China's S-Curve Of Expansion, Stagnation And Decline

All the policies that worked in the Boost Phase no longer work.

Natural and human systems tend to go through stages of expansion, stagnation and decline that follow what's known as the S-Curve. The dynamic isn't difficult to understand: an unfilled ecological niche is suddenly open due to a new adaptation; a bacteria evolves to exploit a new host, etc. Expansion is rapid until the niche is fully occupied, and then growth matures and stagnates; the low-hanging fruit has all been picked, and it's much more costly to reach what little is left.

Human economies starved of capital, credit, access to markets and freedom are akin to unexploited ecological niches. Lacking capital, credit and the freedom to innovate, experiment and advance, economies wallow in a self-reinforcing stagnation.

Should capital, credit, access to markets and freedom become available, the economic expansion can be breath-taking. This is the basic script of postwar Japan and the Asian Tiger economies: economies with either minimal or war-damaged infrastructure, limited capital/credit and stifling status quo power structures that limited the freedom of the populace to access markets and innovations were suddenly open to credit, markets and innovation.

This territory of opportunity was quickly exploited in the Boost Phase: all the low-hanging fruit could finally be picked.

In the Boost Phase, policies that open the economy to credit and innovation generate virtuous cycles of expanding credit, markets, capital, employment and development. In the Boost Phase, everyone's a genius; everyone joining the land rush can get a piece of the action.

In this expansive phase, everyone extrapolates this rapid growth into the future, as if the Boost Phase can last essentially forever. Thus all sorts of pundits predicted that Japan's late-bubble GDP of 1989 would soon surpass the GDP of the U.S.

A year later, Japan's bubble burst and it has wallowed in stagnation since. The policies of the Boost Phase all work because any loosening of limits works wonders in economies with an abundance of low-hanging fruit. But once the easy fruit's been picked, those policies no longer have the same efficacy. In fact, policies that worked wonders are now active impediments, as they were designed for an era that has passed: all the low-hanging fruit is long gone.

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Disclosures: None.

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