As the Chinese economy tumbles into recession, the World Bank’s chief economist is embarking on a campaign to reverse negative perceptions about his home country’s prospects.
“China has the potential to achieve another 20 years of 8% growth,” said Justin Yifu Lin in a speech sponsored by the Federal Reserve Bank of San Francisco late last month.
Moreover, he also has stated in various venues that in two decades the Chinese economy could, in purchasing power parity terms, end up twice the size of the American one.
And what is his principal argument? Lin correctly notes that China is at the level of Japan in 1951, South Korea in 1977, and Taiwan in 1975, and for the two decades after each of those years those countries grew at annual rates of 9.2%, 7.6%, and 8.3%, respectively.
In short, he thinks the Chinese economy has lots of room to expand and merely needs to accomplish something that smaller countries have already managed.
Yet as the South China Morning Post’s Tom Holland noted on Thursday, “You don’t need to be an eminent international economist to spot the holes in his argument.”
Japan, South Korea, and Taiwan all grew through exports. As Holland tells us, China is far larger than those countries, and there are not enough consumers in the world to support Chinese growth at Lin’s predicted rate.
In any event, China’s export performance is already stumbling. Its existing markets—the European Union and the United States together absorb about half of its exports—will not support continued Chinese expansion in this troubled period, and the country’s new markets are either not large enough to take up the slack or are not willing to do so, at least on a sustained basis.
In fact, Xia Bin, an advisor to the People’s Bank of China and a researcher at the State Council’s Development Research Center, says that next year trade may end up being a negative for GDP.
Moreover, both central government and outside economists believe that the country’s export-fueled current account surplus will continue to fall as a percentage of GDP. It stood at 10.1% of GDP in 2007, and was 5.2% last year. By next year, it could be half the 2010 figure.
In these circumstances, Justin Lin is right to say Beijing must unwind what he calls the “triple imbalances” by boosting lagging domestic consumption, narrowing the widening income gap, and protecting the degraded environment.
Beijing’s leaders for years have acknowledged these problems but have deliberately pursued policies that have made them substantially worse.
In short, they did not attempt to alleviate the imbalances in the boom times in the middle of the last decade, so it is unlikely they will do so now as the economy falters and as the Communist Party and central government head into a multi-year political transition.
Justin Lin knows the difficulty of sponsoring change in today’s China. Before he became the first Chinese citizen to follow in the footsteps of Larry Summers and Joseph Stiglitz to assume his current post at the World Bank, he was a staunch opponent of change, a champion of Beijing’s behemoth state enterprises.
Those in control of the Chinese economy view the state sector as their primary source of power and patronage and perceive needed reforms as “political suicide.”
After all, a literal translation of the name of the Communist Party is “the Party of Public Assets,” so that organization must protect state enterprises—the country’s “public assets”—to maintain political legitimacy.
Because China will not be able to ramp up exports or eliminate the “triple imbalances,” it is sure to be snared in what economists call “the middle-income trap,” where growth stalls before a moderately well-off population becomes rich.
China has already reaped all the easy growth that comes with starting from a low base, and now it needs to, among other things, encourage consumption, allow the renminbi to float, flatten the social structure, promote democratization, remove restrictions on labor, adopt the rule of law, and strengthen the social safety net.
The Party will not make substantial progress toward any of these goals—with the possible exception of the last one—until it adopts fundamentally different political and economic models.
In the meantime, Justin Lin’s triple imbalances are getting larger because Party leaders have ruled out the structural changes necessary to lay the foundation for the next multi-decade round of growth.
So, despite what the World Bank economist hopes, China will not become the next Japan, South Korea, or Taiwan. It’s much more likely to resemble the trapped Venezuela and Argentina—not to mention the former Soviet Union.
Lin, who terms his homeland “a leading dragon” of the global economy, nonetheless remains confident. “I am hopeful that we can anticipate an Asian century where China will grow dynamically,” he wrote at the end of last month on the World Bank site.
forbes.com
“China has the potential to achieve another 20 years of 8% growth,” said Justin Yifu Lin in a speech sponsored by the Federal Reserve Bank of San Francisco late last month.
Moreover, he also has stated in various venues that in two decades the Chinese economy could, in purchasing power parity terms, end up twice the size of the American one.
And what is his principal argument? Lin correctly notes that China is at the level of Japan in 1951, South Korea in 1977, and Taiwan in 1975, and for the two decades after each of those years those countries grew at annual rates of 9.2%, 7.6%, and 8.3%, respectively.
In short, he thinks the Chinese economy has lots of room to expand and merely needs to accomplish something that smaller countries have already managed.
Yet as the South China Morning Post’s Tom Holland noted on Thursday, “You don’t need to be an eminent international economist to spot the holes in his argument.”
Japan, South Korea, and Taiwan all grew through exports. As Holland tells us, China is far larger than those countries, and there are not enough consumers in the world to support Chinese growth at Lin’s predicted rate.
In any event, China’s export performance is already stumbling. Its existing markets—the European Union and the United States together absorb about half of its exports—will not support continued Chinese expansion in this troubled period, and the country’s new markets are either not large enough to take up the slack or are not willing to do so, at least on a sustained basis.
In fact, Xia Bin, an advisor to the People’s Bank of China and a researcher at the State Council’s Development Research Center, says that next year trade may end up being a negative for GDP.
Moreover, both central government and outside economists believe that the country’s export-fueled current account surplus will continue to fall as a percentage of GDP. It stood at 10.1% of GDP in 2007, and was 5.2% last year. By next year, it could be half the 2010 figure.
In these circumstances, Justin Lin is right to say Beijing must unwind what he calls the “triple imbalances” by boosting lagging domestic consumption, narrowing the widening income gap, and protecting the degraded environment.
Beijing’s leaders for years have acknowledged these problems but have deliberately pursued policies that have made them substantially worse.
In short, they did not attempt to alleviate the imbalances in the boom times in the middle of the last decade, so it is unlikely they will do so now as the economy falters and as the Communist Party and central government head into a multi-year political transition.
Justin Lin knows the difficulty of sponsoring change in today’s China. Before he became the first Chinese citizen to follow in the footsteps of Larry Summers and Joseph Stiglitz to assume his current post at the World Bank, he was a staunch opponent of change, a champion of Beijing’s behemoth state enterprises.
Those in control of the Chinese economy view the state sector as their primary source of power and patronage and perceive needed reforms as “political suicide.”
After all, a literal translation of the name of the Communist Party is “the Party of Public Assets,” so that organization must protect state enterprises—the country’s “public assets”—to maintain political legitimacy.
Because China will not be able to ramp up exports or eliminate the “triple imbalances,” it is sure to be snared in what economists call “the middle-income trap,” where growth stalls before a moderately well-off population becomes rich.
China has already reaped all the easy growth that comes with starting from a low base, and now it needs to, among other things, encourage consumption, allow the renminbi to float, flatten the social structure, promote democratization, remove restrictions on labor, adopt the rule of law, and strengthen the social safety net.
The Party will not make substantial progress toward any of these goals—with the possible exception of the last one—until it adopts fundamentally different political and economic models.
In the meantime, Justin Lin’s triple imbalances are getting larger because Party leaders have ruled out the structural changes necessary to lay the foundation for the next multi-decade round of growth.
So, despite what the World Bank economist hopes, China will not become the next Japan, South Korea, or Taiwan. It’s much more likely to resemble the trapped Venezuela and Argentina—not to mention the former Soviet Union.
Lin, who terms his homeland “a leading dragon” of the global economy, nonetheless remains confident. “I am hopeful that we can anticipate an Asian century where China will grow dynamically,” he wrote at the end of last month on the World Bank site.
forbes.com
No comments:
Post a Comment