Chinese state action from the onset of the global crisis countered any investment decline. In the EU, it’s a case of too little, too late
With world economic growth waning sharply, China is launching a new multibillion-dollar stimulus programme. In the first four months of 2012 its national development and reform commission approved 868 new investment projects. It speeded up this month, with more than 100 approved on 21 May alone. Simultaneously on the consumer side, subsidies for purchasing energy-saving products and a “cash for clunkers” programme were launched.
The full scale of stimulus is not yet announced – officially, China’s premier Wen Jiaboa merely acknowledges new emphasis on growth. It is neither required nor likely to be on the same scale as China’s $586bn 2008 package launched to deal with the international financial crisis’s onset. But what has started is a programme focused on state-led investment and consumption incentives running into many tens, or the low hundreds, of billions of dollars.
To assess its impact, it is worth comparing the period following the launch of China’s last stimulus with the results in Europe and the US over the same period. Since the peak of the last US business cycle, in the last quarter of 2007, in slightly over four years China’s economy grew by more than 40% while the US grew by 1.0%, the EU shrank by 1.5%, and the UK declined by 4.3%.
It is also clear why China’s stimulus programmes worked and Europe’s economic policy failed. Europe’s recession is driven by a sharp investment fall. In inflation-adjusted prices, since the peak of its last business cycle, EU GDP fell by $282bn. However, if positive shifts in government consumption and trade balance are added together with the modest fall in consumer spending, EU GDP would have increased by $116bn. The whole of the EU recession was accounted for by a $424bn decline in fixed investment. The US shows the same pattern.
In China, the core of the stimulus was a state-led investment programme targeting infrastructure and housing. In the three years up to 2010, the last for which full data is available, China’s GDP rose by $2.1 trillion, of which $1.2tn was increased investment. State action in China therefore countered any investment decline. This, in turn, explains why China’s GDP expanded since the financial crisis began and why its household income has risen sharply.
After four years of refusing to face the real situation, identification of the core problem in Europe is beginning to emerge. European parliament president Martin Shulz recently wrote that “targeted investment should be given priority”. José Manuel Barroso, European commission president, initiated moves to increase the European Investment Bank’s capital by $13bn, which could be used to start pan-European infrastructure “pilot projects”. Even Nick Clegg, after heading in the wrong direction throughout the whole period of the coalition, recently vaguely announced support for a “massive” increase in state-backed investment in housing and infrastructure.
But the EU, unlike China, wasted four years already – and the new policy changes are too small to turn the situation around. The EU is a $16tn economy. The idea that a $13bn programme, 0.06% of EU GDP, can offset the multi-hundred-billion decline in EU investment is evidently unrealistic. Unless Europe grasps the nettle of a large China-style programme, one based on state-led investment, Europe is likely to face, at best, years of economic stagnation.
China naturally analyses its stimulus in terms of Deng Xiaoping and Marx. But it is equally possible to interpret it in the framework of Keynes – only not the bowdlerised Keynes taught in undergraduate textbooks but the real Keynes of The General Theory of Employment, Interest and Money. The Keynes who wrote: “I expect to see the state … taking an ever greater responsibility for directly organising investment,” and “I conclude that the duty of ordering the current volume of investment cannot safely be left in private hands.” The Keynes who said: “I conceive, therefore, that a somewhat comprehensive socialisation of investment will prove the only means of securing an approximation to full employment.”
The Wall Street Journal recently stumbled across the truth by accident, noting: “Most economies can pull two levers to bolster growth – fiscal and monetary. China has a third option … accelerate the flow of investment projects.” Quite – that is why China’s response to the financial crisis has been so much more successful than the EU or US. It is the lesson from China that must be drawn by both governments and those opposing the failing policies of austerity in the UK and Europe.
• Follow Comment is free on Twitter @commentisfree