Monitor | Cautionary fable from 1994 holds good for China today
This year, China's growth is expected to be driven by investment without gains in efficiency and this scenario is not sustainable, says a consultant
If China's new leaders really want to understand the economic challenge they face, they should dig out an essay published in the November 1994 edition of magazine by American economics professor Paul Krugman.
Entitled , the essay caused quite a stir at the time. In it, Krugman compared the rapid emergence of the Asian "tiger" economies with the fast growth of the Soviet Union in the era of Joseph Stalin and Nikita Khrushchev.
The performance of the Soviet economy might have looked impressive, even intimidating, to outside observers, argued Krugman. But there was nothing miraculous about it. The Soviet Union's rapid output growth could be explained entirely by rapid growth in inputs of labour and, especially, of capital.
Asia's economies had grown in the same way, Krugman explained. Bringing underemployed peasants into the urban workforce, and investing lavishly in machinery and infrastructure had produced an enormous surge in output.
But the growth was based on "perspiration rather than inspiration". Everything was achieved by pouring in more labour and more capital. Nothing was due to improvements in the amount of output per unit of input, or what economists call total factor productivity.
