2/8
Low household income relative to productivity gave China the international "competitiveness" that allowed a very rapidly expanding export share, along with the high savings used to fund massive increases in much-needed infrastructure and manufacturing capacity.
Low household income relative to productivity gave China the international "competitiveness" that allowed a very rapidly expanding export share, along with the high savings used to fund massive increases in much-needed infrastructure and manufacturing capacity.
3/8
With the lowest household share of income in the world, this created a very powerful engine for Chinese growth. But this also created the trap. China can no longer continue relying on the highest trade surplus and investment share of GDP in history to generate growth.
With the lowest household share of income in the world, this created a very powerful engine for Chinese growth. But this also created the trap. China can no longer continue relying on the highest trade surplus and investment share of GDP in history to generate growth.
4/8
It must now raise the share of domestic demand – i.e. domestic consumption and the domestic business investment it spurs – to continue driving growth. As we've know for 15 years, this can only happen with a massive increase in the household share of GDP.
It must now raise the share of domestic demand – i.e. domestic consumption and the domestic business investment it spurs – to continue driving growth. As we've know for 15 years, this can only happen with a massive increase in the household share of GDP.
5/8
But this means either turning off the investment tap or (as Brazil did in the 1970s) switching from domestic funding to foreign borrowing to keep investment high, with all the associated dangers. It also means undermining the very important export and tradable goods sectors.
But this means either turning off the investment tap or (as Brazil did in the 1970s) switching from domestic funding to foreign borrowing to keep investment high, with all the associated dangers. It also means undermining the very important export and tradable goods sectors.
6/8
That's the trap. Continued growth requires a major rebalancing of income distribution, but a major rebalancing of income distribution would cause enormous pain during the first few years as the entire economy was forced into very difficult adjustment.
That's the trap. Continued growth requires a major rebalancing of income distribution, but a major rebalancing of income distribution would cause enormous pain during the first few years as the entire economy was forced into very difficult adjustment.
7/8
Consider Japan. It has been trying to raise the consumption share of GDP for 30 years, but every time the export sector is threatened, Tokyo quickly backs down. As a result Japan still suffers from weak consumption and weak business investment.
Consider Japan. It has been trying to raise the consumption share of GDP for 30 years, but every time the export sector is threatened, Tokyo quickly backs down. As a result Japan still suffers from weak consumption and weak business investment.
8/8
Will China bite the bullet and force through the necessary income adjustments no matter how painful they might be? We'll see, but 15 years of promising to rebalance has not worked.
Will China bite the bullet and force through the necessary income adjustments no matter how painful they might be? We'll see, but 15 years of promising to rebalance has not worked.
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