Excellent piece on a logical China slowdown

Morningstar:

The next 10 years will see each of the four conditions that aided the reform era’s outsize productivity gains approach exhaustion. Technological progress will decelerate as firms must innovate rather than imitate, urbanization will slow as the rural labor surplus is exhausted, returns on capital will deteriorate as overinvestment makes high-return projects ever scarcer, and the country’s demographic window of opportunity will close. Productivity growth is likely to slow from its recent pace of about 2.3%, dragging GDP growth down with it.

But by how much? History offers some clues. Over the past five decades, the typical country at China’s rung on the income ladder generated 0.7% average productivity growth in the subsequent 10 years. Notably, less than one fourth of those countries enjoyed the 2%-plus annual gains implicit in consensus forecasts for China.

More ominous is the possibility that productivity growth utterly stagnates–roughly one third of countries at China’s income level saw flat to negative productivity growth for an entire decade. Academic research suggests flatlining productivity is especially common among previously fast-growing middle-income countries, a phenomenon economists refer to as the middle-income trap.

RTWT. We’ll come back to this shortly, when we have time, but it contains a lot worth pondering, since there’s a lot of what seem to be good parallels from other developing economies. Meanwhile, this is good, but everyone should cool it since almost no one knows what they’re talking about.

Leave a Reply