China and development economics

China is moving through what many would believe to be a classic development cycle. There is extensive and intensive development  behavior as the economy grows and adapts. Extensive development relies on increases in labor and capital to increase growth. Labor has been cheap in China so it has been easy to use this input to increase economic welfare. The same applies to capital as it used to build plant and equipment as well as infrastructure. Extensive development is not easy because labor and capital have to be usefully employed but the Chinese government has been able to move labor to the coast and build a export driven economy.

Intensive development comes from improvement in skills ad technology as the driver of growth. Intensive development is necessary when labor costs increase to the level of other trading competitors. This will require a change in behavior by both labor and the government. There has to be greater allowance for entrepreneurial development and less from entrenched state enterprise. It can easily be argued that many developed countries need further intensive development to beat those countries that have excess capital or labor.

The transition period is when countries may enter a middle-income trap. It is this turning point between extensive and intensive development which has to managed carefully. The Chinese government is aware of the turning point because it is well know in development economics after the Noble prize winner Arthur Lewis. However, awareness does not mean that it can be executed properly. The transition is what will be the key feature of 2012 growth.