China As Economic Engine

October 27, 2008

Comments

This morning the New York Times has an editorial that gets on a bandwagon I’ve been on for some time, urging China’s leaders to cultivate an internal market, to consume more:

Over the last 30 years, China has hitched its economy to the industrial world, exporting cheap goods to the United States and other developed nations, building up an enormous trade surplus that will hit about $400 billion this year. As those industrial economies sputter, China is now in a position to pick up some of the slack: selling more of its own goods at home and buying more from the rest of the world.

China runs a trade surplus with virtually every trading partner. That’s not a sustainable condition and it’s such a large country that its long-term economic health depends on cultivating its domestic market but its leaders have been reluctant to do so.

Characteristically, the NYT proposes that the additional consumption be spurred by public works projects rather than relaxing its various forms of import restrictions:

To get China’s consumers to spend, the government will need to spend more at home, investing in public works projects and providing more social benefits — including health insurance and pensions — so its citizens don’t feel they have to save so much for a rainy day.

For example, China continues to have a policy of food self-sufficiency. Like all economic independence policies, its basis is xenophobic and it is dyseconomic.

China doesn’t have any form of universal social insurance nor does it have a sound banking or equities system nor a robust system of civil law to support either of the latter. The “One Child Policy” places the entire responsibility for supporting people in their old age on those single children.

Why doesn’t the Chinese leadership encourage greater consumption? Essentially, I think the answer is that they want to preserve harmony. They’re concerned that liberalizing trade within China and with its trading partners will foster development in new and unpredictable ways that are beyond their ability to control. The policy has been one of gradualism and the pace of reform, while no doubt breathtaking to the Chinese, appears glacial to us in the West.

While I agree with the NYT that more consumption in China would be good for China and good for the world, the trick is to get China’s leadership to agree to move in a direction in which their power is diminished. I’m afraid that will take more than editorials.

4 responses to “China As Economic Engine”

Brett

October 27, 2008 at 1:16 pm

Isn’t there an inflationary risk as well? Right now, the Chinese economy is growing by 8-10%, which is pretty much has to in order to absorb the tens of millions of people flowing into its cities every year from the countryside (supposedly, they are already seeing tougher times with employment and urban discontent just with the slightly lowered growth rate below 10%).

Money is flowing into the economy, and a lot of it is going down to the local Chinese (who save it), and to the banks (which reinvest it in other countries). Now, if all that money was flowing in the Chinese economy, wouldn’t that cause a serious rise in the amount of currency in China, risking inflation?
Matthew Stinson

October 27, 2008 at 4:29 pm

Not the entire responsibility. China does have social insurance in the form of government-managed retirement funds which will pay people an amount based on their salary when working, provided that the company agreed to give this benefit to the worker in the first place. Some Chinese companies overseas offer no welfare benefits to workers, while foreign workers in China working for Chinese firms generally don’t get these benefits either.

But once you get past this, while Chinese social insurance is a form of supplemental income, it’s not enough, and it does put Chinese into the bind of having their children provide for most things in their old age, which in turn makes the majority of Chinese marriages an economic arrangement wherein the husband agrees to pay for the living costs for his wife’s parents AND his own.

Incidentally, these generational transfer payments are not one-sided. Parents usually provide for the majority of their children’s educational expenses (scholarships don’t) and middle- to upper-class Chinese will buy a house for their children. For the Chinese government to effectively break open this piggy bank as the Times endorses would require pretty massive handouts.

As for improving consumption, Wen Jiabao has made this a goal in recent years, though the biggest problem is the need to balance increased consumption (lower taxes and interest rates to increase consumer spending) and development of the economy in the Chinese periphery (which arguably requires more taxes and higher interest rates, the former for infrastructure development and the latter to create the capital pool needed for loans to fledgling businesses in the countryside).
linda henry

October 27, 2008 at 9:30 pm

China’s one child policy has lead to rampant child kidnapping. Couples pay middle men to kidnap boys (and pay more for them) but will also pay for girls, either for slave labor, or to marry off their own son when she’s older. Teenage girls are kidnapped and sold into marriage or prostitution. Just google “china black market children.” Watch HBO’s China’s Stolen Children.