Can China maintain high growth rates under the “dual-circulation” decoupling?

Popov, Vladimir (2023): Can China maintain high growth rates under the “dual-circulation” decoupling?

Abstract

In 2020, after decades of “great international circulation” – a strategy of pursuing economic growth and development through export-oriented production – China announced that it would adopt a “dual-circulation” strategy. As was argued, “this means that, while China will continue to engage with global markets and supply chains, it will rely on domestic markets rather than external demand to drive economic growth” (Yu, 2023).

What happens to the Chinese growth rates under the dual circulation strategy? Is it inevitable that the dramatic slowdown of growth that occurred since 2007 will become permanent? This paper argues that the slowdown of the Chinese growth is due not only to the objective factors (slowdown of population increase, approach to the technological frontier), but also to policy choices made well before the “dual-circulation” strategy emerged. It is due first and foremost the cessation of foreign reserve accumulation after the “Great Recession” of 2008-09 that led to the appreciation of the yuan, decline in the growth of export, investment and GDP.

It is also argued that there are not only temporary costs of decoupling associated with restructuring (reorientation from foreign to domestic markets), but also permanent costs caused by the decline in international specialization and division of labor. It means that high growth rates could be maintained only at a higher price, in particular only with an even higher share of investment in GDP. Such a strategy can be justified only by security consideration, not economic ones.

• Item Type: MPRA Paper
• Language: English
• Keywords: dual -circulation strategy, Chinese growth, export/GDP ratio, exchange rate undervaluation, foreign exchange reserves accumulation
• Subjects: O - Economic Development, Innovation, Technological Change, and Growth > O1 - Economic Development > O11 - Macroeconomic Analyses of Economic Development; O - Economic Development, Innovation, Technological Change, and Growth > O2 - Development Planning and Policy > O24 - Trade Policy ; Factor Movement Policy ; Foreign Exchange Policy; O - Economic Development, Innovation, Technological Change, and Growth > O4 - Economic Growth and Aggregate Productivity > O47 - Empirical Studies of Economic Growth ; Aggregate Productivity ; Cross-Country Output Convergence; O - Economic Development, Innovation, Technological Change, and Growth > O5 - Economywide Country Studies > O53 - Asia including Middle East

References

Bhalla, S. (2012). Devaluing to Prosperity. Misaligned Currencies and Their Growth Consequences. Washington, D.C.: Peterson Institute for International Economics, 2012.

Dollar, D. (1992). Outward-oriented developing economies really do grow more rapidly: evidence from 95 LDCs, 1976-1985. In: Economic Development and Cultural Change, Vol. 40, No. 3, April, Chicago: University of Chicago Press, April 1992, pp.523-44.

Easterly, W. (2001). The Lost Decades: Explaining Developing Countries Stagnation 1980-1998; Washington, D.C.: The World Bank, February 2001.

Greenwald, B., Stiglitz, J. E. (2013). Learning and Industrial Policy: Implications for Africa. In: Stiglitz, J., Lin, J., Patel, E. (Eds). The Industrial Policy Revolution II. Africa in the XXI century. International Economic Association Series. London: Palgrave MacMillan, 2013.

Griffith-Jones, S., Ocampo J. A. (2008). Sovereign Wealth Funds: A Developing Country Perspective. Paper prepared for the workshop on Sovereign Wealth Funds organized by the Andean Development Corporation. London, February 18, 2008. Available at: http://www.stephanygj.net/papers/SovereignWealthFundsDevelopingCountryPerspective2010.pdf .

Harris, R. and Li, Q. C. (2007). Learning-by-Exporting? Firm-Level Evidence for UK Manufacturing and Services Sectors. Glasgow: Business School - Economics, University of Glasgow, 2007. Available at: http://www.gla.ac.uk/media/media_36279_en.pdf .

Hausmann, R., Hwang, J., Rodrik, D. (2005). What You Export Matters, In: NBER WORKING PAPER SERIES, NBER Working Paper No. 11905. Cambridge, MA: National Bureau of Economic Research, December 2005. Available at: http://www.nber.org/papers/w11905.pdf .

Lin, Justin Yifu (2017). Industrial policies for avoiding the middle-income trap: a new structural economics perspective. Journal of Chinese Economic and Business Studies, 15:1, 5-18, DOI: 10.1080/14765284.2017.1287539

Lin, Justin Yifu, Guanghua Wan, Peter J. Morgan (2016). Prospects for a re-acceleration of economic growth in the PRC. - Journal of Comparative Economics, vol. 44 (4), pages 842-853.

Lin, Justin Yifu & Xiaobing Wang (2022) Dual Circulation: a New Structural Economics view of development – Journal of Chinese Economic and Business Studies, 20:4, 303-322, DOI: 10.1080/14765284.2021.1929793

Maddison Project Database, version 2020. Bolt, Jutta and Jan Luiten van Zanden (2020), “Maddison style estimates of the evolution of the world economy. A new 2020 update ”.

Polterovich, V. and V. Popov (2004). Accumulation of Foreign Exchange Reserves and Long Term Economic Growth. In S. Tabata and A. Iwashita (eds). Slavic Eurasia’s Integration into the World Economy. Hokkaido University, Sapporo. Updated version, 2006.

Popov, V. (2010a). Development Theories and Development Experience. - CEFIR and NES working paper #153. Moscow: Centre for Economic and Financial Research at New Economic School, December 2010.

Popov, V. (2010b). Global Imbalances: An Unconventional View. -- CEFIR and NES working paper # 160. May 2010.

Popov, V. (2011). Стратегии экономического развития <Strategies of Economic Development>. Moscow: The Higher School of Economics Publishing House, 2011.

Popov, V. (2013). Currency Wars: Why Russia and China Are Rapidly Accumulating Foreign Exchange Reserves. PONARS Policy Memo 256. June 2013. http://pages.nes.ru/vpopov/documents/PONARS-June_2013-accumulation%20of%20FOREX,%20Russia,%20China.pdf

Popov, V. (2015). Catching Up: Developing Countries in Pursuit of Growth. MPRA Paper No. 65878, August 2015.

Popov, V. (2019). Slowdown of growth in China: Circumstances or choice. If the past experience of economic miracles is any guide, the slowdown of growth in China should either take place in a couple of decades rather than now, or it should not happen at all. – DOC-RI website, |January 28, 2019.

Popov, V. (2020). Successes and failures of industrial policy: Lessons from transition (post-communist) economies of Europe and Asia. - Oxford Handbook on Industrial Policy. Ed. by Arkebe Oqubai, Christopher Cramer, Ha-Joon Chang, Richard Kozu-Wright. OUP, 2020, p.779-810.

Popov, V., K. S. Jomo, (2017). Are Developing Countries Catching Up?. In: Cambridge Journal of Economics, Volume 42, Issue 1, 10 January 2018, Oxford: Oxford University Press, pp. 33–46, 2017.

Popov, V., K.S. Jomo (2020). Exchange Rate Undervaluation and Growth in China. Development 63, 120–125 (2020). https://doi.org/10.1057/s41301-020-00248-y

Rodrik, D. (2008). Real Exchange Rate and Economic Growth. Undervaluation is good for growth, but why? - Brookings Papers on Economic Activity, Fall 2008. https://drodrik.scholar.harvard.edu/files/dani-rodrik/files/real-exchange-rate-and-growth.pdf

Shevtsova, Y. (2012). International Trade and Productivity: Does Destination Matter?. In: Discussion Papers in Economics 12/18. Heslington: University of York, 2012.

UN DESA (2016). World Economic Situation and Prospects 2016. WESP Report. New York: United Nations Department of Economic and Social Affairs, United Nations, 2016.

Verma, Raj (2023). India’s Economic Decoupling from China: A Critical Analysis. - Asia policy, volume 18, number 1 (January 2023), 143–66. Http://asiapolicy.org

Yu Yongding (2023). China’s Response to Decoupling. Project Syndicate, June 28, 2023.

Zhang, Weiying (2017) China’s future growth depends on innovation entrepreneurs, Journal of Chinese Economic and Business Studies, 15:1, 19-40, DOI: 10.1080/14765284.2017.1287540