Containing China’s Slowdown

SEOUL – Pundits love debating the Chinese economy’s growth prospects, and nowadays the pessimists are gaining the upper hand. But many are basing their predictions on other economies’ experiences, whereas China has been breaking the mold on economic growth for the last three decades. So, are China’s economic prospects as bad as prevailing wisdom seems to indicate? And, if they are, how can they be improved?

China’s situation is certainly serious. The economy grew by 7.4% last year, the lowest rate since 1990; it is unlikely to meet the official target of 7% this year, and, according to the International Monetary Fund, will probably grow by a mere 6.3% in 2016. Clearly, weak domestic activity and diminished external demand are taking their toll.

China is also losing long-term growth momentum, as falling fertility rates and returns on investment weaken labor-force expansion and capital accumulation. And it is becoming increasingly difficult for China to take advantage of technology-driven productivity gains.

All of these challenges have led former US Treasury Secretary Lawrence Summers and his Harvard colleague Lant Pritchett to argue that China’s growth could slow to 2-4% over the next two decades, as the country succumbs to the historically prevalent growth pattern implied by “regression to the mean.” But, given that China’s growth pattern has, so far, been exceptional, the notion that it will suddenly start following a common trajectory seems unlikely.