The world’s economic leaders need to “rebalance” their thinking as well as their economies. Fiscal and monetary policies have dominated. That makes sense to a degree: decisions on deficits, debt and the eurozone this autumn may well determine whether the global economy slides deeper into danger, or begins the long climb back. But these policies are insufficient for sustained growth: we need action on the structural dynamics to generate jobs, higher productivity and a sustainable long-term rebalancing. What happens in China is as important as Europe, Japan, or the .
China’s growth has been a source of strength in the crisis, but its leaders know their growth model is unsustainable. For 30 years, China has enjoyed average annual growth of about 10 . In 1990, its income per capita was 30 lower than the average for ub-Saharan Africa – today, it is three times greater, over $4,000. By 2030, if China reaches a per-capita income of $16,000 – a reasonable possibility – the effect on the world economy would be equivalent to adding 15 of today’s South Koreas. It is hard to see how that expansion could be accommodated within an export and investment-led growth model, so China will need to rebalance through boosting domestic demand, lowering savings and increasing consumption.
Without fundamental structural changes, China is in danger of becoming caught in a “middle income trap” – exacerbating the world’s growth problems. In the short term, there is the risk of inflation driven by food prices. In the longer term, the drivers of China’s meteoric rise are waning: resources have largely shifted from agriculture to industry; as the labour force shrinks and the population ages, there are fewer workers to support retirees; productivity increases are declining, partly because the economy is exhausting gains from the transfer of basic production methods. Then there are other challenges, including serious environmental degradation; rising inequality; heavy use of energy and production of carbon; an under-developed service sector and an over-reliance on foreign markets.