Posted by: mulrickillion | December 5, 2011

China’s economic growth model – A recipe for growing too fast?

By M. Ulric Killion


While China’s economic growth since 1990 is astonishing, China has a long way to go before it can beat or overtake the US economy. Despite the strong growth the Chinese economy still is relatively small compared to the US economy. So in that sense it may be premature to call China as the rising superpower. Emerging markets in Asia, Africa, etc. may not be able to consume as much of the Chinese goods as the US did simply because consumers in those markets do not have the purchasing power as Americans do. Chinese Exports: Can Emerging Markets Replace the U.S. Consumer?, Seeking Alpha, November 13, 2009; Photo / Source: Der Spiegel.

There is a recent (December 2, 2011) posting of an interesting article by Adam Ozimek, which is titled, “If there is a recipe for growing too fast forever, I have yet to see it”, at the Modeled Behavior blog. The article engendered a lively discussion on the Internet, and the comments also provide for interesting reading.

The focus of the article was on the sustainability of China’s burgeoning economic growth. For instance, an excerpt from the article reads,

Karl  [Smith] defends Andy Stern on China by making a claim about economic growth that on the one hand I think is partly true, but I think he overstates the case. His argument is that it is possible for economies to grow too fast in some sense, because economic growth is not the same thing as welfare. You can take too much from current generations in the name of stimulating economic growth.  Karl has made this point in the past more explicitly, pointing to China’s 40% savings rate outside the bounds of plausible optimal savings rate. This much I agree with, or at least I agree that it is possible and worth considering (I don’t know what the bounds of optimal savings are for China, or if they’re actually outside it). The problem is to use this to defend the notion that China can go too fast forever and use their current strategy to one day surpass us in per capita GDP.

As earlier stated the comments are also equally interesting because some of the comments even link the sustainability of Chinese economic growth with democracy. For example, according to one comment, “being a rich country requires democracy.”

For these reasons, both the article and comments are a compelling read; they also present several issues about the future sustainability of China’s economic growth.

First, the discussions challenge a seeming truism, if not tacit assumption, that China will overtake the U.S. economy in the new millennium. Quoting from an earlier article,

In the early 1990s, the World Bank predicted that in the early days of the new millennium, China would overtake the US as the largest economy in the world. In November 2006, as reported in the Wall Street Journal, former World Bank Chief James Wolfensohn warned Western countries of an economic future and altered balance of power dominated by China and India. Based on projections by investment bank Goldman Sachs, Wolfensohn predicted that within 25 years the combined GDP of China and India would exceed that of the G7 nations. China, by 2030 to 2040, would become the world’s largest economy. By 2050, “China’s current $2 tn GDP is set to balloon to $48.6 tn, while that of India, whose economy weighs in at under a trillion dollars, would hit $27 tn.” He also highlighted the recent and substantial investments of both China and India in Africa, as examples of how these two emerging giants are exercising their increasing global influence (M. Ulric Killion, “Regional Economic Integration: The Chinese Way,” The Analyst-Finance Magazine: Global Economy Special Issue, August 2008).

Second, the article and comments seem to ignore the reality that there are pristine models of neither capitalism nor socialism. All of which, in the real world, presents questions of how socialist “we” are, how capitalist “they” are, and vice versa. In this respect, there is also a problematic denial of the genuine possibility of what hails as a Beijing model, Beijing consensus, and even arguably the potential for China and its economic growth model actually presenting a possible evolution in the capitalist model (M. Ulric Killion, Post-global financial crisis: The measure of the “Beijing consensus” as a variety of capitalisms, MPRA Paper No. 26382, November 2010, discussing the varieties of capitalism theory in the context of the Chinese economy). In other words, China presents itself as a socialist-political polity pursuing capitalist-economic policies.

Third, the article and comments also arguably fail to recognize that China’s economic growth model, though many Western experts will disagree, stems from an inherent inevitability rather than choice in how best to modernize. This is because, “The initial choice of an open export-oriented strategy as the breakthrough point for reform had an inherent inevitability,” rather than being a blind imitation of other East Asian economies, and presumably other non-Asian economies (C. Pei and L. Peng, “Reform and opening up in the area of circulation: a retrospect,” Zhongguo Shehui Kexue [Soc. Sci. China], Vol. XXX, No. 1 (February 2009), 36-53).

Notwithstanding their detailed presentation regarding this inherent inevitability, Pei and Pang generally characterized both exported-oriented production and international capital investment as critical choices of China’s open strategy. Although China’s factor endowment advantage of labor (i.e., lower wages than neighboring economies) provided an incentive for international investors, the arrangements made in the course of trade system restructuring came to coincide with the investment strategies of international capital; thus, eventually presenting for China the historical opportunity of international capital’s industrial transformation (Pei and Pang, 2009).

Fourth and finally, there is the debt crisis of developed countries, which, as empirical studies suggest, will impact on the gross domestic product (GDP) of these countries. This also challenges the notion of what the article characterizes as China’s “catch up growth.” As Davide Furceri and Aleksandra Zdzienicka recently concluded, “Debt crises produce significant and long-lasting output losses, reducing output by about 10 percent after eight years. The results also suggest that debt crises tend to be more detrimental than banking and currency crises” (Davide Furceri and Aleksandra Zdzienicka, “How Costly Are Debt Crises?”, IMF Working Paper, No. 11/280, December 1, 2011).

For all of these reasons, in the end, one suspects that China will sustain its economic growth, while developed countries continue to struggle with debt crises and the aftermath of debt crises.

Copyright © Protected – All Rights Reserved M. Ulric Killion, 2011.

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