Martin Wolf, like his FT colleague, Gideon Rachman, is optimistic regarding the future of China. But he is less bullish, writing that China’s transition from a middle-income country to a high-income country, though possible, is not inevitable.
China is entering upon a difficult transition to both lower growth and a different pattern of growth. …. The past record of economic success, under Communist party rule, does not guarantee a comparably successful future. ….
China is ceasing to be a labour surplus country, in terms of the development model of the late West Indian Nobel laureate, Sir Arthur Lewis. Lewis argued that the subsistence income of surplus labour in agriculture set a low ceiling for wages in the modern sector. This made the latter extremely profitable. Provided the high profits were reinvested, as in China, the rate of growth of the modern sector and so of the economy would be very high. But, at some point, labour would become scarcer in agriculture, so raising the price of labour to the modern sector. Profits would be squeezed and savings and investment would fall as the economy matured. ….
China is now at the Lewis turning point. …. [Its] growth must be driven by … [technical progress], which will sustain profits, rather than rising ratios of capital to labour, which will lead to declining profits, particularly now that real wages are rising fast. Some decline in profits is desirable, given the maldistribution of income. Taken too far, it would damage potential growth. ….
[G]etting from an investment rate of 50 per cent of gross domestic product to one of 35 per cent, without a deep recession on the way, requires an offsetting surge in consumption. China has no easy way to engineer such a surge ….
Martin Wolf, “How to blow away China