85.1 F
Fort Worth
Saturday, September 26, 2020
- Advertisements -
Opinion Samuelson: ‘Middle-income trap’ squeezing Chinese economy

Samuelson: ‘Middle-income trap’ squeezing Chinese economy

Other News

Commentary: TCC Chancellor Eugene Giovannini: Maintaining Our Mission

Since our inception, one of Tarrant County College’s hallmarks has been our unwavering commitment to serving our community. As we all work to navigate...

Commentary: M. Ray Perryman: The Fed is taking largely unseen but essential action

The inevitable and unavoidable result of the extraordinary measures taken to curb the tragic health effects of the coronavirus has been a strong shock...

Commentary: Rising to the Challenge: Coronavirus Spurs Sacrifice and Generosity in Time of Need

These are difficult days. We’re frightened by the havoc COVID-19 may wreak on our families, friends, local businesses and the simple pleasures of life...

Analysis: Notes from a coronavirus hot spot

NEW ORLEANS (AP) — New Orleans is right outside my door. But I can't go out. Not much, anyway. My wife and I are...
Robert Francis
Robert Francis
Robert is a Fort Worth native and longtime editor of the Fort Worth Business Press. He is a former president of the local Society of Professional Journalists and was a freelancer for a variety of newspapers, weeklies and magazines, including American Way, BrandWeek and InformatonWeek. A graduate of TCU, Robert has held a variety of writing and editing positions at publications such as the Grand Prairie Daily News and InfoWorld. He is also a musician and playwright.

 

Robert Samuelson 

WASHINGTON – China has fallen into the “middle-income trap” – a significant event full of domestic and international implications.

China’s economy is visibly slowing. The latest evidence: lower-than-expected industrial production and exports. Global stock markets have responded nervously. But in some ways, the slowdown isn’t China’s fault and was entirely predictable. The explanation is the middle-income trap.

To economists, the term describes an inevitable cycle for poor countries aiming to become rich. Early gains are often rapid, as countries adopt well-known technologies and management practices. Workers move from subsistence farming into basic manufacturing: textiles, clothes, shoes. Growth soars. Wages improve. But it gradually becomes harder to piggyback on advances made abroad. Countries have to rely more on local innovation, entrepreneurship and investment.

Growth slows as countries reach middle-income status – not truly rich but no longer desperately poor. Since World War II, many countries have followed this cycle, according to a study by economists Barry Eichengreen of the University of California, Berkeley; Kwanho Shin of Korea University; and Donghyun Park of the Asian Development Bank.

Japan is a classic example. In the late 1960s and early 1970s, its economy was expanding at a scorching rate of nearly 9 percent annually; it then slowed to about 3 percent, the study reports. Growth revived in the 1980s but then slumped again. It went from 4.6 percent in 1990 to about 1 percent over the next seven years. South Korea, Ireland, Israel, the Netherlands, Estonia and Denmark all experienced middle-income slowdowns.

Now it’s China’s turn.

Since 1978, when market reforms began, China’s annual economic growth has averaged about 10 percent. In 2012 and 2013, it fell to 7.7 percent. The International Monetary Fund predicts further declines this year (7.5 percent) and next (7.3 percent). It might go lower.

Of course, most countries would be thrilled with 7 percent growth. The United States grew 1.9 percent in 2013 and Brazil grew 2.3 percent. Still, China faces a tortuous transition. Its economic strategy is outmoded. It needs a new one. So say many economists. China’s rulers seem to agree.

The old strategy has relied on export-led growth and huge investment in industry, housing and infrastructure, fueled by easy credit. Export-led growth faces two problems: Global trade has slowed, and China’s American and European customers – worried about their own unemployment – resent its aggressive export tactics. Massive investment in industry and real estate has produced gluts of factories and homes.

Economist Nicholas Lardy of the Peterson Institute says that a burst housing bubble poses the largest risk to China’s economy. It would hurt satellite industries such as steel and building materials and create losses for banks and other lenders. From 2008 to 2013, loans to Chinese businesses and households jumped from about 120 percent of gross domestic product (a measure of the economy) to roughly 180 percent of GDP, reports the credit rating agency Moody’s. A strong economy helps borrowers service these loans. A sharp slowdown would change matters.

The new strategy is consumer-led growth. Chinese would save less and buy more. Their stronger spending would keep the economy humming. Just recently, officials indicated they would raise interest rates on bank deposits within two years. This is regarded as crucial to stimulating consumer spending. If depositors receive more interest income, it’s argued, they will spend more. Higher deposit rates would also combat industrial overcapacity by discouraging cheap loans to firms.

That’s the theory. What if it doesn’t work? China’s headlong rush into modernity has created conflicting attitudes. People expect more jobs, higher wages and better living standards. They also resent industrialization’s pervasive pollution and the self-enriching land grabs of business and communist party elites.

Will there be a backlash if these expectations are further disappointed by a slowing economy with higher unemployment and lower wage gains? How would the communist party respond? Might it not survive? The slowdown has already hurt countries (Australia, Brazil) that satisfied China’s huge appetite for raw materials. How would a deeper slowdown affect the global economy? Would China become more nationalistic abroad to distract from domestic discontent?

Make no mistake: The middle-income trap is no minor inconvenience. It’s a big deal for China and the world.

Robert Samuelson’s column is distributed by The Washington Post Writers Group. .

- Advertisements -
- Advertisements -

Latest News

Letter from the Editor: The Big One

Military Museum of Fort Worth www.facebook.com/militarymuseumoffortworth/ I got one of the last...

Commentary: Empowering Seniors 2020 Goes Virtual

Empowering Seniors 2020 Cost: Free Location: Virtual event available on computers, tablets and smartphones

Commentary: Tourism is in the fabric of our city

Bob Jameson Visit Fort Worth National estimates show that COVID-19 has wiped out more...

Can Trump and McConnell get through the 4 steps to seat a Supreme Court justice in just 6 weeks?

Caren Morrison, Georgia State University United States Supreme Court...

Letter from the Editor: The Two Katies

On Sept. 12 I went to see the Fort Worth Symphony Orchestra and Asleep at the Wheel at the Will Rogers Coliseum....