviet dominance by 2015. Spending and producing does not automatically equal a functioning economy or economic prosperity, and their price mechanisms can in no way be accruate. We have to assume, a priori, that there exists an unimaginable amount of malinvestments in China. So libertarians shouldn’t be so quick to praise China’s so-called ‘economic liberalism.’ But, at the same time, they do have an enormous amount of savings. I think China needs to be more closely examined.
Robert, you don’t understand Keynesian economic principles. First you dig a hole, then you fill it in. The value will be created when you bulldoze the empty buildings.
I am not an economist, so forgive this post if it is too simplistic. I don’t understand why we even have a stat called GDP. What possible good does it do if you are not measuring any sustainable, “real” economic growth or decline? What would we have if all government spending were removed? It, for me is another example of the fallacy of other stats such as CPI or the unemployment data, both of which can and apparently are manipulated.
Please help me out here.
Great article, Robert. This explains why GDP numbers, generated by government spending of borrowed money, are bogus, and do not indicate an economic recovery.
I agree with the skepticism. I’ve met several Chinese, and between their stories and the general history of China, it appears that the communist party one day decided to institute capitalism. My concern is, if they turned capitalist on a whim, what’s to stop the leaders from returning to communism just as quickly?
Do you know whether the central planners are going to provide state run medical services for the people not living in these houses? Does the value of the planned and budgeted but not delivered services count as economic activity? What about education provided to the children not attending schools in this town?
One reason why governments love GDP numbers is because GDP is best at measuring economic activity (not necessarily productive economic activity) and governments tax economic activity
Good news – China is awash in savings, and savings a priori represent future capital investment. Granted, China artificially restricts credit, but not much above what the country’s cultural time-preference would be. Thus, if normal market conditions were ever instituted in China
Bad news – they’re still commies. And commies don’t fundamentally believe in freedom, whether politically or economically. The first major crisis will bring a return of central planning on a large-scale, I’d wager. At that point, once the taxmen come to confiscate all that saved up wealth, either the Chinese gains over the last 30 years are wiped out or (much more likely, considering Chinese political history) the Chinese revolt, and possibly institute a more liberal (in the classical sense) order.
to les:
http://mises.org/daily/2878
reisman dissects gdp, and why it’s a misleading as a proxy for growth.
I would love to see China (or any country in the world) have a Misesian revolution.
But it’s tough when education is totalitarian, as it is in every country. Oh, I’m sorry, a “public good”.
GDP seems to be a good indicator for momentary prosperity, but it provides almost no information about how sustainable the economy is. If GDP is rising, while the capital base is stagnating or falling, a country is living beyond its means.
For bureaucrats calculating GDP is straightforward, whereas valuing the capital base is hard and subjective.
The chinese GDP is still low compared to industrial countries and their capital base certainly did increase, even when discounting malinvestments. If they stay course with savings and private investment, and maybe even liquidate a few malinvestments, there’s still room for more growth.
Sheesh, whatever happened to “if you build it, they will come”
Not to worry, the Chinese will be just march people into those houses at gunpoint, and then use a “white ticket rebate” as incentive
I’ve seen this before in China, empty highways, empty buildings…and then a couple years later, the whole place is filled and booming. Pudong was a ghost town in 2004, now its packed.
I don’t understand why we even have a stat called GDP.
GDP is the sum total of what can be taxed. So it’s very useful if that’s your goal.
If I push a broom GDP doesn’t change, if I hire someone to push it it does…
http://en.wikipedia.org/wiki/Ordos_City
Although wiki is not the best source to cite, it states a population of over 1 million for the so-called “empty city.” However it does have a citation (number 4) linking to the video which is also linked in this post to the Al Jazeera newscast. But the empty section is a part of the city.
I post this only to correct the appearance your post gives that Ordos is completely vacant. Robert, I agree with you but just want all the facts laid out.
Robert T: “it appears that the communist party one day decided to institute capitalism.”
If I remember correctly, they didn’t actually change on a whim. The Chinese were on the verge of mass starvation. The US had kept them alive with massive loans to buy our grains to feed their people. After Mao died, Deng decided to institute reform out of desperation. Surveys of the people show that Chinese have a much more favorable attitude toward free markets than do Americans.
If you compare the GDP of countries you will notice that the US is about 3 times that of second place Japan, but China is in third place. There are many who say don’t worry, because it will be a long time before the Chinese economy is as large as the US economy.
In 1980 China was the 11th largest economy with the US economy about 15 times that of China and China remained there until the 1990s. By 2000 China had climbed to number 6 with the US economy down to about 9 times the Chinese economy. In 2008 China had moved to third only behind Japan with the US economy now only about 3 times the Chinese economy almost the same as Japan. It is interesting to note that other economies have remained about the same relative to the US economy while the Chinese economy has shot up like a rocket.
If the Chinese economy continues to grow relative to the US as it has in the recent past, it will be as large as the US economy in less than 10 years. I would venture to say that with the current US government destroying growth that the Chinese economy will be as large as the US economy in five years.
What’s with all the skepticism surrounding the legitimacy of GDP?
If anyone has a better method of measuring Government Destruction of Production, I’d love to see it.
“If I push a broom GDP doesn’t change, if I hire someone to push it it does…”
If you push a broom, you lower the GDP because you could have been doing something productive like shopping.
Robert Peston reports from a Chinese city, built in just five years
It seems to me that China only continues along until the people finally decide they don’t want to keep working for 50 cents an hour, with the bulk of the money going to the government. As long as the Chinese government can keep exploiting these people like they are I guess they can keep going.
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