On July 16 the State Statistics Bureau of China announced that GDP for the April-June quarter grew 7.9 percent in real terms from a year before, surpassing the 6.1 percent rate of the January-March quarter. After the Lehman Brothers shock last September, China’s annual economic growth rate — which until the first half of 2008 had been more than 10 percent — slowed with the decline of exports bound for Europe.
Yet, China’s economy has already shown signs of a strong recovery, thanks largely to the stimulus package of public spending measures worth about 4 trillion yuan (¥55 trillion).
The Chinese government is now promoting the construction of a harmonious society with regard to five sectors: (1) coastal and inland areas, (2) cities and rural villages, (3) industry and agriculture, (4) nature and human beings, and (5) China and the world, especially Asia. The first three involve the “elimination of economic gaps.”
The large-scale public works program that the Chinese government hammered out last November was under way after the turn of the year. Railway, expressway and airport construction projects began one after another in inland areas. Naturally, demand for steel, cement and other industrial materials soared, leading to a sharp rise in capital spending by private enterprises. Thus the notion of stimulating domestic demand, Keynes’ style, has worked well.
The Chinese government has also worked out stimulus measures for consumers. As interest rates were lowered, a subsidy system to provide discounts of more than 10 percent for purchases of household electrical appliances was introduced in rural areas. A sharp rise in sales of refrigerators, washing machines and television sets resulted.
Meanwhile, car sales in the first half of this year totaled 6.09 million units, a 17.7 percent rise over the previous year, outpacing U.S. sales to become No. 1 in the world. This was partly due to the cut in the vehicle sales tax for cars with an engine displacement of 1,500 cc or less.
Although the downtrend in exports continues at a level about 20 percent below that of last year, China has acted swiftly to shift its export-dependent economy toward one focused on domestic demand.
The international financial crisis, which started with American subprime loans, is blamed generally for the global recession, but probably the principal culprit is the global-scale Keynesian problem of production capacity for industrial goods exceeding effective demand.
Such a situation emerged at the time of the East Asian monetary crisis in 1997. China’s devaluation of the yuan in 1995 had spurred Chinese exports, while damping export growth in Thailand, Malaysia and South Korea. Hedge funds that had detected signs of poor business performance in Thailand sold Thai stock shares, corporate bonds and government bonds, changing them into dollars, and then fled the market. Thailand’s central bank devalued the Thai baht in an attempt to halt the decline of its foreign exchange reserves. But short-term capital flights continued, forcing the country to resort to emergency loans from the International Monetary Fund.
In other words, in the latter half of the 1990s, the Keynesian syndrome in which global industrial production capacity surpassed effective demand because of industrial progress in East Asia and Central and South America had already surfaced. Keynes urged using fiscal and monetary policy to stimulate effective demand at the national level. This time there are indications that the domestic demand-spurring measures taken by China, which represents about 20 percent of world population, may become the primary vehicle driving recovery from the global recession.
But there are limits to fiscal stimulus action and there are fears that drastically eased credit may trigger a sharp uptick in the money supply and that surplus funds may flow into the stock and real estate markets, forming another bubble economy. If that’s the case, we cannot rely on China alone. And it is necessary to make efforts to develop an international financial mechanism aimed at spurring potential domestic demand in developing and newly emerging countries. That means reform of the current international financial system.
In the years to come, as production gains in developing and newly emerging countries accelerate, the world-scale Keynesian problem is likely to become increasingly serious. It was said until recently that “Keynes is dead,” but to overcome the global recession, the world’s advanced countries launched stimulus measures. The effects are not apparent yet. One reason is the extent to which durable consumer goods have diffused through the economy. In advanced countries, automobiles, for example, are near the saturation point.
So, the question is, what will be the next generation of products to spur personal consumer spending? Perhaps they will be ecologically friendly items such as solar power generation, fixed-type fuel cells, electric vehicles, plug-in hybrid cars and LED lighting. At present, the diffusion rate of these products among households remains less than 1 percent. As their diffusion rate approaches 10 and then 20 percent, the economy will grow.
If the feed-in tariff system is introduced for renewable energies — under which electric power from these energy sources are bought at fixed prices — the installation of so-called smart grids or networks for power transmission and distribution will be proposed as large-scale public works projects. They will be controlled by information technology to stabilize frequency and voltage.
Energy-saving efforts involving houses and buildings are expected to create jobs. On this score, U.S. President Barack Obama’s plan to raise the national ratio of renewable energy to total energy supply as the main prop in his climate-change and economic-recovery package wins plaudits.
Takamitsu Sawa is a professor of Ritsumeikan University’s Graduate School of Policy Science and an appointed professor at Kyoto University’s Institute of Economic Research.