When discussing China's economic convergence with the rest of the world, where it will end up is a very important issue. It is a very difficult question; even China's different provinces are converging to different steady states. The parts of the country that still have bad institutions and infrastructure, mainly in inland China, are converging to a lower steady state than the outlying regions in special economic zones. Internal convergence is restricted by rules that discourage capital and labor mobility.
1. Economic Freedom vs. GDP per capita: While there are certain problems with using the economic freedom index for poor countries, it is considered by some to be a decent proxy for neoliberalism.
Looking at the G20, China’s PPP GDP per capita is pretty close to where it is expected. This is a somewhat biased sample since countries that are not significant economic players in the world financial system are not included in this sample. Including all of the countries would show that the index’s correlation to economic success is very noisy within the 50’s and 60’s. This is particularly true for China, where the methodology gives China a score that would penalize it for the poor economic institutions in its poorer regions without getting a boost for having areas with significantly better institutions.
2. IQ vs. GDP per capita: One measure of a country’s potential output level is the measured IQ of its current workforce. As previously mentioned, IQ’s correlation with variables other than intelligence makes it particularly significant for economic growth.
Source: IQ and Global Inequality, calculated IQ for 113 countries
A simple linear regression done on countries with IQ measurements and the natural log of GNI per capita suggests that if all other things were equal China would be converging towards a PPP GNI per capita of about 25,000 dollars (the number is closer to 18,000 if the regression includes 79 countries with IQ estimates).
3. China’s large advantage over other countries with similar economic freedom scores lies in its human capital. Human capital can also be measured by years of schooling or life expectancy, both of which China excels at relative to its current level of income. The textbook estimate of Barro and Sala-i-Martin is that the income gap between two countries with the same human capital endowment has traditionally narrowed by about 2 percent a year. Of course, this doesn’t show us where the steady state will be unless the answer is “at the same level as similar countries”, which suggests that the economically free parts of China are converging to an income level comparable to Korea’s.
While trying to track these different factors, keeping tabs on any reverse liberalization is important. To the extent China is copying Korea or Japan instead of the US China is still on a path where its eventual steady state is so much higher than its current value that it is insignificant, but downturns are politically volatile times and that will be where the biggest risk to China’s growth lies. If China starts replacing private businesses with SOEs, it won’t matter that they have good human capital.