China Redux

Nobel laureate Michael Spence published a fascinating piece in the WSJ (subscription required) that condenses decades of cutting-edge development economics into roughly 1000 words. Among the 11 cases of sustained high growth (defined as above 7 percent over 25 years or more) since World War II, Spence has has identified three shared characteristics:

1) Functioning markets with price signals, incentives, decentralization, and some degree of private property ownership

2) High levels of savings and investment

3) Resource mobility, which Spence compares to Schumpeter’s “creative destruction” and Romer’s “churn”

China is an examplar of the latter two trends in particular — for example, savings in China ranges between 35% and 45% of GDP.

The piece does a great job of conveying the essence of China’s growth miracle: China is exceptional (for its size, pace) and yet not–it has the same fundamental economic features as the other development wonders.

What I found especially compelling was the way in which Spence celebrates the growth miracle without ignoring the tensions caused by sustained high growth in developing countries. For example, he notes that the 1% annual decline in China’s rural population, instrumental for increasing productivity, represents 13 million people who are moving to cities and need infrastructure, education, and services — not to mention jobs. And it gets stickier. The early movers are rewarded, the latecomers, less so; income inequality rises “for an extended period.”

While this is a natural consequence of the process, it presents a challenge. Excessive inequality of income and wealth is not only a normative problem in most societies; it is also socially and politically disruptive and can threaten support for the policies and public sector investments that in part sustain the growth process.

So, the downside of growth — increased income inequality (albeit distributed in new ways) and social and political tensions — are equally important characteristics of the story. There is a front-end and a back-end to high growth, and China must deal with both; it needs to maintain high growth yet it must mitigate against exacerbating inequalities and social tensions.

China has so far succeeded, by most accounts, in “managing” growth. Spence’s nuanced picture goes a long way towards understanding China’s conduct on certain critical bilateral and international issues (currency devaluation, for example). I would not bank on any significant deviations from those strategies any time soon.