What is GDP in China? Thoughts on the slowdown from Michael Pettis

A fascinating piece from Michael Pettis, an economist I regularly reference, on how China is probably growing much more slowly than the official GDP figures make out, alongside a discussion of the nature and measurement of GDP itself.

This would confirm his long-held thesis that China’s ultra-high investment growth model has been unsustainable for some years, and will change of necessity, either through enlightened policy or, more painfully, in the absence of such a policy.

Trade tensions and rising protectionism are combining with the exhaustion of the recent economic upturn to slow growth in many countries.

The slowdown in China could lead to a ‘lost decade’ of relative economic stagnation there, until growth rebalances away from a significant share of unproductive investment and towards a higher share of consumption and a lower but more productive share of investment in overall demand.

Although the country is already economically powerful, its rise to global dominance could be much further away than many ‘China bulls’ have predicted. Even so, given its prominence in global manufacturing value chains, relative stagnation will have a large but uneven impact on global economic activity.

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Chinese development – the end of the miracle?

800px-Chinese_draakThe Economist magazine has an interesting article this week questioning the sustainability of the Chinese growth model and drawing some parallels between it and the Soviet Union in the post-war period.

During the last 40 years, the rapid development of China has been perhaps the most extraordinary example of economic transformation in human history, both in speed and scale. The economy grew by around ten percent per year for three decades. Growth has in recent years begun to slow, but is apparently still humming along at more than six percent, a decent clip by any standard. Hundreds of millions of its population have escaped from poverty and the new ‘workshop of the world’ has flooded the world with cheaper goods.

But cracks have begun to show, particularly since the financial crisis of a decade ago. The Chinese government’s response to a collapse of exports was to ramp up lending from state-owned banks and embark on a massive spending spree on infrastructure. Continue reading

Sun hats and development

I recently bought a new sun hat (stay with me). A label inside reads ‘made in China’. Replacing my previous hat was well overdue, as it was more than 20 years old. Out of curiosity and before getting rid of it, I checked inside and saw a label, which also read ‘made in China’. I must be something of a geek, as this got me thinking about the manufacture of clothing and development processes.

It is notable that China is manufacturing and exporting clothing such as this, just as it was twenty years ago. The hats are not dissimilar. Of course, the Chinese economy is the largest manufacturing nation in the world and exports a huge amount of goods of all kinds. But according to this experience, companies there are still involved in the manufacture of quite basic clothing. Continue reading

Industrial policy and Chinese development

The rapid growth and transformation of the Chinese economy since 1978, when policymakers began a programme of economic reforms, has been extraordinary. Up until the last few years, GDP growth averaged around 10% per year, lifting hundreds of millions out of poverty. This represents the largest episode of poverty reduction in human history. China, as the largest manufacturing nation, has become the ‘workshop of the world’.

With a population of 1.4 billion, and an economy relatively open to international trade, these changes have and will continue to have an enormous impact on the rest of the rest of the world. For this reason, we should take a great interest in China’s continuing evolution.

Donald Trump, both on the campaign trail and since becoming US President, has placed great emphasis on getting some sort of ‘better deal’ between the US and Chinese economies. His administration has criticised China for taking advantage of the US on trade and the use of technology. But should China’s rise be a worry in these respects? Or is the US being hypocritical? In fact today’s rich countries all intervened in the economy and used forms of trade, industrial and technology policy to promote their growth and enable periods of ‘catch up’ with those at the frontier. China has been no exception. Continue reading

High wages vs high savings as models of development

I refer to the work of Michael Pettis quite often on this blog. He strikes me as a highly original thinker, combining macroeconomics, finance, development, political economy and economic history in a way which provides a deep understanding of world economic events.

He recently posted here about what he sees as the two main models of economic development which nations have used to transform their economies at certain times in history: the high wages model, and the high savings model.

Models of development can be described as a set of policies and institutions which aim to develop the economy and achieve sustained rises in productivity and output via industrialisation and the advancement of technology.

For Pettis, both models aim to raise wages and productivity, but they are distinct from one another in how they drive the investment which makes this possible. Continue reading

Michael Pettis on China, the US, debt and trade tensions

Michael Pettis is a Professor of Finance at Peking University’s Guanghua School of Management, and an economist whose work I have found to be original, interesting and inspiring. His book The Great Rebalancing explores the role of current account imbalances in the Great Recession and its aftermath of slow growth. I explore some of his ideas in more detail here.

Particularly relevant to today’s events is his prediction that, just as in the 1930s, in a world of limited demand, tensions over international trade are inevitable.

In the short video below, he explores some of the issues facing China’s economy over the next decade, its misallocated investment and unsustainable rise in debt, relations with the US including trade tensions, GDP and its measurement, and liberalization under different economic and financial circumstances.

Inequality, global imbalances and crisis

Tracing a connection between rising inequality and the Great Recession of 2008 is appealing to leftist economists. It suggests that what they see as two of the potential downsides of capitalism and in particular the neoliberal economic order can perhaps be mitigated via appropriate policies. Thus, a more egalitarian capitalism can become less prone to crisis or recession.

Of course, what is appealing as social and economic outcomes is not a good enough reason to investigate linkages between them, though I suspect that I am far from the only one who is drawn to particular ideas as a matter of bias.

Perhaps there is nothing wrong with that as a starting point, followed by economic analysis of the chosen object of study.

An article in the latest issue of the heterodox Cambridge Journal of Economics explores the potential linkages between the distribution of income and current account imbalances in a simplified model of the global economy consisting of the US, Germany and China, prior to the 2008 recession.

These three countries had the largest current account imbalances in absolute terms in the run-up to the recession. The US ran a deficit, and Germany and China were running surpluses. Since these imbalances have been pinpointed by some economists as a cause of the recession itself, analysing them is important. Continue reading