PEET STRYDOM COLLOQUIUM EMERGING MARKETS, GROWTH RESILIENCE OR HITTING A LOW GROWTH TRAP?

Introduction  The global economy is slowing o Will China have a hard or soft landing. o How will / can policymakers deal with it?  This seminar is concerned with a much broader question: Is the current slowdown the end of catch- up growth? Can China get stuck in a middle-income trap?  What will be the role of the developmental state?

Global slowdown  The rise of China is a familiar story: Gapminder.htmGapminder.htm  But growth is slowing:  What part is cyclical and what part structural?

Chinese slowdown  There are many causes of the current slowdown.  Exports and investment account, respectively, for 30% and 40% of China’s GDP growth, which means that the economy is particularly vulnerable to weakening external demand and accumulation of non-performing loans caused by excessive and wasteful spending on fixed assets.  Can, or should policymakers respond?  Keynesian vs. (neo-) Austrian views.

Chinese slowdown  To assess the risks and options for China, one must understand China’s “Made in the World” production system, which rests on four distinct but mutually dependent pillars:  World factory.  China infrastructure network.  Chinese financial services supply chain.  Government services supply chain.  With the onset of the current global crisis, and changes in demographics, urbanization, and resource constraints, all four pillars are now under stress.

Can China adjust?  A new consumption-based growth model for China?  Reflected in the government’s recently approved 12th Five- Year Plan.  If this view is right, the solution is straightforward: China can correct its imbalances by increasing its citizens’ incomes (by cutting taxes, raising wages, or increasing social spending), so that they can consume more.  But what if there are underlying constraints?

Can China adjust?

 Export dependence partly reflects the high degree of difficulty of doing business in China.  Official corruption, insecure property rights, stifling regulatory restraints, weak payment discipline, poor logistics and distribution, widespread counterfeiting, and vulnerability to other forms of intellectual-property theft.  In “the ease of doing business” China is ranked 91st, behind Mongolia, Albania, and Belarus. It is particularly difficult to start a business in China (151st), pay taxes (122nd), obtain construction permits (179th), and get electricity (115th).  All of these obstacles increase transaction costs and make it difficult for entrepreneurs to thrive in domestic markets.

Can China adjust?  In order to enjoy the same low transaction costs that they have in exporting, China’s entrepreneurs need a much better business environment.  The key governance question is: which top-level architecture would enable the country to adopt the reforms needed to meet global and domestic pressures?

Can China adjust?  China 2030 report states that reforms are required:  Land  Labour  Energy  Competition  Banking  Capital markets  SOEs  Taxes and spending

China as a developmental state  John Knight defines the development state as one that gives overriding priority to rapid economic growth.  There can be differences in degrees of democracy or dictatorship, nature and extent of state intervention in the economy, strength of industrial policy.  The evolution of reform in China.  Institutions: "regionally decentralised authoritarianism".

China as a developmental state  How China grew fast:  Rapid capital accumulation.  Conditional convergence from a low base.  Sectoral change  High physical capital investment.  Structural reforms: expansion of trade, privatisation of production, transfer of labour out of agriculture.  High confidence, high investment, high growth.

China as a developmental state  Sustainability of this model will depend on:  Power of the top leadership.  Strength of bureaucratic, business and military vested interests.  There are many threats:  Adverse shock, a bubble, financial collapse.  Social instability.

Conclusions  China will continue to lead global growth.  But possibly at lower rates.  Inclusive economic (and political) systems will matter for future growth.  What does it mean for South Africa?  For our resource exports, for our manufacturing sector…  For Africa?