In Forbes, Tim Worstall looks at last week’s announcement that China is (slightly) lowering their economic growth forecast.
On that larger scale though what people are worrying about is this. Catch up growth is easier than growth from the technological frontier. What is meant by this is that it’s a great deal easier to generate economic growth if you have an example in front of you of how to do things. To take a trivial example, if you can go and buy a mobile phone, take it apart to see how it works, it’s a lot easier to copy that technology than it is to invent it for the first time. And this is true of how you make cement, how you put up buildings, how you farm a field and so on. And at root that’s what economic growth is: becoming more efficient at doing all of these things as well as everything else. Each time you become more efficient at doing one task you free up resources to be doing something else. Thus you get both the original thing plus the new one from the same resources: this is the very definition of economic growth.
However, there’s a limit to such catch up growth. In certain areas China is right at that technological frontier (in some areas ahead of the rest of the world in fact). Which is where things become more difficult: there’s no one to copy. Therefore that invention has to happen domestically. This is obviously more difficult. But also it rather requires a certain set of institutions. The rule of law, property rights and so on. These aren’t things that China notably has (although things are very much better than they were decades ago). It’s those headwinds that need to be beaten. Bringing in these new institutions, embedding them in the society and the economy, without causing so much disruption as to slow down growth while they are done.
The standard jargon for this is “middle income trap”. To be crude about it the general feeling is that it’s pretty easy to go from dirt poor to middling income. The essence is really just to stop doing stupid things that hold economic development back. China’s done that very well even though they did start from a very low level of an immense number of very stupid things that Maoism did to hold economic growth back. The middle income trap is where the transition over to those institutions that promote technological frontier growth don’t appear (or are not imposed). And thus the stunning growth peters out.
