China can’t save global economy

By Sushil Seth  / 

Fri, Jul 10, 2009 - Page 8

As the global economic meltdown continues to defy any rational solution, apart from what sometimes looks like throwing good money after bad, there is a naive belief that China might become the ultimate savior with its economic stimulation program.

Lately, the estimates of China’s economic growth vary between 6 percent and 9 percent; not bad considering that much of the world is in a recessionary mode.

If true, it might not be long before China is again able to reach the double-digit growth that has characterized it in the last few years.

As with everything Chinese these days, there is a tendency to look at things through rose-tinted glasses. And with the world in the economic doldrums, the tendency is even greater to look for a glimmer of hope somewhere. China appears to hold that promise.

But to extrapolate China’s growth as a vehicle for global recovery is like believing in the tooth fairy.

Leave aside the world; even for China its present economic strategy is a bit dubious. The entire growth strategy of the state directing largesse into infrastructure projects and the like is a stopgap arrangement.

It is based on the hope that, as in the past global recessions, the world economy will soon recover to create demand for China’s falling export sector.

Until then, generous state spending on infrastructure and other state directed projects will hold the fort, hopefully staving off growing social instability.

But there are problems with this line of thinking. Japan’s experience during its decade or more of infrastructure spending is instructive in this respect.

Japan tried infrastructure spending (some good but much of it dubious) to lift its economy during its long period of economic slowdown/stagnation, but with unflattering results. In the end, Japan was helped by its robust export sector.

In other words, because the global economy was healthy and growing, Japan could plug its export sector into it to keep ticking.

Besides, Japan’s domestic spending (though sluggish) constituted a large proportion of its GDP.

But in the case of China, the picture is quite different.

First, the current global recession is unlike the ones before it. Previous recessions were short-lived and economies rebounded with greater vigor. Therefore, China was able to expand its export sector, with only a short diversion at times into large scale infrastructure spending.

The current global recession, though, is systemic, steeped in a mountain of private and public debt. It is, therefore, not going to be a short-lived phenomenon.

And if and when the situation recovers, it is going be slow and painful.

Which means that the world, particularly the US with its seemingly insatiable demand for Chinese goods, is unlikely to pick up the tab on Chinese exports with the same alacrity.

And if China’s is looking for economic nirvana through a revived export sector after a relatively short global recession, it is likely to be disappointed.

At the same time, its state directed investments in infrastructure and bank lending are not a real solution. It is basically filler until normalcy returns, which is more like wishful thinking — at least in its old form — than a hardheaded policy.

Instead of being a vehicle of global economic revival, China has to think more in terms of reviving its own economy in a more meaningful way.

The present infrastructure spending, as part of a nearly US$600 billion stimulus package, will help but it is not going to fix China’s problems. Therefore, it needs to stimulate its domestic consumer spending.

It has successfully managed to depress or contain economic demand at home to produce exportable goods at cheaper prices with a skewed exchange rate. That option is now constrained because of the deep global debt crisis.

Therefore, it has to stimulate its domestic consumer economy. But there are two problems here.

First, China, both at the government and private level, puts great store by a high savings rate of about 30 percent. From the government’s viewpoint, a high rate of saving with low interest rates for its savers, contributes to China’s low cost economy.

And with high private savings as a cushion against adversity, China has been able to manage with the minimum spending on social services and the health of its people.

This must change. China needs to modernize its social spending to take greater care of its people’s education, health, old age and related services. This is long overdue.

The expansion of the social services sector will create domestic demand for a whole range of jobs and goods with a multiplier effect on the economy.

More than anything else, China badly needs to revive and upgrade its rural sector. It can no longer afford to use its depressed rural economy to subside the urban industrial sector.

If it wants to create a broadbased and sustained domestic economy, it needs to put more resources into the rural economy.

This is necessary not only to bridge the urban-rural gap, but also to expand the domestic economy through increased consumer demand beyond the urban middle class of about 300 million people.

It is important to note that 800 million or more of China’s rural folk have been largely left out of China’s industrial economy.

An expanded domestic economy will also create demand for foreign goods once China undertakes to revalue its currency to better reflect the international exchange mechanism.

There is a need for China to shed its hoarding mentality of building up currency reserves, and large domestic savings for some sort of rainy day. It is no longer vulnerable to the foreign manipulation and occupation of the 19th century.

A reinvigorated Chinese economy with a strong domestic base can play a useful role internationally.

But with its historical baggage of a “century of humiliation” and a Leninist political system, it might not be able to deliver.

Sushil Seth is a writer based in Australia.