Those who admire China’s authoritarian government might want to peruse a feature story from the latest issue of Bloomberg Businessweek.
Earlier in October, former Treasury Secretary Larry Summers and fellow Harvard economist Lant Pritchett produced Asiaphoria Meets Regression to the Mean: “China’s experience from 1977 to 2010 already holds the distinction of being the only instance, quite possibly in the history of mankind,” they write, of such rapid continuous growth. “Why will growth slow? Mainly, because that is what rapid growth does.” They also say that in China’s case, “a high degree of government discretion vis-à-vis businesses and an authoritarian regime add to the likelihood of a growth slowdown.”
The bears and bulls agree that China must change its economic model. Rapid productivity gains followed sweeping restructuring of the state sector in the late 1990s. Starting in 2001, productivity was further boosted by the new technology and manufacturing processes introduced by foreign investors who swarmed into China after it entered the World Trade Organization. But since the global financial crisis began in late 2008, Steven Barnett, chief of the China division at the International Monetary Fund, points out, growth has been driven by government-directed investment, while productivity gains have slowed. That reliance has saddled China with debt exceeding 200 percent of GDP. Prices in the overbuilt property market have slid for five consecutive months, fanning fears of a spillover effect. “China’s structural property downshift [has started] to have a bigger impact,” affecting heavy machinery, cement, steel, home decoration, and auto sales, warned the China economists at UBS Securities (UBS) in an Oct. 24 research note. …
… The key difference between the bulls and the bears is the level of faith they have in the leadership to carry out productivity-boosting but deeply destabilizing reforms. Chinese leaders say the most-needed steps include giving farmers more rights to sell the land they own or borrow against it, and promoting urbanization by loosening the rules that keep people tethered to schools, hospitals, and pensions in their hometowns. Also important is allowing banks to lend according to the soundness of a business rather than for political reasons. The reforms are “very painful and even feel like cutting one’s wrist,” [Premier] Li [Kiqiang] said in March 2013.
