In China, Cultivating the Urge to Splurge

[ProSense]

In China, Cultivating the Urge to Splurge

By DAVID LEONHARDT

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The rise of China can often seem inevitable. It is the world’s most populous country, now reclaiming its long-lost power. Its economy recently passed Japan’s as the second-biggest in the world, leaving economists to debate whether China was on pace to overtake the United States by the year 2025 or 2030. Yet China’s rise has been anything but inevitable. Consider other poor countries — in South America, Africa and even Asia — with vast pools of cheap labor, which nonetheless have not been able to grow rapidly. Or consider other once-socialist countries, mostly in Eastern Europe, still suffering from a post-Soviet hangover. Even look at India, which is often paired with China as the great growth story of modern times. As recently as 1990, India had a comparable per-capita income to China. Today, China’s is more than twice as high. So having a lot of cheap labor or moving toward a market system, or even both, does not guarantee the phenomenal growth China has experienced.

That growth — among the most rapid in human history — has been a result of strategy and good fortune. The Maoist period was brutal and repressive, but despite the terrible famines and the Cultural Revolution’s assault on education, China did emerge with an unusually literate and healthy population for a poor country. Toward the end of that period, even before the one-child policy, a baby boom ended, creating a relatively small group of children and elderly to be supported by a large group of able workers. Into this fertile economic ground, Deng Xiaoping and his fellow reformers planted the seeds of a market evolution. Workers gained an incentive to succeed, while central planners, unconstrained by democracy, made the investments to turn China into the world’s factory.

This model is part of something that has been called the Beijing Consensus, and it is understandably appealing to other poor countries. Yet in many respects it is not new. Politics aside, China’s story is the classic one of economic development: investments in physical capital and education make a society more productive and are combined with a huge shift of people from farms to factories. England, Germany, the United States, Japan and South Korea have all followed the model over the last 250 years. The economist Gregory Clark, author of “A Farewell to Alms,” calls it the only story of economic development.

And this same story explains why China’s continued rise is no more inevitable than its recent rise. From far away, China may look like an unstoppable colossus. From the inside, it looks more vulnerable. Indeed, Chinese economists, business executives and Communist Party officials are debating, sometimes passionately, just how vulnerable it is. “In the short and medium term, there should be no problem,” says Yu Yongding, a prominent economist. Among other things, the government has built up enough savings to spend its way out of most problems over the next several years. “But there are fundamental contradictions in the Chinese economy. We can waste our strengths in one or two decades. If we exhaust these strengths, then we’ll be in a big trouble.”

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Very long, but fascinating article.