FacebookTwitterGoogle+RedditEmail

Learning From China

by MARK WEISBROT

Global trade flows and the economic stimulus policies of individual national economies will play an important role in the recovery from the current global recession. This is especially true of the world’s two largest economies, the United States and China.

The U.S. economy was running an annualized trade deficit of $697 billion, or 5 percent of GDP, when our recession began in the last quarter of 2007. By the first quarter of this year, it had fallen by more than half to $327 billion, or 2.3 percent of GDP.

Partly this is due to the arithmetic of going into a world recession with a large trade deficit. If imports and exports decline by the same percentage, then the trade deficit will shrink, because the imports are bigger in absolute size. It so happens that our imports have declined even faster than our exports in percentage terms too, partly due to falling oil prices – which are also a product of the world recession.

This means that the United States economy is getting a boost from the global economy during the Great Recession. It may not feel like that as we now hemorrhage jobs and have about one-sixth of the labor force officially unemployed or underemployed. But the national income accounting is real. If not for our shrinking trade deficit, for example, the first quarter of this year would have seen a fall of 7.9 percent of GDP, instead of 5.5 – a big difference in terms of output and employment.

Countries that export a lot (relative to their economy) and entered the recession with a surplus are affected by the opposite arithmetic: they get hit harder in the recession as their trade surplus shrinks. Japan’s GDP is projected to fall by 6 percent this year, much worse than the United States’ projected 2.6 percent. Although it is no consolation for the Japanese, their shrinking trade surplus contributes to the growth of the rest of the world.

Countries that export a lot to the United States have also gotten hit hard. Mexico, which exports more than 21 percent of its GDP to the U.S., is expected to shrink by 7.3 percent this year. Brazil, by comparison, exports less than two percent of its GDP to the United States (and does not have a large trade share of GDP overall), is expected to decline by 1.3 percent.

This seems to offer a lesson for developing countries: it’s good to diversify your trade, and maybe not become overly dependent on markets where there are enormous asset bubbles (i.e. our $8 trillion housing bubble) and large trade deficits. Mexico’s “free trade” agreement with the United States also had the misfortune of not even producing decent economic growth before the crash – unless you focus on the illegal drug industry.

But the most interesting case is China, which over the last three decades has had the fastest-growing economy in world history. The Chinese economy grew at 9 percent last year, and now looks likely to grow by 8 percent this year. Hans Timmer, Director of Economic Forecasting at the World Bank, told the Wall Street Journal that “China will be among the first countries to lead the global economy out of this recession.” He appears to be correct.

Remarkably, this is despite the fact that China, which has had a lot of export-led growth for many years, is facing a rapidly shrinking trade surplus. This shows how powerful an effective economic stimulus can be to counteract the fall-off in private demand.

As economist John Ross has emphasized, China’s stimulus is not just a matter of deficit spending. China’s government has other tools available, and is using them in a big way. The state controls most of the banking system, and has used this control to double the amount of bank lending in the first half of this year, as compared to 2008. It has greatly increased investment by state-owned enterprises, which are a large share of investment in the Chinese economy. The money supply has increased 28.5 percent over the past year. (There is no need to worry about inflation, which has been negative for the last year.)

This has implications for the rest of the world that go beyond the significant positive effect that China, the world’s second largest economy, will have on the global economic recovery. It is clear that more countries need to counter the fall-off in private spending with large-scale and effective stimulus programs. This is true for developing countries as well as for rich countries. Of course, many developing countries do not have the institutional capacity to implement a stimulus as effectively as China has done. In many cases this is because neoliberal reforms over the past quarter-century have weakened the capacity of the state to respond appropriately to the global downturn. China did not adopt reforms that would cause the government to lose control over key policy instruments. Nonetheless, most developing country governments can still use expansionary fiscal and monetary policies as much as possible to counteract the downturn. Unfortunately, the International Monetary Fund, which supports such counter-cyclical policies in rich countries, has been promoting the opposite – including fiscal and monetary tightening – in many low-and-middle-income countries.

The rich countries also seem to be more hamstrung than China. The United States has approved a stimulus package that for 2009 and 2010 – taking into account the spending cuts and tax increases by state and local governments – is only about 0.9 percent of GDP. This is a small fraction, perhaps not even a tenth, of the expected decline in private spending from the bursting of our $8 trillion housing bubble.

Critics will point out that the Chinese government can move public investment projects much more quickly because it does not have to respond as much to environmental or other citizen concerns. But there are other stimulus policies in the U.S. that can be implemented very quickly. The sad truth is that in spite of our more developed system of governance, the rule of law, and a much more developed economy, the U.S. government has not been all that responsive to the most urgent needs of our national economy in a time of its greatest challenge since the Great Depression. In fact it is less responsive than the government of a middle-income country run by a Communist Party. That ought to give American pundits and social scientists something to think about.

MARK WEISBROT is an economist and co-director of the Center for Economic and Policy Research. He received his Ph.D. in economics from the University of Michigan. He is co-author, with Dean Baker, of Social Security: The Phony Crisis (University of Chicago Press, 2000), and has written numerous research papers on economic policy. He is also president of Just Foreign Policy.

This column was originally published by The Guardian.

 

 

 

 

 

 

 

 

 

Mark Weisbrot is co-director of the Center for Economic and Policy Research, in Washington, D.C. and president of Just Foreign Policy. He is also the author of  Failed: What the “Experts” Got Wrong About the Global Economy (Oxford University Press, 2015).

More articles by:

CounterPunch Magazine

minimag-edit

bernie-the-sandernistas-cover-344x550

zen economics

Weekend Edition
February 24, 2017
Friday - Sunday
Jeffrey St. Clair
Roaming Charges: Exxon’s End Game Theory
Pierre M. Sprey - Franklin “Chuck” Spinney
Sleepwalking Into a Nuclear Arms Race with Russia
Paul Street
Liberal Hypocrisy, “Late-Shaming,” and Russia-Blaming in the Age of Trump
Ajamu Baraka
Malcolm X and Human Rights in the Time of Trumpism: Transcending the Master’s Tools
John Laforge
Did Obama Pave the Way for More Torture?
Mike Whitney
McMaster Takes Charge: Trump Relinquishes Control of Foreign Policy 
Patrick Cockburn
The Coming Decline of US and UK Power
Louisa Willcox
The Endangered Species Act: a Critical Safety Net Now Threatened by Congress and Trump
Vijay Prashad
A Foreign Policy of Cruel Populism
John Chuckman
Israel’s Terrible Problem: Two States or One?
Matthew Stevenson
The Parallax View of Donald Trump
Norman Pollack
Drumbeat of Fascism: Find, Arrest, Deport
Stan Cox
Can the Climate Survive Electoral Democracy? Maybe. Can It Survive Capitalism? No.
Ramzy Baroud
The Trump-Netanyahu Circus: Now, No One Can Save Israel from Itself
Edward Hunt
The United States of Permanent War
David Morgan
Trump and the Left: a Case of Mass Hysteria?
Pete Dolack
The Bait and Switch of Public-Private Partnerships
Mike Miller
What Kind of Movement Moment Are We In? 
Elliot Sperber
Why Resistance is Insufficient
Brian Cloughley
What are You Going to Do About Afghanistan, President Trump?
Binoy Kampmark
Warring in the Oncology Ward
Yves Engler
Remembering the Coup in Ghana
Jeremy Brecher
“Climate Kids” v. Trump: Trial of the Century Pits Trump Climate Denialism Against Right to a Climate System Capable of Sustaining Human Life”
Jonathan Taylor
Hate Trump? You Should Have Voted for Ron Paul
Franklin Lamb
Another Small Step for Syrian Refugee Children in Beirut’s “Aleppo Park”
Ron Jacobs
The Realist: Irreverence Was Their Only Sacred Cow
Andre Vltchek
Lock up England in Jail or an Insane Asylum!
Rev. William Alberts
Grandiose Marketing of Spirituality
Paul DeRienzo
Three Years Since the Kitty Litter Disaster at Waste Isolation Pilot Plant
Eric Sommer
Organize Workers Immigrant Defense Committees!
Steve Cooper
A Progressive Agenda
David Swanson
100 Years of Using War to Try to End All War
Andrew Stewart
The 4CHAN Presidency: A Media Critique of the Alt-Right
Edward Leer
Tripping USA: The Chair
Randy Shields
Tom Regan: The Life of the Animal Rights Party
Nyla Ali Khan
One Certain Effect of Instability in Kashmir is the Erosion of Freedom of Expression and Regional Integration
Rob Hager
The Only Fake News That Probably Threw the Election to Trump was not Russian 
Mike Garrity
Why Should We Pay Billionaires to Destroy Our Public Lands? 
Mark Dickman
The Prophet: Deutscher’s Trotsky
Christopher Brauchli
The Politics of the Toilet Police
Ezra Kronfeld
Joe Manchin: a Senate Republicrat to Dispute and Challenge
Clancy Sigal
The Nazis Called It a “Rafle”
Louis Proyect
Socialism Betrayed? Inside the Ukrainian Holodomor
Charles R. Larson
Review: Timothy B. Tyson’s “The Blood of Emmett Till”
David Yearsley
Founding Father of American Song
FacebookTwitterGoogle+RedditEmail