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Professor David Shambaugh issues a wake-up call to those who believe that China’s progress is unstoppable. He reports that it must overcome massive impediments to develop fully, and explains why it might not succeed and could become more nationalistic and repressive. Shambaugh links China’s need for innovation and better service sector performance to deeper issues, including the hope that the Chinese Communist Party will relinquish its hold, especially on the financial sector. So far, China has defied the Western idea that economic success requires democratization. getAbstract recommends this keen-eyed overview of China’s economy to those investing or doing business in China, or planning to do so.


Developed or Developing?

With economic growth slowing in much of the world, China’s future matters internationally; today, its economy is a locomotive pulling a hefty 35% of total global GDP growth. Despite warnings of doom and gloom, China’s economy is still growing at an envious rate. But can China defy the historical patterns of other developing countries and reach developed-nation standards? Can it move beyond the “middle-income trap”? No nation has ever progressed successfully to a developed modern economy without democratizing. Since 1960, 101 nations have gained middle-income status, but only 13 of these states have become high-income, fully developed nations.

The Deng Xiaoping era set an economic model in motion that relied on “large fixed-asset investment domestically (primarily into hard infrastructure) plus low-end, low-cost export manufacturing.” That strategy brought massive gains, but it’s now garnering “diminishing returns.” The GDP generated by spending a certain amount of credit on infrastructure and on the manufacture of export goods has fallen significantly as wages and other costs have started to rise, thus reducing China’s competitiveness...

About the Author

David Shambaugh is a professor of Political Science and International Affairs at George Washington University and the director of its China Policy Program. He is also a nonresident Senior Fellow in the Foreign Policy Studies Program at the Brookings Institution.

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