China's Growth Slowdown is Utterly Unsurprising

Nobody is immune to economic slowdowns, and it was perhaps only a matter of China encountered such an episode. To paraphrase my erstwhile LSE IDEAS colleague Martin Jacques, when China rules the world may be set back a few years. Even the Associated Press via Yahoo! News has noticed that, gee, maybe the advice offered to China in recent times about transitioning to a sustainable form of growth not fuelled by mercantilist policy and presumptions of steadily expanding global economic growth was sound:

The cost of inaction could be high. The World Bank says without change, annual growth could sink to 5 percent by 2015 — dangerously low by Chinese standards. Some private sector analysts give even gloomier warnings. The government's own advisers say it needs to promote service industries and consumer spending, shifting away from reliance on exports and investment. That will require opening more industries to entrepreneurs and forcing cosseted state companies to compete. State banks would have to lend more to private business that is starved for credit.

An overemphasis on manufacturing and an underemphasis on services not only relies more on external demand but is also more damaging to the environment. In turn, export markets tend to get fed up running persistent deficits with China. Credit going mostly to traditionally favoured SOEs instead of entrepreneurs and SMEs is another thing to consider. Misallocation of credit on an epic scale, to be sure. If it sounds familiar, it's because these prescriptions have constantly been offered to the Chinese policymakers who thought that the old export-led model could continue forever, but no. They were drunk on success, but it's now time to sober up.

Actually, Dani Rodrik has long offered the wisdom that igniting economic growth is a separate task from sustaining it. And, of course, China's current model is visibly straining against the limits of ecological and economic unsustainability. But, here is Rodrik from 2004:

The second argument is that igniting economic growth and sustaining it are somewhat different enterprises. The former generally requires a limited range of (often unconventional) reforms that need not overly tax the institutional capacity of the economy. The latter challenge is in many ways harder, as it requires constructing a sound institutional underpinning to maintain productive dynamism and endow the economy with resilience to shocks over the longer term. Ignoring the distinction between these two tasks leaves reformers saddled with impossibly ambitious, undifferentiated, and impractical policy agendas.      

The institutions Rodrik speaks about generally concern property rights and rule of law--not necessarily always in evidence in the Wild, Wild East. More recently, Rodrik offered an opinion that there are "no more growth miracles" that revolves around similar ideas:

Manufacturing enables rapid catch-up because it is relatively easy to copy and implement foreign production technologies, even in poor countries that suffer from multiple disadvantages. Remarkably, my research shows that manufacturing industries tend to close the gap with the technology frontier at the rate of about 3% per year regardless of policies, institutions, or geography. Consequently, countries that are able to transform farmers into factory workers reap a huge growth bonus.

To be sure, some modern service activities are capable of productivity convergence as well. But most high-productivity services require a wide array of skills and institutional capabilities that developing economies accumulate only gradually. A poor country can easily compete with Sweden in a wide range of manufactures; but it takes many decades, if not centuries, to catch up with Sweden’s institutions.

Too dependent on demand from enervated Western economies in North America and Europe instead of from home, this outcome was actually rather predictable. I will soon offer more thoughts on this topic, especially China's inability to move up the value-added chain in terms of branding and marketing. I have covered this topic in some depth, and I do believe that it helps that my masters degree was in marketing, not political science! At any rate, more soon.