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Inputs, outputs and growth

Reading Paul Krugman's essay on “The Myth of Asia's Miracle" did a lot to clarify my thinking on China's economy. The key concept, Krugman explains, is that "economic expansion represents the sum of two sources of growth. On one side are increases in 'inputs': growth in employment, in the education level of workers, and in the stock of physical capital (machines, buildings, roads, and so on). On the other side are increases in the output per unit of input; such increases may result from better management or better economic policy, but in the long run are primarily due to increases in knowledge."

When you take an undeveloped economy and pump foreign investment into it, you're mainly growing your inputs, and you can do that rapidly. If you've got the money and the labor and the raw materials, you can build roads, and lay telephone wire, and erect buildings, pretty quickly. And if foreign firms need workers and are willing to pay more than the prevailing wage, it doesn't take all that long to bring subsistence farmers into cities.

But at some point, growing your inputs becomes difficult and you need to begin growing the output of your inputs. And my point isn't that China will or won't have trouble doing that. It's that they won't be able to do it nearly as quickly as they grew their inputs, and that's worrying, as they're an insecure authoritarian government that seems to believe social stability relies on keeping economic growth above 8 percent.

By Ezra Klein  |  June 4, 2010; 2:01 PM ET
Categories:  China  
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Your analysis only gets halfway there. The main input being absorbed by the Chinese economy is labor, via the migration of subsistence farmers to the urban sector. That migration results in roughly a tripling of the typical migrant's real wage--and an even bigger boost to that person's contribution to real GDP. Once this surplus labor pool is absorbed, GDP growth will naturally slow, as it has for every other economy making this transition. But a much slower growth rate would then also be consistent with social stability.

Posted by: madhoboken | June 4, 2010 2:23 PM | Report abuse

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