Finding Growth in a Fractured World

CAMBRIDGE – For decades, China set a shining example of how to capitalize on globalization to accelerate domestic economic growth and development. These days, however, the country risks becoming a cautionary tale about mishandling globalization’s shift from a beneficial tailwind to a disruptive headwind.

Although the Chinese economy’s recent travails have some unique characteristics, they illustrate the growth challenges facing many developed and developing countries. They also show that while economic growth is not everything, you cannot solve much of anything without it.

This year was supposed to mark a robust economic recovery for China. Instead, many analysts have been forced in recent days to again revise down their projections for Chinese growth, and more are likely to follow suit. This increasingly pessimistic outlook can be attributed to three main factors.

First, as the most recent trade data show, the global economy no longer supports China’s domestic growth dynamics. In June, Chinese exports fell by 12.4% (in dollar terms), and imports declined by 6.8%, far worse than the consensus forecast of a 10% decline in exports and a 4.1% decrease in imports. These disappointing figures are the result of sluggish demand growth in Europe and elsewhere, and enhanced restrictions against China, particularly those imposed by the United States, which created a self-reinforcing cycle that further dampened the country’s growth prospects.

Second, the Chinese authorities appear to be torn between two distinct approaches to stimulating the economy, resulting in a rather indecisive policy response. While the government seems inclined to revert to the top-down stimulus measures it employed in the past, actual implementation has been limited, owing to concerns about exacerbating inefficiencies and impeding the ongoing and generally orderly deflation of debt bubbles in certain sectors. Conversely, the much-needed alternative of unleashing bottom-up economic dynamism is constrained by domestic political considerations, leaving China stuck in the muddled middle. Meanwhile, domestic policy challenges are compounded by structural factors, including the aging population, , and remaining pockets of excessive leverage.

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