Stiglitz: China is doing the right thing
Feb 21, 2009
Recently did a walking video interview with Joseph Stiglitz, nobel laureate in economics, on his take about the Chinese economy. China is doing the right things in many ways, he said. Text summary below the video.
Stiglitz said China is in a good position to address the global crisis, with $2 trillion in reserves for a rainy day.
Three years ago the government committed to becoming less export dependent, but has not yet succeeded. The government also wanted to increase consumption with more reliance on domestic savings and investment.
Now, thanks to this crisis, the government will have extra impetus for restructuring the economy to be less export dependent.
In the most recent major financial crisis to face China – the 1997/98 Asian financial crisis – China responded with almost Keynesian economics. One of the few countries in the region to follow what was taught in American textbooks (as opposed to Hoover-ite policies imposed on other countries by the IMF), China’s policies worked. The economy was stimulated, but more importantly, the infrastructure laid down became the basis for the remarkable growth that took place in ensuing years.
In this crisis growth will slow down and the premier indicated that they hope to have continued strong growth of 8 percent. That is markedly below the 11.5 to 12 percent growth of the last couple years.
If they achieve 8 percent it will still be strong growth, but the slowdown will obviously have global consequences. The commodity prices once buoyed by China’s very strong demand will obviously be muted.
So do you think China is dealing with the crisis in the right way? Yes I do.
What role could could China play?
In recent years China has played a very important role in terms of foreign aid. China’s contribution to support infrastructure in Africa exceeded that of the World Bank and the African Development Bank combined.
Traveling around Ethiopia a year and a half ago we saw what a remarkable effect this had. In the west there is a continuing subsidy to industries, which creates an un-level playing field. There are now rumblings of cutting back on assistance as countries focus on their own problems.
What about debt obligations coming due in developing nations? Net capital flows will be down by two-thirds next year. Interest rates are higher because risk premiums are higher. Even though the core interest rate is coming down, the interest rates they have to pay are going up. Commodity prices will be lower and many developing countries depend on commodities. Trade flows will be lower. On all accounts it is not a nice place to be.
Some countries will be worse affected than others – those with weak banking systems. The good news is that many emerging markets have better banking practices than the United States. They will do fairly well going into the crisis, but when you have a recession all banks have problems. Countries dependent on commodities will face a problem as will those that have to roll over their debt. Countries with two or more of these problems are particularly likely to face difficulties.