Teaching Comparative Government and Politics

Wednesday, April 22, 2015

Challenges of economic policy

Linda Yueh's review at the BBC offers a clear view of the challenges facing China's rulers in the area of economic policy. Can the CPC leaders control consumption as easily as it controlled industrial production? (You might want a briefing about the factors of production and the elements that make up the GDP to go with this article.)

The end of an era for China
Probably the least surprising thing about China's GDP growth rate for the first three months of the year is that it slowed to 7%. After all, that's the target for the year.

Chinese consumers
What's more surprising are the drivers: consumption more than investment, services outpacing manufacturing, and domestic demand rather than exports. Taking today's figures and the data for March together with the full year picture for 2014 shows that China's growth drivers are changing.

Consumption contributed 3.8 percentage points to 2014's 7.4% growth rate, which is more than investment which accounted for 3.6 percentage points. Net exports - so exports minus imports - contributed nothing.

Consumption has risen to account for more than 50% of GDP… and finally places China in the realm of market economies where consumption is between half to two-thirds of GDP.

Indeed, industrial production in March expanded by 5.6% in March, the slowest on record, which was significantly outpaced by retail sales - a measure of consumption - which grew at over 10%.

This is what China has been trying to achieve…

It's part of their aim of overcoming the middle income country trap to become prosperous by improving the quality of the growth drivers in the economy.

Growing more through consumption and services is similar to the growth drivers of developed economies such as the U.S. and Europe. So, China's re-balancing also marks the beginning of the end of a period of rapid growth that is based on industrialisation…

So, the picture in terms of re-balancing looks better than the headline growth rate of the slowest quarterly growth rate since the global financial crisis…

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