China’s economy and that of the rest of the world

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Few things better illustrate the difference between the state of China’s economy and that of the rest of the world than the fact that its newly announced GDP growth figures of 7.6% were analysed as a “slowdown”. In any other major economy this would have been considered blistering growth threatening overheating. Instead, it is clear China has room for further stimulus measures in the second half of the year.

Indeed, as the international financial crisis has unfolded, there have been few starker contrasts than those between China, the US and the EU. Europe has combined loose monetary policy with little or no stimulus to the productive economy – the “austerity” approach. The result has been that the EU’s economy shrank by 2% over four years – the UK’s shrank by 4.4%. The US has combined loose monetary policy with a consumer stimulus delivered via the budget deficit. The result? The US economy has grown by 1.2% in four years. India, which followed the US model of a budget deficit delivering a consumer stimulus, saw its growth decline from 9.4% in the first quarter of 2010 to 5.3% in the first quarter of 2012.

Meanwhile China, which combined expansionary monetary policy with an investment-led stimulus, has experienced more than 9% annual average growth throughout the four years of the financial crisis.

Confronted with China’s performance, a literature has developed claiming China is “about to overreach itself” and suffer deep economic crisis. Nouriel Roubini is currently a vocal advocate of such an analysis, although in the past it has also been advanced by those with a more critical view of western economic policy, such as the Guardian’s Larry Elliot.

Unfortunately for this thesis China’s performance during the international financial crisis continued long-term economic trends. China’s annual average GDP growth since launching its economic reforms in 1978 has been 9.9%. China has the world’s most rapid growth of both household and total consumption – ie including government services such as education.

As Professor Danny Quah of the London School of Economics has pointed out, China has lifted more than 620 million people out of internationally defined poverty – accounting for the entire world reduction of the numbers in such poverty. That figure is more than the population of the EU or Latin America.

When confronted with such gigantic economic growth and improvement in human living conditions the rational response would be to study the case intently to find out what can be learned from such success. But instead, a strange new approach has been developed: China is more economically successful than the rest of the world therefore it must be China’s economic policies which are wrong!

To put this more precisely, China’s economic structure differs significantly from most of the world. It has a higher investment level and a much larger state sector than most economies. But instead of concluding from this that the rest of the world should move towards China’s structure, by increasing investment and expanding the state sector, instead it is apparently China which should bring its economic structure into line with the rest of the world – doubtless thereby simultaneously bringing its growth rate and elimination of poverty down to the same slower rate.

In reality, far from being vulnerable or mysterious, China’s economic policy is extremely coherent and robust and can be readily understood both in the Marxist framework utilised by its creator, Deng Xiaoping, or as set out in western economics.

Deng Xiaoping’s is a far more “classical” Marxist analysis than the one from Stalin which the USSR inherited – one in which the market was eliminated in a single step with the five-year plan of 1929. Much of Deng’s analysis reads like a commentary on Marx’s most extended writing on socialist society, his Critique of the Gotha Programme.

Marx wrote: “What we have to deal with… is a communist society, not as it has developed on its own foundations, but, on the contrary, just as it emerges from capitalist society; which is thus in every respect… still stamped with the birthmarks of the old society from whose womb it emerges.” Marx thought that in this new society markets will continue for a prolonged period: “the same principle prevails as that which regulates the exchange of commodities, as far as this is the exchange of equal values.”

Marx concluded: “Right can never be higher than the economic structure of society… after the productive forces have also increased … and all the springs of co-operative wealth flow more abundantly – only then can … society inscribe on its banners: From each according to his ability, to each according to his needs!” China’s overall economic policy framework, with its central categories of “socialist market economy” and “primary stage of socialism”, is clearly merely paraphrasing Marx.

Most people in the west will not wish to adopt a Marxist framework. But they can equally understand China’s economic policy through the framework of Keynes. The Keynes who wrote, “the duty of ordering the current volume of investment cannot safely be left in private hands.” That it was necessary to have, “a socially controlled rate of investment.” Who wrote: “I expect to see the state… taking an ever greater responsibility for directly organising investment.” And who advocated: “a somewhat comprehensive socialisation of investment.”

Deng Xiaoping’s most famous remark was: “it doesn’t matter if a cat is black or white provided it catches mice”. It is not the most important issue whether one wishes to describe China’s economic policy in Keynesian or Marxist terms. What is important is its prodigious ability to catch mice: it is delivering both the world’s most rapid long-term economic growth and the most successful response to the financial crisis. For these reasons it is urgent the rest of the world learns from it. – The Guardian (UK)