Thursday, 3 February 2011

The starving and inattentive panda

The rules of thumb which, good or bad, became embedded in the discipline of macroeconomics evolved during a period when most of the exemplars of economic growth shared many common features.  These structural relationships had become buried in the models.  Recent history has been unveiling them.

During the industrial revolution, as each of the developed world countries generated more economic growth at a national level, they also generated growth on a per capita basis.  In other words the average person found their income and wealth rise as the country itself found its relative position rising.  This has implications for the set of policy options open to that country.

When a country finally reached the 'big table' in terms of economic clout, then a certain set of assumptions are implicitly brought into play about what that country can afford to do to pay for its place - in terms of constraints on its fiscal policy, monetary policy, currency policy, growth policy.  However this policy consensus assumes implicitly a certain relationship between economic growth and population growth.  

But China stepped out of economic growth for the guts of half a century and, even though it tried to do the same for its population growth, it didn't achieve that.  The net result is a rich country which deserves a place at the top table, but one where the average citizen - and there are many of them -  is really quite poor relatively and absolutely speaking.  Policy makers ought to realise that with China, the GDP-to-Population growth relationship is quite different and that the usual constraints one once observed on a 'top table' economy may not be associated with the same degree of policy flexibility in the same way as it had done for many other growing national economies.

This point is strictly economic in scope, and has no bearing on the repugnancy of the political regime currently in power.