This somewhat provocative question was the title of a conference hosted by Oxford and Standard Charter this week in London. My answer was: "No, not tomorrow; but yes, eventually – especially if China continues to vigorously pursue economic reform."
The reason that China cannot be the engine of global growth tomorrow is straight-forward. For the last decade an awful lot of the final demand in the world has come from the U.S. That era is over for the time being as U.S. households now concentrate on rebuilding their savings. No one country can fill the gap left by the slowdown in U.S. consumption: Japan, Germany, and China together have less consumption than the U.S., so no one of them can replace the U.S. as the major source of demand in the world. It's not realistic to expect China to play that role. But we are probably moving into a more multi-polar period in which there is more balanced growth in all of the major economies.
How can China make its contribution? Given the big external shock it has received it is in China's interest to compensate by stimulating domestic demand. That is what the government has done with a very large monetary and fiscal stimulus. This is having the desired effect of reversing the slowdown in China's economy. The point I made in London is that this stimulus is very welcome but can only be a temporary source of growth – no one can grow sustainably based on fiscal stimulus. And the export stimulus of the past is not likely to come back. As the world economy recovers China will be the biggest exporter in the world – but for that reason it is not likely to see its exports grow much faster than world trade as a whole – which is usually around 6-8% in good years. It is not likely that China will return to 20% rates of growth of exports. So exports will make a contribution but they will not be the engine of growth as they were in the past decade. Thus government economists, private economists – everyone is talking about the need to have growth based more on the expansion of domestic consumption in order to sustain continued high rates of growth. This is possible, but there are a series of reforms that would help the process along.
- First, there is the issue of public education, health, and safety nets. Households save a lot because of high private costs of education and health and a lack of old age support for many people. Some of the measures included in the stimulus plan, such as expansion of health insurance to 90% of the population and more funding for public education address these concerns. More secure households will feel comfortable to spend more of their income.
- Second, the process of rural-urban migration raises both productivity and incomes, and hence consumption. It is still the case that there are surplus workers in the rural sector who would be more productive in the urban economy. Clearly there is a temporary problem with the large numbers of workers who have lost their jobs as a result of the slowdown. But the long-run tendency is still for rural-urban migration. Workers who move permanently to cities with their families add a lot to demand because they need housing, public services, appliances, etc. Domestic demand everywhere is primarily services. So there is the potential for a virtuous circle of more jobs in service sectors tightening labor markets and raising wages; rural-urban migration to fill some of that demand; and the rising income of the urban population fueling the demand for those services. This dynamic would benefit the rural population as well because the remaining rural-population would have more favorable land-labor ratios and be able to develop larger scale, higher productivity agriculture.
- A third are of reform is the financial sector. The crises around the world have given financial liberalization a bad name, and clearly this is something that needs to be approached cautiously. But Chinese banks are robust enough to move further with interest rate reform. During the height of the export boom, households were getting sharply negative real returns on their large liquid savings; capital in turn was lent to established firms at relatively low cost, fueling profits and expansion. If households receive a better return on their savings, that will have a significant positive effect on household income. A more competitive banking system would also channel funds to consumers, home-purchasers, small and medium firms, and the rural sector.
All of these are difficult reforms that will take time. But China is moving in its own way on each front and is likely to make a successful transition to sustainable growth based on domestic consumption. The point I was trying to emphasize is that it will inevitably take time so it's not fair to expect China – or any other single country – to ride to the rescue of the global economy.