China's road to prosperity

Comments on Jane Golley “China’s rocky road to prosperity”, 18/11/2010, http://www.eastasiaforum.org/2010/11/18/chinas-rocky-road-to-prosperity/
As an economist, I have often been puzzled by a number of economic issues concerning economic development and management in both the industrialised and developing economies.

One is the so called international imbalances and related closely to that is China's heavy reliance on exports and investment for growth in the past up to now.

Just consider the issue of a country's growth as an optimisation issue. If there are international markets the country can export to fully utilise its domestic resources as much as possible, why should it not be an optimal choice? Japan did that before, Korea did that before and Taiwan did that before. When it became China's turn, now it's regarded as a problem that caused global imbalances! What a puzzle and what a joke!

So is my puzzle with investment. Let’s analyse the main differences between the industrialised and developing economies in traditional economics of the Solow growth model. The key difference is capital per capita or per worker. What and how can developing countries mitigate or eliminate that difference? It is investment. Is there any other way to increase capital without investment? I doubt it.

Another fundamental issue is how to manage the economy. China used to be a planned economy but has become largely a market economy. Traditional and orthodox economics tells us that it is macroeconomic policies, namely monetary and fiscal policies to get full employment and low inflation. Apart from that it is difficult to talk about economic structure because that becomes an autonomous by-product of good macroeconomic policy and private entrepreneurs. However, we are now confronted with China’s economic structural issues. What can we say about it?

Then we are confounded with political reforms, democracy or the lack of it. I remember that in the past there were the terms of Japan Inc, its industry policy and certain organisational characteristics, as well as some for Korea's. While I am not saying they were not democracy, those terms must have meant something, maybe that were not fully consistent with the orthodox western democracy and a liberal economy.

Japan’s road to prosperity in the second half of the last century had its uniqueness, so had Korea’s and Taiwan’s. China has and will have its own, even if it means it is at a much larger scale.

While I agree with Jane Golley’s point that ‘be prepared that some of our predictions may well turn out to be wrong’, I am not sure it is upside or downside biased.

For another issue altogether, the transitional or turning point in the Chinese economy in terms of the end of surplus labour means the argument that China’s currency is under-valued is low currency itself. It will be disastrous for China to bow to the US pressure to appreciate its currency prematurely. The rising labour costs will reduce current account surplus.

The argument for low carbon economy, while not irrelevant itself, is not unique to China and China's growth.