China is drinking from tainted economic waters
- Source: Global Times
- [22:04 June 11 2010]
- Comments
Editor's Note:
China's massive stimulus package in 2008–09 was publicly credited with saving the economy from the recession. Yet the measures have had their strident critics, among them is Xu Xiaonian (Xu), a professor at China Europe International Business School, whose high-profile criticisms of what he sees as erroneous policies go to the very heart of economic theory. Are his criticisms correct? Is China throwing money away? Will China follow the path of Greece? NetEase Finance (NE) interviewed Xu on his opinion of China's economic policies.
Xu Xiaonian
NE: Year-on-year GDP rose by 11.9 percent in the first quarter of 2010. Some believe that China has entered the fast track of economic recovery. Is this right?
Xu: Let us first assume that those numbers are real and the economy is indeed recovering. I believe that the excessive credit supply of last year and the extremely loose monetary policy both resulted in recovery, which I regard as the result of squandering money. Whether the effects of squandering money will last depends on the government's decision on whether to keep throwing money about.
Needless to say, squandering money will definitely stimulate the economy.
However, China's economy has structural problems that cannot be easily solved by palliatives. Too much investment, too little consumption and purely relying on domestic investment and external demand-driven economic growth will no longer support sustainable development.
Chinese President Hu Jintao has repeatedly stressed the need to accelerate the reform of the economic growth model.
But contrary to our fantasies, squandering money did not change the previous growth model, and it has resulted in the structure of the economy deteriorating further. Blood transfusions and oxygen therapy may make a patient feel better, but the illness is not cured. Toxic water may cure your thirst, but it may still kill you.
NE: You claim that macroeconomics is nothing but a pseudoscience. So are our current national macroeconomic policies based purely on pseudoscience?
Xu: There are two important issues in macroeconomics that haven't been discussed so far, and that's why I call it a pseudoscience.
The first issue concerns how macroeconomic volatility occurs and what are the reasons for it.
I regard macroeconomics, especially the policy part, as an implementation of counter-cyclical policies for an ostensible economic cycle that doesn't really exist.
It's just like physical therapy, where you offer a cold bath to a fevered patient and a sauna to a shivering patient. Keynesianism never questions why the patient is sick. It maintains the stability of the economic cycle, regardless of how this cycle is caused.
Let's take the invention of railways as an example to illustrate how new technologies affect the economic cycle. Railways were a major technical innovation of great importance 150 years ago, which massively increased the efficiency of transportation. Everyone then was investing in railways while the speed of economic growth was accelerating.
The government then had no reason to control the development of the railway system.
Government obstruction would obviously impede a wider application of railway technology as well as obstructing social productivity. Faced with such peaks of economic growth, the government would be better off doing nothing, and it would be nonsense to keep stimulating the economy after the peak of growth was over.
Also, can the illness be really cured by such physical therapy? The answer is no. Government policy was not helping to conserve steady economic development in many cases, and it increased the volatility of the economic cycles instead.
Such measures are based on the premise that the government can accurately predict the right point of time, launching the right policy with the right intensity.
If the time and intensity were not appropriate, the wave would be even bigger than before. In many cases the government reluctantly enlarged the wave.
