The narrative about China has changed with astonishing speed and it is no longer an unstoppable monster but a pathetic, helpless giant. How did it happen?
I feel that much of what is written about China places too much emphasis on recent events and politics. Yes, Xi Jinping is an unpredictable leader. But China’s economic problems have been building up for a long time. And while Xi’s inability to adequately address these complications undoubtedly reflects his personal limitations, it also reflects deep ideological biases within China’s ruling party.
Let’s start with the long term perspective.
After Deng Xiaoping came to power in 1978 and introduced market-based reforms, China boomed for three decades and its real gross domestic product increased more than sevenfold. To be fair, this prosperity was only possible because China started with a large technological gap and was able to quickly increase its productivity by adopting technologies already developed abroad. But the speed of Chinese convergence was extraordinary.
However, the country appears to have lost much of its dynamism since the late 2000s. The IMF estimates that total factor productivity – an indicator of how efficiently resources are being used – has grown half as fast since 2008 as it did in the previous decade. While we shouldn’t take these calculations at face value, it’s clear that the pace of technological progress has slowed.
And China no longer has the demographics to support rapid growth: its working-age population peaked around 2015 and has been declining ever since.
Many analysts attribute China’s loss of momentum to Xi, who took power in 2012 and has become increasingly hostile to private companies than his predecessors. That seems too simple to me. Of course, Xi’s emphasis on state control and arbitrariness hasn’t helped, but China’s slowdown began even before Xi came to power.
And in general, no one is particularly good at explaining long-term growth rates. The great MIT economist Robert Solow quipped that attempts to explain why some countries grow slower than others always end in “a waste of amateur sociology.” There were probably deep reasons why China could not continue to grow as it did before 2008.
In any case, it is clear that China cannot come close to achieving the high growth rates of the past.
However, slower growth does not necessarily lead to an economic crisis. As I noted earlier, even Japan, often seen as a recent cautionary tale, has done fairly well since its slowdown in the early 1990s. Why are things looking so bad in China?
Fundamentally, China suffers from the savings paradox, where an economy can suffer if consumers try to save too much. When companies are unwilling to borrow and then invest all the money consumers want to save, the consequence is an economic recession. Such a recession can reduce companies’ willingness to invest, so trying to save more can actually lead to a decline in investment.
And China has an incredibly high national savings rate. Because? There is no consensus, but an IMF study argues that the main causes are a low birth rate – so people don’t believe they can count on their children in retirement – and an inadequate social safety net. He doesn’t think he will be able to count on public support either.
As the economy grew extremely quickly, companies found meaningful ways to invest all those savings. But this growth is now a thing of the past.
The consequence is that China has a huge amount of savings, everything organized and without a good friend. And the history of Chinese politics can be summarized as increasingly desperate attempts to obscure this problem. For a while the country sustained demand through huge trade surpluses, but there was a risk of a protectionist backlash. China later funneled excess savings into a huge housing bubble, but that bubble has since burst.
The obvious answer is to stimulate consumer spending. encourage state-owned companies to share more of their profits with workers; strengthen the safety net; and in the short term, the government could simply give people money by sending checks, as the United States has done.
Why isn’t this happening? Several reports suggest that there are ideological reasons why China refuses to do the obvious. From what I understand, the country’s leaders suffer from a strange mix of hostility to the private sector (simply giving people the opportunity to spend more would weaken party control), unrealistic ambitions (China should invest in the future, not into the joy of life). (today) and a kind of puritan resistance to a strong social safety net, with Xi condemning “welfare policies” because they could undermine work ethic.
The result is policy paralysis and half-hearted efforts by China to push the same investment-based incentives it has used in the past.
Should we abandon China? Of course not. China is a full-fledged superpower with enormous ability to get to work. Sooner or later he will surely overcome the prejudices that weaken his political response. But the next few years are likely to be quite uncomfortable.
Paul Krugman He is a Nobel Prize winner in economics. © The New York Times, 2023. Translation from News Clips.
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