From the Editor

As China racked up an impressive record of economic growth over the last 30 years, a myth sprouted that Beijing had invented a new model for eradicating poverty from the developing world. While other East Asian "miracles" also experienced their own adolescent growth spurts, China was remarkable for the way in which it compressed social and economic change into such a short period, while at the same time the Communist Party fended off demands for political reform. Especially in the last decade, the technocrats dazzled the world by always managing to bring growth in above target.

Now we are learning that the growth, while not exactly a mirage, was unsustainable. As Michael Pettis writes in this issue, in hindsight the decade from 1998-2008 looks more like an aberration than the dawning of a new era. After the 1997 crisis, Asian governments responded by accumulating ever larger foreign-exchange reserves. This fueled a global expansion of liquidity that led to self-reinforcing trends of rising investment in Asia and rising consumption in the U.S.

Stephen Green analyzes China’s predicament and finds that it is much worse than the official statistics would suggest. Various proxy indicators show the economy has fallen off a cliff. Growth in the next year will be well below the level needed to keep mass unemployment at bay.

The point here is not to assign blame, although there are lessons here for policy makers. The immediate priority is what to do now. And Mr. Pettis warns that the bulk of the readjustment is going to fall on China, much as it did on the U.S. in the 1930s. Either domestic demand will pick up to absorb the overcapacity or production will drop.

It is in everybody’s interest to lessen the impact of this transition and avoid a repeat of the spiraling protectionism of the 1930s. Razeen Sally, Fredrik Erixon and Greg Rushford describe the mounting temptation in Asia and the West to go down that road.

A solution will require a more flexible response than we have seen so far from the Hu administration, which as Willy Lam describes seems to be hunkering down with Maoist rhetoric and measures to turn back the clock on already circumscribed civil liberties.

There is still time to do as Mr. Pettis suggests—strike a grand bargain with the U.S. and EU that gives China a couple years’ breathing room, in return for a package of reforms aimed at a long-term rebalancing of the economy. Sure, the chances of this happening are small. But the China model is already finished. The question is whether the country can avoid a decade of lost growth and social unrest.

H.R.