As the rhetoric around trade continues to deteriorate and the incidence of name calling rises, it is getting harder and harder to discuss global trade and monetary conditions dispassionately and objectively. This should not come as a surprise, and is something I have been “predicting” for several years as part of the standard package of events that mark the end of a major liquidity cycle, but it is nonetheless frustrating.
The name calling at times gets pretty silly. For example I have been criticized by trade nationalists as being a hopelessly naive free-trading fundamentalist for saying that over the medium term US trade deficits don’t worry me as much as they do many others. What I had found unsustainable in the past decade was not the fact of the deficits, but rather the way they were financed — by binge borrowing for household consumption. Although I strongly support free trade I am not a fundamentalist, whatever that means. On trade issues (and on many others) I am a staunch follower of Alexander Hamilton. I think free trade is almost always good for highly productive, technologically advanced countries like the US, but if trade policies are used wisely (which they almost never are) they can also alter unfavorable structures of comparative advantage for countries with low levels of productivity, like China.
However, at the same time that I am attacked for being a panda-hugging free-trade fundamentalist I am also regularly accused of being anti-trade or, even worse, anti-China, when I argue that Chinese policies aimed at promoting “competitivity” will, if they exacerbate global overcapacity, almost certainly lead to trade friction, and that both theory and historical evidence suggest that in a world of collapsing demand, trade friction is especially difficult for trade-surplus countries like China. These “anti-trade” and “anti-China” accusations I find especially idiotic: Examining and citing historical precedents to understand how trade frictions are likely to arise is certainly not the same thing as calling for trade war. On the contrary, it is an attempt precisely to reduce the likelihood of trade friction.
The debate over the underlying causes of the global monetary imbalance is often even more muddled. This almost always quickly degenerates into a profoundly silly argument over whether the current crisis is all China’s fault or all the fault of the US. In fact it has become fiendishly difficult to make what should be a very obvious point: that every major participant in the massive and wholly unprecedented distortions in the global balance of payments that characterized the past decade are necessarily implicated in the resulting imbalances, and any policy-making aimed at minimizing the cost of the adjustments are doomed to fail if the role of each major participant and the implications of its role are not understood.
Are both China and the US both responsible for the policies that exacerbated the monetary imbalances of the past decade? Of course they are (and many other countries too). After all the two participants in this system have between them run up the largest trade deficits in history, the largest trade surpluses in history, the largest accumulation of reserves in history, and in so doing stumbled into the first sustained period in history of massive (truly massive) capital flows from poor countries to rich countries. All of these things, and the numbers are huge even by global standards, must have mattered in some way, right? To say that China was merely the victim of US machinations must be as idiotic as saying that the US was merely the victim of Chinese machinations. Both countries locked themselves, for good or bad reasons, into monetary policies in which each reinforced the other’s imbalance and which together were at the heart of the mechanism that created the explosion in global liquidity. It was this excess liquidity that was at the root of the subsequent global asset and credit bubbles.
In the US there is very occasionally a real debate on monetary policies that doesn’t automatically degenerate into your-fault-my-fault. See for example a very interesting discussion on Econobrowser, in which the moderator largely disagrees with the claim that the Asian savings glut is the prime mover, but acknowledges the role of Chinese and Japanese (and OPEC) savings in the imbalances, and hosts a real debate. In China unfortunately except at the left- and right-wing academic fringes there is very little real debate as far as I can see on China’s role in the imbalances, although I can say that the Guanghua Students Monetary Policy Committee (a sort of PBoC shadow committee run by a dozen brilliant grad and undergrad students at Peking University) is ferociously debating the issue openly and intelligently.
Probably the main reason the discussion so easily takes this your-fault-my-fault turn is that most analysts and commentators seem to have only the vaguest grasp of balance of payments mechanisms and the role of central banks within that mechanism. In trying to understand why, I saw a very helpful recent blog entry by Paul Krugman in which he worries about the widespread argument that the identity between savings and investment indicates that fiscal expansion is useless. He says:
What’s so mind-boggling about this is that it commits one of the most basic fallacies in economics — interpreting an accounting identity as a behavioral relationship. Yes, savings have to equal investment, but that’s not something that mystically takes place, it’s because any discrepancy between desired savings and desired investment causes something to happen that brings the two in line
I think something similar is happening in analyses of the balance of payments, in which the requirement that accounts balance is seen as implying a crude causality — the direction of which depends on your geopolitical predisposition — where none need exist. At any rate discussions about China and the US are destined forever to get mired in crude political grandstanding.
Anyway, enough whining. I should be honored that people take my musings seriously enough to accuse me of evil intent. On a very separate note I have been enjoying the amazing weather in southern Spain where I’ve spent most of the past three days sunbathing and reading Antony Beevor’s excellent (and profoundly depressing) book on the Spanish Civil War, so I haven’t been following global events too closely, and the pleasant daze in which I live when I am home in Spain should explain, I hope, the scarcity and thinness of recent blog entries. I was nonetheless awakened from my stupor by a report from Credit Suisse that projects an increase in January bank lending in China of RMB 1.3 trillion.This is a huge number — about one-quarter of last year’s total increase. According to Credit Suisse’s Dong Tao:
We observe that most of the expected lending is earmarked for infrastructure projects. Infrastructure lending is “politically correct”, backed by collateral, and should have steady cash flows. Lending to the industrial sector and export sector should see minor improvements, however, and banks remain cautious on the economic outlook. Large property developers should get some lending as well, but smaller and “weak” ones are still barred from receiving credit. The private sector seems to be experiencing greater trouble obtaining loans than the public sector and state-owned enterprises.
Dong Tao then goes on to make the point that worries me:
We are concerned about the quality of bank lending but the move to increased lending would be positive news for China’s GDP and global demand. We do wonder how banks conducted their due diligence to allow them to lend one-forth of last year’s lending within three weeks. The potential consequence to the health of the banking sector remains to be seen. Nevertheless, with this massive credit expansion, our upbeat 2009 growth forecast of 8% is more likely to be met.
China has to make an adjustment from an economy overly dependent on exports to one more focused on domestic consumption. This adjustment was never going to be easy and there will definitely be a significant cost. Every other country in history that I can think of that successfully made the adjustment only did so with great difficulty, in the throes of crisis, and over decades. My worry, which I started discussing a few months ago, is that in their desperation to reduce the combined cost of the transition and the global slowdown — instead of forcing the transition during good times they waited until they were forced into it during a crisis — policymakers are going to throw everything they have against the resulting slowdown, including out-of-control bank expansion. While this may reduce the extent of the slowdown this year, as Dong Tao points out, it does so at the risk of creating much deeper instability in the banking system.
If the global crisis lasts only a year, this all-but-the-kitchen-sink strategy will probably have turned out to be a good one, but if, as I suspect, the crisis is going to last two or three years or more, weakening the banking system so early in the process may create much greater risks for China in the future. Piling up loans in such an undisciplined way and having the banks bear most of the heavy lifting in the fiscal expansion plans is good only if it does not result in a sharp rise in non-performing loans. That, most of us would agree, and Victor Shih has been especially worried about this possibility, is unlikely. If it does result in surging NPLs, however, in the near future policymakers will be seriously constrained in their ability to fund more expansion and may even find themselves caught up in a monetary contraction as bank portfolios go bad. The monetary side of policy making in China continues to be, in my opinion, the most difficult and uncertain part of the process, and I think it pays to be cautious.
I know, I know, it sounds like I am warning that China’s growth will be much lower than expected (I still think well below 7% for 2009), which is a bad thing, but if I am wrong, and growth is higher, that is an even worse thing. That sounds a little mean spirited, doesn’t it, and possibly inconsistent?
Maybe, but not necessarily. I have been arguing for three years that an adjustment in China is very necessary and that this adjustment does not involve choosing policies that lead either to good or bad outcomes but rather that lead to bad or worse outcomes. In other words Chinese overcapacity was based on excess investment and massive capital misallocation. There will be a significant cost to reorienting capital and resolving the earlier misallocation. This necessarily entails a slowing of the economy — reallocation of capital typically takes place disruptively and via bankruptcies.
If adjustment policies had been put into place during periods when the global economy was booming — always easier said then done, politically — the adjustment would have been more easily absorbed, but clearly that is no longer an option. There is however still a chance to postpone the adjustment by accelerating the misallocation process, but this only postpones the adjustment and, of course, increases its magnitude. This strategy may be politically necessary but ultimately represents a gamble on the duration of the global slowdown. If the duration is short and the slowdown light, it will have been a winning gamble, and once the world takes off again China can get serious about resolving the internal imbalances.
Of course if the global slowdown is long and deep, the gamble will have failed. That means, dear readers, that if Chinese GDP growth in 2009 is higher than I projected — say 8% – I will not whip out the party hats and favors. Instead I will immediately begin whining about the state of the banking system. Perhaps that indicates intellectual rigidity on my part, but I have been working with and studying developing economies long enough to know that problems that we identify may take longer to emerge than we expected, and often emerge differently from what we projected, but they almost always do emerge in the end.
By the way recent growth numbers from Japan suggest just why we shouldn’t expect the global crisis to be a one-year problem. Fourth quarter Japanese GDP numbers will be released later in February and will show a double-digit decline in GDP and, according to CNBC, that “Japanese industrial production fell a record 9.6 percent in December, while core annual inflation almost evaporated, reinforcing expectations of a record economic contraction as the global financial crisis worsens.” If true, these are staggering numbers. It is hard to imagine a contraction of this magnitude not having ugly implications for the rest of Asia and the world. If it were only Japan, that would be bad enough, but I don’t need to tell anyone who reads newspapers that other large economies aren’t following radically different paths.
Finally, I see that Wen Jiabao and Angel Merkel had a good meeting yesterday. Following their meeting China and Germany have vowed to make joint efforts to stabilize the global economy amid the ongoing financial and economic crisis. As the two leading trade surplus countries I think both of them are going to be subject to the same kinds of very sharp criticism from their trading partners concerning their failures to boost domestic demand and their undermining of fiscal expansion in trade deficit countries. According to Sina.com , “the two sides agreed to strengthen dialogue on economic and trade, currency and fiscal policies and pledged to support each other on their economic stimulus plans based on their own situations…The two sides also stressed the importance of curbing trade protectionism, saying they will oppose trade and investment protectionism in whatever forms. “
I am sure they will. Unfortunately nearly all the trade-protection cards are in the hands of the trade deficit countries.
Michael, your last comment “I am sure they will. Unfortunately nearly all the trade-protection cards are in the hands of the trade deficit countries.”, echo’s a recent comment I made in Brad Setser’s blog;
In the end the power lies in where the consumer, in this case the American consumer, spends his/her money. That is a decision that the US can and may influence more than China.
I suspect the wealth accumulated by the top 1% wealthiest Americans each year is many times the trade deficit incurred with China, most of which is probably parked in the tax heaven overseas. That is the real imbalance the U.S. is facing today. Bringing back progressive taxation is the only real solution. BTW, it seems to me that the effect of the trade imbalance with China is somewhat exaggerated once you compare it to the GDP and fiscal spending of the U.S.
To criticize China for doing nothing during the “good years” is not entirely fair to me. China was actually throwing billions around each year to clean up her banking mess in those good days. As for the next 3 years, China will establish universal health care. Currently, China spends less than 1% GDP on the health care annually. If the health service industry takes off, it alone will probably add several points to the GDP. I guess it is time to buy stocks of medical technology in China.
Well, as a german, I would argue that the surplus of germany is a result of two things
- we never had a major deficit and were always a country with an overproportional industrial sector (compared to other european countries) People who are working in the industrial sector get high wages, even the workers, so I wouldn’t compare china and germeany on that level
- we had to integrate eastern germany, and that means that you have to employ 17 million people who had nothing, most of them didn’t have accurate skills. Unployment levels in eastern germany reached 25% in 2005, so how do you want to get these people to consume? Should the state pay even more for them? It’s not that easy…we’d be glad if it were.
As they say in India, you cannot clap with one hand. I hope all the parties get together to come up with a cooperative solution. Davos did not go well either.
Michael,
Your articles have been emphasizing on the much-needed Chinese adjustment to the global “imbalance”. I came across a perception from a friend lately when we were discussing this global trade “imbalance” between US and China. He commented that in a pure capitalist society, there’s always going to be the wealthier segment and the poorer segment, suggesting a near zero sum situation when total wealth grows. Thus, looking at the global economy holistically, this trade “imbalance” is not necessarily unsustainable, so long US consumption power stays ahead of China and the rest of the developing countries till the medium term future. Looking at it on a very long term horizon, if the Chinese government is ready to raise its domestic consumption level (making the Chinese citizens a lot wealthier), they will stop purchasing the US bonds. But then again, is this adjustment absolutely necessary, when global economy can grow so long China stays poorer than the US?
Thank for this great input,
I just agree on most of what you said. Including on monetary issues on which I have always works on different premises. Including on issues such as whether deficits mattered or not:)
I just wanted to be specific and say. “I agree that this adjustment has to be on both sides, OECD countries, certainly not US alone and a host of Asian countries, certainly not China alone.”
This adjustment is both one of economic nature and a systemic currency issue. This certainly not a question of “who’s fault is it?”
The more the situation deteriorates, the more we move in uncharted territories in terms currency system. I just hope that political leaders on both side of the pacific are aware of the risks of a significant regression in this area. A regression in terms of both systemic organization and instruments. This is so abysmal that I will certainly remain politically correct on this issue.
Good luck to everyone reading.
Glen, I think the key point, as Brad titled one of his recent blogs, is that there is currently a shortfall in Chinese demand for the world’s goods, not Chinese demand for the world’s bonds – or, more generally, a shortfall of global demand for goods, not global demand for bonds. That means the ability to deploy savings is much less important than the ability to deploy demand for goods. China and Germany need to understand this reality, which will be difficult given that for so long we have seen high savings and trade surpluses as virtues.
Seatrus, there is clearly (at least in my mind) a problem with income distribution in the US and this needs to be resolved. The faint good news, I think, is that historically the periods of global liquidity expansion were often associated with rising income and wealth inequality whereas the periods of subsequent adjustment were associated with the opposite. I think Obama has the support of most Americans to implement measures for income redistribution which is in my opinion a political, not an economic, issue.
Seatrus, to continue with your comment, as for China’s “doing nothing”, I guess I am being very sloppy in my language and thanks for catching me out on it. China has certainly done a lot of things (although reforms were much weaker in the past decade than in the previous) but by “nothing” I meant nothing, or very little, aimed at addressing the overcapacity problem. Cleaning up the banks certainly involved doing something major, and it was only many years of double-digit GPD growth that kept the cost of the cleanup from being crippling (over 50% of GDP according to the World Bank), but this did nothing to help increase Chinese consumption relative to production. On the contrary one can argue that because the Chinese banking system funnels savings almost exclusively into production and investment, strengthening the banking system and repressing interest rates were all production-enhancing measures that worsened the overcapacity problem.
Daniel, the cost of East German integration was certainly very high, but I would have thought that the natural consequence of unification, not to mention high wages for workers, would have been a trade deficit, not a surplus. In China one of the factors often blamed for low consumption is low wages and the inability of Chinese workers to organize and demand higher wages. At any rate I am not smart enough to figure out what Germany needs to. My main point is that it is logical to me that they would want, along with China, to forestall trade protectionism but neither country really has much say in the matter, and both of them are likely to be very vulnerable to criticism that they are not carrying their share of the demand-creation burden.
Kangwei, I am not sure what your friend means by saying that the existence of a richer segment and a poorer segment (a mathematical necessity unless everyone is making exactly the same income) means that growth is zero sum, but this is patently false. It would be hard to argue that the fact that capitalist societies over the past three hundred years have had both rich and poor segments means that on average everyone has not gotten much richer. I am not so worried about the US trade deficit not because the US is much richer than China but largely because the US has an immense capacity to run deficits for much longer and I think the deficit will reverse sharply over the next few decades.
Daniel from Paris, of course I think you are right, but I am not terribly optimistic.
“I have been working with and studying developing economies long enough to know that problems that we identify may take longer to emerge than we expected, and often emerge differently from what we projected, but they almost always do emerge in the end”
I don’t think this is limited to developing countries
I don’t think that China has had a problem with excess capacity and misinvestment, and the extra capacity that China has built up over the last several years gives it the ability to expand its domestic economy *regardless* of what happens in the rest of the world.
China needs to boost demand, but boosting demand is not necessarily the same thing as boosting consumption, and I think that the outcome of this recession is a shift in the Chinese economy away from a export-driven economy to one that is driven by investment and government provisioning of public goods.
The crux of the debate is that I don’t think that the investment focus of China’s economy is a sign of imbalance, and hence I do not think that it is a problem to be fix. On the contrary, the large amount of investment in infrastructure and industrial capacity will be very useful and perhaps essential for China to get out of this mess.
The reason people get emotional over these issues is that the consequences matter. My personal belief is that describing the Chinese economy as being out of balance and too investment driven will lead to devastating policies that will destroy the Chinese economy. The reason I try to be polite about this is that I could be quite wrong about this, and the policies that I advocate might be devastating to the Chinese economy.
But at the very least it means that we do have to debate these issues.
Financial Times headline:
“Savings not to blame for global financial crisis, says premier”
Of course savings is not to blame, but printing yuan is not the same as saving either.
I think “savings = investment” is the most perverse and dysfunctional meme in the macroeconomic lexicon. And for a discipline that still embraces Say’s Law, production functions, equilibrium, rational expectations, etc, that’s saying something!
Cash savings, which in aggregate is zero, may or may not be forwarded via primary flows in financial markets. Borrowed money may be used for (a) business investment, (b) deficit spending, and/or (c) financial market speculation. Clearly, savings and financing and investing are three separate processes which are governed by very different processes.
Obviously we’ve had a glut of financial flows arising from imbalances in the real economy — both the US trade deficit and US household income polarization. Clearly also too much money has been flowing into (b) and (c) instead of (a) above.
To say that savings = investment not only conflates three different processes, it is fatuous in view of the current crisis, which arises precisely because of the disconnect between these separate steps.
The deficit countries, i.e. US and UK, are taking the same gamble on the world “taking off again” as they accelerate the misallocation of capital to prevent house prices and securities based on them from finding a cash clearing price and to support the existing capital structures of insolvent banks. It’s hard to see where a “take off” is going to come from if we keep levering up and/or demanding more return from the same assets. Best case seems to be this is (somehow) sustainable (i.e., no great depression or Jim Rogers “forest fire”) but risk is higher for longer, returns lower and lower than the risk warrants. Did I just describe Japan in the 90′s? I was in a better place back then…
Twofish,
Could you please elaborate – “China needs to boost demand, but boosting demand is not necessarily the same thing as boosting consumption”?
I also don’t know why germany has such a high surplus, but I think I messed two things a bit up
I mentioned the high wages (especially in southwest germany) because I think the german industry might just have a competitive advantage. R&D is the most important thing for most companies.
I mentioned east germany because the high levels of unemployment had some very serious consequences, and that was wage deflation. Wage deflation didn’t happen in the industrie sector but in the service sector.
I don’t know how to fix that problem that millions of (service) workers even need government aid to survive, and I also know that this isn’t a german problem. But in germany, it was and somehow still is quite extrem because of the 17 million workers we had to integrate.
Of course there are imbalances in China’s manufacturing sector. Otherwise, why would tens of million migrant workers be out of their jobs right now, and will be indefinately? As for the sudden surge in lending, this looks to me to be an accounting excercise, clearing or otherwise funding non-bank debts piled up by SOEs. Many large SOEs (not central ones, regional/local ones, though the central ones win no prize themselves) are behind on paying wages, suppliers etc, and the stimulus provided by this lending surge is really just to ease the log-jam of triangular debts. This implies that there will not be much “bang” for all of this lending, hence Wen Jiabao’s hints that even more stimulus is coming, and rightly so, precisely because things are so out of whack. Anyone who would claim that there is not over capacity has not bothered to go to look at it. It is haunting to see deserted streets in factory towns. Stop reading bogus reports and go and look.
All in all, I think that it is good that the US is raising some friction over the RMB, not so much because it is a good time to monkey with exchange rates, but rather because there is the real liklihood that the US external imbalance will remain large with such large deficits on the horizon unless creditors pare back their lending. A little name calling gives both sides some useful rhetorical cover – Wen Jiabao can be the unabashed populist that he is in reubuking the US publicly, Geithner/Obama can talk tough, and they can work out something behind the scenese if they are smart. If not, both will suffer in different ways.
Leon: Could you please elaborate – “China needs to boost demand, but boosting demand is not necessarily the same thing as boosting consumption”?
Supply = Demand = consumption + gross investment + government spending + (export – imports)
You can increase demand by increasing investment, government spending or net exports. In the case of China, it seems that the obvious thing to do is to boost government spending to pay for public goods.
The comment on what the banks had to do in order to keep payment logjams from occurring is interesting because that is more or less what the Fed had to do with the commercial paper market in the United States. It’s not stimulus, but it is something rather essential for keeping the system going.
Yes, but the CP market in the US is like the banking system in China in that, especially during times of distress, it is only available to a small proportion of potential borrowers. This does, as you point out keep the system going, for some. The problem is that after an unprecedented jump in lending, we are finally getting to the point where stimulus to the real economy would achieve a reasonable impulse. This is where the government needs to do more, as Wen has implied, rather than rely on the banks as quasi-fiscal organs of state. The government is in a tight spot because it played a shell game more elaborate than normal with deficits last year and does not want to lose face with putting out the level of spending it needs in order to deal with massive unemployment and rickety social services structures that have not been tested yet. Adding all this up, I think that I am better understanding Prof. Pettis’ points about the risks stemming from a large monetary adjustment. It would seem, however, that a stop to the upward adjustment of the value of the RMB may have a base money effect that the authorities may not be able to counter adequately in the short-term without resorting to the “dropping money from the helicopter” approach.
have to say I share your concern on China’s longer-term growth outlook. the “expensive bet” on a quick recovery in global trade and economy trade will likely prove miscalculated, eventually hurting China’s balance sheet and earning power. The Govt should focus more on helping the private sector in the rational way instead of blindly throwing money into public sector investment mainly initiated by local govts… but we all know politically this is almost impossible. a permanent derating of china’s GDP to below 5% beyond this cycle is not totally out of the question just like what happened to Japan after early 1970s.
Mike, touché.
Brian, Paul Krugman was particularly nasty about some of the misunderstandings that arise from savings = investment identity.
BCG, I think I agree. William Buiter discusses some of the reasons why here.
Mr. Yu, very interesting point about the lending. I will cite it in my next blog entry.
Yu: This is where the government needs to do more, as Wen has implied, rather than rely on the banks as quasi-fiscal organs of state.
One problem is that if you rely on direct funding from the government, what tends to get funded are large infrastructure projects which then take on a life of their own. The big problem with Keyesian stimulus is not so much starting big projects, but shutting them down once you have gotten out of trouble. Once you have a large political group that is making money from an infrastructure project, it becomes difficult to shut down. This is less of a problem with health and education, but it can be a big problem with things like roads.
Something that the government has to do is get credit to small and medium enterprises, and at that point the banks play a crucial role since only the banks have the staff to figure out who to lend to. The problem with lending to small and medium enterprises is that it’s something new for the big state banks, and they are likely to do it badly at the beginning. A small increase in NPL’s is not necessarily a bad thing, if it actually does encourage small and medium enterprise formation.
One important point is that when I say that the Chinese economy should be focused on investment and not consumption, I *don’t* support state subsidized capital to heavy industry. What I do support is investment in small and medium businesses. Getting credit to a dim-sum stand is in some ways much, much harder than getting credit to a steel factory.
Flora: have to say I share your concern on China’s longer-term growth outlook. the “expensive bet” on a quick recovery in global trade and economy trade will likely prove miscalculated,
I don’t think that the Chinese government is betting on a recovery in global trade and economy. It needs to create enough demand so that you have reasonable economic performance in China *regardless* of what happens in the rest of the world. It really doesn’t have a choice in the matter. If the government doesn’t get the Chinese economy growing in the next year or so, then the people on the streets will take matters into their own hands.
Flora: The Govt should focus more on helping the private sector in the rational way instead of blindly throwing money into public sector investment mainly initiated by local govts…
It’s not either/or. The problem is getting money into small and medium enterprises is very tough to do. One big problem is that large enterprises are too big to fail, so no one minds loaning them money. Small and medium enterprises can fail, so people are reluctant to lend to them in tough times. Another big problem is corruption. It’s much harder to make sure that money to small and medium enterprises gets to the right people than it is to monitor money to big enterprises.
Flora: a permanent derating of china’s GDP to below 5% beyond this cycle is not totally out of the question just like what happened to Japan after early 1970s.
I don’t think this is likely. Japan’s GDP started to hit limits after it had already reached levels of industrialization that China will not see for decades. Remember that by the 1920′s, Japan was already an industrialized nation with a far more productive economy than China has now.
Chinese GDP growth is not magical. It’s that the country is so underinvested that anything will help. The first freeway that you put in a county will generate huge amounts of economic growth as well the first factory. It doesn’t matter if the freeway or factory are incredibly inefficient. It is less inefficient than what was there before. If you have a poor enough country, then even industrialization through a broken inefficient system will create growth. Look at Russia from 1930 to 1960. Part of the problem with these discussions is that people are so fixiated about Japan and Russia in 1990, that the don’t look at the lessons of Japan and Russia in 1935.
Twofish:
“If you have a poor enough country, then even industrialization through a broken inefficient system will create growth”.
I disagree – in a recent holiday to Chiang Mai, Thailand, I concluded that underdevelopement itself shouldn’t automatically translate into high growth. If that’s the case, Asian crisis shouldn’t have halted the fast development of most southeast asian countries. Also if you’ve been to the US, I think you’ll agree with me that there are many areas in the States that have very underdevelped infrastructure. But US ceased to grow at above 5% long time ago. I didn’t say that China will stop growing, just that the growth rate will slow down.