China’s shift from export-driven growth to a model based on domestic services and household consumption has been much bumpier than some anticipated, with stock-market gyrations and exchange-rate volatility inciting fears about the nation’s economic stability. Yet by historical standards, China’s economy is still performing well — at near 7 percent annual GDP growth, some might say very well — but success on the scale that China has seen over the past three decades breeds high expectations.
There is a basic lesson: “Markets with Chinese characteristics” are as volatile and hard to control as markets with US characteristics.
Markets invariably take on a life of their own; they cannot be easily ordered around. To the extent that markets can be controlled, it is through setting the rules of the game in a transparent way.
All markets need rules and regulations. Good rules can help stabilize markets. Badly designed rules, no matter how well intentioned, can have the opposite effect.
For example, since the 1987 stock-market crash in the US, the importance of having circuit breakers has been recognized; but if improperly designed, such reforms can increase volatility. If there are two levels of circuit breaker — a short-term and a long-term suspension of trading — and they are set too close to each other, once the first is triggered, market participants, realizing the second is likely to kick in as well, could stampede out of the market.
Moreover, what happens in markets might be only loosely coupled with the real economy. The recent Great Recession illustrates this. While the US stock market has had a robust recovery, the real economy has remained in the doldrums. Still, stock-market and exchange-rate volatility can have real effects. Uncertainty might lead to lower consumption and investment — which is why governments should aim for rules that buttress stability.
What matters more, though, are the rules governing the real economy. In China, as in the US 35 years ago, there is a debate about whether supply-side or demand-side measures are most likely to restore growth. The US experience and many other cases provide some answers.
For starters, supply-side measures can best be undertaken when there is full employment. In the absence of sufficient demand, improving supply-side efficiency simply leads to more underutilization of resources.
Moving labor force from low-productivity uses to zero-productivity unemployment does not increase output. Deficient global aggregate demand requires governments to undertake measures that boost spending.
Such spending can be put to many good uses. China’s critical needs include reducing inequality, stemming environmental degradation, creating livable cities and investment in public health, education, infrastructure and technology. The authorities also need to strengthen regulatory capacity to ensure the safety of food, buildings, medicine and much else. Social returns from such investments far exceed the costs of capital.
China’s mistake in the past has been to rely too heavily on debt financing. However, China also has ample room to increase its tax base in ways that would increase overall efficiency and/or equity. Environmental taxes could lead to better air and water quality, even as they raise substantial revenues; congestion taxes would improve quality of life in cities; property and capital-gains taxes would encourage higher investment in productive activities, promoting growth. In short, if designed correctly, balanced-budget measures — increasing taxes in tandem with expenditures — could provide a large stimulus to the economy.
Nor should China fall into the trap of emphasizing backward-looking supply-side measures. In the US, resources were wasted when shoddy homes were built in the middle of the Nevada desert. However, the first priority is not to knock down those homes — in an effort to consolidate the housing market; it is to ensure that resources are allocated efficiently in the future.
Indeed, the basic principle taught in the first weeks of any elementary economics course is to let bygones be bygones — do not cry over spilled milk. Low-cost steel — provided at prices below the long-term average cost of production, but at or above the marginal cost — might be a distinct advantage for other industries.
It would have been a mistake, for example, to destroy the US’ excess capacity in fiber optics, from which US firms gained enormously in the 1990s. The “option” value associated with potential future uses should always be contrasted with the minimal cost of maintenance.
A challenge facing China, as it confronts a problem of excess capacity, is that those who would otherwise lose their jobs would require some form of support; firms would argue for a robust bailout to minimize their losses. However, if the government accompanied effective demand-side measures with active labor-market policies, at least an employment problem could be effectively addressed, and optimal — or at least reasonable — policies for economic restructuring could be designed.
There is also a macro-deflationary problem. Excess capacity fuels downward pressure on prices, with negative externalities on indebted firms, which experience an increase in their real — inflation-adjusted — leverage. However, a far better approach than supply-side consolidation is aggressive demand-side expansion, which would counter deflationary pressures.
The economic principles and political factors are thus well known. However, too often the debate about China’s economy has been dominated by naive proposals for supply-side reform — accompanied by criticism of the demand-side measures adopted after the 2008 global financial crisis. Those measures were far from perfect; they had to be formulated on the fly, in the context of an unexpected emergency — but they were far better than nothing.
That is because using resources in suboptimal ways is always better than not using them at all; in the absence of the post-2008 stimulus, China would have suffered substantial unemployment. If the authorities embrace better-designed demand-side reforms, they would have greater scope for more comprehensive supply-side reforms. Moreover, the magnitude of some of the necessary supply-side reforms would be markedly diminished, precisely because the demand-side measures would reduce excess supply.
This is not just an academic debate between Western Keynesian and supply-side economists, now being played out on the other wide of the world. The policy approach China adopts is likely to strongly influence economic performance and prospects worldwide.
Joseph Stiglitz, a Nobel laureate in economics and a professor at Columbia University, was chairman of former US president Bill Clinton’s Council of Economic Advisers and served as senior vice president and chief economist of the World Bank.
Copyright: Project Syndicate
With escalating US-China competition and mutual distrust, the trend of supply chain “friend shoring” in the wake of the COVID-19 pandemic and the fragmentation of the world into rival geopolitical blocs, many analysts and policymakers worry the world is retreating into a new cold war — a world of trade bifurcation, protectionism and deglobalization. The world is in a new cold war, said Robin Niblett, former director of the London-based think tank Chatham House. Niblett said he sees the US and China slowly reaching a modus vivendi, but it might take time. The two great powers appear to be “reversing carefully
As China steps up a campaign to diplomatically isolate and squeeze Taiwan, it has become more imperative than ever that Taipei play a greater role internationally with the support of the democratic world. To help safeguard its autonomous status, Taiwan needs to go beyond bolstering its defenses with weapons like anti-ship and anti-aircraft missiles. With the help of its international backers, it must also expand its diplomatic footprint globally. But are Taiwan’s foreign friends willing to translate their rhetoric into action by helping Taipei carve out more international space for itself? Beating back China’s effort to turn Taiwan into an international pariah
Typhoon Krathon made landfall in southwestern Taiwan last week, bringing strong winds, heavy rain and flooding, cutting power to more than 170,000 homes and water supply to more than 400,000 homes, and leading to more than 600 injuries and four deaths. Due to the typhoon, schools and offices across the nation were ordered to close for two to four days, stirring up familiar controversies over whether local governments’ decisions to call typhoon days were appropriate. The typhoon’s center made landfall in Kaohsiung’s Siaogang District (小港) at noon on Thursday, but it weakened into a tropical depression early on Friday, and its structure
Since the end of the Cold War, the US-China espionage battle has arguably become the largest on Earth. Spying on China is vital for the US, as China’s growing military and technological capabilities pose direct challenges to its interests, especially in defending Taiwan and maintaining security in the Indo-Pacific. Intelligence gathering helps the US counter Chinese aggression, stay ahead of threats and safeguard not only its own security, but also the stability of global trade routes. Unchecked Chinese expansion could destabilize the region and have far-reaching global consequences. In recent years, spying on China has become increasingly difficult for the US
RSS