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Human capital key to economic snag
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ONE of the most notable developments of the world economy since the financial crisis in 2008 is that advanced economies have been on their way to slow yet firm recovery. On the contrary, emerging economies have experienced slowed growth to varying degrees. How they can break the bottleneck of slowed growth is a topic of significance to the world economy.
Domestic and foreign experts discussed the issue recently at the 2014 Shanghai Forum, hosted by Fudan University and the Korea Foundation for Advanced Studies. At the panel discussion on “Asia’s Growth Bottleneck,” Hua Min, Fudan University professor of economics, pointed out that the crisis engulfing emerging economies might eventually evolve into a prolonged downturn.
Hua said Asian prosperity tends to be short-lived. Japan’s economic boom lasted 50 years before it turned to bust. Having grown briskly for 35 years, China’s economy is at a crossroads, with looming signs of a contraction, said Hua.
He believes that the short-lived prosperity is a result of the Asian “catching-up” growth model. High GDP rates were achieved at the price of social reforms necessary to sustain the growth momentum. Some “catching-up” economies were thus plunged back into poverty and fell into the middle income trap — a term that refers to the limits to developing economies’ growth.
This particular growth model stresses government support, exports and heavy investment as its main components, said Moon Woo-sik, professor at Seoul University and a member of the Monetary Policy Committee of the Bank of Korea.
According to Moon, despite falling investments in both South Korea and Japan, investments as a share of GDP continue to grow in China. However, this trend won’t necessarily last, said Moon.
Outdated Asian model
Since there is almost a global consensus that the once-successful Asian growth model is now outmoded, consumption has been hailed as an alternative recipe for success. Although the contribution of consumption to Chinese GDP is still small, and falling, this fact also means there is plenty of room for Chinese consumption to pick up, Moon observed.
In terms of the dynamics for Asian economies’ growth, the Chinese government’s efforts to boost consumption may not reap its intended effect, lamented Professor Hua. Consumption should be a result of growth, not a cause thereof. People must be enriched before they are encouraged to consume, he said. However, since the new round of urbanization promises to pay demographic dividends — by freeing more peasants from their land and enabling them to migrate to cities — pent-up potential can be unleashed to create consumption, he said.
Rural potential
Robert J. Shiller, Yale University professor and 2013 Nobel laureate in economics, concurred. He observed that China should overhaul its policy to bring rural talent into the growth equation, a source of massive productivity that often tends to be underestimated. They should be included in the social security system, so that nobody is left behind.
Unlike Professor Hua, Shiller is more sanguine about Asian growth, convinced that the view of Asian short-lived prosperity hasn’t been born out by any statistical evidence. Of course, these Asian countries, such as China, are mired with problems including demographic changes and legacies of the one-child policy. But investment in human capital and education can unleash potential and thus serve as a huge impetus for growth.
Adam Posen, president of the Peterson Institute for International Economics, also objected to Hua’s gloomy view about the middle-income trap. China’s urbanization is far from complete as there are still hundreds of millions of Chinese stuck in the countryside, said Posen. He argued that apart from the need to promote regional integration among Asian nations, equal attention has to be given to internal integration within China.
Better internal integration can be reflected by a movement of jobs and education opportunities from the coastal areas to inland provinces. Shanghai, for example, is ill-suited to development of manufacturing, which can be relocated in central and Western China, said Posen.
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