Government investment under the new global normal is the key to rapid economic growth in China and India
Luo Siyi
Mr. Luo Siyi is currently a Senior Research Fellow at the Chongyang Financial Research Institute of Renmin University of China, a former Director of the London Economic and Commercial Policy Agency and a consultant to the world's top 100 companies. Since 1992, he has written more than 200 articles on the Chinese economy and its relationship with the world economy. The published languages ​​are English, Chinese, Spanish and Russian.
Mr. Luo Siyi very much hopes that readers of the new finance fans will see his article and offer valuable opinions and suggestions. He is very welcome regardless of his approval or his temptation. Thank you for your attention to his new work, "A big game?" Analysis of China's New Destiny .
China and India are currently the two fastest growing economies in the world. The two development models have similarities, but they are very different from the slow-growing Western economies. In the process of rapid economic expansion in China and India, government investment has grown rapidly, and private investment has either grown very slowly or declined. On the contrary, in Western economies that rely on private investment and slow government investment growth, economic growth is slow.
As shown below, under the new normal global economic situation, there is a positive correlation between rapid expansion of government investment and rapid economic growth, and excessive reliance on private investment will lead to a slowdown in economic growth.
This economic reality highlights the importance of China's famous saying "seeking truth from facts." This is also crucial for China to implement actual economic policies, because China plans to achieve the goal of building a well-off society in an all-round way by 2020, and soon to become a high-income economy according to World Bank standards. I believe this will help to recognize the role of government investment and private investment in the current economic development of China.
But the reality of the global economy is also very important for economic theory and analysis. According to the dogmas of "neoliberalism" and "Washington Consensus", private investment is beneficial, and government investment is useless. It turns out that the opposite trend is emerging.
The economic performance of China and India shows that there is a positive correlation between rapid economic growth and rapid growth of government investment; the economic performance of the United States, the European Union and Japan shows that there is a correlation between private investment and slow economic growth. These trends are very important for interpreting the new normal of China and the world.
Based on the principle of seeking truth from facts, I will first outline the real trends of the global economy and then analyze the reasons for this trend.
Fast-growing China and India
In 2015, China's per capita GDP increased by 6.4%, while India's figure was 5.9%. The growth rate of China and India is undoubtedly faster than any major economy. This also promotes household consumption and total consumption growth in both countries as fast as any major economy.
In particular, the per capita GDP growth rate of the two countries is much faster than that of the Western economies. In 2015, the EU's per capita GDP only increased by 1.7%, the United States was 1.6%, and Japan was 0.6%. As shown below, according to the latest data from 2016, China and India maintain the same rapid growth pattern, while the United States, the European Union and Japan are also growing slowly.
Talking about the macroeconomic development model of China and India. According to data provided by Zhu Tian, ​​the head of the Department of Economics and Decision Sciences at the China Europe International Business School, and from the National Bureau of Statistics, China’s state-owned fixed-asset investment grew by 23.5% year-on-year in the first six months of 2016. It only grew by 2.8% year-on-year (see Figure 1).
Figure 1
Another fast-growing major economy, India, has the same growth model as China. According to the latest data provided by HSBC's chief Indian economist Pranjul Bhandari on July 22, India's state-owned investment in January-June 2016 increased by 21% year-on-year, and private investment actually fell by 1.4% (see Figure 2).
In a nutshell, the rapid growth of China and India, the two fastest growing economies in the world, is driven by state-owned investment, while private investment growth is very slow and even declining.
Figure II
Slowly growing Western economies
Unlike China and India, the economic growth of Western economies is very slow. As shown in Figure 3, according to the latest international comparable data, China's per capita GDP in the first quarter of 2016 increased by 6.2% year-on-year, India was 6.6%, the EU was only 1.6%, the United States was 1.3%, and Japan was 0.2%. According to data from the second quarter of 2016, China's per capita GDP also increased by 6.2% year-on-year.
Figure III
From the data of the longer period since the international financial crisis, the overall growth rate of Western economies is much slower than that of China and India. As shown in Figure 4, from 2007 to 2015, China's per capita GDP increased by 85%, India by 52%, the United States by only 3%, and both the EU and Japan by 2%.
Clearly, China and India's per capita GDP growth has outperformed that of Western economies.
Figure 4
Western government investment is sluggish
In summary, it can be clearly seen that the rapid growth of China and India is positively related to the rapid growth of government investment. So what is the reason for the slow growth of the Western economies? Perhaps from the best-performing US data in Western economies, you can see the whole leopard.
First, a comparison of Chinese and US government investment and private investment is made at nominal prices. As shown in Figure 5, US private investment in the first quarter of 2016 increased by 2.4% year-on-year, and government investment only increased by 5.8% year-on-year, both lower than China and India. The growth of private investment in the United States has also shown a steady decline.
Although private investment in China and India has also grown slowly, rapid government investment (over 20%) has compensated for the decline in private investment growth.
The United States also published private investment and government investment data after removing inflation: in the first quarter of 2016, US private investment increased by 2.2% year-on-year, and government investment actually increased by 6.4%. The two sets of data point to a conclusion: Unlike China and India, US government investment growth is not enough to compensate for the decline in private investment.
It is clear that there is a correlation between the rapid growth of Chinese and Indian government investment and rapid economic growth. There is also a correlation between slower growth of US government investment and slow economic growth.
Figure 5
The role of government investment
The logic is clear: between the rapid growth of government investment and rapid economic growth, relying on the causal relationship between private investment and slow economic growth, the rapid growth of government investment has promoted rapid economic growth, not the other way around. Government investment is directly managed by the government and will not be affected by market forces. Both the Chinese and Indian governments have made it clear that they are cautious about making economic stimulus plans to increase government investment, while the United States opposes government investment from an ideological perspective.
At the beginning of this year, China planned to launch government investment in several projects, especially infrastructure investment.
In May, the National Development and Reform Commission and the Ministry of Transport jointly issued the “Three-Year Action Plan for Major Construction of Transportation Infrastructureâ€, with a plan to promote 303 projects on railways, highways, waterways, airports and urban rail transit. Among them, there are 131 projects in 2016, 92 projects in 2017, and 80 projects in 2018.
As we all know, the Chinese economy has been slowing down from the end of 2015 to the beginning of 2016. Therefore, the rapid start of this round of government investment is not a temporary policy to alleviate the downward pressure on GDP growth, but a well-thought-out measure to stabilize the economic situation and prevent economic recession.
In India, the Modi government appointed experts who studied the Chinese economy, former researchers at the Peterson Institute for International Economics, and the Eclipse: Living in the Shadow of China's Economic Dominance. The author, Arvind Subramanian, is the chief economic adviser.
In October 2014, when Sabrahmaniya took office, he made it clear that government investment is the key to driving India’s economic growth. His claim was explicitly supported by Indian Finance Minister Arun Jaitley.
Then, a series of reports by top Indian economic thinkers also expressed support, such as the India Development Pathways 2040, published by the Thought Arbitrage Research Institute. Also contributing to the report were the planning committee members Pronab Sen and Saumitra Chaudhari, former chief economic adviser Ashok Lahiri. ) Former Treasury Secretary Vasudeva (CM Vasudeva), former Finance Committee member DK Srivastava, Partha Chatterjee and George Matthew Wait.
The report concludes: “Public investment will be the main driving force for economic growth... At present, infrastructure spending accounts for about 6% of GDP, and year-on-year growth rate should increase to 9%. From the perspective of long-term and sustainability, it should be raised to 8%.†The rapid growth of Indian government investment is reflected in the data. That is to say, the policy pursued by the Indian government – ​​investment is the most critical factor driving economic growth, and it is completely planned and well thought out.
However, in the United States, its ideology pursues "state-owned = bad, private = good." Based on this, the United States now rejects major government investment, and the United States certainly does not have such institutional arrangements—the state-owned economy dominates and enables it to quickly initiate government investment.
I am in my new book, "A big game?" The 16th chapter of China's New Destiny Analysis, "The Invisible Hand Is Not Good", has carried out a detailed analysis of the reasons for this erroneous ideology and economic structure that seriously hindered the recovery of the United States from the international financial crisis. Of course, the United States has been trying to fool other economies into pursuing the policy of "state-owned = bad, private = good" advocated by the Washington Consensus.
Smaller economies are also suitable
China and India are undoubtedly the most important examples, but in addition to this, government investment policies have also achieved significant success in other economies. For example, Dani Rodrik, a professor of international political economy at Harvard University, pointed out: “In Africa, Ethiopia is the most compelling success story of the past decade. Since 2004, the country’s average annual economic growth rate. More than 10%, and thus a significant improvement in poverty and health conditions. The country is poorly resourced and has not benefited from commodity booms like many other African countries, and its economic liberalization process and institutional reforms have also It has not played a major role as the World Bank and other donors have consistently recommended.
This rapid growth is actually the result of a substantial increase in public investment – ​​5% of GDP in the 1990s and 19% in 2011, the third fastest growth rate in the world. The Ethiopian government launched a climax of budget spending, building roads, railways, power stations, and an agricultural technology extension system that significantly increased productivity in most poor rural areas. Some of these expenditures come from foreign aid, while others come from unconventional policies that direct private savings to the government (such as financing controls). â€
He also pointed out the situation in Latin America: "As far as Latin America is concerned, Bolivia is a rare mineral exporter, and it will not be in crisis during the current downturn in commodity prices. The total output in Latin America is shrinking (about 0.3%, according to the International Monetary Fund. In the context of the latest forecast, the country's full-year GDP growth is expected to remain above 4% in 2015. A large part of this is due to public investment, and President Morales has identified this as the growth engine of the domestic economy. From 2005 to 2014, the ratio of total public investment in Bolivia to national income more than doubled, from 6% to 13%, and the government plans to increase the ratio further in the next few years."
The relationship between China's "new normal" and the world's "new mediocrity"
Return to the relationship between China's "new normal" and these trends. As we all know, the main feature of the “new normal†is that China's economic growth will shift from a high-speed growth of about 9-10% after 1978 to a medium-to-high-speed growth of 7%-8% in the foreseeable future. Part of the reason why China entered the “new normal†is that the global economy is growing very slowly. The International Monetary Fund (IMF President) Lagarde called this global "new normal" "new mediocre".
China's economic slowdown is far less serious than that of developed economies in the West. As mentioned above, China's per capita GDP increased by 6.2% in the first quarter of 2016. This growth rate is nearly four times that of the European Union, nearly five times that of the United States, and more than 20 times that of Japan. From 2007 to 2015, the average annual growth rate of American GDP is only 0.5%, Japan is 0.2%, and the EU is 0.1%.
There is no doubt that the reason for the extremely slow growth of Western economies is due to the extremely low growth rate of their fixed investment. In fact, the overall fixed investment level of developed economies in the OECD region in 2015 is still below its 2007 level!
As in the case of the United States analysed above, the reason for the economic slowdown in the OECD region is that government investment has not seen rapid growth and is insufficient to compensate for the stagnant or declining growth of private investment. Instead, China and India achieve higher growth rates by rapidly increasing government investment.
The role of government investment in China and the global “new normal†is obvious.
Conclusion: The visible hand and the invisible hand should be used well. The facts show that the economic growth model under the new global normal is obvious:
The major economies with higher government investment growth rates (such as China and India) have higher economic growth rates;
Major economies with lower government investment growth rates (such as the US) have lower economic growth rates.
These trends also explain why India has recently achieved accelerated economic growth and great economic success. India broke the dogma of "state-owned = bad, private = good" pursued by the "Washington Consensus" and used government investment as a driving force for economic development. It is no accident that India has appointed China Tong as its chief economic adviser to move closer to China’s “government investment to drive economic growth†development model.
These global facts have significant implications for China's economic policy and related discussions:
International comparisons show that China’s policy of increasing targeted government investment is clearly correct;
As the experience of the United States, Japan, and the European Union proves, policies that rely solely on private investment are almost impossible to succeed.
Of course, why not stimulate private investment? Economic development has its own realities—as the author has repeatedly emphasized in other articles that the most fundamental reason for the decline in private investment is the misinformation of consumption driving growth. But the analysis of global trends also clearly shows that government investment will play a key role in China's current economic development.
In addition, the actual global trend also shows that Chinese President Xi Jinping put forward in his earlier economic discussions, "To achieve success in China's economy, we must use both 'visible hands' and 'unseen hands'." ,this is correct. This is in contrast to the dogmas of "state-owned = bad, private = good" that has caused great harm to the Western economy.
This economic fact is clearly political, which will make the role of the Chinese ruling party, the Chinese Communist Party, even more important. As a non-Chinese citizen, it is not appropriate to discuss such a policy. But it is clear that in this case, government investment plays a key role. From a political and economic perspective, policies to strengthen investment are critical to the Chinese Communist Party.
Of course, on a global scale, the fact that “government investment is a key factor in the current new normal of economic development†has also slandered the neoliberals who pursue the “Washington Consensusâ€. It is for this reason that neoliberals are reluctant to discuss this fact, but prefer to say something that is unrelated to reality.
Neo-liberalism, the "Washington Consensus" dogma is out of touch with reality, it is inconsistent with the facts of global economic development, and the content related to economic theory is also wrong. But for the analysis of the most basic mistakes in these economic theories, a separate article is required. Therefore, this article will only discuss the facts unrelated to these doctrines.
China’s economic policy is not about whether a student in a university class gets real knowledge, but about the fate of 1.3 billion people. If China adopts the wrong economic theory of "state-owned = bad, private = good", it will damage the Chinese economy and damage the well-being of 1.3 billion people. As analyzed above, in the current global environment, this damage may be immediate and particularly severe.
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