China to save the world?
Socialist Economic Bulletin is an excellent website with the kind of in depth analysis that blogs often lack.
The recent post on the link between saving, investment and growth correctly points out the long term links between current investment and future growth.
I do worry though that the latest post goes to far in it’s praise of China’s macro-strategy.
The high savings, high investment, export led model has certainly served China well over the past decade. Although it has also helped to lay he groundwork for the financial crisis through the build up of global imbalances (between spending and saving). Equally whilst an economy cannot survive on consumption and borrowing alone, nor can it survive on saving and exporting – what happens when the custoers run out of money? In some ways China is just as unbalanced as the UK.
Investment is now something like 45% of GDP. A huge figure.
The article on SEB argues that:
The argument that has appeared in sections of the foreign language media that China should not increase investment because this will increase ‘overcapacity’ is entirely fallacious theoretically. A high level of investment does not consist in creating more production capacity of the same type at the same levels of technology, efficiency, or productivity – the proposal that China should create more low value added production capacity is evidently false. The issue is high investment to upgrade China’s economy technologically and in terms of productivity and efficiency. Moreover, factually, China is at the beginning of this upgrading of its investment capacity. Capital stock per US worker or per West European worker is very much higher than per Chinese employee. To overcome this lag requires that the investment stock per Chinese worker rise more rapidly than in the US or Europe for a prolonged period.
I am afraid I disagree. It is incredibly hard to find out exactly what China is investing in – and maybe they are ‘moving up the value chain’ and investing in technology. That would be fine. I fear they are not.
I concur with Willem Buiter over at the FT:
Although it is hard to understand the exact size of the fiscal stimulus it has provided, there is no doubt that this stimulus was large. Interest rates have been cut. Credit growth, including bank lending to state enterprises and to construction has exploded. The problem with this approach is that the composition of the demand stimulus and production boost is completely wrong. The government has simply done more of whatever it was doing in the past: increased investment in the production of exportable goods and heavy industry (metals and chemicals), increased production of semi-finished manufactured goods and increased investment in infrastructure. The inevitable result of this investment boom will be increased excess capacity in exportables and unprecedented environmental destruction.
China is missing a huge opportunity. Its short-run imperative (boost demand through a fiscal stimulus) coincide with its long-run imperative (reduce the national saving rate and the external current account surplus). This stands in sharp contrast to the US and the UK, where the short-run imperative (boost demand through a fiscal stimulus) conflicts 180 degrees with its long-run imperative (save more and reduce the external current account deficit). China saves too much in the household sector, the corporate sector (especially the state enterprises) and the public sector. It badly needs an unfunded pay-as-you go social security retirement scheme to boost consumption by the old. China’s fiscal position is such that the country could introduce the benefit (pension) part of the social security scheme for a number of years without having the social security tax in place!
If China adds capacity to exports (for which there is little demand at present) it wil simply make the sitaution worse. Although its own GDP will be boosted in the short term (as investment rises), adding further supply to a depressed global arketwill only drive down prices further.
SEB are right to note the long term link between investment and growth, but incorrect I fear to assume all investment is therefore good.
Building an office block counts as investment. It’s not still always the right thing to do: