Monday, June 27, 2011

The China Model of Growth

China entered into communist regima with Mao and ever since then the Chinese govt. has been using five year plans to "micromanage" the economy. Chinese economy outpaced all expectations and grew at a rate of more than 9% for more than a decade. Investments in fixed assets, High rate of savings and capital formation, suppressed demand and export led growth are all inseperable part of the chinese growth model. This model has paid off to China for years and has been a reason of envy for the Indian intellectual class for years.
The question that has recently started to emerge is that has this model enough fire power in it to take China to the next growth Stage and pull it out of the middle income trap as feared by economists. China is all set to take over US as the largest economy in terms of purchasing power parity by 2016 as per IMF's predictions. But, taking into consideration the population of China it will still remain a middle income economy as measured by per capita income. Inflation in China is running highere than govt.'s target and although it is not high enough as 1988 to trigger a Tiennam Square kind of unrest still with suppressed levels of consumption in China inflation is definitely going to take toil on the population and create discontent.
Another problem facing China's Growth model is the slow down of western economies that were the main market for chinese exports so the model is threatened. With the economy escaping recession through the aid of investment in fixed assets which have reached to the tune of around 50% of GDP in 2010, loss of established markets and suppressed consumptions the Chinese economy is bound to face an overcapacity. This is where the chinese model has beeen challenged.
Compared with this the Indian Growth model is based on active participation of public and private players and high domestic consumption and hence unstability in global market does not pose a threat of magnitude as large as chinese economy is facing. Yes, India has its share of problems with rampant corruption and negative investor sentiment at present but, Indian growth model is sound in itself.
It is now on time to reveal if Chinese Growth model will deliver and pull the economy out of middle income trap.

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