Slower growth con­sis­tent with post-in­dus­trial era

The Pak Banker - - OPINION - Dan Steinbock

AF­TER in­ten­sive in­dus­tri­al­iza­tion, growth de­cel­er­a­tion is nat­u­ral. No na­tion has en­joyed sus­tained dou­ble-digit growth af­ter in­dus­tri­al­iza­tion. The real test of re­silience is the con­tin­ued in­crease of Chi­nese liv­ing stan­dards. In 2015, China's econ­omy grew by 6.9 per­cent. In­ter­na­tion­ally, the per­for­mance was por­trayed as the "slow­est in 25 years." Some ar­gued that the slow­down re­flected the eclipse of do­mes­tic de­mand. Oth­ers claimed it her­alded China's "hard land­ing." And yet, the per­for­mance was within range of the govern­ment's of­fi­cial tar­get of "about 7 per­cent."

What the de­cel­er­a­tion sig­nals is not China's demise, but the eclipse of Chi­nese in­dus­tri­al­iza­tion. De­cel­er­a­tion is nor­mal In the past, China en­joyed "dou­ble-digit growth." To­day China's growth is slow­ing rel­a­tive to its past per­for­mance. His­tor­i­cally, that is the norm, not the ex­cep­tion. Dur­ing in­ten­sive in­dus­tri­al­iza­tion, most ad­vanced economies have en­joyed rel­a­tively high growth. With the tran­si­tion to postin­dus­trial ser­vices, their growth has de­cel­er­ated.

When the In­dus­trial Rev­o­lu­tion peaked in Eng­land in the early 19th cen­tury, the coun­try ex­pe­ri­enced a "growth mir­a­cle." At the turn of the 20th cen­tury, US growth ac­cel­er­ated dra­mat­i­cally. Af­ter World War II, Western Euro­pean economies had their growth mir­a­cles. A decade or two later, Ja­pan fol­lowed in the foot­prints. As th­ese coun­tries com­pleted their in­dus­tri­al­iza­tion and be­gan to move to­ward a post-in­dus­trial so­ci­ety, growth ac­cel­er­a­tion gave way to de­cel­er­a­tion.

What makes China dif­fer­ent is its mas­sive scale and the pur­pose­ful ef­fort to shift from eco­nomic growth to ris­ing liv­ing stan­dards. As China is "re­bal­anc­ing," the econ­omy is shift­ing from growth based on in­vest­ment and net ex­ports, which is not sus­tain­able, to growth fu­eled by con­sump­tion and in­no­va­tion, which is more re­silient. In the past, prop­erty mar­kets drove the Chi­nese econ­omy. How­ever, last year real es­tate growth con­tin­ued to de­crease from al­most 16 per­cent to 10 per­cent. The same goes for fixed-as­sets in­vest­ment. More­over, last De­cem­ber China's ex­ports fell 1.4 per­cent on a quar­terly ba­sis, and im­ports slid 7.7 per­cent. In­stead, ser­vices grew by al­most 11 per­cent, faster than the in­dus­trial sec­tor. Con­cur­rently, retail sales of con­sumer goods - the key in­di­ca­tor of con­sump­tion - climbed over 11 per­cent on an an­nual ba­sis. The ser­vices sec­tor now ac­counts for over 50 per­cent of the Chi­nese econ­omy. In 2015, Chi­nese con­sump­tion, which ac­counted for less than 40 per­cent of the GDP only half a decade ago, con­trib­uted nearly 60 per­cent to GDP.

The con­tem­po­rary Chi­nese econ­omy is a dual story about the demise of in­dus­tri­al­iza­tion and the rise of the post-in­dus­trial so­ci­ety. As in­no­va­tion and con­sump­tion al­ready fu­els the first-tier mega cities, in­vest­ment-fu­eled ex­pan­sion is still needed for rapid growth in lower-tiered cities. Fur­ther­more, Chi­nese de­cel­er­a­tion must also be seen in the con­text of the in­ter­na­tional en­vi­ron­ment, which is char­ac­ter­ized by di­min­ished growth prospects. Stag­na­tion in the West When Deng Xiaoping launched eco­nomic re­forms and open­ing-up poli­cies in China, he re­lied on the ad­vanced economies' abil­ity to in­vest in for­eign mar­kets and ab­sorb cheap ex­ports. For three decades, this in­ter­na­tional en­vi­ron­ment fu­eled China's in­vest­ment and ex­port-led ex­pan­sion, sup­port­ing dou­ble-digit growth through in­dus­tri­al­iza­tion.

World trade and in­vest­ment ac­cel­er­ated. In­ter­na­tional de­mand soared. Oil and com­mod­ity prices climbed sky high. Af­ter the global cri­sis of 2009-9 and sub­se­quent re­cov­ery poli­cies and stim­u­lus pack­ages, that old nor­mal is his­tory. World trade has plunged. De­mand has weak­ened. Oil and com­modi­ties have col­lapsed. In the ad­vanced West, growth is now pos­si­ble only on the back of record­low in­ter­est rates or steady in­jec­tions of quan­ti­ta­tive eas­ing, or both.

In the emerg­ing economies, the cri­sis years trans­lated to "hot money" (short-term port­fo­lio) in­flows, which con­trib­uted to as­set bub­bles, im­ported in­fla­tion and cur­rency ap­pre­ci­a­tion. In China, the com­bi­na­tion of do­mes­tic stim­u­lus and for­eign hot money in­flows led to over­heated prop­erty mar­kets, huge lo­cal debts and over­ca­pac­ity. In China, the govern­ment's growth tar­get of 6.5 per­cent for 2016 is am­bi­tious but fea­si­ble. As­sum­ing there will be a peace­ful in­ter­na­tional en­vi­ron­ment and grad­ual do­mes­tic re­forms, it is likely to fur­ther de­cel­er­ate to about 5 per­cent by 2020. In­ter­na­tion­ally, that should be seen as a suc­cess. In the next decade, US an­nual growth is un­likely to ex­ceed 2.5 per­cent (if a debt cri­sis is avoided), eu­ro­zone ex­pan­sion will re­main less than 1.5 per­cent (if the re­gion doesn't dis­in­te­grate) and Ja­panese growth will strug­gle at 0.8-1 per­cent (as debt climbs to 300 per­cent of GDP).

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