Daily Archives: January 18, 2012

The slowdown in China’s economic growth last year has fostered mixed reactions. Some argue the recently-released 9.2 per cent annual rate exceeds expectations and is consistent with a soft landing. Others see the fall from 10.4 per cent in 2010 as an indication that a sharper drop is still to come.

Surprisingly, domestic consumption has held up well. However, this is partly due to the early arrival of Chinese New Year, which is likely to have shifted activity forward at the current year’s expense. Without actions to support growth, the pace may fall below eight per cent in 2012.

Beijing is likely to lower taxes and consider special incentives to spur consumption. But the real challenge is to encourage less frugality among the Chinese, especially among migrant workers. Policies must be designed to deal directly with the exceptionally high rates of saving by people and corporations. This would have big implications for the trade balance, a contentious issue with the west.

Attention has focused on the rapid increase in China’s investment, which now exceeds 45 per cent of gross domestic product – the highest of any major economy. Less attention has been paid to the even faster rise in the savings rate, which exceeds 50 per cent of GDP. Since the trade balance is the difference between savings and investment, China has substantial trade surpluses that exceeded six per cent of GDP several years ago. Clearly, global imbalances would moderate and growth would be more robust if only the Chinese were less frugal.

Over the past decade, there has been a sharp increase in savings rates for all three major sectors – households, enterprises and government. The trend has been nurtured by a combination of good and bad policies, and thus it is possible to reshape savings patterns to improve the quality and equity of China’s growth.

The greatest potential lies in moderating household saving rates, which have increased by ten percentage points as a share of disposable income in ten years. Although many factors have contributed, the impact of urbanisation has gone largely unnoticed. The urban population is now larger than the rural with persistent labour inflows. In the major coastal cities, savings rates of migrant workers are much higher than those of established residents. Without formal residency rights to public services, migrants have more incentive to save. And because they now account for the bulk of the labour force in many coastal cities, urban savings rates have soared.

The increase in corporate savings comes mainly from a surge in retained earnings. But because enterprises do not pay significant dividends, some of these surpluses have fuelled wasteful investments – including speculation in real estate. If China’s enterprises paid the same share of their retained earnings as dividends as companies in other countries, this could significantly increase consumption.

Government savings have also increased significantly over the past decade. Some of this has supported investment, but some has also been used to build up the social security system. Thus higher government consumption is unlikely unless revenues are increased.

Overall, providing migrants with more security and encouraging higher corporate dividends could increase consumption by some five percentage points of GDP. This could turn China’s current trade surplus into a deficit. These distinct and politically sensitive reforms would also lessen China’s alarmingly high income disparities. This strategy, with benefits for all, contrasts with that of pressuring China to strengthen the renminbi, perceived by Beijing as benefiting the US at China’s expense.

The writer is a senior associate at the Carnegie Endowment and a former World Bank country director for China

Capitalism earns its keep through Adam Smith’s famous paradox of the invisible hand: self-interest, operating through markets, leads to the common good. Yet the paradox of self-interest breaks down when stretched too far. This is our global predicament today.

Self-interest promotes competition, the division of labor, and innovation, but fails to support the common good in four ways.

First, it fails when market competition breaks down, whether because of natural monopolies (in infrastructure), externalities (often related to the environment), public goods (such as basic scientific knowledge), or asymmetric information (in financial fraud, for example).

Second, it can easily turn into unacceptable inequality. The reasons are legion: luck; aptitude; inheritance; winner-takes-all-markets; fraud; and perhaps most insidiously, the conversion of wealth into power, in order to gain even greater wealth.

Third, self-interest leaves future generations at the mercy of today’s generation. Environmental unsustainability is a gross inequality of wellbeing across generations rather than across social classes.

Fourth, self-interest leaves our fragile mental apparatus, evolved for the African savannah, at the mercy of Madison Avenue. To put it more bluntly, our sense of self-interest, unless part of a large value system, is easily transmuted into a hopelessly addictive form of consumerism.

For these reasons, successful capitalism has never rested on a moral base of self-interest, but rather on the practice of self-interest embedded in a larger set of values. Max Weber explained that Europe’s original modern capitalists, the Calvinists, pursued profits in the search for proof of salvation. They saved ascetically to accumulate wealth to prove God’s grace, not to sate their consumer appetites.

Keynes noted the same regarding the mechanisms underpinning Pax Britannica at the end of the 19th Century. As he put it, the economic machine held together because those who ostensibly owned the cake only pretended to consume it. American capitalism, more secular and less patriotic, created its own vintage of social restraint. The greatest capitalist of the second half of the 19th century, Andrew Carnegie developed his Gospel of Wealth, according to which the great wealth of the entrepreneur was not personal property but a trust for society.

Our 21st century predicament is that these moral strictures have mostly vanished. On the one hand, the power of self-interest is alive and well and is delivering much that is good, indeed utterly remarkable, at a global scale. Former colonies and laggard regions are bounding forward as technologies diffuse and incomes surge through global trade and investment.

Yet global capitalism has mostly shed its moral constraints. Self-interest is no longer embedded in higher values. Consumerism is the world’s secular religion, more than science, humanism, or any other -ism. “Greed is good” is not only the mantra of a 1980s Hollywood moral fable: it is the operating principle of the top tiers of world society.

Capitalism is at risk of failing today not because we are running out of innovations, or because markets are failing to inspire private actions, but because we’ve lost sight of the operational failings of unfettered gluttony. We are neglecting a torrent of market failures in infrastructure, finance, and the environment. We are turning our backs on a grotesque worsening of income inequality and willfully continuing to slash social benefits. We are destroying the Earth as if we are indeed the last generation. We are poisoning our own appetites through addictions to luxury goods, cosmetic surgery, fats and sugar, TV watching, and other self-medications of choice or persuasion. And our politics are increasingly pernicious, as we turn political decisions over to the highest-bidding lobby, and allow big money to bypass regulatory controls.

Unless we regain our moral bearings our scope for collective action will be lost. The day may soon arrive when money fully owns our politics, markets have utterly devastated the environment, and gluttony relentlessly commands our personal choices. Then we will have arrived at the ultimate paradox: the self-destruction of prosperity at the very moment when technological knowhow enables sustainable prosperity for all.

The writer is director of The Earth Institute at Columbia University and author of ‘The Price of Civilization’

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