We don’t need to fear a Chinese slowdown – it’s real capitalism in action

Paul Ormerod
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IT HAS suddenly become fashionable to be concerned about a slowdown in China’s growth rate. It’s not a matter of a short-run cyclical downturn, with normal service resumed shortly. It is a worry that there will be a permanent slowdown by the end of this decade. Instead of annual growth rates around 10 per cent or more, the Chinese economy will settle down to the more sedate rates seen in the West in the 1950s and 1960s, in the range of 3 to 5 per cent.

The source of the problem, it is argued, is that the workers are getting uppity. Certainly, the Chinese authorities have held down increases in the living standards of the average person. As a result, the wider economy has grown faster, with the surplus ploughed back into capital investment projects.

A couple of years ago, I was in Shanghai in August. It was 35 degrees even at nine in the evening. Watching a group of middle-aged women perform Pilates in the street to the sounds of an old ghetto blaster, I could not help but feel that it will not be long before they expect an air-conditioned gym and cutting-edge music. More seriously, “internal security” is a major headache for the Communist Party. There are frequent demos and riots demanding better living standards.

But we’ve been here before. This is how the UK industrialised. In the first half of the nineteenth century, the share of wages as a portion of UK national income was much lower than today. As with China in recent decades, profits were high. This is how almost all rich countries started on the path of development. Marx even coined a phrase for it – the “primitive accumulation of capital”.

The economist Paul Krugman, now a famous critic of austerity, was not always the darling of the metropolitan liberal elite. In 1994, he published a brilliant paper in which he wrote of his “faith in free markets” called The Myth of Asia’s Miracle. Back then, the West feared economies like Japan and Singapore, which were apparently poised to take over the technological leadership of the world.

Krugman essentially rediscovered Marx and showed that their success was based on letting profits and investment boom. He concluded that “if there is a secret to Asian growth, it is simply deferred gratification, the willingness to sacrifice current satisfaction for future gain”. Intriguingly, given his current advocacy of increasing government debt, Krugman went on: “That’s a hard answer to accept, especially for those American policy intellectuals who recoil from the dreary task of reducing deficits and raising the national savings rate”.

But the slowdown in Asian growth rates was not at all bad news. Rapidly rising living standards created export markets for consumer products. In China – and everywhere else – people now demand services. And these are the sorts of things at which the US and the UK excel. The process of China growing up is a massive opportunity, not a problem.

Paul Ormerod is an economist at Volterra Partners, a director of the think-tank Synthesis and author of Positive Linking: How Networks Can Revolutionise the World.