Martin Wolf’s April 2 column in the Financial Times addresses China’s growth prospects, timely given the topic of today’s (April 3rd) class. He argues, without full details, for parallels between Japan and China that point towards the possibility of growth below the Chinese government projections he discusses. We’ll develop the simple Solow growth model today, and growth accounting to help us organize our analysis of the issue.
I left a comment on the article on FT, noting the potential for a (continued) savings-investment imbalance. In that China would parallel Japan, with demographics and a natural cycle of slower growth leading to slower investment keeping savings high relative to investment. Where will that flow? Well, we talked about the challenge for monetary policy due to the lack of “deep” financial markets. If this imbalance leads to the government serving as the “borrower of last resort” then maybe over the next 10 years China will end up with a deep market. [Cf. my comment on the post on the potential of the RMB to serve as a reserve currency.]
To conclude, remember our identity (S-I) + (T-G) = (X-M). If the net trade side (X-M) can’t expand, because China is already “large” in global markets, and the (S-I) side is a big “+” then a big negative of (T-G) is a potential adjustment mechanism (the other is a big drop in GDP, outright negative-growth recession cf. the paradox of thrift). But we’ll develop a “growth accounting” framework to look at this issue from a different direction.
PS Note the addition of a link to the powerpoint slides in both the pages at left and on the course schedule.