Sunday, April 11, 2010

Six myths about China's economy and environment

China's stunning economic rise is one of the biggest stories of this generation. The transformation has occurred so quickly that myths and misperceptions abound about the challenges and opportunities that China poses to America and the rest of the world. Arthur Kroeber, the managing director of GaveKal-Dragonomics, an economic research firm in Beijing, lists “Five myths about China’s economy” in the Washington Post, on 11 April 2010. Following are a few excerpts.

1. China will quickly overtake the United States as the world's most powerful economy.
In 2010, China's economy is expected to produce about $5 trillion in goods and services. China is ahead of Japan, but it would still be barely one-third the size of the $14 trillion U.S. economy and well behind the European Union, if taken as a whole. One reason China's economy is so big is simply that it has 1.3 billion people. But China's per capita gross domestic product is only one-seventh the U.S. level. Each year, an average Chinese household consumes one-fourteenth the value of goods and services purchased by an average American household. In terms of the value of goods, the United States produces more than 20 percent of global manufacturing, or about double China's share.
2. China's vast holdings of U.S. Treasury bonds mean it can hold Washington hostage in economic negotiations.
China has the biggest holdings of U.S. Treasury bonds of any country -- around $1 trillion. Like a depositor, China has little ability to tell its bank how to run its business. It can only vote with its feet, by taking its deposits elsewhere -- but its deposits are so huge, there is no other "bank" in the world that can take them. And it can't simply invest all its dollars at home, because doing so could lead to rampant inflation. So like it or not, Washington and Beijing are stuck with each other -- and neither has the power to hold the other hostage.
3. Letting its currency grow in value is the most important thing China can do to reduce its trade surplus.
Certainly, the exchange rate is important, but it's a mistake to think that letting the yuan rise in value would magically make China's trade surplus disappear. In the late 1980s, Japan allowed the yen to double in value, but its trade surplus didn't budge. Conversely, in 2009 China kept the value of the yuan fixed against the dollar, and its trade surplus fell by a third. By far the most important thing China can do to reduce its trade surplus is to stimulate domestic demand (including demand for imports), something it has started to do through a massive infrastructure spending program. There's some evidence that Chinese households are also beginning to spend more freely as wages rise and people feel optimistic about the future.
4. China's economy has grown mainly through the cruel exploitation of cheap labor.
Every time a developing economy starts growing fast, richer countries accuse it of "cheating" by keeping its wages and exchange rate artificially low. But this isn't cheating; it's a natural stage of development that comes to an end in every country, as it will in China. China has grown in much the same way as other economies we now view as mature and responsible success stories -- including Japan, South Korea and Taiwan. Those nations invested heavily in infrastructure and education, and quickly moved their workers from low-productivity jobs in rural areas to more productive jobs in cities. China still has plenty of workers moving from the countryside to the cities, but the age of ultra-cheap Chinese labor will soon be gone.
5. China's hunger for resources is sucking the world dry and making major contributions to global warming.
China is now the biggest producer of carbon dioxide and other greenhouse gases that contribute to global warming. But China uses more energy to produce a dollar of its GDP than most other countries, including the United States. But on a per-person basis, China's use of resources is still modest compared with that of rich countries. For instance, China, with nearly a quarter of the world's population, accounts for less than one-tenth of the world's oil consumption. The United States, with only 5 percent of world population, accounts for nearly a quarter of global oil consumption.
6) Economic growth degrades the environment
To the five points above, Prof Donald Boudreaux of George Mason University, USA, who blogs at Café Hayek would like to add another one. China's GDP is "barely one-third the size of the $14 trillion U.S. economy," yet, "China is now the biggest producer of carbon dioxide and other greenhouse gases." That is, America's economy - nearly three times larger than China's economy - produces less pollution than does China's economy. So much for the myth that economic growth inevitably and always increases pollution and environmental damage. Clearly, after some point, continued growth can REDUCE pollution and environmental harm.

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