This is a long overdue post, promised as a thankyou to my old friend Martin Ellison who managed the transfer of the blog from the old, slow and unreliable shared server to the new accelerated server a few months back. Anyone who has noticed the difference is welcome to add their thanks in comments.
As a return in kind, I promised a post on any selected topic within reason, and Martin asked about the Chinese economy, a subject on which I’ve regularly promised myself I will get up to date. So, here goes.
To start with some numbers, according to the not very reliable official statistics the Chinese economy (really, the market part of the economy, excluding lots of near-subsistence agriculture) has been growing at around 10 per cent per year. That corresponds, very roughly, to input growth of 6 per cent (a weighted average of a market labour force growing at maybe 3 per cent a year and a capital stock growing at 10 per cent or more thanks to incredibly high savings) and total factor productivity growth of 4 per cent).
If you accept these numbers, then, just to absorb the growth in the labour force, with no further capital deepening, the economy needs to grow at 7 per cent a year. This rate is slowing as the easy opportunities for productivity growth are exhausted and as the supply of reasonably employable entrants to the market diminishes. But it’s not going to drop fast.
The problem is that, with exports falling off a cliff, it’s going to be very hard to maintain growth unless Chinese households suddenly stop saving and start consuming. No doubt this will happen in the end, but the process will certainly be painful.
The likelihood of a severe economic slowdown will pose big problems for the political system. In a Western democracy, the immediate reaction to a severe economic shock is typically to throw out the incumbent government. Even if the other side does no better, the easy availability of an alternative government reduces pressure for revolutionary change. There’s no obvious analog in the Chinese context. Perhaps some minister or group of ministers can be made to take the fall, but it’s unclear that anything that would be perceived as a change of government is feasible.
Turning to the substance of policy, it’s obvious that the existing system has produced big changes in policy, but much less clear (to me) how these are brought about. In the present crisis, for example, the government might seek to accelerate the winding down of state enterprises to save money, or alternatively might reverse this process to save jobs. I don’t know the advocates of the alternative strategies resolve their differences in cases like this. Perhaps others could comment.