November 19, 2012
ALWAYS TAKE THE HOBBITS OVER THE DRAGON:
Economist magazine bets professor over China's future (Laurence Knight, 11/11/12, BBC News)
"China has grown very rapidly in the last 30 years, but it has been following a model that is not unique," says Prof Pettis."In the 50s and 60s almost everyone 'knew' that the Soviet Union would overtake the US in the 70s - even Jack Kennedy - but it didn't happen. Instead, the Russian economy got mired in debt and years of stagnation."Other examples include the Brazilian economic "miracle" of the 1960s and 1970s, says Prof Pettis, that ended in a 1982 financial crisis and a "lost decade" of growth, or Japan's rapid ascent up until its own 1990 crisis and subsequent two-decade stagnation.What these countries have in common is an enormous level of government-led investment - in roads, trains, schools, hospitals, education and training."You can get tremendous growth by keeping investment levels high," he explains. "And in the early days, growth is healthy and sustainable."But later... you very easily reach a point where you can't identify economically viable projects any more, and you overshoot and start misallocating capital in a pretty significant way. That's when debt rises more quickly than the economy's capacity to service it."China has been overinvesting perhaps since the 1990s, according to Prof Pettis, and certainly in the last five to 10 years."A lot of growth is fake," he says. "If you spend $1bn building an airport, it generates the same amount of [economic output] today whether or not anyone actually uses the airport."If no-one uses it, however, the economic value created by the airport is not enough to repay the debt, and so future growth must decline as wealth is transferred from some other part of the economy to pay down the debt."He says that there are three main sources of growth for China. The first, investment, is already exhausted. The second, exports, are also no longer viable, as China's main export markets in Europe and the US are depressed, and China's trade surplus has become politically contentious in those countries.The third option is for ordinary Chinese people to increase their spending on consumer products and services.But here the numbers just don't stack up. Consumers account for just a third of spending in China - an unprecedentedly low share for any major economy - while investment accounts for a whopping half of the economy.
Posted by Orrin Judd at November 19, 2012 6:54 PM