Thursday, August 04, 2011

The world is in good hands, Chinese hands - Michael Spence

Ask the Nobel Prize winning economist who has advised China on its latest five-year plan the question on every Australian economists’ lips and he doesn’t flinch.

“How long have we got? How much longer can China’s extraordinary explosion of economic growth continue,” I ask Michael Spence down a phone line to Italy where he lives six months of the year.

“I think the answer is something like two decades, in the later part of that they will start to slow down,” he says ahead of his book tour of Australia to promote The Next Convergence - the Future of Economic Growth in a Multispeed world.

He is a good person to ask. As well as actually advising China on its growth strategy, for the past four years he has chaired the World Bank sponsored Commission on Growth and Development set up to distill all that is known about how to drive economic growth and cut poverty.

His key insight about China is striking - that the sudden burst of growth that has revolutionised global economics and politics was the result of a conscious decision made by just a handful of people.

Deng Xiaoping and a few comrades could have decided to throw the switch to growth later - perhaps even in 20 years time; they could have decided to do it earlier, although not before Mao died and the Gang of Four were arrested in the late 1970s.

Deng and cronies decided first to allow the limited use of market prices for farmers selling production over and above what was required, saw the results were impressive and then semi-secretly invited experts including the then president of the World Bank Robert McNamara to give them advice on what steps to take next. Some of the meetings took place on boats on the Yasngtze River.

“What Deng asked for was not primarily financial capital, even though he was talking to the World Bank,” Spence writes. “Rather, it was knowledge. He realised intuitively the missing piece was know-how.”

Spence himself is now providing that know-how. When he sent over his thoughts for latest the five-year plan that began this year he felt his ideas being sucked out of him.

“They ingested. They didn’t just kind of get a couple of people read it, they sent to everyone involved in the five-year plan. It doesn’t mean they believe it. This is an economy that ingests ideas,” he tells the Herald...

It is the ability to take what works from the West that has seen China’s industrial revolution spark growth rates far faster than those during the first and second centuries of the West’s revolution. Starting very late has allowed it to use ideas, processes and machines that have already been tested to supercharge what used to happen more sedately.

When will it stop? Greenhouse gases might put a stop to it. More on that later. But otherwise it is hard to see a roadblock.

“This is a country with a per capita income of $5000. That’s a huge improvement over $300 but it is a long way from $25,000,” he says.

“What happens when you get to $20,000 - whether you turn out to be Italy or the United States or Germany - depends on a whole new set of factors. But the immediate challenge over the next two decades is to get over the middle income transition, to get to $10,000.”

“There are risks, the thing could blow up politically. It’s not a done deal. But if income is $5000 now, in 15 years it could easily double twice, even if things slow down a bit in the later stages. By then China will be a middle income country. In terms of sheer economic size all China has to do is double once more, then it will be comparable in economic size to the US or to Europe, depending what happens to Europe.”

But doesn’t China’s sustained growth depend on the rest of the US and Europe saying out recession.

Not any more says Michael Spence.

“Right now the emerging economies that are trading with each other are self-sustaining. They can grow even if the major industrial powers just plug along.

“If you go back ten years that wouldn’t have been possible. Weak growth in Europe or the United States of 1 or 2 per cent would have dented growth in China and associated emerging nations. But not now. China will become increasingly decoupled as time moves on. Its own emerging middle class will drive its own growth.”

But surely its billions of citizens will never get to the stage where they pump into the air pollutants at the rate of around 20 tonnes per person per year as do Australians and Canadians and residents of the United States.

No, they never will, says Michael Spence.

They will use much more energy per person. At the moment it is less than 5 tonnes. “But the realise they will have to deviate from our growth pattern before they get to 10 tonnes per person, where the Europeans are now. They will never get to Canadian or Australian emissions.”

“This is a new realisation, maybe just two years old. They are set to become so big economically, to have such a big stake in the planet, that they realise they will have to save the planet.”

“In the US people find China’s growth confronting. I know Australians don’t. It looks as it could work out well.”

Michael Spence will speak at the Grattan Institute in Melbourne on August 15 and at the National Press Club in Canberra on August 17.

Published in today's SMH and Age

China is preparing to take the lead from developed nations in saving the planet from climate catastrophe according to an advisor to the nation who worked on its most recent five year plan.

Nobel Prize winner Michael Spence who is about to visit Australia has told The Herald there has been a sharp change of attitude in the world’s fastest-growing big economy.

While it was set to continue to grow very strongly for two decades, underpinning Australia’s prosperity it would aim to approach developed nation standards of living without developed nation emissions per household.

“China and is starting to internalise these things,” he said.

“They are coming to realise that they will soon be big enough economically to put pressure on the entire globe’s environment. In a sense they will become much of the globe.”

“They are moving away from the free-rider problem you have in smaller places such as Australia where you say - why should we do anything, the US is not doing anything we are just shooting ourselves in the foot.”

“This is a real change. It is very recent. It forms part of their new five-year plan. It would date back a couple of years at most.”

Asked whether a small nation with big per capita emissions such as Australia should bother cutting those emissions Professor Spence said it was more important to take part in global discussions.”

“Australia can be influential, but it is not smart to get too far ahead. The Europeans are pertty aggressive, but they are suffering push back from their business community, and that will get worse with Europe’s growth problems.”

China’s new approach was part of a journey rather than a fixed outcome and it might still decide not to assist the rest of the planet and go for western-style emissions.

“At some time in the future China may face a choice between draconian measures to restrain emissions for the good of the planet and further growth. It may chose to go for growth regardless. If it does that I don’t know how my grandchildren are going to do.”

China’s emissions per capita remain a fraction of the West’s at less than 5 tonnes per person per year compared to 10 tonnes in Europe and near 20 in Australia, the United States and Canada.

China was reaching the stage where its growth would be self-sustaining. It would no longer depend on consumers in any other nation, relying solely on demand from its own middle class.

Published in today's SMH

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