Michael Pettis provides a bit of insight into the theoretical underpinnings behind the China growth model:
In a 2003 book review Columbia University economist Albert Fishlow very usefully elucidated Gershenkron’s position (“Review of Economic Backwardness in Historical Perspective”, February 13, 2003, EH.net):Pettis goes on to explain the constraints which limit that sort of economic model.This of course sounds a lot like the Chinese growth model, and that of a number of other countries that experienced growth “miracles” in the 20th Century. In fact countries undergoing the process described by Gershenkron were able to generate fairly substantial increases in wealth for long periods of time – as clearly happened in China, at least during the first fifteen or twenty years since the reforms of 1978.
- Relative backwardness creates a tension between the promise of economic development, as achieved elsewhere, and the continuity of stagnation. Such a tension takes political form and motivates institutional innovation, whose product becomes appropriate substitution for the absent preconditions for growth.
- The greater the degree of backwardness, the more intervention is required in the market economy to channel capital and entrepreneurial leadership to nascent industries. Also, the more coercive and comprehensive were the measures required to reduce domestic consumption and allow national saving.
- The more backward the economy, the more likely were a series of additional characteristics: an emphasis upon domestic production of producers’ goods rather than consumers’ goods; the use of capital intensive rather than labor intensive methods of production; emergence of larger scale production units at the level both of the firm as well as the individual plant; and dependence upon borrowed, advanced technology rather than use of indigenous techniques.
- The more backward the country, the less likely was the agricultural sector to provide a growing market to industry, and the more dependent was industry upon growing productivity and inter-industrial sales, for its expansion. Such unbalanced growth was frequently made feasible through state participation.
But the case of China, and every other case of an investment-driven growth miracle, suggests that the model cannot be sustained indefinitely because there are at least two constraints. The first has to do with the constraint on debt-financed investment and the second with the constraint on the external account, and one or both constraints have always eventually derailed the growth model. _Michael Pettis
Have you been seduced into trusting China's trajectory of growth?
The beginning of the end-stage of this cycle of bubble-bust-boom
The widespread misperception that China is -- and will continue to be -- the global economic leader, is being sustained by an international financial media which cannot even change its own diapers, much less advise others how to invest their resources.
You would do best not to trust China's ruling class, and not to trust the numbers coming out of China. Be careful where you invest your money in this era of corrupt and Idiocratic government.