The Chinese development model is an old one and can trace its roots at least as far back as the infant industry protection, internal improvements, and system of national finance of the American System of the 1820s and 1830s. Understanding why the many precedents for its growth model have succeeded in some few cases and failed in others will help us enormously in understanding China’s prospects.
Whether the U.S. current account deficit is harmful or not to the U.S. economy depends on the assumptions we make about capital scarcity. In a world awash with excess capital and insufficient demand, the U.S. current account deficit is a drag on growth.
The three scenarios listed in a recent Financial Times article set out the range of plausible economic outcomes available to China. The most likely is that China experiences a long, but orderly, growth deceleration as it grinds away at its debt burden, but under easily specified conditions each of the three is possible.
Rejecting the Trans-Pacific Partnership should not mean the rejection altogether by Washington of the very idea of a stable, rules-based trading system. The world is better off with such a regime.
China’s success will depend Beijing’s ability to centralize power, to begin to sell off government assets, to rein in credit growth, and to accept much lower GDP growth rates.
China’s rebalancing can only occur in a limited number of ways, and each of these has a fairly predictable impact. The path Beijing chooses to follow will likely be based on political decision-making.
China’s problem is excessive debt in the economy, not a banking system facing insolvency. Beijing’s reform strategy should reduce the debt burden as quickly as possible to minimize the economic costs.
There is no way Beijing can address its debt problem without a sharp drop in GDP growth, but as unwilling as Beijing may be to see much lower growth, it doesn’t have any other option.
China is embarking on ambitious economic reforms to boost its growth prospects. What is the rationale behind these new reforms and what are the prospects for their success?
A simple model can help illustrate the problems that China will face over the coming decade.
Because savings and investment must always balance, the idea that the savings rate in any country is determined at home is nonsense.