Nobel laureate Krugman believes China is entering an era of stagnation

China has recorded deflation and high youth unemployment, signaling the beginning of an era of “stagnation and disillusionment” in the country, said Nobel Prize laureate in economics Paul Krugman. He expressed his point of view in a column for The New York Times.

According to him, some analysts predicted an “economic boom” for China after the restrictions imposed due to the coronavirus were lifted, but instead, China “lags behind in almost all economic indicators,” except for GDP, which grew by 5.2%. Although “there is widespread skepticism about this figure,” the economist says.

“And in other ways, the Chinese economy appears to have faltered. Even official statistics say that China is experiencing Japanese-style deflation and high youth unemployment. This is not a full-blown crisis, at least not yet, but there is reason to believe that China is entering an era of stagnation and disappointment,” Mr. Krugman wrote.

One of the reasons the economist cited was the “poor leadership” of Chinese leader Xi Jinping, whose “propensity for arbitrary interventions—which autocrats tend to do—stifles private initiative.” At the same time, Paul Krugman argues, “it has long been clear that China’s economic model is becoming unsustainable.” This was led to, among other things, by “financial repression” (paying low interest on savings and issuing cheap loans to privileged borrowers), as well as a weak social safety net that “forces families to accumulate savings in case of possible emergencies.”

“Very high rates of investment can be sustainable if, as in China in the early 2000s, you have rapid labor force and productivity growth… But China’s working-age population peaked around 2010 and has been declining since then. Although China has demonstrated impressive technological capabilities in some areas, its overall productivity also appears to be stagnating.

At the end of 2023, China’s economy grew by 5.2%, having won back the effect of the lifting of Covid restrictions, which were lifted only a year ago. It is expected that in 2024 the figure is unlikely to exceed 4.5%; in the medium term, economists also do not expect China to return to its previous growth rates. This will be hampered by both weak external demand and structural constraints in the economy.

Details – in the material “Kommersant” “China is no longer in a hurry”.

Laura Keffer