CAMBRIDGE, Mass. — A. Michael Spence won the Nobel Memorial Prize in economics in 2001 for esoteric research on how people make decisions when critical information is hard to obtain. But by that time, after more than a decade and a half as an academic dean at Harvard and Stanford, many of Spence’s colleagues had begun referring to him as a “former economist.”
Spence, who turned 70 last year, begs to differ: He learned to become a better, “older” economist, he countered.
In recent years, Spence has become something of an expert on the Chinese economy after being invited by Beijing, along with Edwin Lim, a former chief World Bank representative in China, to put together an unaffiliated advisory group, supported by the Cairncross Economic Research Foundation. The group has met intensively with the Chinese government’s key planning and economic officials and conducted what those officials have called an unprecedented study of China’s development challenge.
While Spence has come away impressed with how “curious and open” Chinese officials are, he doesn’t mince words about how serious China’s problems are.
With the global economy increasingly dependent on China, the danger is that the nation is “on a collision course with its own growth model,” he said in an interview. The Chinese must move beyond low-wage exports and “generate a fair amount of demand domestically, or they’ll fail.”
China faces a daunting challenge called the middle-income transition, where developing nations have repeatedly stumbled. Since Japan rebuilt after World War II, only the Asian Tigers — South Korea and Taiwan and the city-states of Singapore and Hong Kong — have made it from middle-income status generating, in today’s dollars, some $10,000 in economic activity per person to high-income status of $20,000 and above.
In the modern era, poor nations have often found that the most effective strategy to jump-start their economies is to specialize in low-wage exports, tapping vast global demand. But the middle-income transition, Spence argues, requires a much more sophisticated economic policy, with nations gradually moving up the ladder of producing more complex industrial goods, and, importantly, strengthening domestic demand for consumer goods.
Moreover, an export-led strategy no longer can rely on nearly insatiable demand from the United States, as the Asian Tigers could through the end of the 20th century. Stagnant economies in Europe and Japan limit global demand even more. China therefore faces unusually harsh pressures to increase the buying power of its own consumers if it wants to make the leap to a truly prosperous nation. This is a fairly conventional Western view of the Chinese economy. But what was surprising is that it was a central theme of the no-nonsense 2011 report prepared under Lim and Spence — and that Beijing published it not just in English but in Chinese for domestic consumption.