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Friday, April 13, 2007

Joseph Stiglitz: Growing Pains

Joseph Stiglitz says China is not the big bad wolf, if its "new economic model" leads to success, it could make us all better off:

Growing pains, by Joseph Stiglitz, Project Syndicate: China's success since it began its transition to a market economy has been based on adaptable strategies and policies... This process includes social innovation. China recognised that it could not simply transfer economic institutions that had worked in other countries; ... what succeeded elsewhere had to be adapted to the unique problems confronting China.

Today, China is discussing a "new economic model". Of course, the old economic model has been a resounding success... The changes are apparent not only in the statistics, but even more so in the faces of the people that one sees around the country. ...

[But] China knows that it must change if it is to have sustainable growth. At every level, there is a consciousness of environmental limits... As an increasing share of China's population moves to cities, those cities will have to be made liveable, which will require careful planning, including public transportation systems and parks.

Equally interesting, China is attempting to move away from the export-led growth strategy... That strategy supported technology transfer, helping to close the knowledge gap and rapidly improving the quality of manufactured goods. Export-led growth meant that China could produce without worrying about developing the domestic market.

But a global backlash has already developed. Even countries seemingly committed to competitive markets don't like being beaten at their own game, and often trump up charges of "unfair competition". More importantly, even if markets are not fully saturated..., it will be hard to maintain double-digit growth rates for exports.

So something has to change. China has been engaged in what might be called "vendor finance", providing the money that helps ... Americans to buy more goods than they sell. But this is a peculiar arrangement: a relatively poor country is helping to finance America's war on Iraq, as well as a massive tax cut for the richest people in the world's richest country, while huge needs at home imply ample room for expansion of both consumption and investment.

In fact, to meet the challenge of restructuring China's economy away from exports ..., China must stimulate consumption. While the rest of the world struggles to raise savings, China, with a savings rate in excess of 40%, struggles to get its people to consume more.

Providing better social services (public health care, education, and nation-wide retirement programs) would reduce the need for "precautionary" savings. More access to finance for small and medium sized businesses would help, too. ...

Too many people think of economics as a zero-sum game, and that China's success is coming at the expense of the rest of the world. Yes, China's rapid growth poses challenges to the west. Competition will force some to work harder, to become more efficient, or to accept lower profits.

But economics is really a positive-sum game. An increasingly prosperous China has not only expanded imports from other countries, but is also providing goods that have kept prices lower in the west, despite sharply higher oil prices in recent years. This downward pressure on prices has allowed western central banks to follow expansionary monetary policies, underpinning higher employment and growth.

We should all hope that China's new economic model succeeds. If it does, all of us will have much to gain.

    Posted by on Friday, April 13, 2007 at 12:03 AM in China, Economics | Permalink  TrackBack (0)  Comments (24)

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