Like it or not, the mainland may have to keep depending on investment to drive growth if the government continues to target economic expansion of as much as 7 per cent over the next decade.
SCMP, November 11
One of the counts I have long held against the work of the economist John Maynard Keynes is his part in coming up with the concept of gross domestic product.
Agreed that people like to have some idea of how well their economy is doing and that this can be important to investment planning, but perhaps doing without an overall measure of economic performance is better than relying on a bad one, and GDP is certainly a bad one.
This much was recognised even when it was devised in the middle of the second world war. GDP has its uses in helping government planners estimate how much tax they can collect and how big a military effort they can mount, which is useful during war, but it is much too narrow a measure of economic performance to gauge the wealth of an economy.
It is, for one thing, a form of cash-flow statement that takes no account of how useful any investment project might be or of its useful life. In Europe and America, for instance, it happens occasionally that government builds a public housing block only to demolish it and leave the land idle again when the tenants prove unhappy with it.
In GDP, this counts not as a waste but as two useful capital projects. The costs of construction and demolition are both treated as fixed capital formation and nothing is deducted as a loss on a bad investment. Thus in GDP, one minus one equals two.
But while ignoring common-sense accounting practices, GDP figures confidently assert what no corporate accountant would ever attempt. GDP comes in both nominal dollar of the day figures and in deflated constant price figures. Statisticians make guesses about inflation in different sectors of the economy and then juggle them to provide a "real" economic growth rate.
There are other big uncertainties here and yet we all pretend that economic growth can be measured with precision this way to the right of the decimal when even the first place to left of the decimal is a guess. In reality, what we have with GDP is like an old car with a manual three-speed transmission - (1) zero to 4 per cent growth; (2) 4 to 8 per cent growth; and (3) probable nonsense. Don't even ask for a figure if you're in reverse.
But I think perhaps the worst thing that this obsession with GDP does is focus governments on headline growth numbers, as a form of report card, to the cost of the people whom the economic effort is meant to serve.
Governments face a difficulty, however, in stimulating growth. If people are worried about their jobs or their level of debt, then they won't go shopping and the growth of personal consumption expenditure, the biggest component of GDP in non-fascist economies, will be slow.
Similarly, corporations worried about their balance sheets will generally not expand rapidly and exporters will not sell if overseas markets do not buy. Governments can do nothing about this. The old principle applies: you can lead a horse to water but you can't make it drink.
All that governments can really do is expand themselves aggressively, which invariably means big infrastructure projects. This is not a bad thing if lack of decent infrastructure was holding back the rest of an economy and there is a good test of whether it has truly done so. It is whether the rest of the economy then expands as fast the infrastructure spending, allowing for a lag of maybe two or three years.
And on the mainland, fixed-capital formation has been running at more than 40 per cent of GDP for more than 10 years, far above levels elsewhere in the world, while household expenditure has lagged.
There has been no catch-up. The evidence strongly suggests that much of the capital spending is indeed wasteful. Beijing is engaged in an artificial stimulus to push up headline GDP numbers with little regard for real benefit.
And I blame John Maynard Keynes in part for encouraging this wasteful practice.