Limits to growth

When studying the French Revolution and the English Civil Wars as special topics in my History A-Level, I was powerfully struck by the observation of a number of writers on these events that such upheavals seemed to be precipitated not by conditions of absolute deprivation - food shortage, natural disasters, chronic deflation, etc. - but by a mismatch between economic growth and rising middle-class expectations. These two great political cataclysms actually followed on from periods of rapidly increasing prosperity. The problem is that such rapid growth leads to an expansion of the middle-class, and it tends to be the middle-class - educated, aspirational - who are most likely to make demands of their government, and most likely to get stroppy if those demands are not being adequately met. Moreover, rapid growth engenders rapidly rising expectations, particularly amongst this voluble middle-class - expectations which may, indeed, start to rise faster than the economic growth that could realise them. And if the economic growth rate tails off, even slightly, while middle-class aspirations and expectation of public goods continue to rise as quickly as during the preceding boom decades, a dangerous 'expectation gap' suddenly appears. This is when revolutions happen.

China is facing such a slowdown. As I observed back at the start of the global financial meltdown, after a decade-and-a-half of consistent double-digit annual GDP growth, even trimming down that growth rate by two or three percent is going to feel like a recession here. China's growth has dipped back into single figures over the past couple of years. And the government - suddenly mindful of the need to find a more sustainable path of development! - is projecting a rate of just 7% per year in the new Five-Year Plan (although that will almost certainly be exceeded, at least for a while; nevertheless, the days of 11% and 12% annual growth are gone).

Even without this deliberate reining in of the economic juggernaut, it would seem that China might be about to hit a brick wall anyway. I was interested to read this recent article in The Economist (about this paper for the National Bureau of Economic Research by Barry Eichengreen, Donghyun Park, and Kwanho Shin) which suggests there is a critical threshold at which rapidly developing economies find their growth rates abruptly tailing off towards the lower single-digit level of the advanced economies. The researchers have come up with a very precise figure for this threshold: a per capita GDP of $16,740.

China is set to hit that mark within the next two or three years. Furthermore, these researchers have identified a number of risk factors which make a sudden and violent slowdown around this threshold more likely, if not inevitable: an undervalued currency (oops, China), a protectionist attitude (oops), weak domestic consumption (oops), a low ratio of workers to dependents (One Child Policy - oops), and high or irregular inflation (yay, China! until recently, but now starting to look like another oops).

Within a decade, China's growth could have slumped to 5% a year. And a lot of people - especially the middle classes - are going to be very, very grumpy about that.

This - historically - is how revolutions happen.

[Of course, revolutions don't have to be violent, bottom-up convulsions; they can be achieved in a gradual way, guided by an enlightened leadership, without too much economic damage or loss of stability. But what are the odds of the Chinese Communist Party being able to pull off something like that? Not good, I fear; not good at all.]