4 - Savings and China’s Investment-Led Growth

Summary

Chapter 4 starts by distinguishing between long-term growth and short-term fluctuation. The former is determined by the supply-side factors of investment, education and technological progress, whereas the latter is affected by demand-side factors of consumption, investment and exports. Investment creates both short-term demand and long-term supply. China has enjoyed the highest investment rate in the world in the past few decades, made possible by its extraordinarily high savings rate. After evaluating several popular explanations for China’s high savings rate, the chapter argues for a cultural explanation. Although a high rate of savings and investment is one of China’s distinct advantages over all other developing countries, the popular press often describes China’s growth as seriously imbalanced, relying too much on investment and exports and too little on consumption. Chapter 4 shows why this popular view is misplaced. Much of the misunderstanding is caused by the failure to distinguish between long-term and short-term growth and the resulting failure to understand that economic development as long-term growth cannot be driven by consumption.