×
Home Companies Industry Politics Money Opinion LoungeMultimedia Science Education Sports TechnologyConsumerSpecialsMint on Sunday
×

What Nelly Furtado has to teach us about China

What Nelly Furtado has to teach us about China
Comment E-mail Print Share
First Published: Fri, Apr 22 2011. 10 15 PM IST

Jayachandran/Mint
Jayachandran/Mint
Updated: Fri, Apr 22 2011. 10 15 PM IST
Economies like China and India are the new poster boys of rapid growth, just as Japan and South Korea used to be. But the scholarly authors of this learned paper quote the erudite rock star Nelly Furtado, who warbled All Good Things Come to an End, to make the point that China too will slow down, in the not too distant future.
Jayachandran/Mint
But this is not one of those theses that say China has grown too much too fast, or that its investment-led model of growth is unsustainable. Instead, the authors study late developing countries that had strong growth, but slowed down. Why the slowdown? The researchers point out, “Periods of high growth in late-developing economies do not last forever. Eventually the pool of underemployed rural labour is drained. The share of employment in manufacturing peaks, and growth comes to depend more heavily on the more difficult process of raising productivity in the service sector. A larger capital stock means more depreciation, requiring more saving to make this good. As the economy approaches the technological frontier, it must transition from relying on imported technology to indigenous innovation.”
The big question is: when does the slowdown happen? The study finds that rapidly growing late developing economies slow down sharply when their per capita incomes reach around $17,000 (Rs7.5 lakh today) at 2005 constant prices. If China continues to grow strongly, say the authors, it will reach that level by 2015 or so. Growth also slows when employment in manufacturing reaches about 23% of the workforce, a level the authors say China is already near. There’s also a more conventional reason: China’s population is aging, a sure sign of slower growth in future.
But the study also puts forward a more controversial rationale for slower growth coming sooner rather than later in China—it says, “slowdowns are more likely and occur at lower per capita incomes in countries that maintain undervalued exchange rates and have low consumption shares of GDP”. China, of course, is eminently qualified on both counts. The study finds that the possibility of a slowdown is minimized when consumption is 62-64% of an economy.
Although the authors don’t mention it, it’s interesting to consider the implications for India. The country’s demographics are much better than China’s, since we have a larger proportion of youth. We have a long way to go before we come anywhere near $17,000 per capita. And consumption as a percentage of India’s GDP is much higher than 64%, if we include government consumption. So Indian growth is unlikely to slow in the near future.
Interestingly, although the Chinese five-year plan talks of GDP growth at only 7% per annum between 2011 and 2016, IMF forecasts around 9.5% growth, which is hardly a slowdown.
Will a Chinese slowdown affect global growth and commodity prices? Not if other countries like India step into the breach. As the Furtado song goes, Well the dogs were barking at a new moon/whistling a new tune.
Write to simplyeconomics@livemint.com
Comment E-mail Print Share
First Published: Fri, Apr 22 2011. 10 15 PM IST