Economics, International economy, Pethokoukis

Has China been snared by the middle-income trap? If so, here’s how it can escape

041513China

As any football coach knows, you run the same play until it stops working. Developing countries do the same. Their economies tend to expand rapidly as they shift agricultural workers to basic manufacturing. But moving up the value ladder and innovating are hard, and often these economies get stuck in what economists call the “middle-income tap.” Per capita income stalls at around $10,000 and then again at $15,000. China is just shy of $9,000 and — right on time — is running into trouble. The Financial Times:

China has entered an era of slower growth and must adjust to the end of three decades of double-digit annual economic expansion, the government department that produces the nation’s statistics warned on Monday.

In announcing that economic growth had unexpectedly slowed to 7.7 per cent in the first quarter compared with a year ago, Sheng Laiyun, National Bureau of Statistics spokesman, said that “after 30 years of high-speed economic growth, potential productivity in China has dropped”.  …

Echoing Beijing’s warning, the World Bank on Monday said Chinese growth would slow to “between 6 and 7 per cent by the end of the decade”, according to Bert Hofman, its chief Asia economist. … Mr Sheng said he expected China to meet the annual growth target of 7.5 per cent set by China’s new leaders earlier this year. If the economy grew at that rate or less in 2013, it would mark the slowest annual growth since 1990, when Beijing faced sanctions over the 1989 Tiananmen Square crackdown.

 

The concern here for Beijing is that failing to meet the rising expectations of its people could be politically destabilizing. The Communist Party can only justify its authoritarian rule by continuing to deliver the economic goods. But to do that means more economic freedom and less state control and crony-capitalist corruption. As William Janeway, a managing director at private-equity firm Warburg Pincus, writes: “The state’s role must shift from executing well-defined programs to supporting trial-and-error experimentation and tolerating entrepreneurial failure.” Janeway then suggests China look to 19th century Great Britain as a role model:

Can China manage the economic, cultural, and political transitions necessary to assume the leadership role now up for grabs? I find it intriguing to go back almost 200 years and consider Britain’s political economy when the First Industrial Revolution was gathering steam.

England in 1820 was governed by a corrupt oligarchy that exercised power in intimate collaboration with a national religious establishment. Political legitimacy was validated by fear of anarchy, the terrifying reality of which had been observable across the Channel within living memory. Arbitrary, draconian repression was the rule: under the “Bloody Code” of criminal justice, more than 100 felonies were punishable by death or transportation. The patent system was notoriously expensive and inaccessible.

England’s rulers sought in vain to keep a lid on the greatest explosion of economic energy and financial wealth in human history. Over a long generation, England was transformed. From the Great Reform Act of 1832 to the repeal of the Corn Laws in 1846 – and on to the civil-service reforms initiated in 1853 and the Representation of the People Act of 1867 – Britain pursued its unique path toward a relatively stable and sustainable democratic capitalism.

In other words, is China finally ready for reform?

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