Must-read: Cardiff Garcia: “China and Traditional Industrialisation-Led Development: The World Was Not Enough”

Cardiff Garcia: China and Traditional Industrialisation-Led Development: The World Was Not Enough: “[My] reaction was to be startled by [Justin Yifu Lin’s] comparison of China’s current position…

…to that of Japan in 1951 and South Korea in 1977…. Japan and Korea started rebalancing and liberalising their economies much later in the process than China did. Distortions… continued to linger for a long time after the rebalancing… the eventual opening is also challenging both in terms of timing and execution…. Japan and Korea are nonetheless held up as success stories of fast catchup growth in living standards. The best account… is Joe Studwell’s How Asia Works — check out Diane Coyle’s summary. Why were Japan and Korea able to pursue this model until per capita living standards were closer to those of rich countries, while China is undergoing this wrenching process so much sooner?…

A note by Credit Suisse economists offers a convincing explanation….

[A]fter growing at a steady pace of around 11% over the decade up until 2001, the pace of real Chinese export growth more than doubled in the period up to the Great Recession…. The problem with an increase in market share is that the adjustment is likely to be a one-off…. For China, this ‘adjustment’ back to a more normal growth model has been made much more difficult by external events and by the sheer size of the Chinese economy…. Despite GDP per capita only increasing to a still-modest 25% of that seen in the US, China now accounts for fully a third of global industrial production (up from only 5% as recently as the 1990s)….When you are that big, it becomes increasingly difficult to grow exports and production at a pace materially faster than growth in final global demand….

Finally… the Great Recession was a tremendous setback to the ultimate objective of more balanced growth…. The main policy mechanism for fighting the slowdown in 2008 and 2009 was a massive increase in investment, which we now know occurred at just the time that the export-driven growth model was breaking down….

The issue is complicated…. Automation… raises the prospect that premature de-industrialisation will be forced on countries who try this strategy anew…. Demographic changes surely also matter…. Still, what I take from the note is that China was just too big (or the world ex-China too small, if you prefer) for the model to ever work as well as it did in Japan and Korea…. That’s not to suggest that China was either right or wrong to follow this particular approach to catchup growth. Given this development strategy’s record in the case of Japan and Korea, maybe it made sense to try. Who can say what a counterfactual approach would have yielded?…

January 24, 2016


Brad DeLong
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