Should-Read: Wing Thye Woo: China’s Growth Odyssey

Should-Read: Wing Thye Woo: China’s Growth Odyssey: “Former World Bank Chief Economist Justin Yifu Lin is sanguine…

…Lin is confident that policies to boost domestic demand – including “improvements in infrastructure, urbanization efforts, environmental management, and high-tech industries” – will prove sufficient to meet the government’s official growth targets…. When Japan’s per capita income was that far behind the US, in 1951, it then “grew at an average annual rate of 9.2% for the next 20 years.” Lin attributes this growth to developing countries’ “latecomer advantage”…. Nobel laureate economist Michael Spence and Fred Hu of Primavera Capital Group seem to agree. While they acknowledge that “the Chinese trade engine has lost much of its steam,” they attribute this to “weak foreign demand,” and conclude that “China’s transition to a more innovative, consumer-driven economy is well underway.” In Spence and Hu’s view, China’s economy “is experiencing a bumpy deceleration, not a meltdown”….

[But] Cornell University’s Kaushik Basu… predicts that “Trump is about to make a policy mistake.” His “neo-protectionist” brand of tariffs, combined with financial deregulation, will not hurt only the US, Basu argues, but also any country that runs “large trade surpluses vis-à-vis the United States” – namely, China….

China must confront serious domestic challenges as well…. “China’s problem is not that it is ‘in transition,’” Jin says. “It is that the state sector is choking the private sector.”… Zhang Jun… also believes that the state sector poses a major threat to China’s economy, and calls for “a far-reaching restructuring of large SOEs.” He outlines the positive knock-on effects of shutting down state-backed “zombie” firms and limiting SOEs’ role to just a few relevant economic sectors – a process former Premier Zhu Rongji started but did not finish two decades ago….

Any discussion of China’s economy must address the political choices it faces. For the New School’s Nina Khrushcheva, Chinese President Xi Jinping has initiated an era in which “collective leadership has given way to one-man rule, and the unwritten rules of behavior have been junked.” Taken together, Xi’s re-centralization of power, prosecution of potential rivals, crackdown on the domestic media, and efforts to reinforce the “Great Firewall” to block foreign websites amount to a major setback for China’s sociopolitical progress – and possibly for its economic progress, too….

Taken together, the five largest Latin American economies’ per capita GDP, adjusted for purchasing power parity, was around 30% of the US level in 1955, and that ratio remains the same today. While these countries’ absolute standard of living has improved, the size of their development gap vis-à-vis the US has not changed in more than 60 years. This failure to catch up is generally known as the “middle-income trap.” And, as Ernesto Talvi of the Brookings Institution points out, it is no coincidence that the past 40 years of Latin American history has been marked by cycles of political disruption. Similarly, growth slowdowns in Malaysia and Thailand over the past two decades have led to large-scale protests and episodes of political violence.
Moreover, the middle-income trap is the norm. The only large Asian economies that have managed to narrow their development gaps relative to the US are Japan, Taiwan, and South Korea, and China’s problems are too large and complex simply to assume that it shares its neighbors’ economic exceptionalism….

Taming China’s SOEs is necessary for restoring strong growth, as Project Syndicate commentators agree. This does not reflect a shared ideological bias, but rather the reality that SOEs constitute a growing burden on the economy. The largest SOEs should not necessarily be privatized, but private firms must be allowed to compete freely with them (with exceptions for certain sectors such as armaments), and hard-budget constraints and open trade must be maintained. China should also explore policies to expand domestic innovation…. China can still achieve sociopolitical harmony and position itself to become a developed, high-income country. In an age of mounting global uncertainty, owing in no small part to the US, China stands to benefit enormously – particularly in geopolitical terms – if it can emerge as a source of sustained economic dynamism.