Paul Krugman: China’s economy is in serious trouble

Paul Krugman: China’s economy is in serious trouble
Paul Krugman: China’s economy is in serious trouble

THE NEW YORK TIMES – In 2023, the US economy U.S It far exceeded expectations. A widely predicted recession never happened. Many economists (although I don’t include myself) have argued that to reduce inflation, years of high unemployment would be necessary; Instead, we had flawless disinflation, a rapid fall in inflation at no visible cost.

But the story has been very different in the world’s largest (or second largest, depending on the measure) economy. Some analysts expected the Chinese economy to grow after the country suspended draconian “zero covid” measureswhich he had adopted to contain the pandemic. Instead, China underperformed in virtually every economic indicator except official GDP, which reportedly grew 5.2%.

But there is widespread skepticism about this number. Democratic nations like the United States rarely politicize their economic statistics – although I wonder again if donald trump will return to office – but authoritarian regimes tend to do so.

And in other ways, the Chinese economy appears to be stumbling. Even official statistics say China is suffering Japan-style deflation and high youth unemployment. This is not a full-blown crisis, at least not yet, but there is reason to believe that China is entering an era of stagnation and disappointment.

Why is China’s economy, which just a few years ago seemed to be heading towards world domination, in trouble?

Xi Jinping greets diplomats at meeting in Beijing: Chinese president is criticized for his management of the economy

Photograph: Li Xueren/Xinhua/EFE/EPA

Part of the answer is bad leadership. The president Xi Jinping is starting to look like a bad economic manager, whose propensity for arbitrary interventions – something autocrats tend to do – has stifled private enterprise.

But China would be in trouble even if Xi were a better leader than he is.

It has long been clear that China’s economic model was becoming unsustainable. As Stewart Paterson notes, consumer spending is very low as a percentage of GDP, probably for several different reasons. Among them are “financial repression” – the payment of low interest on savings and cheap loans to some favored people -, which retains family income and diverts it to government-controlled investments; a weak social safety net, which causes families to accumulate savings to deal with possible emergencies; and much more.

With consumers buying so little, at least relative to the productive capacity of the Chinese economy, how can the country generate enough demand to keep that capacity in use? The main response, as Michael Pettis points out, has been to promote extremely high investment rates, more than 40% of GDP. The problem is that it’s difficult to invest that much money without experiencing extremely diminishing returns.

It’s true that very high investment rates can be sustainable if, like China in the early 2000s, you have a rapidly growing workforce and high productivity growth as it catches up with Western economies. But China’s working-age population peaked around 2010 and has been declining ever since. While China has demonstrated impressive technological capabilities in some areas, its overall productivity also appears to be stagnant.

In short, this is not a nation that can productively invest 40% of GDP.

These problems have been quite obvious for at least a decade. Why are they only becoming high pitched now? Well, international economists like to quote Dornbusch’s Law: “A crisis takes much longer to arrive than you think, and then it happens much faster than you thought.” What happened in the case of China was that the government managed to mask the problem of inadequate consumer spending for several years by promoting a gigantic real estate bubble. In fact, China’s real estate sector has become insanely large by international standards.

But the bubbles eventually burst.

To outside observers, what China should do seems simple: end financial repression and allow more of the economy’s income to flow to families, and strengthen the social safety net so that consumers don’t feel the need to hoard cash. And by doing so, the government can reduce its unsustainable investment spending.

But there are powerful actors, especially state-owned companies, who benefit from financial repression. And when it comes to strengthening the safety net, the leader of this supposedly communist regime sounds a bit like the governor of Mississippi, denouncing the “welfare” that creates “lazy people.”

So how worried should we be about China? In some ways, China’s current economy resembles Japan’s after its bubble burst in the 1980s. However, Japan ended up managing its problem well. It avoided mass unemployment, never lost social and political cohesion, and real GDP per working-age adult increased by 50% over the next three decades, not far below the growth of the United States.

My big concern is that China may not respond as well. How cohesive will China be in the face of economic problems? Will it try to prop up its economy with a surge in exports that clashes with Western efforts to promote green technologies? And, most frightening of all, will China try to disguise domestic difficulties by engaging in military adventures?

So let’s not gloat over China’s economic stumble, which could become everyone’s problem.

The article is in Portuguese

Tags: Paul Krugman Chinas economy trouble



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