There continues to be a lot of discussion in China whether GDP growth will reach the government target of 8 percent this year, and whether the government should put in place more stimulus measures, typically presumed to be the kind of infrastructure-oriented stimulus that characterizes the package already in place.
I think it would not be a good idea to add more traditional, infrastructure-oriented fiscal stimulus in 2009. Why?
- First, growth is already on course to be close to the government’s target, despite the global weakness.
- Second, it would be good to keep room for fiscal stimulus in 2010, given the uncertain global prospects. The higher the fiscal deficit is in 2009, the less room there is for an additional increase 2010 – given limits on the size of deficits, even for China.
- Third, there are limits on how much additional infrastructure-oriented stimulus can be spent effectively and efficiently. If the government wants to address the adverse consequences of the downturn for households, this can more efficiently be done by using and beefing up the social safety net. That would also fit well with China’s medium- and long-term objectives.
This is an extract from the East Asia and Pacific on the Rise blog. To read the rest of the article, click here.
This is my first comment on this article. It is likely that I will make a second comment on this in terms of deregulation.
Louis Kuijs has made a number of interesting points in his article on what policies China should pursue. Most of them may be correct. However, I would like to argue two points of policy of development, in the Chinese current context.
The first is about savings and consumption and their role in long term growth. It is mostly natural to assume a country like China should increase consumption in the face of the current great global recession and the much talked point of international imbalance in savings and consumption between the US on the one hand and some other countries including China the other.
China has had until recently current account surplus and has high savings. Exports have fallen due to the global recession. Saving rate is going up in the US, mainly because of the burst of housing and equity markets bubbles, rising unemployment and the difficulties in credit and financing. So if international consumption is falling, an increase in consumption in China may be able to offset that. But is that the correct and most optimal action to take for China? That is the most important question for China’s policy makers.
I am not sure to change savings and consumption is the best course of action for China to take. The main reason for my doubts is that China is still a low income country with low physical capital per capita and it has huge potential for rapid growth. Unlike most industrialised countries where the marginal return for investment may be naturally lower due to the fact that they are mostly in the world production possibility frontier, the return to investment in China may be much higher due to the potential of rapid growth in the catching up phase. So, there is an alternative to increase in consumption, China can increase investment in infrastructure and physical capital for even faster or at least sustained rapid growth.
So most people / economists with the view for China to increase its consumption as a long term policy to sustain growth may be misguided. China has more options than most industrialised countries in terms of savings and consumption trade off. It also has a much greater feasibility set in terms of investment than most countries. So it is not good enough to simply argue for an increase in consumption and a reduction in savings. It is a much short-sighted view. It reflects a poor understanding of development processes and the important role of domestic savings in those processes.