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Yes, that Chinese stimulus didn’t work either..

November 9th, 2010 · No Comments

It only saved the world..
Keynesianism, on a policy level, means countercyclical policy. Running surplusses during the good times, deficits during the bad ones. And sure they’ve been bad the last couple of years.

The US stimulus was way too small (but it nevertheless stopped the economy falling off a cliff, which happened even faster than in the 1930s). It effectiveness was further undermined by tax cuts (which were mostly saved as households were overextended and overleveraged), drastic cuts at state level, and pork-politics.

For a real 101 on countercyclical policy, go to China. It was proportionally much larger..:

What’s Next for China After Saving the World?
nytimes ALAN WHEATLEY, On Tuesday November 9, 2010, 3:40 am EST

BEIJING — The giant fiscal stimulus and bank lending spree that China started two years ago saved the world from recession. What can Beijing do for a follow-up act?

Internationally, the success of the unprecedented pump-priming has accelerated a shift in economic influence that has put Beijing front and center of policy making, as the summit meeting of the Group of 20 major economies in Seoul is likely to show this week.

Domestically, the 4-trillion-renminbi, or $601 billion, package announced Nov. 9, 2008, put a floor under an economy that was in free fall during the global financial crisis. More than 20 million migrant workers who had lost their jobs were quickly absorbed as the government started public works projects.

Two years later, China can boast, among other things, the world’s biggest high-speed-rail network, which is doing wonders for the country’s reputation.

“China’s self-confidence got a big boost from the fiscal program, which goes beyond the immediate economic effects,” said Jonathan Fenby, head of China research at Trusted Sources, an emerging markets consulting firm.

Mr. Fenby said the tangible results of the splurge could only increase China’s pride in its ability to raise its game.

“One cannot help making comparisons with infrastructure in the U.S. and U.K.,” he said. “I am sure the Chinese do.”

Success, however, heightens expectations.

China, which now has the world’s second-largest economy, after that of the United States, is under pressure to shoulder more responsibility for tasks including curtailing carbon emissions and reducing global imbalances.

Beijing’s response to date has been to toss the ball back into the court of developed countries, particularly the United States, which it holds responsible for the world’s economic troubles.

“We came through the financial crisis test very well,” said Li Daokui, an economics professor who advises the Chinese central bank. “We got full marks, 100 percent, but we’re being criticized by those who failed to pass the exam.”

Chinese leaders have for decades kept a low foreign policy profile to concentrate on maintaining economic growth and political stability at home.

But Elizabeth C. Economy, director for Asia studies at the Council on Foreign Relations in New York, argues that China has come to realize that achieving those goals today requires actively managing events beyond its borders.

In the financial sphere, for example, China has successfully pushed for greater power at the International Monetary Fund, becoming one of the fund’s biggest shareholders.

“China is transforming the world as it transforms itself,” Ms. Economy writes in the latest issue of Foreign Affairs. “Never mind notions of a responsible stakeholder; China has become a revolutionary power.”

Revolutionary is an evocative word. But is it too strong to describe the effect that China’s economic rise, sustained by the two-year fiscal program, is having on the rest of the world?

According to the I.M.F., the global economy grew just 0.19 percent last year, measured in terms of purchasing power parity.

China contributed 1.19 percentage points to that growth. In short, it really did save the world from recession.

And that is without accounting for ripple effects, like bolstered business confidence, higher commodity prices and lower global interest rates, that researchers trace to China.

“Clearly, it made a significant contribution,” said Vivek Arora, assistant director of the I.M.F.’s Asia-Pacific department. “It’s there in the numbers. But beyond the arithmetic impact, if you take into account spillover effects, the contribution is even larger.”

Looking at it in another way, China contributed 46 percent of global domestic demand in 2009, more than double the average of 22 percent from 2000-9, according to Goldman Sachs.

“Suffice it to say, without the support of the infrastructure package, China’s growth would have been much smaller and the global contraction substantially larger,” said Ivailo Izvorski, lead Asia-Pacific economist for the World Bank.

On top of the 9.1 percent growth in China’s gross domestic product last year, Yolanda Fernandez-Lommen of the Asian Development Bank in Beijing stresses the role China played in shoring up financial stability during the crisis.

Beijing has purchased $50 billion worth of I.M.F. bonds, established $95 billion in bilateral currency swaps with a clutch of countries and provided a third of the funds for a regional financial fall-back mechanism, she said.

Exporters of natural resources, including Australia, Africa and Latin America, have been the top beneficiaries of the stimulus. China’s share of global demand for industrial commodities jumped to 46 percent in 2009 from 31 percent in 2008, Richard Cookson and Alexander Godwin at Citi Private Bank said in a report. In 1999, the figure was just 7 percent.

But the benefits of the stimulus are not limited to emerging markets. Germany is enjoying a miniboom, largely because of insatiable Chinese demand for the high-end machinery, chemicals and cars it manufactures.

Total Chinese imports in the first nine months were $300 billion more than in the same period last year.

At the current pace, in another 12 to 18 months, “German trade with China could be as big as German trade with France,” Jim O’Neill, chairman of Goldman Sachs Asset Management, said during a visit to Beijing.

“If you are doing business in Munich, what is happening in China is more important than what is happening in the rest of Europe — and possibly in the rest of Germany,” he said.

Alan Wheatley is a Reuters correspondent.

Tags: Public Policy