Montag, 13. April 2009

Does China "need" 10 % growth?

According to Nouriel Roubini, China will manage around 5 % growth this year, and there's further "downside risk". He points out that this constitutes a "hard landing" for a country used to double digit growth rates, 13 % growth in 2007, and 9 % in 2008. And he claims that China needs 10 % growth "in order to move millions of poor rural farmers to the modern urban manufacturing sector every year."

But does China really need to 10 % growth every year? What's so horrible about 5 % for a year or two? After all, 5 % growth still means that - on average -, every Chinese person will be 5 % richer than the previous year (well, actually only 4.5 %, if population growth is taken into account).

Just asking this question led to Peking Duck calling me "naive, immature and ignorant of Econ 101", because it's apparently obvious that a slowdown from 9 % growth (in 2008) to 5 % (in 2009) is a "cataclysmic" event for China.

But why? The fact remains that 5 % growth means China is producing 5 % more than the year before. If the previous year was acceptable, then 5 % more than the previous year shouldn't be considered a total disaster, should it?

Presumably, the notion of 10 % "required growth" comes from the assumption that China's potential growth is 10 % (after all, it managed to achieve 10 % growth for many years). If potential growth is 10 %, and actual growth is 5 %, then the economy falls short of its potential by 5 %. This could mean, for instance, that 95 % of the economy is doing fine, but 5 % is falling off a cliff. 5 % of jobs are lost, 5 % of companies go bankrupt, etc. Or, if labor-intensive sectors (the notorious "migrant workers") are hit particularly hard, unemployment could even rise by much more than 5 %.

But in spite of this, China would still be producing 5 % more stuff.

And it doesn't end there:

If - as seems likely - China's current account surplus goes down sharply this year due to flagging exports (one of the main reasons why GDP growth is down in the first place), then 5 % GDP growth actually implies growth in domestic GDP use of 7-9 %. In other words: Domestic consumption and domestic investment will grow by 7-9 %, even though the economy only grows by 5 %. So again: Why is 7-9 % growth of both consumption and investment necessarily catastrophic and cataclysmic? (And if - as would happen in the West - corporate investment also goes down to adjust to lower demand growth, consumption could grow even more and still be compatible with overall growth of 5 %; but this being China, I suspect that corporate investment won't slow down all that much.)

Let's ask a Ukrainian, facing a 20 % or so drop in GDP this year, if he thinks that 7-9 % growth in per-capita consumption is horrible. Or an Indonesian, who can expect stagnant per-capita GDP this year. Or an Indian, who might even see 3 % per-capita growth. I wonder what they will say? Will they sympathize with the plight of the Chinese people? (by the way: All those countries have a lower per-capita income than China!)

If the government redistributes resources in an appropriate way, it can cushion the blow to all affected sectors. Many people might lose their jobs. But they can still get their rice-bowls and subsidized apartment rent and newly introduced healtcare and whatever, courtesy of the government. Nobody has to be worse off. OK, some will be somewhat worse off, but at least things don't have to be catastrophic for those affected.

I know, redistribution towards the poor and disadvantaged is not exactly what the Chinese government has chosen to do in the recent past. So in a sense I am not saying this will happen. I am saying it could happen, because it is an obvious choice that the government has, especially considering that it is the government of a "people's republic". And it is a choice that it can afford to take, considering the resources China has available by now.

But considering its track record, maybe people (understandably) doubt the Chinese government's ability to manage a "harmonious" transition to a lower growth rate? Maybe the assumption is that many millions will lose out in a slowdown, and the government won't do enough to prevent or counteract their plight. That the millions of migrant workers laid of by Guangzhou factories and Beijing construction sites have nowhere to go, no income, and nobody cares about them. That the government will - as in the past - choose to pour billions and billions into rather useless investments of all kinds, be it hard infrastructure or heavy industry, which ultimately do not benefit the standard of living of the masses, and certainly won't do much to help unemployed low-skilled migrants (except possibly giving some of them their job back, if only for a while).

Yes, that's a possible outcome. But then, that wouldn't be due to the inadequacy of 5 % growth. It would be due to misallocation of resources: If you "throw away" large portions of your GDP by overinvesting in things nobody needs, everyone needs to work much harder to also produce the things people do need. In other words: The growth is not exactly "quality growth".

So if the assumed "need" for 10 % growth simply comes from the implied assumption that much of it isn't allocated well, and lots of growth is therefore needed so that some of it trickles down and benefits the little man - if that is indeed what the fixation with 10 % growth is about, well, in that case maybe China seriously needs to restructure its economy. And right now is the best time to start doing exactly that.

In any case: If India, Indonesia, the Ukraine and Egypt can somehow get by - and in the case of India even be celebrated as a moderate success story -, then China can certainly deal with a year or two of "only" 5 % growth. It may not be great, and China understandably wants to do better, but it's far from a doomsday scenario.

Kommentare:

  1. That's a very good question. Though I quite far from being a China expert I dare to give my 2 cents. Please discount my words heavily.

    While there is now some desctruction of production jobs going on in the cities, still mainly jobs are missing for the rural population. So China needs more industrial jobs to channel the ever growing amount of "migration worlers".

    I have no clue which GDP growth is neccessary for China to mitigate civil unrest and I doubt that anybody really knows, but I think that the stability of the country is the main concern.

    IMHO there is another risk for China: Inflation. Keeping the peg to the Dollar means copying the expansive US monetary policy. But the inflation risk in China was always higher than in the US. So people speak about a signifikant inflation risk in US, how high it is in China? They might be forced to release the peg, but that will cost a lot of jobs in Chinas industry.

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  2. China will do fine, don't worry!

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  3. I think the main problem with China's current slowdown is that it hits low-skilled migrants particularly hard: The decline of Guandong's exports and the construction crash both affect labor-intensive low-skilled workers much harder than anybody else.

    Therefore IMHO, it's not so much a question of 5 % or 6 % or 7 % growth, but which sectors are growing and who benefits from the growth.

    Regarding civil unrest, my personal opinion is that Western observers overstate the danger of dramatic upheaval. Sure, the top guys in Beijing are worried about it, but that doesn't necessarily mean it's a likely scenario.

    China is much much richer now than it was 10 years ago. But it needs to find a way to distribute this additional wealth so that everyone gets to participate at least a bit. IMHO, that's the big policy challenge facing the Chinese government, and it's much more important than a bit of extra growth.

    Regarding inflation: Right now, there appears to be moderate deflation. No idea where things are headed in the mid-term. But if US inflation indeed takes off in a while, they can always decide to let the RMB appreciate by the inflation differential, I suppose.

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