Consumption-led growth model for developing countries likely to be an illusion

Comments on Meiyan Wang and Fang Cai "Migrant workers key driver of Chinese consumption", 10/12/2015

It makes perfect sense to provide the same public services and social security to rural-urban migrants. A main question is whether the national and local governments have the means, mainly the revenue to do so. If they have then it will be all fine. If they don’t, then the question is how they can have the revenue to do so.

There should be a national policy mandating a deadline for achieving the equality between rural-urban migrants and the permanent residents, recognising the differential capacity between different regions. The central government may also need to use its financial power to assist some regional governments in the process.

Personally, though, I am a bit sceptical about the consumption-led (more generally a demand driven model) rapid economic growth model for a developing economy. If consumption can lead the development of a developing country, then every country could do it easily. The basic logic is that you have the income in hand first before you can consume.

I think it is conceptually easier to have production-driven through a combination of investment and productivity enhancing, supply-driven model (using international trade to balance the difference between production and consumption). While the current surplus capacities in some industries in China represent a serious problem and may take years to be overcome, businesses and the government need to consider how to raise productivity in many other sectors. Surplus in the capacity of some industry can occur in any countries: the current international mining and oil industries are examples.

Having said that, there will be an effect on growth if the rural-urban migrants are afforded equal services as their permanent counterparts.