Daily Archives: July 23, 2013

Markets are having a hard time interpreting China’s economic slowdown and evaluating policy options. At one extreme, some observers are talking about a potential dynastic collapse. But most have turned to the notion that economic growth needs to be more consumption driven since the almost universal view is that China’s growth is unbalanced, with consumption as a share of gross domestic product having declined steadily to below 35 per cent – the lowest level of any major economy – while its investment share rose to above 45 per cent, correspondingly the highest.

The reason for this imbalance is often attributed to low interest rates or an undervalued exchange rate. This has been the easy explanatory option since financial markets are comfortable with prices driving outcomes. But in his article in The New York Times last week, Paul Krugman is unique among prominent commentators in getting it right. He notes that China’s unbalanced growth is explained by the Nobel Prize-winning model by Arthur Lewis that shows how the transfer of surplus workers from the rural sector to the modern economy, complemented by rising investment, leads to rapid but unbalanced growth. The model also lays out the conditions when labour supplies tighten, growth slows and China’s economy eventually becomes more balanced – referred to as the “Lewis turning point” – and this as argued by Mr Krugman is causing China to “hit its Great Wall”.

Continue reading »

The A-List

About this blog Blog guide
Welcome. This blog is available to subscribers only.

The A-List from the Financial Times provides timely, insightful comment on the topics that matter, from globally renowned leaders, policymakers and commentators.

Read the A-List author biographies

Subscribe to the RSS feed



To comment, please register for free with FT.com and read our policy on submitting comments.

All posts are published in UK time.

See the full list of FT blogs.

What we’re writing about

Afghanistan Asia maritime tensions carbon central banks China climate change Crimea emerging markets energy EU European Central Bank George Osborne global economy inflation Japan Pakistan quantitative easing Russia Rwanda security surveillance Syria technology terrorism UK Budget UK economy Ukraine unemployment US US Federal Reserve US jobs Vladimir Putin

Categories

Africa America Asia Britain Business China Davos Europe Finance Foreign Policy Global Economy Latin America Markets Middle East Syria World

Archive

« Jun Aug »July 2013
M T W T F S S
1234567
891011121314
15161718192021
22232425262728
293031