fsayed
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Paul Krugman
All economic data are best viewed as a peculiarly
boring genre of science fiction, but Chinese data are
even more fictional than most. Add a secretive
government, a controlled press and the sheer size of
the country, and it's harder to figure out what's really
happening in China than it is in any other major
economy.
Yet the signs are now unmistakable: China is in big
trouble. We're not talking about some minor setback
along the way, but something more fundamental. The
country's whole way of doing business, the economic
system that has driven three decades of incredible
growth, has reached its limits. You could say that the
Chinese model is about to hit its Great Wall, and the
only question now is just how bad the crash will be.
Start with the data, unreliable as they may be. What
immediately jumps out at you when you compare
China with almost any other economy, aside from its
rapid growth, is the lopsided balance between
consumption and investment. All successful economies
devote part of their current income to investment
rather than consumption, so as to expand their future
ability to consume. China, however, seems to invest
only to expand its future ability to invest even more.
America, admittedly on the high side, devotes 70
percent of its gross domestic product to consumption;
for China, the number is only half that high, while
almost half of GDP is invested.
How is that even possible? What keeps consumption so
low, and how have the Chinese been able to invest so
much without (until now) running into sharply
diminishing returns? The answers are the subject of
intense controversy. The story that makes the most
sense to me, however, rests on an old insight by the
economist W. Arthur Lewis , who argued that countries
in the early stages of economic development typically
have a small modern sector alongside a large
traditional sector containing huge amounts of "surplus
labor" - underemployed peasants making at best a
marginal contribution to overall economic output.
The existence of this surplus labor, in turn, has two
effects. First, for a while such countries can invest
heavily in new factories, construction and so on
without running into diminishing returns, because they
can keep drawing in new labor from the countryside.
Second, competition from this reserve army of surplus
labor keeps wages low even as the economy grows
richer. Indeed, the main thing holding
down Chinese consumption seems to be that Chinese
families never see much of the income being generated
by the country's economic growth. Some of that income
flows to a politically connected elite; but much of it
simply stays bottled up in businesses, many of them
state-owned enterprises.
It's all very peculiar by our standards, but it worked
for several decades. Now, however, China has hit the
"Lewis point" - to put it crudely, it's running out of
surplus peasants.
That should be a good thing. Wages are rising; finally,
ordinary Chinese are starting to share in the fruits of
growth. But it also means that the Chinese economy is
suddenly faced with the need for drastic "rebalancing"
- the jargon phrase of the moment. Investment is now
running into sharply diminishing returns and is going
to drop drastically no matter what the government
does; consumer spending must rise dramatically to
take its place. The question is whether this can
happen fast enough to avoid a nasty slump.
And the answer, increasingly, seems to be no. The
need for rebalancing has been obvious for years, but
China just kept putting off the necessary changes,
instead boosting the economy by keeping the currency
undervalued and flooding it with cheap credit. (Since
someone is going to raise this issue: No, this bears
very little resemblance to the Federal Reserve's policies
here.) These measures postponed the day of reckoning
but also ensured that this day would be even harder
when it finally came. And now it has arrived.
How big a deal is this for the rest of us? At market
values - which is what matters for the global outlook -
China's economy is still only modestly bigger than
Japan's; it's around half the size of either the US or
the European Union. So it's big but not huge, and, in
ordinary times, the world could probably take China's
troubles in stride.
Unfortunately, these aren't ordinary times: China is
hitting its Lewis point at the same time that Western
economies are going through their "Minsky moment,"
the point when overextended private borrowers all try
to pull back at the same time, and in so doing provoke
a general slump. China's new woes are the last thing
the rest of us needed.
No doubt many readers are feeling some intellectual
whiplash. Just the other day we were afraid of the
Chinese. Now we're afraid for them. But our situation
has not improved.
source m.economictimes.com/news/international-business/all-the-signs-coming-from-the-economic-data-show-that-china-is-in-big-trouble/articleshow/21162753.cms
All economic data are best viewed as a peculiarly
boring genre of science fiction, but Chinese data are
even more fictional than most. Add a secretive
government, a controlled press and the sheer size of
the country, and it's harder to figure out what's really
happening in China than it is in any other major
economy.
Yet the signs are now unmistakable: China is in big
trouble. We're not talking about some minor setback
along the way, but something more fundamental. The
country's whole way of doing business, the economic
system that has driven three decades of incredible
growth, has reached its limits. You could say that the
Chinese model is about to hit its Great Wall, and the
only question now is just how bad the crash will be.
Start with the data, unreliable as they may be. What
immediately jumps out at you when you compare
China with almost any other economy, aside from its
rapid growth, is the lopsided balance between
consumption and investment. All successful economies
devote part of their current income to investment
rather than consumption, so as to expand their future
ability to consume. China, however, seems to invest
only to expand its future ability to invest even more.
America, admittedly on the high side, devotes 70
percent of its gross domestic product to consumption;
for China, the number is only half that high, while
almost half of GDP is invested.
How is that even possible? What keeps consumption so
low, and how have the Chinese been able to invest so
much without (until now) running into sharply
diminishing returns? The answers are the subject of
intense controversy. The story that makes the most
sense to me, however, rests on an old insight by the
economist W. Arthur Lewis , who argued that countries
in the early stages of economic development typically
have a small modern sector alongside a large
traditional sector containing huge amounts of "surplus
labor" - underemployed peasants making at best a
marginal contribution to overall economic output.
The existence of this surplus labor, in turn, has two
effects. First, for a while such countries can invest
heavily in new factories, construction and so on
without running into diminishing returns, because they
can keep drawing in new labor from the countryside.
Second, competition from this reserve army of surplus
labor keeps wages low even as the economy grows
richer. Indeed, the main thing holding
down Chinese consumption seems to be that Chinese
families never see much of the income being generated
by the country's economic growth. Some of that income
flows to a politically connected elite; but much of it
simply stays bottled up in businesses, many of them
state-owned enterprises.
It's all very peculiar by our standards, but it worked
for several decades. Now, however, China has hit the
"Lewis point" - to put it crudely, it's running out of
surplus peasants.
That should be a good thing. Wages are rising; finally,
ordinary Chinese are starting to share in the fruits of
growth. But it also means that the Chinese economy is
suddenly faced with the need for drastic "rebalancing"
- the jargon phrase of the moment. Investment is now
running into sharply diminishing returns and is going
to drop drastically no matter what the government
does; consumer spending must rise dramatically to
take its place. The question is whether this can
happen fast enough to avoid a nasty slump.
And the answer, increasingly, seems to be no. The
need for rebalancing has been obvious for years, but
China just kept putting off the necessary changes,
instead boosting the economy by keeping the currency
undervalued and flooding it with cheap credit. (Since
someone is going to raise this issue: No, this bears
very little resemblance to the Federal Reserve's policies
here.) These measures postponed the day of reckoning
but also ensured that this day would be even harder
when it finally came. And now it has arrived.
How big a deal is this for the rest of us? At market
values - which is what matters for the global outlook -
China's economy is still only modestly bigger than
Japan's; it's around half the size of either the US or
the European Union. So it's big but not huge, and, in
ordinary times, the world could probably take China's
troubles in stride.
Unfortunately, these aren't ordinary times: China is
hitting its Lewis point at the same time that Western
economies are going through their "Minsky moment,"
the point when overextended private borrowers all try
to pull back at the same time, and in so doing provoke
a general slump. China's new woes are the last thing
the rest of us needed.
No doubt many readers are feeling some intellectual
whiplash. Just the other day we were afraid of the
Chinese. Now we're afraid for them. But our situation
has not improved.
source m.economictimes.com/news/international-business/all-the-signs-coming-from-the-economic-data-show-that-china-is-in-big-trouble/articleshow/21162753.cms
