In “How China broke the Asian model” (June 22), Gideon Rachman concludes that in our new geopolitical environment, Xi Jinping’s China needs to find a new development model if its rise is to continue uninterrupted. In framing this judgement, he is doubtless correct, but it leaves us hanging a bit: what might this new development model look like, and will Xi embrace it?
As Rachman explains, China has chosen a political path which means it cannot pursue a typically Asian development path. As a result, it faces a harsh external environment, perhaps as bad or worse than during the early decades of the People’s Republic.
Yet, China might still develop an alternative development model, following the example of Japan, South Korea, Singapore and Taiwan, for example. When these Asian tigers had China’s current level of income per head, they succeeded within a few years in shifting their own models away from heavy reliance on investment in favour of consumption and services. They were also able to enjoy a still rising working-age population, and the benefits of high and rising levels of educational attainment in the labour force. They went on, of course, to join the upper echelons of the OECD group of nations.
China is in a different place, and seems not to want to follow this path. Its working-age population will decline relentlessly for the foreseeable future. It has income per head similar to Malaysia and Russia, but consumption per head that is only slightly more than Iraq and a bit lower than Jamaica. Its consumption share of gross domestic product is absolutely low and barely more than it was in 2010, while investment still accounts for over 45 per cent of national income. The share of informal sector workers with low levels of skill in the economy, according to development economist Scott Rozelle, is at an all time high, while the level of educational attainment in the workforce is lower than typical middle-income nations. Educational, economic and social welfare reforms are needed urgently.
Yet Xi’s China retains a firm Leninist, supply-side, production-oriented grip on policy. A recent research paper published by the People’s Bank of China argued that China should not follow the example of other countries in promoting more consumption-oriented growth. The government certainly has virtually no policies designed to do so. If it doesn’t, though, and balks at enabling economic and social reforms, the misallocation of capital and bad debt problems associated with such high investment will act as additional deadweights on China’s growth potential.
The new model China should follow, urgently because of the external environment, isn’t actually new at all. The problem is that for China’s current leadership, it is a political bridge too far. Only one of China’s current politics and its economic trajectory is likely to continue uninterrupted.
George Magnus
Research Associate at Oxford University’s China Centre, and at SOAS, London NW3, UK
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June 23, 2021 at 07:22AM
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Letter: China must pivot to consumption-led growth or risk decline - Financial Times
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