China’s Problems Still Manageable, Says Nobel Laureate

China has significant problems, including rising debt and increasing inflation. But Michael Spence, winner of the 2001 Nobel Prize in Economics, argues that these challenges are manageable.
Stan Luxenberg |  November 29, 2011
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Racing to modernize, China has accomplished an unprecedented feat, expanding its economy 10 percent annually for three decades. Now the country faces slower export sales to customers in Europe and the United States. Some economists fear that problems in the developed world could disrupt China’s boom. But Nobel Laureate Michael Spence is confident that the Beijing government will be able to steer through the difficult times, he said at a November event sponsored by the Chazen Institute of International Business and the Social Enterprise Program at Columbia Business School.

“I tend to be an optimist on China,” he said. “There are people who have bet against China every year for the last 31 years, and they have lost money every single time.”

A decade ago, China relied heavily on exports to the developed world, he noted. But now much of China’s trade comes from emerging economies such as Brazil and India. Those countries should continue growing even if Europe stagnates. “Emerging markets can sustain growth when the advanced countries are flat,” he said.

To be sure, China has significant problems, including rising debt and increasing inflation. But Spence argued that these challenges are manageable. The aggregate sovereign debt is still well under 50 percent of GDP, a figure substantially below that of the United States and most developed countries, he noted. In addition, the government is raising interest rates to cool the economy and keep inflation under control.

In the coming years, China is likely to enjoy continual rapid growth as the economy enters a new phase that will rely on domestic consumer spending instead of export sales, he said. As part of the 12th Five-Year Plan, the Beijing government will seek to boost wages and profits by making factories more efficient and capable of producing sophisticated products. The aim is to move workers from low-skilled jobs to positions that require higher skills and pay better wages. “The labor-intensive sector of the economy will be exported to countries that are at lower stages of development,” he said.

By emphasizing sophisticated manufacturing, China is following the successful course taken by other developing countries, including Japan and Korea, he said.

“The economy is starting to change very fast,” said Spence. “They are moving in the direction of increasing their productivity and competitiveness.”

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