Second, in every single case even the greatest of skeptics arguing against the sustainability of the growth miracle ended up wildly underestimating the difficulty of the subsequent adjustment. Had those who were most skeptical about the Japanese growth miracle been told in 1990 that Japan faced twenty years of growth under 1 percent, even they would not have believed it. Had any economist who questioned the sustainability of the Soviet economy been told in 1970 that within twenty years the Soviet economy would have collapsed, and with it the state itself, it is unlikely that he would have taken the claim seriously. Even the most pessimistic of Americans in 1929 or Brazilians in 1980 would not have included in their bearish forecasts the possibility that their countries would experience a decade of negative growth. In retrospect the adjustment period would be described as a middle-income trap, a debt trap, or any of a dozen other traps, but it’s virulence would have always come as a shock.
Third, the adjustment period was never just a period of difficult economic adjustment. It was also always a period of tremendous political difficulty, fractious political disputes and, more often than not, a period of radical political transformation. In fact excluding a few, very unique cases (Singapore, for example, whose small size and external orientation gave it a flexibility impossible in a larger country), the adjustment that followed a long period of miraculous growth has always been even more striking as a period of political change than as a period of economic change.
And it is not hard to see why this should be the case. It is a commonplace among historians, almost a truism, that when a country’s governance is structured in such a way that incentives for the political elite are aligned with the economic interests of the country, the country is likely to grow rapidly and in a healthy way. When they are misaligned, there are likely to be significant strains and pressures that resolve themselves through the political system.
How does this apply to China? In the early 1980s when China’s reforms began, the country was seriously underinvested and urgently needed to improve its infrastructure, its manufacturing capacity, and housing and education. As the country’s farsighted leaders engaged in a massive program of investment, there were many opportunities for the state and for the political and economic elite to benefit directly from transforming the country’s capital stock from one of the weakest in the world to one of the best. Among the consequences was that while the lives of ordinary Chinese improved at a pace perhaps unmatched in human history, the share of China’s GDP retained by the state sector and the political elite actually increased for thirty years as they benefited disproportionately from Chinese growth. China produced more billionaires more quickly than anyone in history.
But every country that has experienced a growth miracle has also developed imbalances that had to be reversed, and the adjustment process is simply the process by which these imbalances are reversed. China is no exception. In order to rebalance the Chinese economy we must move from a period during which the elite received a disproportionate share of growing Chinese wealth to one in which ordinary households and small businesses receive a disproportionate share. After thirty years during which Chinese households retained an ever smaller share of the rapidly growing Chinese economy, doing nonetheless very well in the process, we must shift to a period during which ordinary Chinese households receive an ever rising share of a more slowly growing Chinese economy, in fact this is almost the very definition of rebalancing in the Chinese context.
China’s economic adjustment necessarily involves, in other words, a sharp reduction in the rate at which the state and the political elite have been able to grow their assets during the past thirty years, and perhaps even an overall decline. It also requires significant changes in the ways in which the financial system funds economic activity, an increase in the role of small businesses and the service industry, a very different legal framework, and a number of institutional changes that represent a sharp break from the recent past.-- Richard O'Connell +34 666 24 1104