Question

What is the long term growth threat raised by the “catch-up” model of growth? How is China attempting to avoid this threat?

Answer 1

Catch-up model generally referred to the theory of convergence. Admittedly people and Institutions of low per capita income countries willingly to catch high per capita income countries. The concerns for getting converge or the threat for long term catch-up model of growth is sustainability in producing the output for developing countries or more precisely the sustainability of debt taken for the development which leads to converge.

Now the long term threat generally refers to the defaults of debts. If household defaults, it will be a big mess like credit crisis took place during Lehman Brothers collapse, but if sovereign debt defaults, there may be several ways can come-up to fix the credit crisis.

Chinese economy is little interesting and confusing too to understand.

China runs a model where local economy does not produce local demands, as a result per capita income of Chinese households remains low over a longer period of time. In-fact US per capita income is 3.5 times larger than Chinese per capita. The questions lay-down that why China being the second largest economy and totally converged to modern developed countries, still people of China is facing low per capita income. The answers is disclosed in Chinese National Income share of GDP instead of Household share of GDP.

To avoid crisis in household debt during the transition process of convergence, China lifted national share of GDP by creating massive infrastructure projects which is financed through government debt and simultaneously export capital to developed countries especially in US ( China is heavily invested in US Treasury Bonds) to remain trade surplus country since long time thereby suppressing household income share of GDP.

In this way Chinese economy converge with developed countries, eventually to avoid the long term threat of catch-up of debt crisis amongst household segments.