15 September 2009

Can Global Economy Find a New Growth Pattern?

Some economists call for more consumption in export-driven economies

Shopping malls like the one in Guangzhou city have gained ground in China, but consumption lags behind economic growth.

By Andrzej Zwaniecki
Staff Writer

Washington — Household spending on goods and services in America represents more than two-thirds of U.S. economic activity. For years, U.S. consumer purchases of furniture, appliances and other goods fueled economic growth domestically and in countries that export to the United States. During times of economic stagnation, U.S. politicians encouraged consumer spending — through tax policy and public pronouncements — as the best way out of recession.

But the recession that began in late 2007 has been different. Because risky lending by U.S. banks and excessive borrowing by some Americans contributed to the slowdown, frugality is gaining an upper hand among many Americans. This might be a positive development in the long run, but it raises a question about who will create the demand necessary to nudge the global economy into robust growth.

Some economists look to consumers in emerging economies, especially China, to pick up the slack created by reduced American spending. In addition, they think the United States should strengthen its export sector while China expands its domestic retail sector.

When Golden Resources shopping mall opened in 2004 in Beijing, dethroning the Mall of America in Minneapolis as the largest shopping mall in the world, it was viewed by some as a symbol of China’s desire to become a consumer nation.

But Golden Resources failed to attract the anticipated crowds of shoppers, and an even larger mall, which opened in Dongguan in 2005, closed in 2008. China’s consumer spending has grown steadily since 1995, but its economy (largely fueled by industrial exports) has grown even faster. As a result, consumption as a percentage of gross domestic product (GDP) dropped to 36 percent in 2007 from 47 percent a decade earlier, thus contributing less to economic output than in the United States, Brazil or India, according to the World Bank.

DESPERATELY SEEKING CONSUMERS

Sherle Schwenninger of the New America Foundation, a policy research group, said the Obama administration needs to do more to encourage China and other trade-surplus countries to generate stronger domestic demand.

President Obama has called for a new era of “cooperation, not confrontation” with China in an effort to put the global economy on a sounder footing. At a July U.S.-China high-level meeting, the two sides agreed on a four-part road map to guide their economic policies. That road map is aimed at raising the U.S. savings rate and cutting the budget deficit as well as pushing the Chinese economy toward a greater reliance on domestic demand as a source of growth. No details have been released on how these goals will be accomplished. (See “U.S., China Share Goals at Strategic and Economic Dialogue.”)

Chinese banks pay meager interest on private accounts and have yet to develop a mortgage system for home financing.

Michael Pettis, a U.S. professor of finance at Peking University in Beijing, believes the administration should arrange with China that, in exchange for specific Chinese measures aimed at eliminating production subsidies, Washington would maintain policies that encourage U.S. consumer demand for somewhat longer than necessary for the U.S. economy to resume growth.

CHINESE TO THE RESCUE?

Chinese consumers, however, are not in a position to replace American shoppers any time soon because average Chinese incomes are too low, according to Daniel Gros, the head of the Centre for European Policy Studies in Brussels. Also, in China, households represent only one-third of total domestic savings; the corporate sector holds the rest.

Pettis said one way to deal with this situation would be to reduce corporate savings by getting corporations to pay bigger dividends to shareholders to increase household income.

China repeatedly has declared its intention to move its economy away from heavy reliance on exports, but its actions have been inconsistent, in the view of some economists. Pettis said policy groups run by various Chinese government agencies increasingly are critical of the nation’s existing growth model. But, he said, important power blocs — such as provincial and municipal leaders and state-owned enterprises — do not welcome change.

China’s hesitation is understandable, Pettis said. Transitions from export-led economies to consumption-led economies never have been easy. “Everybody reasonable would agree it is a slow process and will take time,” Pettis said.

But Pettis is dubious about the economic stimulus initiative in China, which he said was designed to reinforce the existing model by emphasizing investment in infrastructure and production capacity. Pettis said pressure to slow unemployment growth forced Chinese policymakers to invest in factory production, but he believes that in the long term the stimulus will create production overcapacity and make the Chinese economy even more reliant on U.S. consumption.

Pettis said he sees some signs that suggest China might be reaching the limits of its industrial investment push, such as caps on new lending to corporations.

A study published in July by the Peterson Institute for International Economics says the Chinese government has tried for some time to move away from heavy reliance on exports. The study’s authors believe this process has accelerated over the first six months of 2009, with the government taking steps to stimulate private consumption. The study argues China should accelerate appreciation of its currency, something many economists outside China view as the ultimate test of the government’s intentions. This would help reduce China’s trade surplus and boost its consumers’ purchasing power.

The full report, “The Future of China’s Exchange Rate Policy,” is available for purchase on the institute Web site.