China's resilience is an economic gut check for America
Nobel Laureate Michael Spence talks about lessons from China, austerity vs. stimulus, long-term investment in a politically divided democracy, and prospects for economic growth.
Michael Spence is chairman of the independent Commission on Growth and Development associated with the World Bank. A professor emeritus at Stanford University, he was awarded the Nobel Prize for economics in 2001. He spoke with Global Viewpoint Network editor Nathan Gardels in Italy on Thursday.Skip to next paragraph
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Lessons from China's resilience
Nathan Gardels: In your report on “post-crisis growth,” you noted the “resilience” of China, which has bounced back to high growth after the Wall Street crash and is now officially the second-largest economy in the world.
What are the key factors of China’s resilience? Will China be able to keep bouncing back, or might the recessionary winds from across the Pacific cool things down?
China, in particular, is capable of sustained growth if it can properly manage structural change in several dimensions.
First, China is going through a “middle-income transition” in parts of the country as earlier “growth drivers” in the export sector, notably low-wage manufacturing along the coast, die off and must be replaced with other drivers such as services. The domestic consumer will have to become more important so there is a better match between the productive potential of the economy and domestic demand.
Second, China is going to have to get quite a bit more income into the hands of the household sector in order to drive growth from within the domestic market. That means getting away from the very high levels of investment in the corporate and public sector where the marginal return on investment is declining.
Disposable income as a percent of GDP is low, and the savings rate is high, around 40 percent of GDP.
Third, they have to get their current account surplus down in the global economy or they will get a bad reaction from outside, for example protectionism.
If they can get the surplus down, that will help the global economy, but it will also help build domestic demand and household income.
This is a complicated set of changes to navigate, but I believe the Chinese leadership is up to it. I’ve been able to listen in and participate in some of their internal discussions, and I think they are going in the right direction. Certainly there are interests that want to block these changes. But the same qualities that have enabled China’s resilience so far – a long-term horizon, decisive policymaking, and consistent follow-through by a generally competent government – bode well for the future.
Because of their long time horizon there is a high level of understanding by the leadership that the economy has to evolve. Looking out at where they want China to be in 10 or 20 years, they know that an advanced economy cannot be based, as China is today, on labor-intensive process manufacturing for export.
They have seen how South Korea has managed the middle-income transition. I’m sure they are intensively studying that experience.
The German miracle
Gardels: With a nearly 9 percent annualized growth rate, Germany has picked up as the bright spot, a saver and strong exporter among the indebted consumer democracies of the West.