Krugman on China

Paul Krugman is pessimistic about China’s growth path.   He is certainly correct that China has focused on building up its export industries and has invested a fortune in urban infrastructure.  Following a Keynesian model, it has invested in public works projects in hundreds of big and small cities as it anticipates the urbanization of 300 million more people over the next 30 years.   China’s leaders must be aware that its exports are unlikely to grow by 8% per year.  Instead, the future growth model must be based on the following;  1.  improving the quality of Chinese products (food, goods, apartment buildings) so that producers can sell them for a higher price to domestic consumers.  2. selling stuff such as cars to their emerging middle class, 3. selling basic durables (fridge, AC) to the new urbanites from the countryside, 4. investing in their military.    Krugman ignores the quality side of capitalism.  As China grows richer, its urban middle class will seek to buy better stuff and this will create huge demand and growth opportunities.  China’s domestic car industry is booming.

Dr. Krugman is correct that the local governments in China have made Zillions $ of loans in investments that may have a negative rate of return.  But, this is “too big to fail” lurking again.  I have asked my co-authors in China about implicit loan guarantees and they agree that the Central Government is highly likely to bail out cities for “bad loans”. Moral hazard always lurks and China will offer a nasty test of this hypothesis.

Author: Matthew E. Kahn

Professor of Economics at UCLA.

11 thoughts on “Krugman on China”

  1. I don’t think moral hazard exactly lurks in China. Struts about and puts on parades, more like. My pessimism about China mostly has to do with the fact that they’re a police state knitted together out of conquered territories that don’t really want to be part of China. The sort of place that, like a lump of explosive, is stable right to the moment it blows sky high.

    Nor do we really know how things are doing in China. Police state, again, they can lie about stuff, and disappear anyone who’d expose the lies. We should have no confidence in statistics coming out of there.

  2. Brett – what you say about the “knitted together” aspect of China may very well be true, but I will just point out that China – patchwork though it may be – has been around for quite some time. It will probably come as no surprise that I think the flashpoint, if and when it comes, will be economic [poor/wealthy|rural/urban] rather than geographic. But this is just supposition on my part, so obviously YMMV.

    1. I think you’re quite right here. And equally important as China’s longevity is the overwhelming numerical and economic dominance of Han China in comparison to those “conquered territories” that Brett worries about. The only one that’s even conceivably relevant is Xinjiang. Well, if you drive through Xinjiang nowadays, what you see is construction — dams, highways, wind farms, oil fields, mile after mile of cotton fields, a brand-new 350 kph high-speed rail line to Urumqi, you name it — all of them largely built and managed by Han Chinese and all of them tying Xinjiang ever more closely to the rest of China.

      I’d say that major changes in China’s political/economic/social system are far more likely to just evolve from the present system than to result from some kind of spectacular revolution. (The purely evolutionary changes of the past three decades are breathtaking enough). But if you want to imagine a scenario involving an abrupt, revolutionary disruption, “worn” is quite right — it’s going to come from within Han China, not from outside.

    2. “China” has been around for a long time. China with it’s current borders, not nearly so long. Pieces of it were independent countries within living memory, places that have been independent countries for longer are part of the border they claim, but do not yet rule.

      I’d agree with you about the flash point, just noting that this particular empire has a lot of preexisting fracture lines built in. Though, at the rate they’re genociding the native Tibetians, they might erase that line fairly soon.

      1. China certainly contains some regions and ethnic groups about which a strong case for secession could be made, and some people make that case, in ways both noble and ignoble. The imposition of Chinese rule and indeed of Han-centric culture on these places is disreputable and disturbing in what it says about the Chinese ruling class’s vision of themselves and their ambitions. And that’s not nothing; the willingness to destroy the history of Tibet to make some point about an eternal unified China really is terrible. But, in terms of China as a global economic and military force, does any of this matter? Yes, there are a lot of Tibetans and a lot of Uighurs, and they’re not treated so great – but aren’t they a fairly small part of the Chinese population, and a far smaller part of the Chinese economy? Unless you’re going to claim a major secessionist movement by, say, Cantonese speakers I think all of this may be rather peripheral to the aspects of China most relevant to the Western world. Indeed, I rather think we’re seeing as much integration of economically powerful ethnically Chinese classes in Singapore and Taiwan (and further afield) into the Chinese sphere of influence as we’re seeing threats of secession by economically negligible groups at the western and northern edges of China.

  3. Ahem. “[N]ew urbanites from the countryside” is a euphemism. Rural people are being forced to move to cities to prop up the economy, says the NYT, since they won’t be able to feed themselves anymore.

    Perhaps Kahn approves of this “new urbanism,” smart growth, or whatever the bleep you want to call it.

    I do not.

    1. At the same time, it might be noted, that they’re going out of their way to destroy existing housing stock in the cities, replacing it with, perhaps nicer, but decidedly more expensive housing.

      What’s this attraction of command economies?

  4. Following a Keynesian model

    Which Keynesian model are we talking about? Is this just another nitwit effort to equate Keynes with government spending, or is there some teaching that is specific to Keynes that applies to China’s growth?

    It’s a serious question. I don’t agree with the rest of the post, but it’s not ridiculous. I’ve been awaiting a Kahn post on economics that didn’t contain at least one howler, and this one almost makes it. Can someone help me here?

  5. I think I understand how making more and better stuff, and selling it consumers, contributes to economic growth. I don’t quite understand how military spending contributes to economic growth, unless you’re recommending Keynesian stimulus spending.

    Please advise.

  6. What about: 5. massive investment in the energy transition, including tapping household savings for paying rooftop solar and non-paying but low-externality electric vehicles?
    The good news is that this is current Chinese policy.

    1. The bad news is that this doesn’t really do anything to address the imbalances Krugman is discussing. Like pretty much all of the other suggestions in this thread, you are talking about more and more investment. That might help in the short run, but in the long run no investment project can produce the changes China needs. At some point it will have to reduce the proportion of its economy devoted to investment projects and figure out how to increase consumption. Adding more investment projects, as you advocate, will only make the eventual adjustment more difficult.

Comments are closed.