China’s era of spectacular economic growth is coming to an end. That’s a popular theme at the moment, with any number of culprits cited, including an overleveraged financial system, pollution, too little consumer spending and corruption. It’s reached the point that the Chinese government’s International Press Center felt compelled to gather a group of reporters in Beijing recently just so that Justin Yifu Lin, the former World Bank chief economist who is now a professor at Peking University and a government adviser, could tell them that he’s “confident China will be able to maintain 7.5% to 8% growth.”
But here’s the thing: A gross domestic product growth rate of 7.5% to 8% is already a significant slowdown from the nearly 10% annual pace at which China’s economy had been growing until last year. And while all the economic issues cited above are real, the big issue confronting the Chinese economy is something simpler and more encouraging: The country is on the cusp of succeeding in its epic quest to break into the ranks of the world’s affluent nations. When that happens, growth tends to slow.
That’s been the finding of economists Barry Eichengreen of the University of California, Berkeley, Donghyun Park of the Asian Development Bank in Manila, Philippines, and Kwanjo Shin of Korea University in Seoul, South Korea, in two recent studies of growth slowdowns in emerging markets around the world. In the first, published in Asian Economic Papers last year, they reported a marked tendency toward slower economic growth when per capita incomes reach around $17,000 a year (in 2005 prices). In a newer working paper with more-complete data, they revise that to report two inflection points, one in the $10,000-$11,000 range and another around $15,000-$16,0000.
China, with a per capita GDP of $7,827 in 2011 (in 2005 dollars, according to the latest edition of the Penn World Tables), is getting close to that first landmark. It also has a couple of other characteristics that Eichengreen, Park and Shin have found to be identified with growth slowdowns – an aging population and an economy that has favored investment over consumption. Basically, it’s due. Or, as Eichengreen put it in an email when I asked him about it:
“Financial systems, deleveraging and environment and political problems all differ across countries, but all fast growing, late developing countries slow down once the low hanging fruit has been picked. China can add several percentage points of growth a year by shifting 20 million workers from rural underemployment to urban employment, but once the pool of underemployed labor is drained it’s, well, drained. If you’re a technological latecomer, you can grow fast by importing foreign technology, but once you’ve succeeded in that you have to start investing in and developing your own, which is a harder task.”
Remember, these difficulties are the fruits of success. With 7.5% annual growth, China would cross the $10,000 per capita threshold in 2015, and $15,000 in 2020. Well before then it would pass into the ranks of the world’s “high income” nations, according to the World Bank’s classification.
None of this means there aren’t big risks inherent in such a slowdown for the Chinese government (unlike South Korea, which experienced its own slowdown in the late 1980s, China is showing no signs of transitioning toward democracy) and for the global economy (for which a Chinese slowdown would have an impact that earlier slowdowns in Korea and the other Asian tigers did not). But it is important to remember that for an emerging market, slowing down can mean you’ve arrived.
(Justin Fox is executive editor, New York, of the Harvard Business Review Group and author of “The Myth of the Rational Market.”)
© 2013 Harvard Business School Publishing Corp.