Politics
International Relations
Economics
Economic Development
China
Innovation
Infrastructure Investment
1/9
Xi Jinping said this week that China must address and resolve the problems of "unbalanced and inadequate development" over the next five years. Among other problems he cites "low quality growth" and "weak innovation".
reuters.com
Xi Jinping said this week that China must address and resolve the problems of "unbalanced and inadequate development" over the next five years. Among other problems he cites "low quality growth" and "weak innovation".
reuters.com
2/9
For me the key is this issue of "low quality" growth. In China, "high quality" growth generally means growth driven by consumption, exports and business investment, with business investment itself driven mainly by consumption and exports.
For me the key is this issue of "low quality" growth. In China, "high quality" growth generally means growth driven by consumption, exports and business investment, with business investment itself driven mainly by consumption and exports.
3/9
"Low quality" has come generally to mean growth driven by China's excessively high levels of investment in property and unnecessary infrastructure. They are necessary to China if it is to achieve its growth targets, but they are also the main source of China's surging debt.
"Low quality" has come generally to mean growth driven by China's excessively high levels of investment in property and unnecessary infrastructure. They are necessary to China if it is to achieve its growth targets, but they are also the main source of China's surging debt.
4/9
That's why rebalancing demand is so important for China. Because consumption is the most important of these "high quality" sources of demand, and is also the main driver of business investment, boosting "high quality" growth means above all boosting consumption.
That's why rebalancing demand is so important for China. Because consumption is the most important of these "high quality" sources of demand, and is also the main driver of business investment, boosting "high quality" growth means above all boosting consumption.
5/9
But the only sustainable way to raise the consumption share of GDP is to raise the share households retain of GDP, and that's where the difficulty lies, not just for China but for every country that has previously followed this growth model.
But the only sustainable way to raise the consumption share of GDP is to raise the share households retain of GDP, and that's where the difficulty lies, not just for China but for every country that has previously followed this growth model.
6/9
All "internationally competitive" countries – whether high wage countries like Germany, the Netherlands and Japan or lower wage ones like China or Vietnam – are manufacturing and export powerhouses precisely because their household shares of GDP are very low.
All "internationally competitive" countries – whether high wage countries like Germany, the Netherlands and Japan or lower wage ones like China or Vietnam – are manufacturing and export powerhouses precisely because their household shares of GDP are very low.
7/9
These low household shares of GDP work partly by lowering unit labor costs for manufacturers and partly as the obverse of the high shares of GDP plowed into logistics, infrastructure and direct and indirect subsidies for manufacturing.
These low household shares of GDP work partly by lowering unit labor costs for manufacturers and partly as the obverse of the high shares of GDP plowed into logistics, infrastructure and direct and indirect subsidies for manufacturing.
8/9
For China to raise the income share of GDP, in other words, would increase consumption and rebalance demand, but also by reducing the savings share of GDP it would force a reduction in the investment share even as it undermines China's export performance.
For China to raise the income share of GDP, in other words, would increase consumption and rebalance demand, but also by reducing the savings share of GDP it would force a reduction in the investment share even as it undermines China's export performance.
9/9
This, in my opinion, is the essence of the "middle income" trap. After many years of successful unbalanced growth reaches its limit, the economy must switch to a different growth model, but because of the short term costs of switching, very few economies are able to do it.
This, in my opinion, is the essence of the "middle income" trap. After many years of successful unbalanced growth reaches its limit, the economy must switch to a different growth model, but because of the short term costs of switching, very few economies are able to do it.
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