What lessons does China’s fast economic recovery from Covid-19 hold for the US and Europe?
- China has rallied resources with carefully placed investments in strategic areas of the economy. Conversely, the US and Europe have relied too much on blanket stimulus to turn things around, with less effect
This might be the best model for China’s socialist market economy, but the problems faced by the United States and Europe suggest a different approach is needed for market-based economies. To beat the crisis, the West needs better reflation plans, targeted with pinpoint accuracy, instead of relying on the hit-and-miss macro methods employed so far.
Meanwhile, industrial production has rallied 6.9 per cent in the past 12 months to September, boosted by four straight months of export-led recovery. China’s exports rose 9.9 per cent year on year to a record high of US$239.8 billion in September.
According to World Bank forecasts, China’s GDP is expected to grow 1.6 per cent this year, while the global economy is likely to contract 5.2 per cent based on its summer projections. The contrast with Western economies couldn’t be more marked.
Without generous government support schemes and aggressive central bank action early on, the damage would have been far worse. Even so, US GDP collapsed at an annualised rate of 31.4 per cent in the second quarter, compared with falls of 11.8 per cent for the European Union and 19.8 per cent for Britain.
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China GDP: economy grew by 4.9 per cent in third quarter of 2020
Third-quarter GDP numbers due out from the US and Europe later this week should show sharp rebounds but doubts nevertheless still persist about whether recovery is sustainable without more radical government intervention.
A better policy balance is needed for recovery, less dependent on short-term palliative measures and more focused on longer-term deliverables. The problem faced by consumer-driven economies like the US and Britain, where private consumption typically accounts for more than 60 per cent of GDP, is that reflation efforts are sucking in huge amounts of government resources through tax cuts, cash handouts and welfare payments.
By contrast, in China, where private consumption plays a smaller role, accounting for around 39 per cent of GDP, it has been easier for Beijing to rally its resources with carefully placed investments in strategic areas of the economy.
Conversely, the US and Europe have relied too much on blanket stimulus to turn things around, with less effect. What’s needed is a big investment push into key areas like transport, infrastructure, telecoms, health and education to boost employment, productivity and growth in the longer term. A recession-busting New Deal is needed for the US and Europe.
Building up stronger supply-side capacity would not go amiss for stagnant growth economies like Britain, especially after decades of chronic underinvestment and long-term industrial decay.
Where the private sector may be reluctant to invest, given the current climate, there is a very strong case for the state to step in and take up the slack.
While it may be difficult to turn back the clock on consumer-dependent growth, the US and Europe can take heart from China’s handling of the pandemic: more proactive, capital-intensive and productivity-driven macro management does work and can lead to a faster recovery.
David Brown is the chief executive of New View Economics
