SPEAKING
FREELY Is
it China's turn to change economic
gear? Takahiro Miyao and
William S Comanor
Speaking Freely is
an Asia Times Online feature that allows guest
writers to have their say. Please
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There is little
question but that the Chinese economy, after its
spectacular performance over the past two decades,
is currently in the process of slowing down. From
growth rates in terms of real Gross Domestic
Product reaching 9% per annum, it is now declining
toward the 8% level or even less in the near
future. Some say that this represents the start of
a bubble bursting following the path taken by
Japan in about 1990 and the US in 2008/9. Others
believe, however, that this shift is merely a
small correction towards a more sustainable growth
path.
The pessimists point to recent
declines in housing prices in major Chinese
cities, and also the substantial increase in vacant
properties that may have
been built for speculative purposes. From that
vantage point, there appear to be striking
similarities to real estate markets in Japan and
the US when those bubbles burst.
On the
other hand, optimists believe that the recent
decline in economic growth is the direct result of
government policies whose intended purpose is
specifically to restrain real estate speculation
and ease inflationary pressures. The goal is to
engineer a "soft landing" at a growth rate that
can be maintained for a substantial period of
time; and that the recent slowdown is entirely
consistent with achieving that objective.
China observers are conflicted, and
include knowledgeable people on both sides of the
divide. The question asked is which side is right;
which side more accurately describes what is
actually going on in China? This debate is really
over near-term forecasts. While the pessimists
foresee a decline in Chinese growth rates, the
optimists see only bright lights ahead, although
perhaps with slightly slower growth rates.
Interestingly, such polarizing views regarding
China are not uncommon. One explanation is that
both alternatives are found within the vast
confines of that country.
Rather than
adopt either position, we seek a more integrated
approach, emphasizing government policy decisions,
which will link Chinese development to that which
occurred in Japan only a few decades earlier. We
believe that policy mistakes in Japan were largely
responsible for its economic breakdown. There are
striking similarities between their economic paths
from which to draw certain conclusions. However,
we do not suggest that China will necessarily
encounter the same period of stagnation that Japan
did following 1990; it is fundamentally up to its
government policies.
In various respects,
the Chinese economy in the past decade appears
much like its Japanese counterpart in the 1960s.
During that decade, which was sometimes
characterized as the Japanese Miracle, its economy
registered double-digit real growth rates that
incorporated both a domestic investment boom and
an aggressive export drive. Even more relevant,
the Japanese economy at the time was going through
a fundamental change from a labor surplus phase to
a labor shortage phase; it passed the so-called
Lewis turning point sometime in the mid-60s, just
as China is doing today.
Since the 1970s,
Japan has encountered an up and down process that
might be characterized as an "unstable bumpy
landing" towards a long run growth path. The high
growth rates achieved in the early 70s were
followed by slower growth in the mid- to late-70s,
and then relatively low growth rates in the early
80s that were followed by high growth in the mid-
to late-80s. Unfortunately, then came the lost
decades with virtually no growth in the 90s and
beyond, which now looks like a long-run path for
Japan. However, we believe that this zero growth
path was not inevitable but rather resulted from
mishandling the unstable economic processes of the
1980s by the Japanese government and the Bank of
Japan.
It appears that China may be
entering a similar process today where economic
and social policies can make a critically
important difference. They could determine which
camp, optimists or pessimists, is right; whether
China can follow a positive and fairly high growth
path, or alternatively a much lower one or even
the zero growth path as found recently in Japan.
As the optimists point out, the Chinese
economy has important advantages. These include an
enormous labor force from which to draw upon,
substantial savings from which to finance the
projects and infra-structure needed for economic
development, and considerable natural resources.
All of these factors offer the potential for
maintaining high growth rates for decades to come.
On the other hand, as the pessimists
emphasize, China has encountered serious problems
recently which, if left untreated, pose serious
threats to future growth.
These problems
include major economic disparities between the
urban rich and the rural poor, political barriers
between the privileged few and the suppressed
general population, serious conflicts of interests
between the central and local governments, a
declining quality of life due to long working
hours and environmental degradation which could
retard the growth of its labor supply.
How
these problems and advantages are balanced depends
on the social and economic policies that are
pursued. Among the most important actions to take
is pursuing more flexible and responsive monetary
and foreign exchange rate policies. These policies
are linked since maintaining low values of the
yuan leads invariably to increased foreign
reserves which in turn expands the money supply
and promotes inflationary pressures.
While
such pressures could be countered by higher
governmentally-imposed interest rates, such rates
would tend to depress economic activity. The
better solution would be to revalue the yuan which
would make this problem less likely to appear in
the first place. That would give policy-makers a
more free hand to achieve economic growth and
price stability simultaneously in the long run.
A second critical policy area is the need
for more equitable distributions of income and
wealth. Exchange rate re-valuations will
invariably lead to making exports more costly
abroad, which in turn will foster a partial
transformation away from an export-driven economy.
To make up for any decline in export demand, there
must be an expansion of domestic demand, which in
turn requires substantial demand growth from
middle-class consumers.
Some measure of
income redistribution is needed if Chinese
effective demand for the products of its mills and
factories will expand sufficiently. Although the
Chinese middle class has expanded greatly in
recent years, there is a question as to whether
that has been sufficient to support an economy in
transition from being largely export driven.
Finally, there is the question of
governance. As an economy has become more complex,
it becomes increasingly difficult to fashion
solutions to such problems as pollution and
environmental protection in a centralized manner
where proposed solutions follows a "one size fits
all" approach. Instead, expanded power and
responsibility should be held by local governments
who can fashion policies that are more responsive
to local residents' needs and preferences.
Whether such policy shifts will occur is
of course difficult to predict. For this reason,
it is pointless to take either an optimistic or
pessimistic view on the Chinese economy. Much
depends on the course of actions taken by China's
political leaders and policy makers. As is often
the case, the adequacy and foresightedness of
economic policy is critical.
Takahiro Miyao is Emeritus
Professor at the University of Tsukuba, Japan, and
William S Comanor is Professor of Economics
at the University of California, Santa Barbara,
California, United States.
(Copyright
2012 Takahiro Miyao and William S Comanor.)
Speaking Freely is an Asia Times Online
feature that allows guest writers to have their
say.Please
click hereif you are interested in
contributing. Articles submitted for this section
allow our readers to express their opinions and do
not necessarily meet the same editorial standards
of Asia Times Online's regular
contributors.
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