China’s Rebalancing: Lessons from East Asian Economic History

China’s senior leaders have spoken for some time about the need to rebalance the economy away from such heavy reliance on exports and investment, towards consumption. This paper examines the earlier development experiences of Japan, South Korea, and Taiwan in order to shed light on the questions of whether China really needs to rebalance towards consumption and how it might be accomplished. The earlier developers had high investment rates peaking around 35 % of GDP. Starting at about the level of per capita GDP that China has now, they all experienced a tapering off of investment. In general they rebalanced towards external demand which was possible because they had trade deficits in their rapid growth phases, which could then shift to trade surpluses. China differs from the earlier developers in several key dimensions. In recent years it has had 15-20 percentage points of GDP less in household consumption than the others; its investment rate has been noticeably higher; and it developed trade surpluses at an earlier stage of development. The unique aspects of China’s development likely stem from key institutional features of its model: the hukou system limiting rural-urban migration, the large role of state enterprises in the economy, financial repression, and the system for evaluating and rewarding local government officials. These factors together create a heavy bias in the Chinese system against household income and consumption, and in favor of investment and exports. Reform of thes