Kenneth Rogoff, writing for Project Syndicate, argues that if China’s stimulus succeeds, it will do so at the expense of intermediate-term growth. He echoes the widely-held view that China needs to move towards a paradigm that gives more weight to domestic consumption. The problem is, however, that a transition will be awkward and is likely to be forced on China (the low wages that are key to international competitiveness are an impediment to developing a large, more self-sustaining internal market sufficient to absorb much of the production now focused overseas).
From Project Syndicate:
Addressing the annual World Economic Forum in Davos, Switzerland, Chinese Premier Wen Jiabao explained his government’s plans to counter the global economic meltdown with public spending and loans.
He all but guaranteed that China’s annual growth would remain above 8 percent in 2009…
But does the Chinese government really have the tools needed to keep its economy so resilient? …
America’s deepening recession is slamming China’s export sector, just as it has everywhere else in Asia. The immediate problem is a credit crunch not so much in China as in the United States and Europe, where many small and medium-size importers cannot get the trade credits they need to buy inventory from abroad.
As a result, some once-booming Chinese coastal areas now look like ghost towns, as tens of thousands of laid-off workers have packed their bags and returned to the countryside.
Similarly, in Beijing’s Korean section, perhaps half of the 200,000-300,000 inhabitants ― mainly workers (and their families) who are paid by Korean companies that produce goods in China for export ― reportedly have gone home…
Many leading Chinese researchers are convinced that that the government will do whatever it takes to keep growth above 8 percent. But there is a catch. Even if successful in the short run, the huge shift toward government spending will almost certainly lead to significantly slower growth rates a few years down the road.
Simply put, it is far from clear that marginal infrastructure projects are worth building, given that China is already investing more than 45 percent of its income, much of it in infrastructure.
True, some of China’s fiscal stimulus effectively consists of loans to the private sector via the highly controlled banking sector. But is there any reason to believe that new loans will go to worthy projects rather than to politically connected borrowers?
In fact, China’s success so far has come from maintaining a balance between government and private sector expansion. Sharply raising the government’s already outsized profile in the economy will upset this delicate balance leading to slower growth in the future.
It would be preferable for China to find a way to substitute Chinese for U.S. private consumption demand, but the system seems unable to move quickly in this direction.
If government investment has to be the main vehicle, then it would be far better to build desperately needed schools and hospitals than “bridges to nowhere,” as Japan famously did when it went down a similar path in the 1990s.
Unfortunately, China’s local officials need to excel in the country’s “growth tournament” to get promoted. Schools and hospitals simply do not generate the kind of fast tax revenue and GDP growth needed to outperform political rivals.
Even prior to the onset of the global recession, there were strong reasons to doubt the sustainability of China’s growth paradigm. The environmental degradation is obvious even to casual observers.
And economists have started to calculate that if China were to continue its prodigious growth rate, it would soon occupy far too large a share of the global economy to maintain its recent export trajectory.
So a shift to greater domestic consumption was inevitable anyway. The global recession has simply brought that problem forward a few years…
One way or the other, the financial crisis is likely to slow medium-term Chinese growth significantly. But will its leaders succeed in stabilizing the situation in the near term?
I hope so, but I would be more convinced by a plan tilted more toward domestic private consumption, health, and education than to one based on the same growth strategy of the past 30 years.