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AS 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 adopted to deal with it by Europe and the U.S. are failing to do so. This is a statement of the obvious vis-à-vis Europe, where a double dip recession is a reality and the list of countries kept afloat by economic bailout packages has expanded to include Spain.
The situation in the U.S. is not much better, with GDP growth from the last quarter at an anemic 1.9 percent. To understand the depth of the U.S.’s economic woes, consider that its annual economic growth during the last four years has averaged 0.3 percent and its employment is still five million below its pre-crisis peak. China’s economy has grown over 40 percent in size over the past four years. The contrast between the East Asian dynamo and the U.S. and EU economies could scarcely be more striking.
The results of the different economic policies introduced to deal with the financial crisis in the three economies have been equally clear-cut. To summarize:
– Europe has combined loose monetary policy with no stimulus to the productive economy, i.e.“austerity.” The result is an EU economy that has actually shrunk two percent over four years.
– The U.S. has combined loose monetary policy with a consumer-orientated stimulus package delivered via a budget deficit. But the results of the stimulus were not effective, and as a result the U.S. economy grew by only one percent in four years. India, which followed the U.S.’s consumer stimulus model, has seen its growth decline from 9.4 percent in the first quarter of 2010 to 5.3 percent in the first quarter of 2012.
– China combined expansionary monetary policy with an investment-led stimulus, and enjoyed an average annual growth of 10 percent right through the financial crisis.
These differing results are nothing unexpected when we consult economic theory, which says that shifts in investment determine business cycle fluctuations. Indeed, since the beginning of the downturn, investment decline has accounted for almost all of the economic difficulties faced in the U.S. and the EU.
In real terms, the U.S. economy has expanded by US $432 billion in four years – a weak performance, dragged down further by a US $298 billion fall in investment expenditures. EU GDP has fallen by US $282 billion – pulled negative by the US $423 billion investment decline in the zone.
In 2008, China launched a massive stimulus program focused on investment. China’s policymakers acted with a considerable degree of foresight, but in line with economic theory. And look what a difference it’s made – in four years China’s GDP has expanded by more than 40 percent!
As the Old World continues to exert a damaging influence on the world economy, China should be able to overcome these negative headwinds –although a new stimulus on the scale of 2008’s US $586 billion package is both unnecessary and undesirable.
In 2008 the global economy was plunged into its deepest downturn since World War II, with U.S. GDP falling 5.1 percent and EU GDP dropping 5.7 percent. Today, what we are seeing is very slow growth in the U.S. and a milder recession in Europe than in 2008, not a severe economic plunge.
As the international economic situation is different, a new stimulus in China on a scale of that in 2008 would be both inappropriate and inflationary. Instead, a moderate easing of monetary policy is called for. This should be fairly straightforward– inflation is already falling due to slumping world commodity prices. Monetary easing, combined with a moderate stimulus to China’s productive economy, should stave off any economic dangers China should face.
Under the present conditions, a stimulus to the productive economy should have both consumer and investment components. The reason is that overall large increases in investment are difficult to manage efficiently, and since 2008 China has seen a very significant rise in levels of investment. Further sharp increases should therefore be avoided at present, and the consumer side of a stimulus package should be given greater weight than in 2008.
Nevertheless, global investment conditions are still negative. As a precaution, some limited measures to sustain investment should be introduced.
Although there is no need for China to adopt measures of the scale and complexity required in 2008, some economic errors have recently appeared in analyses from some observers regarding China’s economic policy which, if acted on, would produce unnecessary economic problems.
Some statements confuse a higher rate of consumption growth – necessary to increase living standards – with an increased percentage of consump-tion in overall GDP. These aren’t the same things: a higher sustainable rate of consumption growth is a positive development, but if consumption accounts for more of overall GDP by taking the place of investment, economic growth and therefore consumption will be slower over the long run. Consumption and investment need to rise together.
Policies calling for greater environmental protection while simultaneously lowering new investment have also been advocated by some economists. But environmental protection actually requires more investment. For example, nonpolluting power stations and energy supplies are more expensive than polluting energy sources, and necessary environmental measures such as reforestation require large-scale investments and have long payback periods. Investment is therefore required for environmental protection.
Others focus exclusively on 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 investment levels fall by 20 percent, people will be worse, not better off.
Attempts to implement policy based on any one of these suggestions would most likely lead to a worsening of China’s economic performance, which would damage both China and the global economy.
Thirty-four years ago China set about instituting a suite of economic reforms masterminded by one of the greatest economic geniuses in history, Deng Xiaoping. Eventually codified as “socialist market economy,” these policies have produced long-run, sustainable and robust economic growth for over three decades, and created the most rapid increase in the living standards of such a big population on record.
During this period there have been some who have sought to stop or even overturn the reform policies introduced by Deng Xiaoping. But pushing ahead with these reforms has borne fruit.
But these days, attacks are coming from the other direction. Given the elementary character of the economic mistakes made by those who wish China to adopt 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 the world’s most successful. The country’s economic growth has been the powerhouse of the world economy for some time now. It is in everyone’s interests, not only China’s, that this continues.
The situation in the U.S. is not much better, with GDP growth from the last quarter at an anemic 1.9 percent. To understand the depth of the U.S.’s economic woes, consider that its annual economic growth during the last four years has averaged 0.3 percent and its employment is still five million below its pre-crisis peak. China’s economy has grown over 40 percent in size over the past four years. The contrast between the East Asian dynamo and the U.S. and EU economies could scarcely be more striking.
The results of the different economic policies introduced to deal with the financial crisis in the three economies have been equally clear-cut. To summarize:
– Europe has combined loose monetary policy with no stimulus to the productive economy, i.e.“austerity.” The result is an EU economy that has actually shrunk two percent over four years.
– The U.S. has combined loose monetary policy with a consumer-orientated stimulus package delivered via a budget deficit. But the results of the stimulus were not effective, and as a result the U.S. economy grew by only one percent in four years. India, which followed the U.S.’s consumer stimulus model, has seen its growth decline from 9.4 percent in the first quarter of 2010 to 5.3 percent in the first quarter of 2012.
– China combined expansionary monetary policy with an investment-led stimulus, and enjoyed an average annual growth of 10 percent right through the financial crisis.
These differing results are nothing unexpected when we consult economic theory, which says that shifts in investment determine business cycle fluctuations. Indeed, since the beginning of the downturn, investment decline has accounted for almost all of the economic difficulties faced in the U.S. and the EU.
In real terms, the U.S. economy has expanded by US $432 billion in four years – a weak performance, dragged down further by a US $298 billion fall in investment expenditures. EU GDP has fallen by US $282 billion – pulled negative by the US $423 billion investment decline in the zone.
In 2008, China launched a massive stimulus program focused on investment. China’s policymakers acted with a considerable degree of foresight, but in line with economic theory. And look what a difference it’s made – in four years China’s GDP has expanded by more than 40 percent!
As the Old World continues to exert a damaging influence on the world economy, China should be able to overcome these negative headwinds –although a new stimulus on the scale of 2008’s US $586 billion package is both unnecessary and undesirable.
In 2008 the global economy was plunged into its deepest downturn since World War II, with U.S. GDP falling 5.1 percent and EU GDP dropping 5.7 percent. Today, what we are seeing is very slow growth in the U.S. and a milder recession in Europe than in 2008, not a severe economic plunge.
As the international economic situation is different, a new stimulus in China on a scale of that in 2008 would be both inappropriate and inflationary. Instead, a moderate easing of monetary policy is called for. This should be fairly straightforward– inflation is already falling due to slumping world commodity prices. Monetary easing, combined with a moderate stimulus to China’s productive economy, should stave off any economic dangers China should face.
Under the present conditions, a stimulus to the productive economy should have both consumer and investment components. The reason is that overall large increases in investment are difficult to manage efficiently, and since 2008 China has seen a very significant rise in levels of investment. Further sharp increases should therefore be avoided at present, and the consumer side of a stimulus package should be given greater weight than in 2008.
Nevertheless, global investment conditions are still negative. As a precaution, some limited measures to sustain investment should be introduced.
Although there is no need for China to adopt measures of the scale and complexity required in 2008, some economic errors have recently appeared in analyses from some observers regarding China’s economic policy which, if acted on, would produce unnecessary economic problems.
Some statements confuse a higher rate of consumption growth – necessary to increase living standards – with an increased percentage of consump-tion in overall GDP. These aren’t the same things: a higher sustainable rate of consumption growth is a positive development, but if consumption accounts for more of overall GDP by taking the place of investment, economic growth and therefore consumption will be slower over the long run. Consumption and investment need to rise together.
Policies calling for greater environmental protection while simultaneously lowering new investment have also been advocated by some economists. But environmental protection actually requires more investment. For example, nonpolluting power stations and energy supplies are more expensive than polluting energy sources, and necessary environmental measures such as reforestation require large-scale investments and have long payback periods. Investment is therefore required for environmental protection.
Others focus exclusively on 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 investment levels fall by 20 percent, people will be worse, not better off.
Attempts to implement policy based on any one of these suggestions would most likely lead to a worsening of China’s economic performance, which would damage both China and the global economy.
Thirty-four years ago China set about instituting a suite of economic reforms masterminded by one of the greatest economic geniuses in history, Deng Xiaoping. Eventually codified as “socialist market economy,” these policies have produced long-run, sustainable and robust economic growth for over three decades, and created the most rapid increase in the living standards of such a big population on record.
During this period there have been some who have sought to stop or even overturn the reform policies introduced by Deng Xiaoping. But pushing ahead with these reforms has borne fruit.
But these days, attacks are coming from the other direction. Given the elementary character of the economic mistakes made by those who wish China to adopt 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 the world’s most successful. The country’s economic growth has been the powerhouse of the world economy for some time now. It is in everyone’s interests, not only China’s, that this continues.