Wolf: China Could Fail Like Japan
Martin Wolf writes in The Financial Times:
Until 1990, Japan was the most successful large economy in the world. Almost nobody predicted what would happen to it in the succeeding decades. Today, people are yet more in awe of the achievements of China. Is it conceivable that this colossus could learn that spectacular success is a precursor of surprising failure? The answer is: yes. Japan’s gross domestic product per head (at purchasing power parity) jumped from a fifth of US levels in 1950 to 90 per cent in 1990. But this spectacular convergence went into reverse: by 2010, Japan’s GDP per head had fallen to 76 per cent of US levels. China’s GDP per head jumped from 3 per cent of US levels in 1978, when Deng Xiaoping’s “reform and opening up” began, to a fifth of US levels today. Is this going to continue as spectacularly over the next few decades or could China, too, surprise on the downside?
Happily, China has close cultural and economic similarities with these east Asian successes. Unhappily, China shares with these economies a model of investment-led growth that is both a strength and a weakness. Moreover, China’s version of this model is extreme. For this reason, it is arguable that the model will cause difficulties even before it did in the arguably less distorted case of Japan.
It is easy to make the optimistic case. First, China has a proved record of success, with an average rate of economic growth of 10 per cent between 1979 and 2010. Second, China is a long way from the living standards of the high-income countries. Relative to the US, its GDP per head is where Japan’s was in 1950, before a quarter century of further rapid growth. If China matched Japan’s performance, its GDP per head would be 70 per cent of US levels by 2035 and its economy would be bigger than those of the US and European Union, combined.
Yet counter-arguments do exist. One is that China’s size is a disadvantage: in particular, it makes its rise far more dramatic for the demand for resources than anything that has gone before. Another is that the political effects of such a transformation might be disruptive for a country run by a Communist party. It is also possible, however, to advance purely economic arguments for the idea that growth might slow more abruptly than most assume.
Such arguments rest on two features of China’s situation. The first is that it is a middle-income country. Economists increasingly recognise a “middle-income trap”. Thus, sustaining rapid increases in productivity and managing huge structural shifts as the economy becomes more sophisticated is hard. Japan, South Korea, Taiwan, Hong Kong and Singapore are almost the only economies to have managed this feat over the past 60 years.
