| Now that the American economy appears to be definitely slowing down, the question is being asked: will the world economy also slow down proportionately or will the Asian economies take up the slack? As usual, some say yes, some say no. |
| Nicholas R Lardy of the Institute for International Finance (which has now been renamed Peterson Institute for International Finance) is the man who wrote the definitive book on the Chinese economy some years ago. And he says China, at least, doesn't look as if it will contribute much to slowing down the coming slowdown. In a recently published policy brief* "" the likes of which one rarely gets to see from Indian think tanks "" he writes that "China's transition towards more consumption-driven growth is likely to be substantially delayed." At least, that is the investment data for the first half of 2006 suggest by continuing to rise. That, in turn, means that contrary to expectations, consumption did not increase. |
| China , as everyone knows, produces a lot, and sells about half of it to America . But if America buys less, China either has to sell the stuff at home or face a slowdown. |
| But alas, says Lardy, "the reported 30 percent growth of fixed asset investment in the first half would translate into an expansion of fixed capital formation by about 23 percent in nominal terms, well in excess of the reported pace of expansion of nominal GDP of 14.3 per cent." In short, the Chinese don't look as if they are going to turn into a domestic consumption-led economy. Net exports, as a share of GDP, are still rising rapidly. Indeed, says Lardy, household consumption "almost certainly continued to decline in the first half of 2006. |
| It is not for the want of trying by the government that Chinese consumption continues to lag behind. But the truth is that the main engine for consumption "" rural folk "" is yet untapped. Quite simply, China taxes the daylights out of the rural poor (something about which Prakash Karat is silent). Not just that. The cuts in income tax on urban Chinese have been too small to have much of an effect. And just see how iniquitous this is: they cut taxes for the urban people, but not for the rural poor. Can we do this in India ? |
| Third, says Lardy, "there is little evidence that a fundamental shift in government spending priorities is under way." Or, as Amartya Sen has pointed out, if you are poor and Chinese, you are as good as dead. Even basic medicines cost what they cost in the US. Can you blame the Chinese for a high precautionary demand for savings? "Consumer confidence seems to be waning, with a marked slowdown in borrowing starting in 2004." |
| It is not just the income dynamics that China is mismanaging. It is making a mess of its exchange rate and monetary policies as well. The latter is not independent in any real sense and so higher interest rates are not allowed. And the former therefore follows suit. |
| So what are these geniuses doing? They are issuing repeated calls and directives to firms to please not invest in areas where there is excess capacity. "But even after two modest increases in interest rates on loans in 2006, the rates paid by corporate borrowers remain very low in real terms...Equally importantly, the real interest rate on corporate bank deposits remains negative, almost ensuring that state-owned companies reinvest all of their retained earnings, even when expected returns are low or even moderately negative." Talk of bungling. |
| I want to end this with something that our Leftists should note. Although China has done so magnificently in production, it has done as horribly as us in generating employment. "Between 1978 and 1993," says Lardy, "employment expanded by 2.5 percent per annum, but between 1993 and 2004, when the investment share of GDP was much higher than in the 1980s, employment growth slowed to only slightly over 1 percent." |
| Policy Briefs Number PB06 6 October 2006, China: Toward a Consumption-Driven Growth Path, https://bsmedia.business-standard.comwww.petersoninstitute.org/publications/pb/pb06-6.pdf |
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