Can the Earth support Chinese growth? The coming boom-bust cycle.

• Author: Nakamae, Tadashi
• Position: Cover Story

In the hope of stimulating a lively debate, let us consider four scenarios for the economic performance through 2015-20 of China and Japan, relative to each other, and relative to appropriate growth paths for a developing and an industrialized economy--say 7 percent for China and 3 percent for Japan. The four scenarios to the left are followed by questions for discussion below.

Question: Which scenario would most seriously undermine the security status quo in Asia?

Answer: Scenario One.

Question: Which scenario would be worst from the viewpoint of global economic growth?

Answer: Scenario Two.

Question: Which scenario, by concentrating the world's resources in Asia, would most seriously threaten the U.S. position as the world's sole super power?

Answer: Scenario Four.

Question: Which scenario, therefore, might the United States see as the most desirable of the four?

Answer: Scenario Three.

Question: Which scenario is associated with the greatest country risk for China?

Answer: Scenario Three.

Question: Which scenario runs most contrary to the general prevailing mood of optimism on China and of pessimism on Japan?

Answer: Scenario Three.

Scenario Three thus emerges as perhaps the most intriguing--if not necessarily the most likely--of the four scenarios.

I have long argued that the first part of Scenario Three--sustained Japanese recovery is not an impossibility. It is becoming more difficult as Japan's population ages and shrinks. Nevertheless, given deregulation and higher interest rates, Japan can still turn things around.

In support of the second part of Scenario Three, I would like--in the role of devil's advocate--to focus on two major downside risks for China; namely

* The risk that the Earth is simply not big enough to sustain rapid Chinese growth;

* The risk that, in the absence of a properly functioning market mechanism, investment-led growth will lead China into one boom-bust cycle after another, with each boom less sustainable than the previous one.

CAN THE EARTH SUPPORT CHINESE GROWTH?

The Chinese economy today is reminiscent of the Japanese economy in 1973, when the first oil crisis drove down Japan's long-term growth rate from 10 percent to 4 percent. But Japan then was a small fish in a big pond. China now is a much bigger fish in a more overcrowded pond.

China's total population is 1.3 billion (ten times that of Japan), of which around 900 million Chinese may be assumed to be of working age. If we assume a labor participation rate of 65 percent, then given that an industrializing economy normally requires around 20 percent of the working population to be employed in manufacturing, this raises the prospect of...