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Why China Must Save Less

China’s rapid investment-led growth in recent decades has been fueled by high levels of national savings, but this unbalanced development path appears increasingly risky. The country must now reduce its excessive savings by shifting to a model focused on domestic consumption and opening up the service and non-trade sectors.

SHANGHAI – In his influential 1954 article “Economic Development with Unlimited Supplies of Labour,” the future Nobel laureate economist Arthur Lewis concluded that “the central problem in the theory of economic development is to understand the process by which a community which was previously saving and investing 4 or 5 per cent of its national income or less, converts itself into an economy where voluntary saving is running at about 12 or 15 per cent of its national income or more.” That process, Lewis argued, “is the central problem because the central fact of economic development is rapid capital accumulation (including knowledge and skills with capital).”

Lewis’s insight is highly relevant to China’s rapid investment-led growth in recent decades. But China’s growth has been based on much higher levels of national savings than Arthur could ever have imagined. And now this development has become unbalanced and appears increasingly risky. In a reversal of the process that Lewis described, China must now find a way to reduce its excessive savings by moving to an economic development model based more on the sheer size of its domestic consumption.

This would represent a major shift. For 30 to 40 years, China has relied on export-led industrialization to sustain rapid economic progress. Like Japan and other fast-growing East Asian economies before it, China successfully channeled its high savings into investment in export-oriented manufacturing. And as surplus labor continued to move within China from agriculture to export sectors, the savings rate continued to increase.

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