HONG KONG — As the world economy reels from bad to worse, and economists go from talking of recession to swapping stories of the Great Depression of the 1930s, eyes turn to China and to what it might, can and should do in its newly emerging role as a global player both economically and politically. The answers may not be what the world wants to hear or in the best global interests.
The Organization for Economic Cooperation and Development, the club of 30 rich industrialized countries, reports that many of the rich economies “are in or on the verge of a protracted recession of a magnitude not experienced since the early 1980s.” If anything, OECD was being optimistic.
Even on the OECD’s assumptions, 8 million more people will lose their jobs in the rich countries, and the United States, Europe and Japan will remain in recession until at least the middle of 2009, followed by a “languid” recovery. Any sharp changes in foreign exchange rates or rise in oil prices could prolong the agony.
Policymakers have been surprised already because finances and economies have worsened beyond their predictions. Still, the forecasters tend to look through rose-tinted glasses, hoping for a return to normal. But what is normal?
The truth is that for years countries in the West generally, and the U.S. in particular, have been living beyond their means. Worse, already heavily indebted governments are trying to cope by spending their way out of trouble, spending what neither they nor their populations have. This is especially true of the U.S. and Britain. Japan is more complicated, with the world’s most heavily indebted government, debts heading toward 170 percent of GDP, but with a large pool of personal savings.
If governments in the West promote recovery by spending heavily, they’ll face a bigger bill later. The long-term remedy for the West is to save more. China is the distorted mirror image, with savings rates that are too high and spending that is too low. Ideally, equilibrium would be reached by meeting somewhere in the middle.
Events of the last few months have demonstrated the effects of globalization. Japanese and Chinese hopes that a downturn in the West would bypass them have been in vain. Falling demand for Chinese exports has led to layoffs in factories in the Pearl River Delta and beyond, and rapidly falling growth. In Japan, the unraveling of yen carry-trade transactions and the flight to yen as a safe currency have been a double-whammy against exporters.
The World Bank in late November predicted that China’s growth would drop sharply to 7.5 percent next year — from the 9.2 percent previously expected. (OECD forecasts 8 percent growth for China in 2009 and 9.2 percent in 2010.) Whether it is 7.5 percent or 8 percent, or lower as skeptical economists fear, most countries would die for such a growth rate.
But in China’s case, lower growth rates will cause rising tensions. Generally, 8 percent is regarded as the symbolic minimum necessary to sustain employment. The World Bank’s message is that China’s high growth can be achieved only by concerted government spending.
The bank expects government spending as a share of overall growth to soar, contributing 4 percentage points next year, or more than half the total growth. There will be a price to be paid, with the government account going from a modest fiscal surplus to a deficit of about 2.6 percent of GDP. The good news is that China is on the ball, having announced a 4 trillion yuan stimulus package followed by a large interest rate cut.
China’s growth has been very lopsided and skewed in favor of those already well-off. The glitzy blocks of shops, luxury offices and upmarket apartments that line the main roads of Beijing, Guangzhou, Shanghai, Shenzhen and other cities are testament to who have benefited. Cheaper housing for the masses is less evident.
Popular pressures may encourage the government to remedy some of the deficiencies. Workers, especially those in Pearl River delta factories who have lost their jobs are making their voices heard.
Pandering to the newly vociferous workers who have tasted prosperity from industrial work but lost their jobs could be good both in stimulating the economy and in correcting one big imbalance: China’s consumption is less than 40 percent of GDP, too low to be healthy. Lower income groups have a higher propensity to spend, and this could have a good multiplier effect in boosting the economy.
David Dollar, the World Bank’s China director, is optimistic that the country can develop a new and healthier growth model, provided that it remembers the basic principles that have served it since 1978:
• Renewed focus on education so that even the rural poor get at least nine, preferably 12, years of schooling.
• Greater incentives for private investment, and continuing openness to imports and direct investment.
• Renewed pragmatic emphasis on infrastructure.
One important question is whether, and to what extent, China can help the rest of the world. The answer is not as much as outsiders would like.
The best that China can do is to learn from history. Strangely, many American economists are talking glibly of a repeat of the Great Depression of the 1930s, without realizing that today’s China is in the position that the U.S. was then — the global manufacturing powerhouse — while the U.S. at present is like the ailing Britain or France of the 1930s.
China is showing some worrying signs that it may try to emulate the U.S., though the revaluation of the yuan has been stopped and some economists say it may fall to 7 against the dollar by yearend (from 6.88 Thursday). But Beijing’s plans to give export tax rebates on almost 4,000 items is a worrying portent that it may try to export its way to growth. This could lead to the risk of trade wars.
China already runs a massive current account surplus, which is forecast by the World Bank to rise from $386 billion this year to $427 billion next, even though this would imply a fall to 8.9 percent of GDP from 9.3 percent, which is still huge for a developing country.
It would be far better for China to re-engineer — turn the former export factories to produce for the domestic market and realize the benefits of a dream market of a billion people.
Then let the foreigners try to compete if they can. If they can, maybe a global balance may be achieved. If they cannot, then next time there are global economic problems, China will be setting the pace and may not have to worry so much about problems in the West.
Kevin Rafferty has edited daily newspapers in Hong Kong, India, Malaysia and Thailand.
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