The latest news about China is that its growth rate is over 11% per annum. soon at this rate of growth it will surpass Germany and will take its place as the world`s third largest economy. The explanation for this is quite clear. One of the world`s oldest civilizations has proven itself quite adept at adapting to globalization and market dynamics.
I am writing this post on a new Toshiba lap top computer made in China. Cheap wages and dramatically improving productivity and product reliability are clearly behind the dramatic Chinese great leap forward.
These rapid growth rates make the growth rates of Canada , the US and Western Europe seem almost stagnant by comparison. One would have to go back to the end of the second world war and the rebuilding recovery phase to find anything comparable. So the obvious question being asked by analysts is are these rates sustainable. And if not what is likely to happen in the near to medium term. There is a very useful analytical tool that is part of Keynesian business cycle theory that is worth introducing. This is the theory of the accelerator which is an earlier development of the original multiplier theory that R.F.Kahn and others developed in the late 1920s and early 1930s.One of the first economists to explore and who first popularised was J.M.Clark who wrote `Business Acceleration and the Law of Demand`in the Journal of Political Economy, March 1917, p.217. The idea behind it was that investment was partly dependent upon consumption and the rate of depreciation of the capital stock and the capital to output ratio.
The multiplier shows how net of leakages any increase in investment has a muliple sustained impact upon the economy and its growth rate. The accelerator explains how this impact is magnified by creating additional induced investment through the growth of capital stock depreciation needs. In other words new investment expands the capital stock and this new durable stock needs to be serviced as it wears out thereby generating additional demand for new investment beyond the original additional investment. This has the affect of accelerating the growth rate in the boom phase.
But what goes up can also go down. If the growth rate falls then there is also an accelerating move downward as the capital/output ratio comes into play along side the fall in new investment and the decline in induced investment.Additions to the stock of capital may slow dramatically as the growth in income slows.
If ,for example, the growth rate falls toward zero but the income level is sustained gross new investment will be totally dependent upon replacing depreciated capital stock. At zero growth here will be no new net investment. The combination of these factors can lead to sharp reversal.
So the Chinese authorities are best to be aware of this risk and carefully manage the growth lest an excessive reversal arrives. One way in addition to the traditional use of tax and interest rate policy is to consider increasing wages so as to slow the growth rate that is export dependent while at the same sustaining aggregate domestic consumption and improve the trade balance in favour of greater imports from Chinese trading partners.
This would have the welcome effect of simultaneously slowing the boom to sustainable proportions and preventing a trade war.
On the human rights front China`s recent judicial decision to convict a former citizen who is now a Canadian and sentence him to life imprisonment is very regrettable. It would be a good sign of progress and modernization if the Government would pardon him and allow him to return to his home in Canada. Mr. Huseyin Celil is an Islamic religious leader who appears to have been wrongly convicted of violating the law while on a visit to his former home in the Uyghur homeland region in north-western China
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