November 07, 2012
The NYT has an article that discussed the possibility that China’s economy will be less focused on investment and more focused on consumption and improving the quality of life of the Chinese people. It notes the extraordinary share of GDP in China that is devoted to investment and includes a graph that shows in the 1980s both Japan and South Korea also had an extraordinary share of GDP devoted to investment. It then tells readers that:
“Growth in Japan and South Korea started to slow and eventually tumbled after investment peaked. The big question now is when China will run into the same limits, …”
This is not quite right. While Japan did have a sharp slowdown in growth following the collapse of its stock and real estate bubbles in 1990, South Korea has continued to maintain a healthy growth rate following the peak of investment in 1990. The point is important, because the NYT characterization of the situation implies that China faces an inevitable crisis while the experience of South Korea suggests that China could transition to a path of healthy growth that is less driven by investment.
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