Krugman on why China is going down: no more workers

Outlook is gloomy

paul krugman China slowing downPaul Krugman says China is hitting a wall, one that it should have anticipated and worked to avoid long ago, but it will now hit a crisis of its own making full on and the result will be “big trouble”.

China has had an export-driven economy with domestic consumption rates that are half the US average. The country’s currency was kept artificially low, and the country binged on cheap credit.

The Chinese government got away with it for so long because there were limitless number of workers that kept inflation low.

The existence of this surplus labor, in turn, has two effects. First, for a while such countries can invest heavily in new factories, construction, and so on without running into diminishing returns, because they can keep drawing in new labor from the countryside. Second, competition from this reserve army of surplus labor keeps wages low even as the economy grows richer. Indeed, the main thing holding down Chinese consumption seems to be that Chinese families never see much of the income being generated by the country’s economic growth. Some of that income flows to a politically connected elite; but much of it simply stays bottled up in businesses, many of them state-owned enterprises.

It’s all very peculiar by our standards, but it worked for several decades. Now, however, China has hit the “Lewis point” — to put it crudely, it’s running out of surplus peasants.

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