China’s Growth Prospects – Short Run vs. Medium Run
An unusually lengthy post – I really feel the need to express
a few thoughts on the China growth debate.
Nearly all export-oriented economies (Germany, Japan, China,
Taiwan, South Korea, Singapore) are currently experiencing sharp slowdowns as
the global economy stalls. Double-dip recession in the Eurozone is a key factor, and, if you
throw in the double-dip recession in the UK, you got essentially the entire EU
region facing economic distress. Growth in most emerging markets have also
moderated or slowed sharply and the US economy is experiencing sub-par growth
as well.
Some are, however, more concerned about a sharp structural
downshift in China’s economy (China is the single biggest contributor to recent
global growth). There are several reasons to be skeptical of the China bears:
A. The electricity usage slowdown and its supposed accuracy
in reflecting China’s broader economic performance is an increasingly tenuous
proposition. As China’s economy becomes more oriented towards efficient
value-added manufacturing and services, its electricity usage per renminbi of
GDP produced will decline. This process is already well underway. See for
instance:
B. China’s famously unbalanced economy is in fact becoming
more balanced. Note recent increases in labor wages and rapid rise in consumption
spending. It will take a little time for the share of consumption spending to
rise but it is inevitable. See:
C. Many observers of China note that it has an
extraordinarily high level of investment rate (recently in the 45-47% range) and
a high level of national saving rate. This leads some to claim that China
cannot maintain decent growth rates in the future because the high rates of
investment are excessive and dangerous. While it is true that China’s saving
rate and investment rate have recently reached extraordinary heights (and as
noted in B, it is likely to come down from such elevated levels), it is worth
keeping in mind that the country is still a relatively poor economy. China’s
capital stock per worker is still very low when compared to Japan or the US.
So, in Solow Model parlance, it is very far from its steady-state capital-labor
ratio. Hence, it can continue to grow at decent rates (6-7%) for a few more
decades. US and Japan, meanwhile, are closer to their steady state capital-labor
ratio (though there is probably still some ways to go – consider US
infrastructure deficit for instance) given their already high level of capital
stock per worker. Thus, just basic capital accumulation led growth is less
relevant for advanced economies like Japan and the US, but still matters for poor economies like China and India. See for instance:
D. On the question of data accuracy:
China has a long
way to go to establish solid and reliable data collection. However, it is worth keeping
in mind that, in many emerging economies, the informal sector is in fact huge
and that non-market activities are relatively far more significant than in the US. Hence, the stats are
more likely to be understating the extent of economic activity in emerging
markets than overstating it.