GUATEMALA CITY -- Just when it seems that China was escaping the economic disasters typical of the bad old days of communism, it is succumbing to the theories of warmed-over Keynesianism. Beijing is giving up class struggle and central planning for discredited tools designed to manage aggregate demand. Whereas central planning kept China's economy on the brink of collapse, Keynesian-style policies will, well, bring China's economy to the brink of collapse.
Beijing has become addicted to fiscal spending aimed at boosting current economic growth. This has caused growing fiscal deficits and ballooning public-sector debt that will weaken China's long-term economic prospects. This is because economic growth bought with increased government spending is unsustainable and creates distortions that cause imbalances in production structures. In addition, more spending by corrupt cadres bring low-quality growth due to the inefficiency and corruption associated with government spending. This vigorous pump priming has been ineffective in reversing deflationary trends.
Although the State Statistics Bureau indicates that fixed-asset spending was up by almost 26 percent for the first five months of the year, most of that spending reflects capital expenditures by government and state-owned enterprises, or SOEs. Thus the central government and its supplicants account for more than two-thirds of investment in the country. Such spending outpaces gross domestic product growth by a factor of three.