07-05-09 kagame -africa has to find itown road to prosperity [ft]

7/28/2019 07-05-09 Kagame -Africa Has to Find Itown Road to Prosperity [Ft]

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May 7, 2009 7:35 pm

Africa has to find its own road to

prosperity

By Paul Kagame

At recent meetings of the Group of 20 and the International Monetary Fund, worldleaders have gathered to discuss the global economic crisis. Unfortunately, it seems thatmany still believe they can solve the problems of the poor with sentimentality andpromises of massive infusions of aid, which often do not materialise. We who live in, andlead, the worlds poorest nations are convinced that the leaders of the rich world andmultilateral institutions have a heart for the poor. But they also need to have a mind forthe poor.

Dambisa Moyos controversial book,Dead Aid, has given us an accurate evaluation ofthe aid culture today. The cycle of aid and poverty is durable: as long as poor nations are

focused on receiving aid they will not work to improve their economies. Some of MsMoyos prescriptions, such as ending all aid within five years, are aggressive. But Ialways thought this was the discussion we should be having: when to end aid and howbest to end it.

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Aid has not only often failed to meet its objectives; it has also rarely dealt with theunderlying issues of poverty and weak societies. We see this with our neighbour, theDemocratic Republic of the Congo. There, 17,000 United Nations peacekeepers thelargest and most expensive presence of its kind in history treat the symptoms ratherthan addressing the issues of capacity, self-determination and dignity.

Often, aid has left recipient populations unstable, distracted and more dependent; asAshraf Ghani, the former finance minister of Afghanistan, has pointed out, it can evensever the relationship between democratically elected leadership and the populace.

Do not get me wrong. We appreciate support from the outside, but it should be supportfor what we intend to achieve ourselves. No one should pretend that they care about ournations more than we do; or assume that they know what is good for us better than we doourselves. They should, in fact, respect us for wanting to decide our own fate.

At the same time, as I tell our people, nobody owes Rwandans anything. Why should

anyone in Rwanda feel comfortable that taxpayers in other countries are contributingmoney for our wellbeing or development? Rwanda is a nation with high goals and a senseof purpose. We are attempting to increase our gross domestic product by seven timesover a generation, which increases per capita incomes fourfold. This will create the basisfor further innovation and foster trust, civic-mindedness and tolerance, strengthening oursociety.

Entrepreneurship is the surest way for a nation to meet these goals. Michael Fairbanksbook,In The River They Swim, which uses Rwanda as one of its examples, highlights theneed to respect local wisdom, build a culture of innovation and create investmentopportunities in product development, new distribution systems and innovative branding.

Government activities should focus on supporting entrepreneurship not just to meet thesenew goals, but because it unlocks peoples minds, fosters innovation and enables peopleto exercise their talents. If people are shielded from the forces of competition, it is likesaying they are disabled.

Entrepreneurship gives people the feeling that they are valued and have meaning, thatthey are as capable, as competent and as gifted as anyone else. Asking our citizens tocompete is the same as asking them to go out into the world on behalf of Rwanda andplay their part.

We know this is a tremendous challenge given our status as a land-locked nationemerging from conflict, with few natural resources, little specialised infrastructure andlow historical investment in education. But, in fact, we have reasons to be optimistic: wehave a clear strategy to export based on sustainable competitive advantages. We sellcoffee now for high prices to the worlds most demanding purchasers; our tourismexperience attracts the best customers in the world and market research reveals thatperceptions of Rwandan tea are improving.


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This has resulted in wages in key sectors rising at more than 20 per cent on an annualbasis. We have cut our aid as a percentage of total GDP by half over the past decade, andlast year we grew at more than 11 per cent even as the world entered a recession.

While this is encouraging, we know the road to prosperity is a long one. We will travel it

with the help of a new school of development thinkers and entrepreneurs, with those whodemonstrate they have not just a heart, but also a mind for the poor.

The writer is president of Rwanda

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March 27, 2013 6:21 pm

Brazil hits growth stumbling block

By Joe Leahy in So Paulo

Brazils slowing economy and fiscal stimulus efforts are weighing on its sovereign creditrating, Fitch said on Wednesday, in the first such note of caution over a country that hasbeen a star of rating agencies.
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Fitch said that while Brazils BBB rating was stable, its upward momentum of recentyears has been affected by slow economic growth threatening the governments abilityto reduce public debt levels, which are high compared with the countrys peers.

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Brazil seems to have hit a bit of a stumbling block in terms of growth, said ShellyShetty, an analyst at Fitch Ratings. The slowdown has been more prolonged and severe

than what we had been expecting.

The word of caution comes after two of the countrys leading state banks, the nationaldevelopment bank BNDES, and the largest mortgage lenderCaixa Econmica Federal,were downgraded last week by another rating agency, Moodys.

Brazils national financial position remains solid, with nearly $377bn of foreign exchangereserves, well-capitalised banks and little government foreign debt, underpinned bymacroeconomic policies based on controlling inflation and maintaining a floatingexchange rate.

But average growth over 2011 and 2012 slowed to 1.8 per cent compared with 4.8 percent between 2004 and 2008, Fitch said.

This had led to a decline in the governments effective primary fiscal surplus thedifference between revenue and expenditure before interest payments, after adjustments to 2.4 per cent, from an official target of 3.1 per cent last year, it said.
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Ms Shetty said the cyclical factors hurting economic growth included a decline in exportsto China and Europe amid falls in commodity prices and trade disputes with BuenosAires, an importer of Brazilian manufactured goods.

Structural issues included a fall in labour productivity, bottlenecks in the economy such

as inadequate infrastructure and bureaucracy, and weak investment.

The agency said Brazils general government debt of just under 60 per cent of grossdomestic product was high for its BBB-rated emerging market peers. Mexico has justbelow 40 per cent gross debt to GDP.

Brazils traditionally high interest rates, a legacy of its past decades of runaway inflation,mean that it has the highest government interest payments among its peers, at 15 per centof budget revenue, compared with 10 per cent for Mexico.

A fall in the central banks benchmark Selic rate to a record low had helped to lower the

burden of these interest payments.

But Fitch said that, in a scenario in which Brazils primary fiscal surplus continued to beone percentage point lower than the target of 3.1 per cent and growth was 3 per cent,national debt levels would rise.

Brazils weak economic performance has weighed on the upward momentum of itssovereign ratings, the agency said.

However, Fitchs prognosis was not shared by Moodys, which maintains a positiveoutlook on its Brazil rating, saying that it expected the recent fall in interest rates to be

permanent. This would give the government much more breathing space on its budget.

A permanent reduction in the level of domestic interest rates will lower thegovernments debt financing costs and provide it with additional fiscal space, Moodyssaid in a recent report on its outlook for Brazil in 2013.


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BRICS Nations Plan New Bank to Bypass

World Bank, IMF
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By Mike Cohen & Ilya Arkhipov - 2013-03-26T13:36:02Z

Tomohiro Ohsumi/BloombergThe leaders of the so-called BRICS nations -- Brazil, Russia, India, China and SouthAfrica -- are set to approve the establishment of a new development bank during anannual summit that starts today in the eastern South African city of Durban.

The biggest emerging markets are uniting to tackle under-development and currencyvolatility with plans to set up institutions that encroach on the roles of the World Bankand International Monetary Fund.

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March 22 (Bloomberg) -- South African Trade Minister Rob Davies discusses thelikelihood of starting a foreign-currency pool with Brazil, Russia, China and India, andthe establishment of a BRICS Business Council. He spoke with Bloomberg's Mike Cohenin Cape Town. (Source: Bloomberg)
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11:47

March 26 (Bloomberg) -- Stephen Roach, a senior fellow at Yale University and formernon-executive chairman for Morgan Stanley in Asia, talks about Cyprus's bailout and theoutlook for the European debt crisis. Roach also discusses Japan's central bank monetarypolicy, and China's new leadership and economic growth. He speaks from Beijing withSusan Li on Bloomberg Television's "First Up." (Source: Bloomberg)

Enlarge image

While BRICS leaders may approve the creation of a development bank in principle at thesummit, theres still disagreement on how it should be funded and operated.Photographer: Tomohiro Ohsumi/Bloomberg

Enlarge image

A security guard stands in front of a floral arrangement ahead of the BRICS Summit inSanya, Hainan Province on April 12, 2011. The BRICS nations have combined foreign-currency reserves of $4.4 trillion and account for 43 percent of the worlds population.Photographer: Qilai Shen/Bloomberg

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The leaders of the so-called BRICS nations -- Brazil, Russia,India, China and SouthAfrica -- are set to approve the establishment of a newdevelopment bankduring anannual summit that began today in the eastern South African city of Durban, officials

from all five nations say. They will also discuss pooling foreign-currency reserves toward off balance of payments or currency crises.

The deepest rationale for the BRICS is almost certainly the creation of new BrettonWoods-type institutions that are inclined toward the developing world, Martyn Davies,chief executive officer of Johannesburg-based Frontier Advisory, which providesresearch on emerging markets, said in a phone interview. Theres a shift in power fromthe traditional to the emerging world. There is a lot of geo-political concern about thisshift in the western world.

The BRICS nations, which have combined foreign-currency reserves of $4.4 trillion and

account for 43 percent of the worlds population, are seeking greater sway in globalfinance to match their rising economic power. They have called for an overhaul ofmanagement of the World Bank and IMF, which were created in Bretton Woods, NewHampshire, in 1944, and oppose the practice of their respective presidents being drawnfrom the U.S. and Europe.

Reform Needed

We need to change the way business is conducted in the international financialinstitutions, South African International Relations Minister Maite Nkoana-Mashabanesaid in a March 15 speech in Johannesburg. They need to be reformed.

The U.S. has failed to ratify a 2010 agreement to give more sway to emerging markets atthe IMF, while it secured Jim Yong Kim, an American, as head of the World Bank lastyear over candidates from Nigeria and Colombia.

Finance ministers and central bank governors from the BRICS nations, who met inDurban today, agreed to set up currency crisis fund of about $100 billion, BrazilianFinance MinisterGuido Mantega told reporters today. He didnt give details of proposed
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funding for the new bank, which Brazil wants established by 2014. The nations leadersare due to sign a final accord tomorrow.

FDI Inflows

Goldman Sachs Asset Management Chairman Jim ONeillcoined the BRIC term in 2001to describe the four emerging powers he estimated would equal the U.S. in jointeconomic output by 2020. Brazil, Russia, India and China held their first summit fouryears ago and invited South Africa to join their ranks in December 2010.

Trade within the group surged to $282 billion last year from $27 billion in 2002 and mayreach $500 billion by 2015, according to data from Brazils government. Foreign directinvesment into BRICS nations reached $263 billion last year, accounting for 20 percentof global FDI flows, up from 6 percent in 2000, the United Nations Conference on Tradeand Development said on its website yesterday.

If they announce a BRICS bank it will be quite something, ONeill said in an e-mailedreply to questions on March 15. At a minimum it symbolizes they can achievesomething as political group and means lots of other things could follow in the future. Italso means that they will have their own kind of special World Bank, which may aidinfrastructure and trade projects.

Currency Pool

While BRICS leaders may approve the creation of a development bank in principle at thesummit, details on funding and operations may take longer to finalize.

Russia favors capping each sides initial contribution at $10 billion,Mikhail Margelov,President Vladimir Putins envoy to Africa he said in a March 15 interview in Moscow.

It will be some time before it will be feasible for this bank to start financing say, arailway project, Simon Freemantle, an analyst at Standard Bank Group Ltd., Africasbiggest lender, told reporters in Durban yesterday. That is some way out.

Interest rates near zero in the U.S., Japan and Europe have fueled foreign investorsappetite for higher-yielding assets, driving up currencies from Brazil to Turkey. Brazilhas warned of a global currency war as nations take reciprocal action to weaken theircurrencies and protect export industries.

African Leaders

Brazils real has gained 1.9 percent against the dollar since the beginning of the year,while South Africas rand has dropped 8.7 percent in the period.

For South Africa, which makes up just 2.5 percent of total gross domestic product inBRICS, the summit is a way to showcase its role as an investment gateway to Africa.
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President Jacob Zuma has invited 15 African heads of state, including Egypts MohamedMursi and Ethiopias Hailemariam Desalegn, for talks with the BRICS leaders at thesummit. For most of the BRICS leaders, its also the first opportunity to meet ChinesePresident Xi Jinping after his appointment on March 17.

We will discuss ways to revive global growth and ensure macroeconomic stability, aswell as mechanisms and measures to promote investment in infrastructure and sustainabledevelopment, Indian Prime MinisterManmohan Singh said in a statement yesterday.

To contact the reporters on this story: Mike Cohen in Cape Town [email protected]; Ilya Arkhipov in Moscow at [email protected]

To contact the editor responsible for this story: Nasreen Seria [email protected]

http://www.bloomberg.com/news/2013-03-25/brics-nations-plan-new-bank-to-bypass-world-bank-imf.html

Karen Hudes5 days ago

Bloomberg didn't want to publish anything about the internal control lapses and corporategovernance irregularities at the World Bank to help US citizens turn this around. So herewe are:http://www.veteranstoday.com/2...-----Original Message-----From: [email protected]: [email protected]: [email protected]: Wed, Jun 15, 2011 3:34 pmSubject: http://www.bloomberg.com/news/...

Dear Sandrine,

We spoke during the Senate Committee onForeign Relations September 15th hearing on the capital increase for the WorldBank, and I followed up with five emails to you containing documentation on

Robert Zoellick's cover up and retaliation against me for reporting internalcontrol lapses to the World Bank's Board of Executive Directors and USCongress. On May 25th I testified before the European Parliament'sCommittee on Budgetary Control about the World Bank's refusal to comply withthe GAO investigation requested by Senators Lugar, Leahy and Bayh intotransparency at the World Bank. Here's my blog in Huffington Post aboutHilary Clinton's attempt to replace Zoellick. I have been briefing USCongress concerning the International Bank for Reconstruction and Development's
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violation of securities laws, and that is one of the reasons that the capitalincrease was denied. I met with the Federation of International CivilService Associations in Geneva on June 6th to request the UN's Joint StaffPension Fund to join in IBRD bondholder litigation against KPMG in US DistrictCourt for the District of Columbia. KPMG issued an unqualified audit opinion

on IBRD's internal control over financial reporting.

A very accurate stakeholder analysis predictedin 2004 that the US would lose the gentleman's agreement for appointment of thepresident of the World Bank unless the US respected multilateral obligationsunder the Articles of Agreement. In 2007 I informed Russell Munk in theUS Treasury Department that the World Bank's Board of Executive Directorswould take back the authority delegated by them to the presidency underthe Articles if the rule of law at the Bank was not respected. I met on February 27, 2009

with the Chairman ofthe World Bank's Audit Committee concerning the World Bank's internal controlover financial reporting, and the Audit Committee commissioned an externalaudit. KPMG did not follow Generally Accepted Accounting Standards forsuch audits. The World Bank did not cooperate with a GAO investigationinto transparency commissioned by Senators Lugar, Leahy and Bayh.

When is Bloomberg going to inform theAmerican public how Robert Zoellick has affected the moral authority of the

United States?

Best,

Karen

Law Offices of Karen Hudes

202 317 0684:

Like

Reply

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September 23, 2012 10:44 pm

Global shift: A bank of and for the Brics

is in the air

By Henry Mance

A case of life imitating art or a seminal shift in global power? The idea of a Bricsdevelopment bank may be both. Few can have expected the Bric acronym initially putforward in 2001 as an investment concept to have inspired real-world alliances.

But Brazil, Russia, India and China, recently joined by South Africa, are increasinglyadding diplomatic ambitions to their economic assertiveness.

More

On this story

OverviewNew world order sets a double goal

Loans Globalisation changed the movement of capital funds

Funding ADB and China still in partnership

Aid funding How to get more bangs for your buck

Mission statement Africa is high on a packed priority list

IN The Future of Development Banks 2012

China A new way of lending

Multinational lending Mutual aid works for Latin America

Brazil A bank too big to be beautiful
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Once an outlandish possibility, the proposed Brics development bank was first discussedat a meeting of the five countries in March.

If it becomes a reality, the institution would be the first major multilateral lender toemerge since the European Bank for Reconstruction and Development in 1991.

While the EBRD symbolised the post-Cold War order, the Brics bank could showcase the21st century rise of emerging states.

Amrita Narlikar, director of Cambridge universitys Centre for Rising Powers says: Thiscould be the first step towards more proactive agenda-setting by the Brics.

Its one of the few instances we have when they have gone beyond telling us what theydo not want, and offered an idea of how they could be responsible players contributing tothe system.

Supporters of the bank have suggested various financing niches that it could fill. Thosecould include green technologies to counter climate change, as proposed by leadingeconomists Nicholas Stern and Joseph Stiglitz.

Conversely, the bank could finance projects such as biofuels, large dams and nuclearpower plants that do not meet the World Banks environmental and social standards.

Nonetheless, reaction to the proposal has been mixed. Sceptics have pointed out thediffering interests of China and India.

Jagannath Panda of the Institute for Defence Studies and Analyses, a New Delhi think-

tank says: India sees the Brics as an economic proposition, while the Chinese see it asmore political.

The Chinese are supporting heavily that the bank should be in South Africa, so they willhave clout on that continent. India would still like to have the headquarters in India.

Wherever they are located, the banks offices are unlikely to rival the World Banksimposing presence in Washington.

Brazilian officials suggest the Brics bank should have a lean structure, like the AndeanDevelopment Corporation (CAF).

Other issues yet to be resolved include whether the bank would lend outside of the Bricscountries Brazils foreign minister has suggested it focus on Africa and whether itwould lend to companies as well as governments.

Domenico Lombardi, a former board member of the World Bank Group, and now asenior fellow of the Brookings Institution, says: The question is: do these Brics countrieshave enough in common to make the bank instrumental to their objectives?


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They all have a huge need for infrastructure [investment] and share a dissatisfactionwith the lending policies of the World Bank, so theres a base on which they couldbuild.

There are some signs of modest progress. At preparatory meetings in Rio de Janeiro in

August, the five countries agreed that the bank should raise money from the market,instead of acting merely as a fund.

Indeed, investors willingness to lend to emerging markets may have emboldened thecountries in the first place.

Since the financial crisis, its become clear that you dont need to have a triple-A creditrating to raise money. That is the trigger for the bank, says Mr Lombardi.

A ballpark proposal is that each country would contribute $10bn in initial capital andguarantees.

Equalising contributions would give the institution an equal voting structure, in sharpcontrast to the World Bank. Yet it may also limit the eventual size of the bank giventhat South Africas pockets are not as deep as Chinas.

Negotiations between the Brics, which are usually conducted in English, are likely tocontinue on the fringes of the IMF and World Bank annual meetings in Toyko inOctober. Final feasibility studies are due to be presented at the Brics summit next year.Its going to be at least two years before the bank is established, says Panda.

In the meantime, it remains to be seen what impact the embryonic development bank has

on the Brics commitment to existing international institutions.

The five countries are significant borrowers from the World Bank, with new loans ofover $7bn approved in 2011 alone. They are also growing contributors to the IMF. But allhave expressed frustration at their marginal role in those bodies decision-making.

In that context, starting a new development bank provides a bargaining chip. Byentertaining the idea of a Brics bank, they have better negotiating power over votingrights in the IMF and World Bank, as they can always threaten to walk away, says MrLombardi.


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Brics: summiteers fall short of peak

Mar 27, 2013 3:59pmby Stefan WagstylinShare3

0

Imagine a group of five friends who get together to build aholiday house. Only they cant agree on what it should cost, where to put it or whoshould pay for it.

This roughly is the position of the leaders of Brazil, Russia, India, China and SouthAfrica as they end their annual Brics summit.

They all thinka Brics development bankis a good idea a channel for funds fordeveloping countries, managed by developing countries, independently of theInternational Monetary Fund and the World Bank, which are still dominated by the

developed world.

The Brics leaders said in their summit statement in Durban on Wednesday:

we are satisfied that the establishment of a New Development Bank is feasible andviable. We have agreed to establish the New Development Bank. The initial capitalcontribution to the bank should be substantial and sufficient for the bank to be effectivein financing infrastructure.

That takes things a little further forward from last years gathering in New Delhi, whenthe bank was first proposed. But not by much.

As Anton Siluanov, Russias finance minister, said after a meeting with his Brics peersbefore the heads of state summit: There is positive movement, but there is no decisionon the creation of the bank.

Officials from the five countries discussed funding the bank with $50bn in capital. Butthere was no agreement on whether they should pay in equally $10bn each orwhether the contributions should reflect the members wide differences in gross domestic
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product. Chinas economy is four times the size of Russias or Indias and about 20 timesthe size of South Africas.

Nor is it just a question of who can or cannot afford it. Its also a matter of who staffs thebank, where it lends the money and whose companies benefit from its largesse.

Equally contentious is the issue of locating the headquarters, as other multilateralinstitutions have found. There was a lot of horse-trading, for example, before theEuropean Bank for Reconstruction and Development chose London for its headquarters(even though the UK is by no means its largest paymaster).

China, as the dominant force among the Brics, doubtless would like the bank in Beijing.South Africa has argued that the bank should focus on Africa as the continent most inneed of development funds which might suggest a preference for Johannesburg. SomeBrics observers have indicated that London might make a good compromise a city onnobodys turf and reasonably well located in terms of time zones and transport links.

But putting a Brics bank in London could undermine the aims of promoting the Brics asan emerging-markets counterweight to the Old World. If Bric leaders cant do better onthis house-keeping matter, how can they hope to cooperate on the much bigger questionsthey want to address notably their collective lack of representation at the IMF andother existing multilateral institutions?

The Brics face three underlying difficulties.

First, in whatever order they line up for summit photographs, the leaders cannot avoid thefact that China is much larger than the rest, possesses a stronger economic record and is

much more successful in projecting its economic power in the rest of the world, not leastthrough investment in Africa. Beijing will be wondering what exactly it can achievethrough a Brics bank that it cannot do with the state-run China Development Bank and,for that matter, its other big state-controlled banks.

Next, while the Brics want to make common cause on global economic governance, theyhave to show they can do so in practice. Their failure to advance a joint candidate in the2011 race for the leadership of the International Monetary Fund, when Frances ChristineLagarde was appointed managing director, was not a good precedent. They missed asimilar opportunity the following year in the appointment of a new head of the WorldBank.

Finally, intra-Brics differences are as significant as their similarities. In economics, forexample, Brazil, Russia and South Africa are big resources exporters. China and India areimporters. In politics, there are border tensions between China and India, and competitionfor influence in central Asia between China and Russia. China is a Communist state.Russia is an ex-Communist authoritarian state. The others are democracies.


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The Durban summit was not a failure. The $100bn fund agreed to combat currency crisesis a useful statement of political commitment even if its practical advantages may belimited what, for example, will it do that coordinated ad-hoc action by central bankscannot?

The Brics leaders must take care to remain realistic about the scope of their cooperation.If they can create a Brics bank, fine. If not, they should back down before the planbecomes a political embarrassment.

Related reading:

Brics summit faces challenges over growth, FTBrics assemble for South Africa summit, FT videoGuest post: Brics will promote state-led development at Durban summit, beyondbricsGuest post: the Brics must act on Syria, beyondbricsChina and Brazil: finally delivering a currency swap? beyondbrics

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April 2, 2013 6:42 pm

Why Chinas economy might topple

By Martin Wolf

As Japan has shown, shifting to a lower-growth model is risky
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Matt Kenyon

Over the next decade, Chinas growth will slow, probably sharply. That is not the view ofmalevolent outsiders. It is the view of the Chinese government. The question is whether itwill do so smoothly or abruptly. On the answer depends not only Chinas own future, butalso that of much of the world.

Official Chinese thinking was on display at last months China Development Forum,organised by the Development Research Center of the State Council (DRC), which

brought influential foreigners together with high-level officials. Among the backgroundpapers was one prepared by economists at the DRC, entitled Ten-year Outlook: Declineof Potential Growth Rate and Start of a New Phase of Growth. Its proposition is thatChinas growth will slow from more than 10 per cent a year from 2000 to 2010 to 6.5 percent between 2018 and 2022. Such a decline, notes the paper, is consistent with theslowdown since the second quarter of 2010 (see chart).

More
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The authors note two possible reasons for the decline: either China has fallen into themiddle income trap of aborted industrialisation; or it is managing the natural landingthat occurs when an economy begins to catch up with advanced economies. This latterscenario played out in Japan in the 1970s and South Korea in the 1990s. The DRC paperargues that, after 35 years of 10 per cent growth, it is at last happening to China.

Here are a few reasons why the authors say this view is plausible. First, the potential forinfrastructure investment has contracted conspicuously, with its share in fixed assetinvestment down from 30 per cent to 20 per cent over the past decade. Second, returns onassets have fallen and overcapacity has soared. The incremental capital output ratio ameasure of the growth generated by a given level of investment reached 4.6 in 2011,the highest since 1992. China is getting less growth bang for its investment buck. Third,growth of the labour supply has fallen sharply. Fourth, urbanisation is still rising, but at adecelerating rate. Finally, risks are growing in the finance of local governments and realestate.

This melange of reasons is enough, argue the authors, to indicate that a transition toslower growth has begun. To analyse prospects more rigorously, the authors employ aneconomic model. Its most striking result is that long-established trends reverse. Fixedinvestment rose to 49 per cent of GDP in 2011. But this is forecast to fall to 42 per cent in2022. Meanwhile, the share of consumption in GDP is forecast to rise from 48 to per centto 56 per cent in 2022. Again, the share of industry is forecast to decline from 45 per centof GDP to 40 per cent, while the share of services is to jump from 45 per cent to 55 percent. The economy is consumption-led, instead of investment-led. On the supply side, the
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principal driver of the decline in growth is the collapse in the growth of the capital stock,as investment growth falls. (See charts.)

The view that such a growth slowdown is imminent is quite plausible. But one canadvance a more optimistic view. According to the Conference Boards data, Chinas GDP

per head (at purchasing power parity) is the same as Japans in 1966 and South Koreasin 1988. These countries then had between seven and nine years of superfast growthahead, respectively. Relative to US levels (another measure of catch-up potential), Chinais where Japan was in 1950 and South Korea in 1982. That suggests yet more growthpotential. Chinas GDP per head is just over a fifth of US levels. It seems to have muchfurther to go.

However, there is also a case against this optimistic view. China is an order of magnitudebigger even than Japan. Its opportunities, particularly in the world economy, must berelatively smaller. Furthermore, asformer premier Wen Jiabao often stated, growth hasbeen unbalanced, unco-ordinated and unsustainable. This is true, on a number of

dimensions. But the most significant is the dependence on investment, not just as a sourceof extra capacity, but as a source of demand. Consistently rising investment rates are notsustainable, since the returns ultimately depend on additional consumption.

This is where a far more pessimistic view emerges. As the experience of Japan hasshown, managing a shift from a high-investment, high-growth economy to a lower-investment, lower-growth economy is very tricky. I can envisage at least three risks.

First, if expected growth falls from over 10 to, say, 6 per cent, the needed rate ofinvestment in productive capital will collapse: under a constant incremental capital outputratio the fall would be from 50 per cent to, say, 30 per cent of GDP. If swift, such a

decline would cause a depression, all on its own.

Second, a big jump in credit has gone together with reliance on real estate and otherinvestments with falling marginal returns. Partly for this reason, the decline in growth islikely to mean a rise in bad debts, not least on the investments made on the assumptionthat past growth would continue. The fragility of the financial system could increase verysharply, not least in the rapidly expanding shadow banking sector.

Third, since there is little reason to expect a decline in the household savings rate,sustaining the envisaged rise in consumption, relative to investment, demands a matchingshift in incomes towards households and away from corporations, including state

enterprises. This can happen: the growing labour shortage and a move towards higherinterest rates might deliver it smoothly. But, even so, there is also a clear risk that theresulting decline in profits would accelerate a collapse in investment.

The governments plan is, of course, to make the transition to a better balanced andslower-growing economy smoothly. This is far from impossible. The government has allthe levers it needs. Moreover, the economy continues to have much potential. But
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managing a decline in the growth rate without an investment collapse and financialdisruption is far trickier than any general equilibrium model suggests.

It is easy to think of economies that long showed superlative performance but failed tomanage the inevitable slowdown. Japan is an example. China can avoid that fate, partly

because it still has so much growth potential. But the chances of accidents are high. Iwould not expect one to stop Chinas rise altogether. But the decade to come could be farbumpier than the last.

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