Is there a price to be paid for rapid growth?
Barun Mitra
http://www.capx.co/five-perils-of-growing-like-china/
Most people have something to be disgruntled about China’s economic situation - whether it is its low consumption demand and large external surpluses, industrial overcapacity, environmental degradation, or the range of government intervention spanning from capital controls to financial repression. Pessimists have long called for the demise of the Chinese model, each focusing on a different subset of these issues.
But it is a fallacy to think that these issues are disparate problems. They are, in fact, mere symptoms of a more fundamental problem, the problem of a skewed development model. The model is to some extent a policy-induced construct, the result of a nascent bias for production and manufacturing as the main pillar for economic development, and a penchant for speed - the `Chinese impatience’. That bias earned China the title of ‘factory of the world.’
China’s predilection for production harks back to the days of the Great Leap Forward, where scrap metal was melted to meet the wildly optimistic targets of steel production and Mao’s dream of rapid industrialisation. In today’s China, this proclivity has manifested itself again in the form of vehement fervour for project-based GDP boosters. These industrial and infrastructure projects invite investment and generate tax revenue for the local government. They can push up GDP in a short period of time and meet targets quickly – as opposed to the time it takes to develop service sectors. Direct and indirect government subsidies from the center occasion huge incentives to take on more and more projects in the periphery.
The bias for industrial production is further reinforced by a notion that expanding exporting sectors can somehow help absorb China’s vast labour force. But this belief is misconceived. Exporting sectors experience some of the fastest growth in labour productivity, and for that reason, do little to generate actual employment. The bias has lead to a deeply intricate, self-propelling economic cycle, kept alive by a web of seemingly unrelated distortionary policies that are in fact interwoven, interlinked, and symbiotic. Growing like China has thus produced five main perils.
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http://www.capx.co/five-perils-of-growing-like-china/