China’s Growth Path

When your lowest growth in six quarters is 7.4%, few would worry much about a looming slowdown. But, China is an exceptional case:

Since slower growth is a necessary part of this program, the current slowdown could be read as a positive sign that the days of growth at any cost are over. The announcement last month that deposit rates will be liberalized over the next two years signals an end to financial repression, by which interest paid on savings was kept low to make borrowing cheaper. That suppressed consumption and led to the most lopsided economy the world has ever seen, with investment accounting for about 50% of GDP.

Then again, China isn’t all that exceptional. Other countries haveĀ come to this fork in the road.

One thing most everyone agrees on: China is in transition from a go-go phase driven by abundant capital and labor (think of the U.S. in the late 19th century) to a more mature development track in which growth depends on productivity gains. At this point other countries such as Brazil and Malaysia fell into the “middle-income trap” and stagnated, while South Korea and Taiwan powered through to become wealthy, although not without crises along the way.

My guess is this transition is going to look a lot more East Asian than South Asian or South American.

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