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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, world leaders have gathered to discuss the global economic crisis. Unfortunately, it seems that many still believe they can solve the problems of the poor with sentimentality and promises of massive infusions of aid, which often do not materialise. We who live in, and lead, the worlds poorest nations are convinced that the leaders of the rich world and multilateral institutions have a heart for the poor. But they also need to have a mind for the poor. Dambisa Moyos controversial book, Dead Aid, has given us an accurate evaluation of the 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 Ms Moyos prescriptions, such as ending all aid within five years, are aggressive. But I always thought this was the discussion we should be having: when to end aid and how best to end it.

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Aid has not only often failed to meet its objectives; it has also rarely dealt with the underlying issues of poverty and weak societies. We see this with our neighbour, the Democratic Republic of the Congo. There, 17,000 United Nations peacekeepers the largest and most expensive presence of its kind in history treat the symptoms rather than addressing the issues of capacity, self-determination and dignity. Often, aid has left recipient populations unstable, distracted and more dependent; as Ashraf Ghani, the former finance minister of Afghanistan, has pointed out, it can even sever the relationship between democratically elected leadership and the populace. Do not get me wrong. We appreciate support from the outside, but it should be support for what we intend to achieve ourselves. No one should pretend that they care about our nations more than we do; or assume that they know what is good for us better than we do ourselves. 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 contributing money for our wellbeing or development? Rwanda is a nation with high goals and a sense of purpose. We are attempting to increase our gross domestic product by seven times over a generation, which increases per capita incomes fourfold. This will create the basis for further innovation and foster trust, civic-mindedness and tolerance, strengthening our society. Entrepreneurship is the surest way for a nation to meet these goals. Michael Fairbanks book, In The River They Swim, which uses Rwanda as one of its examples, highlights the need to respect local wisdom, build a culture of innovation and create investment opportunities in product development, new distribution systems and innovative branding. Government activities should focus on supporting entrepreneurship not just to meet these new goals, but because it unlocks peoples minds, fosters innovation and enables people to exercise their talents. If people are shielded from the forces of competition, it is like saying they are disabled. Entrepreneurship gives people the feeling that they are valued and have meaning, that they are as capable, as competent and as gifted as anyone else. Asking our citizens to compete is the same as asking them to go out into the world on behalf of Rwanda and play their part. We know this is a tremendous challenge given our status as a land-locked nation emerging from conflict, with few natural resources, little specialised infrastructure and low historical investment in education. But, in fact, we have reasons to be optimistic: we have a clear strategy to export based on sustainable competitive advantages. We sell coffee now for high prices to the worlds most demanding purchasers; our tourism experience attracts the best customers in the world and market research reveals that perceptions of Rwandan tea are improving.

This has resulted in wages in key sectors rising at more than 20 per cent on an annual basis. We have cut our aid as a percentage of total GDP by half over the past decade, and last 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 who demonstrate they have not just a heart, but also a mind for the poor. The writer is president of Rwanda Copyright The Financial Times Limited 2013. You may share using our article tools. Please don't cut articles from FT.com and redistribute by email or post to the web. http://www.ft.com/cms/s/0/0d1218c8-3b35-11de-ba9100144feabdc0.html#axzz2PQbSrmRa

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Brazil hits growth stumbling block

By Joe Leahy in So Paulo Brazils slowing economy and fiscal stimulus efforts are weighing on its sovereign credit rating, Fitch said on Wednesday, in the first such note of caution over a country that has been a star of rating agencies.

Fitch said that while Brazils BBB rating was stable, its upward momentum of recent years has been affected by slow economic growth threatening the governments ability to 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 Shelly Shetty, 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 national development bank BNDES, and the largest mortgage lender Caixa Econmica Federal, were downgraded last week by another rating agency, Moodys. Brazils national financial position remains solid, with nearly $377bn of foreign exchange reserves, well-capitalised banks and little government foreign debt, underpinned by macroeconomic policies based on controlling inflation and maintaining a floating exchange rate. But average growth over 2011 and 2012 slowed to 1.8 per cent compared with 4.8 per cent between 2004 and 2008, Fitch said. This had led to a decline in the governments effective primary fiscal surplus the difference 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.

Ms Shetty said the cyclical factors hurting economic growth included a decline in exports to China and Europe amid falls in commodity prices and trade disputes with Buenos Aires, 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 gross domestic product was high for its BBB-rated emerging market peers. Mexico has just below 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 cent of 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 be one 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 its sovereign ratings, the agency said. However, Fitchs prognosis was not shared by Moodys, which maintains a positive outlook 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 the governments debt financing costs and provide it with additional fiscal space, Moodys said in a recent report on its outlook for Brazil in 2013. Copyright The Financial Times Limited 2013. You may share using our article tools. Please don't cut articles from FT.com and redistribute by email or post to the web.

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BRICS Nations Plan New Bank to Bypass World Bank, IMF

By Mike Cohen & Ilya Arkhipov - 2013-03-26T13:36:02Z

Tomohiro Ohsumi/Bloomberg The leaders of the so-called BRICS nations -- Brazil, Russia, India, China and South Africa -- are set to approve the establishment of a new development bank during an annual summit that starts today in the eastern South African city of Durban. The biggest emerging markets are uniting to tackle under-development and currency volatility with plans to set up institutions that encroach on the roles of the World Bank and International Monetary Fund.

4:43 March 22 (Bloomberg) -- South African Trade Minister Rob Davies discusses the likelihood of starting a foreign-currency pool with Brazil, Russia, China and India, and the establishment of a BRICS Business Council. He spoke with Bloomberg's Mike Cohen in Cape Town. (Source: Bloomberg)

11:47 March 26 (Bloomberg) -- Stephen Roach, a senior fellow at Yale University and former non-executive chairman for Morgan Stanley in Asia, talks about Cyprus's bailout and the outlook for the European debt crisis. Roach also discusses Japan's central bank monetary policy, and China's new leadership and economic growth. He speaks from Beijing with Susan 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 the summit, 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 in Sanya, Hainan Province on April 12, 2011. The BRICS nations have combined foreigncurrency 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 South Africa -- are set to approve the establishment of a new development bank during an annual 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 to ward off balance of payments or currency crises. The deepest rationale for the BRICS is almost certainly the creation of new Bretton Woods-type institutions that are inclined toward the developing world, Martyn Davies, chief executive officer of Johannesburg-based Frontier Advisory, which provides research on emerging markets, said in a phone interview. Theres a shift in power from the traditional to the emerging world. There is a lot of geo-political concern about this shift 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 global finance to match their rising economic power. They have called for an overhaul of management of the World Bank and IMF, which were created in Bretton Woods, New Hampshire, in 1944, and oppose the practice of their respective presidents being drawn from the U.S. and Europe.

Reform Needed
We need to change the way business is conducted in the international financial institutions, South African International Relations Minister Maite Nkoana-Mashabane said 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 at the IMF, while it secured Jim Yong Kim, an American, as head of the World Bank last year over candidates from Nigeria and Colombia. Finance ministers and central bank governors from the BRICS nations, who met in Durban today, agreed to set up currency crisis fund of about $100 billion, Brazilian Finance Minister Guido Mantega told reporters today. He didnt give details of proposed

funding for the new bank, which Brazil wants established by 2014. The nations leaders are due to sign a final accord tomorrow.

FDI Inflows
Goldman Sachs Asset Management Chairman Jim ONeill coined the BRIC term in 2001 to describe the four emerging powers he estimated would equal the U.S. in joint economic output by 2020. Brazil, Russia, India and China held their first summit four years 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 may reach $500 billion by 2015, according to data from Brazils government. Foreign direct invesment into BRICS nations reached $263 billion last year, accounting for 20 percent of global FDI flows, up from 6 percent in 2000, the United Nations Conference on Trade and Development said on its website yesterday. If they announce a BRICS bank it will be quite something, ONeill said in an e-mailed reply to questions on March 15. At a minimum it symbolizes they can achieve something as political group and means lots of other things could follow in the future. It also means that they will have their own kind of special World Bank, which may aid infrastructure and trade projects.

Currency Pool
While BRICS leaders may approve the creation of a development bank in principle at the summit, 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, a railway project, Simon Freemantle, an analyst at Standard Bank Group Ltd., Africas biggest 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 investors appetite for higher-yielding assets, driving up currencies from Brazil to Turkey. Brazil has warned of a global currency war as nations take reciprocal action to weaken their currencies 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 in BRICS, the summit is a way to showcase its role as an investment gateway to Africa.

President Jacob Zuma has invited 15 African heads of state, including Egypts Mohamed Mursi and Ethiopias Hailemariam Desalegn, for talks with the BRICS leaders at the summit. For most of the BRICS leaders, its also the first opportunity to meet Chinese President Xi Jinping after his appointment on March 17. We will discuss ways to revive global growth and ensure macroeconomic stability, as well as mechanisms and measures to promote investment in infrastructure and sustainable development, Indian Prime Minister Manmohan Singh said in a statement yesterday. To contact the reporters on this story: Mike Cohen in Cape Town at mcohen21@bloomberg.net; Ilya Arkhipov in Moscow at iarkhipov@bloomberg.net To contact the editor responsible for this story: Nasreen Seria at nseria@bloomberg.net http://www.bloomberg.com/news/2013-03-25/brics-nations-plan-new-bank-to-bypassworld-bank-imf.html

Karen Hudes 5 days ago Bloomberg didn't want to publish anything about the internal control lapses and corporate governance irregularities at the World Bank to help US citizens turn this around. So here we are: http://www.veteranstoday.com/2... -----Original Message----From: kahudes@aol.com To: srastello@bloomberg.net Cc: kcostelloe@bloomberg.net Sent: Wed, Jun 15, 2011 3:34 pm Subject: http://www.bloomberg.com/news/... Dear Sandrine,

We spoke during the Senate Committee on Foreign Relations September 15th hearing on the capital increase for the World Bank, and I followed up with five emails to you containing documentation on Robert Zoellick's cover up and retaliation against me for reporting internal control lapses to the World Bank's Board of Executive Directors and US Congress. On May 25th I testified before the European Parliament's Committee on Budgetary Control about the World Bank's refusal to comply with the GAO investigation requested by Senators Lugar, Leahy and Bayh into transparency at the World Bank. Here's my blog in Huffington Post about Hilary Clinton's attempt to replace Zoellick. I have been briefing US Congress concerning the International Bank for Reconstruction and Development's

violation of securities laws, and that is one of the reasons that the capital increase was denied. I met with the Federation of International Civil Service Associations in Geneva on June 6th to request the UN's Joint Staff Pension Fund to join in IBRD bondholder litigation against KPMG in US District Court for the District of Columbia. KPMG issued an unqualified audit opinion on IBRD's internal control over financial reporting.

A very accurate stakeholder analysis predicted in 2004 that the US would lose the gentleman's agreement for appointment of the president of the World Bank unless the US respected multilateral obligations under the Articles of Agreement. In 2007 I informed Russell Munk in the US Treasury Department that the World Bank's Board of Executive Directors would take back the authority delegated by them to the presidency under the Articles if the rule of law at the Bank was not respected. I met on February 27, 2009 with the Chairman of the World Bank's Audit Committee concerning the World Bank's internal control over financial reporting, and the Audit Committee commissioned an external audit. KPMG did not follow Generally Accepted Accounting Standards for such audits. The World Bank did not cooperate with a GAO investigation into transparency commissioned by Senators Lugar, Leahy and Bayh.

When is Bloomberg going to inform the American public how Robert Zoellick has affected the moral authority of the United States?

Best, Karen Law Offices of Karen Hudes 202 317 0684:

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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 Brics development bank may be both. Few can have expected the Bric acronym initially put forward in 2001 as an investment concept to have inspired real-world alliances. But Brazil, Russia, India and China, recently joined by South Africa, are increasingly adding diplomatic ambitions to their economic assertiveness.

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Overview New 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

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China A new way of lending Multinational lending Mutual aid works for Latin America Brazil A bank too big to be beautiful

Once an outlandish possibility, the proposed Brics development bank was first discussed at a meeting of the five countries in March. If it becomes a reality, the institution would be the first major multilateral lender to emerge since the European Bank for Reconstruction and Development in 1991. While the EBRD symbolised the post-Cold War order, the Brics bank could showcase the 21st century rise of emerging states. Amrita Narlikar, director of Cambridge universitys Centre for Rising Powers says: This could 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 they do not want, and offered an idea of how they could be responsible players contributing to the system. Supporters of the bank have suggested various financing niches that it could fill. Those could include green technologies to counter climate change, as proposed by leading economists Nicholas Stern and Joseph Stiglitz. Conversely, the bank could finance projects such as biofuels, large dams and nuclear power plants that do not meet the World Banks environmental and social standards. Nonetheless, reaction to the proposal has been mixed. Sceptics have pointed out the differing interests of China and India. Jagannath Panda of the Institute for Defence Studies and Analyses, a New Delhi thinktank says: India sees the Brics as an economic proposition, while the Chinese see it as more political. The Chinese are supporting heavily that the bank should be in South Africa, so they will have 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 Banks imposing presence in Washington. Brazilian officials suggest the Brics bank should have a lean structure, like the Andean Development Corporation (CAF). Other issues yet to be resolved include whether the bank would lend outside of the Brics countries Brazils foreign minister has suggested it focus on Africa and whether it would lend to companies as well as governments. Domenico Lombardi, a former board member of the World Bank Group, and now a senior fellow of the Brookings Institution, says: The question is: do these Brics countries have enough in common to make the bank instrumental to their objectives?

They all have a huge need for infrastructure [investment] and share a dissatisfaction with the lending policies of the World Bank, so theres a base on which they could build. 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 the countries in the first place. Since the financial crisis, its become clear that you dont need to have a triple-A credit rating 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 and guarantees. Equalising contributions would give the institution an equal voting structure, in sharp contrast to the World Bank. Yet it may also limit the eventual size of the bank given that South Africas pockets are not as deep as Chinas. Negotiations between the Brics, which are usually conducted in English, are likely to continue on the fringes of the IMF and World Bank annual meetings in Toyko in October. 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 of over $7bn approved in 2011 alone. They are also growing contributors to the IMF. But all have expressed frustration at their marginal role in those bodies decision-making. In that context, starting a new development bank provides a bargaining chip. By entertaining the idea of a Brics bank, they have better negotiating power over voting rights in the IMF and World Bank, as they can always threaten to walk away, says Mr Lombardi. Copyright The Financial Times Limited 2013. You may share using our article tools. Please don't cut articles from FT.com and redistribute by email or post to the web. http://www.ft.com/intl/cms/s/0/63400496-024f-11e2-8cf800144feabdc0.html#axzz2PQbSrmRa

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Brics: summiteers fall short of peak

Mar 27, 2013 3:59pm by Stefan Wagstyl inShare3 0

Imagine a group of five friends who get together to build a holiday house. Only they cant agree on what it should cost, where to put it or who should pay for it. This roughly is the position of the leaders of Brazil, Russia, India, China and South Africa as they end their annual Brics summit. They all think a Brics development bank is a good idea a channel for funds for developing countries, managed by developing countries, independently of the International 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 and viable. We have agreed to establish the New Development Bank. The initial capital contribution to the bank should be substantial and sufficient for the bank to be effective in financing infrastructure. That takes things a little further forward from last years gathering in New Delhi, when the bank was first proposed. But not by much. As Anton Siluanov, Russias finance minister, said after a meeting with his Brics peers before the heads of state summit: There is positive movement, but there is no decision on the creation of the bank. Officials from the five countries discussed funding the bank with $50bn in capital. But there was no agreement on whether they should pay in equally $10bn each or whether the contributions should reflect the members wide differences in gross domestic

product. Chinas economy is four times the size of Russias or Indias and about 20 times the size of South Africas. Nor is it just a question of who can or cannot afford it. Its also a matter of who staffs the bank, where it lends the money and whose companies benefit from its largesse. Equally contentious is the issue of locating the headquarters, as other multilateral institutions have found. There was a lot of horse-trading, for example, before the European 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 in need of development funds which might suggest a preference for Johannesburg. Some Brics observers have indicated that London might make a good compromise a city on nobodys 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 as an emerging-markets counterweight to the Old World. If Bric leaders cant do better on this house-keeping matter, how can they hope to cooperate on the much bigger questions they want to address notably their collective lack of representation at the IMF and other existing multilateral institutions? The Brics face three underlying difficulties. First, in whatever order they line up for summit photographs, the leaders cannot avoid the fact 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 least through investment in Africa. Beijing will be wondering what exactly it can achieve through 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, they have to show they can do so in practice. Their failure to advance a joint candidate in the 2011 race for the leadership of the International Monetary Fund, when Frances Christine Lagarde was appointed managing director, was not a good precedent. They missed a similar opportunity the following year in the appointment of a new head of the World Bank. Finally, intra-Brics differences are as significant as their similarities. In economics, for example, Brazil, Russia and South Africa are big resources exporters. China and India are importers. In politics, there are border tensions between China and India, and competition for influence in central Asia between China and Russia. China is a Communist state. Russia is an ex-Communist authoritarian state. The others are democracies.

The Durban summit was not a failure. The $100bn fund agreed to combat currency crises is a useful statement of political commitment even if its practical advantages may be limited what, for example, will it do that coordinated ad-hoc action by central banks cannot? 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 plan becomes a political embarrassment. Related reading: Brics summit faces challenges over growth, FT Brics assemble for South Africa summit, FT video Guest post: Brics will promote state-led development at Durban summit, beyondbrics Guest post: the Brics must act on Syria, beyondbrics China and Brazil: finally delivering a currency swap? beyondbrics

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Why Chinas economy might topple

By Martin Wolf As Japan has shown, shifting to a lower-growth model is risky

Matt Kenyon Over the next decade, Chinas growth will slow, probably sharply. That is not the view of malevolent outsiders. It is the view of the Chinese government. The question is whether it will do so smoothly or abruptly. On the answer depends not only Chinas own future, but also 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 background papers was one prepared by economists at the DRC, entitled Ten-year Outlook: Decline of Potential Growth Rate and Start of a New Phase of Growth. Its proposition is that Chinas growth will slow from more than 10 per cent a year from 2000 to 2010 to 6.5 per cent between 2018 and 2022. Such a decline, notes the paper, is consistent with the slowdown since the second quarter of 2010 (see chart).

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The authors note two possible reasons for the decline: either China has fallen into the middle income trap of aborted industrialisation; or it is managing the natural landing that occurs when an economy begins to catch up with advanced economies. This latter scenario played out in Japan in the 1970s and South Korea in the 1990s. The DRC paper argues 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 for infrastructure investment has contracted conspicuously, with its share in fixed asset investment down from 30 per cent to 20 per cent over the past decade. Second, returns on assets have fallen and overcapacity has soared. The incremental capital output ratio a measure 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 a decelerating rate. Finally, risks are growing in the finance of local governments and real estate. This melange of reasons is enough, argue the authors, to indicate that a transition to slower growth has begun. To analyse prospects more rigorously, the authors employ an economic model. Its most striking result is that long-established trends reverse. Fixed investment rose to 49 per cent of GDP in 2011. But this is forecast to fall to 42 per cent in 2022. Meanwhile, the share of consumption in GDP is forecast to rise from 48 to per cent to 56 per cent in 2022. Again, the share of industry is forecast to decline from 45 per cent of GDP to 40 per cent, while the share of services is to jump from 45 per cent to 55 per cent. The economy is consumption-led, instead of investment-led. On the supply side, the

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 can advance 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 Koreas in 1988. These countries then had between seven and nine years of superfast growth ahead, respectively. Relative to US levels (another measure of catch-up potential), China is where Japan was in 1950 and South Korea in 1982. That suggests yet more growth potential. Chinas GDP per head is just over a fifth of US levels. It seems to have much further to go. However, there is also a case against this optimistic view. China is an order of magnitude bigger even than Japan. Its opportunities, particularly in the world economy, must be relatively smaller. Furthermore, as former premier Wen Jiabao often stated, growth has been 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 source of extra capacity, but as a source of demand. Consistently rising investment rates are not sustainable, since the returns ultimately depend on additional consumption. This is where a far more pessimistic view emerges. As the experience of Japan has shown, managing a shift from a high-investment, high-growth economy to a lowerinvestment, 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 of investment in productive capital will collapse: under a constant incremental capital output ratio 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 other investments with falling marginal returns. Partly for this reason, the decline in growth is likely to mean a rise in bad debts, not least on the investments made on the assumption that past growth would continue. The fragility of the financial system could increase very sharply, 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 matching shift in incomes towards households and away from corporations, including state enterprises. This can happen: the growing labour shortage and a move towards higher interest rates might deliver it smoothly. But, even so, there is also a clear risk that the resulting decline in profits would accelerate a collapse in investment. The governments plan is, of course, to make the transition to a better balanced and slower-growing economy smoothly. This is far from impossible. The government has all the levers it needs. Moreover, the economy continues to have much potential. But

managing a decline in the growth rate without an investment collapse and financial disruption is far trickier than any general equilibrium model suggests. It is easy to think of economies that long showed superlative performance but failed to manage 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. I would not expect one to stop Chinas rise altogether. But the decade to come could be far bumpier than the last. martin.wolf@ft.com Copyright The Financial Times Limited 2013. You may share using our article tools. Please don't cut articles from FT.com and redistribute by email or post to the web. http://www.ft.com/intl/cms/s/0/e854f8a8-9aed-11e2-97ad00144feabdc0.html#axzz2PQbSrmRa