In other words, rather than shifting from investment led to consumer led growth, China appears to be continuing along its investment led growth track.

Lebanon and the Syrian Arab Republic experienced investment led growth in 2004.

For example, when rapid investment growth in 2004 led to overheating, world markets were booming.

This policy stimulus led to strong growth, in both consumption and investment, and economic activity recovered quickly.

And, as GDP growth has become increasingly dependent on government led investment, currency demand has continued to rise.

First, China will begin to wean itself from the manufacturing model that has underpinned export and investment led growth.

At this point, policy becomes expansionary again, and the cycle begins anew led by investment growth, the economy rebounds.

But the viability of Deng s model is nearing its end, and China is now addicted to inefficient state led fixed investment and unsustainable export led growth, rather than domestic consumption, to generate jobs and growth.

In China, November s Third Plenum of the Communist Party Central Committee will show whether China is serious about reforms aimed at shifting from investment led to consumption led growth.

Domestic demand led growth will be a more reliable strategy than export led growth.

The formal sessions played out predictably, placing great emphasis on the coming structural transformation of China s growth model a colossal shift from the all powerful export and investment led growth of the past 32 years to a more consumer led dynamic.

There were no surprises in the basic thrust of the strategy a structural shift in China s investment and export led growth model toward a more balanced consumer based and services led economy.

Is Export Led Growth Passé?

Reckless lending is undermining efficient allocation of capital and preventing China from drawing a line under the investment and export led growth model of the past three decades and basing future growth more on domestic consumption.

In the modern era of globalization, export led growth is supplemented by policies to attract foreign direct investment (FDI), a combination that has been particularly successful in China.

For example, Asian investment is booming again, led by China.

There were no surprises in the basic thrust of the strategy a structural shift in China s investment and export led growth model toward a more balanced consumer based and services led economy. The transformation reflects both necessity and design.

The broad outlines of this transformation are well known a shift from export and investment led growth to an economic structure that draws greater support from domestic private consumption.

Led by strong Chinese growth, emerging markets stabilized.

The hard truth is that the flip side of the consumption led growth model that prevailed prior to the crisis has been deficient investment, particularly on the public sector side.

The control of income by the overlapping corporate and public sectors makes it easier to push the investment led growth model to the point of low (or even negative) returns.

Indeed, rapid growth in investment may translate into high import growth and trade deficits.

In an optimal world, the surpluses of countries pursuing export led growth would be willingly matched by the deficits of those pursuing debt led growth.

Shortfalls in investment eventually diminish growth and employment opportunities.

Third, macroeconomic stability, investment, and growth are mutually reinforcing.

China s economy is caught in the crossfire of structural and cyclical nbsp headwinds. Structural pressures have nbsp arisen from the shift to a new model of services and consumer led growth, and cyclical pressures stem from nbsp a tough global environment that has nbsp put downward pressure on the old model of nbsp export and investment led growth.

Impact on the growth of foreign investment and economic cooperation

As China s economy grows relative to the economies of its trading partners, the efficacy of its export led growth model must inevitably fade. As a corollary, the returns on massive infrastructure investment, much of which is directed toward supporting export growth, must also fade.

In any case, America is the first country in the recession stricken part of the global economy where public stimulus has led to enough private investment and growth that fiscal consolidation has become possible.

A growth slowdown is hardly shocking for an export led economy.

Decomposition estimates of GDP expenditure growth in 2004 indicate that Egypt, Jordan and Yemen experienced consumption led growth.

When investment returns to normal levels, economic growth will slow further.

The key to restoring China s GDP growth is, therefore, returning fixed asset investment growth to at least 25 .

The contribution of investment expenditure growth to GDP growth was moderate in the latter, but impressive in Lebanon.

China s export led economic model has reached its limits, and the transition to domestic led growth is intensifying internal frictions.

This has led some to think that India (and perhaps others) can take a different, service led path to growth.

By contrast, the insistence on minimal government and reliance on the market led to precipitous declines in public infrastructure investment, particularly in agriculture. This not only impaired long term growth, but also increased food insecurity.

Cheap credit and perverse incentives such as promotions for officials who contribute most to GDP growth have led to massive but redundant investment, which, in turn, has contributed to excess capacity in manufacturing and infrastructure.

In emerging markets, slow growth in the advanced economies has shut down a traditional development path export led growth.

But domestic demand, which determines imports, consists not only of consumption, but also of fixed asset investment. Indeed, rapid growth in investment may translate into high import growth and trade deficits.

Third is growth led by economic restructuring and diversification into new products.

Most important, export led growth must give way to domestic economic drivers.

The lesson is clear export led growth is the way to go.

Some people may argue that investment growth without consumption growth will result in overcapacity and eventually lead to recession.

In May 2004, he led an investment mission of 500 Brazilian business entrepreneurs to China.