Why China's success matters to us all
- By John Ross
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E-mail China.org.cn, June 19, 2012
As the heads of the G20 assembled in Los Cabos, Mexico, for their annual summit, it was clear that four years into the international financial crisis, the policies which have been adopted in an attempt to deal with it by Europe and the US are failing to do so. This is dramatically obvious in Europe, where the European Union has entered a double dip recession and the list of countries sustained solely by economic bailout packages has expanded to include Spain. But the situation in the US is not substantially better, with last quarter's GDP growth an anemic 1.9 percent. To give an overall measure of US economic weakness, average US annual economic growth during the last four years has averaged 0.3 percent and US employment is still 5 million below its pre-crisis peak. China's contrast to the EU and US, with economic growth of over 40 percent over the last four years, could scarcely be more striking.
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How much longer? [By Jiao Haiyang/China.org.cn] |
Given these figures, the results of the different economic policies which have been introduced to deal with the financial crisis have been equally clear cut. To summarize:
? Europe has combined loose monetary policy with no stimulus to the productive economy, resulting in the "austerity" policy. The result of this is that the EU economy has shrunk by 2 percent over four years.
? The US has combined loose monetary policy with a consumer stimulus delivered via a budget deficit. As a result, the US economy has grown by 1 percent in four years. India, which followed the US model of consumer stimulus, has seen its growth rate decline from 9.4 percent in the first quarter of 2010 to 5.3 percent in the first quarter of 2012.
? China, which combined expansionary monetary policy with an investment-led stimulus, has experienced an average annual growth rate of 10 percent throughout the financial crisis.
These different results are very much to be expected, both in terms of economic theory and economic facts, the two coinciding. Economic theory shows that shifts in investment determine fluctuations in the business cycle. Factually, since the beginning of the current economic downturn, investment decline has accounted for all of the economic difficulties in both the US and EU. In inflation adjusted prices the $432 billion expansion in other sectors of the US economy has been dragged down to a very weak overall economic performance by an investment fall of $298 billion. EU GDP has fallen by $282 billion - all of which is accounted for by a $423 billion investment decline. China, therefore, by launching in 2008 a stimulus program focused on investment, was acting in accord with both economic theory and the facts of the global recession. Little wonder then that China's economic policy response was so much more successful than that of other countries!
Faced with the new world economic slowdown, China should, therefore, have little trouble in dealing with this situation. All the talk of a new stimulus on the scale of 2008's $586 billion package is both unnecessary and undesirable. In 2008 the global economy was plunging into its deepest downturn since World War II, with US GDP falling by 5.1 percent and EU GDP dropping by 5.7 percent. What we are seeing today is very slow growth in the US and a milder recession in Europe than in 2008, not a drastic downward economic plunge. Therefore a new stimulus in China on a similar scale to what we saw in 2008 would be both inappropriate and inflationary. Instead what is called for is a moderate easing of monetary policy, which is made easier as inflation is falling, as weakness in the global economy reduces commodity prices, combined with moderate stimulus to China's productive economy.
In present conditions such a stimulus should have both consumer and investment components. The reason for this is that overall large increases in investment are difficult to manage efficiently and since 2008 China has seen a very significant investment increase. This indicates that further sharp increases should be avoided at present and the consumer side of a stimulus should be given greater weight than in 2008. Nevertheless, overall global conditions are currently negative for investment and therefore, as a precaution, some limited measures to sustain investment are required.
Objectively, China does not now require measures of the scale and complexity as those which were required in 2008. Such measures were necessary in 2008 due to the worst global economic downturn for eighty years, and since such a scale of measures are not necessary now, no great economic problems should develop. Regrettably, though, major elementary economic errors have recently appeared in analyses in some quarters regarding China's economic policy. If such analyses were acted upon, unnecessary economic problems could ensue.
Some statements stemming from such analyses have made the elementary economic mistake of confusing a high rate of growth of consumption, which is necessary to increase living standards, with raising the percentage of consumption in GDP - which, if it reduces investment - will slow economic growth over the longer term and therefore lead to lower living standards than are possible.
Contradictory policies which call for greater environmental protection while also lowering the level of investment have also been advocated. In fact, environmental protection will require a higher level of investment. For example, non-polluting power stations and energy supplies are more expensive than polluting energy sources, while necessary environmental measures such as reforestation require large-scale investments and have long payback periods.
Confused ideas have been expressed that what must be focused on is the micro-efficiency of investment. However, economic theory, international experience in Asia's most successful economies, and basic arithmetic all show that maintaining the level of investment may be more important for high living standards than micro-efficiency - if the efficiency of investment is raised by 10 percent but its level falls by 20 percent people will be worse, not better off!
Attempts to implement policy based on such elementary economic errors would inevitably lead to a worsening of China's economic performance, which would damage both China and the global economy.
Thirty-four years ago China embarked on economic policies shaped by one of the greatest economic geniuses in human history - Deng Xiaoping. Eventually codified as a "socialist market economy", these policies have produced the greatest economic growth and the most rapid increase in living standards ever experienced by such a large number of people in human history. During that period these policies have repeatedly seen off attempts to overturn them by those who wished to return China to its pre-reform policies. Given the elementary character of the economic mistakes made by those who wish China to adopt the policies which are currently failing so spectacularly in both Europe and the US, it is to be hoped that Deng Xiaoping's theories are equally successful in seeing off attempts to overturn them from another direction.
China's macroeconomic management in the last four years, as in the previous 30 years, has shown itself to be easily the world's most successful. China's economic growth during the international financial crisis has strongly aided both China itself and the rest of the world. It is in everyone's interests, not only China's, that this continues.
The author is a columnist with China.org.cn. For more information please visit: http://m.keyanhelp.cn/opinion/johnross.htm
Opinion articles reflect the views of their authors, not necessarily those of China.org.cn.
