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A Sign of Things to Come in Singapore too?

Leegimeremover

Alfrescian
Loyal
http://www.ibtimes.com/articles/200...ot-help-its-struggling-consumption-donkey.htm

Beijing's stimulus may not help its struggling consumption donkey

By Dr. John Lee, Op-ed Contributor
15 November 2008 @ 02:57 pm EST
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China likes to think big. It has the Great Wall, Tiananmen Square, and has put forward a mind-boggling US$600 billion economic stimulus package. This is the latest response by an increasingly anxious government in Beijing, which is trying to alleviate the effects of the global economic crisis devastating China's export-heavy economy. Although details are hard to come by, which is typical of Beijing, the plan will most likely allow China to maintain an annual growth rate of 78% in the short term. But it is also designed to help reorient the trajectory of growth away from one based on exports towards domestic consumption. This is critical to the sustainability of China's economic miracle. Unfortunately, even such a massive package is unlikely to achieve that goal.

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Chinese leaders and economists have been saying for a decade that its economy is pulled by two strong horses and one weak donkey. China is much too reliant on unsustainably high levels of (inefficient) investment and exports (the two horses) to produce its rates of growth. Consumption has always been the stubborn old donkey dragging its feet. As a proportion of GDP, consumption has declined to about 33%the lowest of any major economy in the world. In the early 1990s, it was around 60%. China's leaders are justifiably worried that the horses will soon run out of puff and the donkey will remain too slow and weak to pull the cart.

Domestic capital is getting less and less bang for its buck. Ten years ago, it took only two dollars to produce one dollar worth of output. Now it takes six. Yet, in the first four months of 2008 investment spending in China increased by around 28%. From 20002007, it increased between 20% and 40% year on year. In contrast, consumption in 2008 is increasing by only around 15%, despite the rise in average income outpacing economic growth.

This shows that while ever-increasing levels of capital expenditure can support an already vibrant bottom-up economy, they cannot create one. Over three-quarters of China's capital is offered to state-owned-enterprises, which are given privileged treatment in the most lucrative and important industries. China's private sector, effervescent as it is, is starved of capital and access to these markets. Subsequently, even the most successful private firms in China tend to flatline at around 30 employees. This has been the trend for almost 20 years.

Second, because China still relies on a state-led model of development, a relatively small number of insiders and the well-connected tend to thrive. Within one generation, China has gone from being the most to the least equal society in Asia in terms of income distribution. Over 400 million Chinese have seen their net household income decline over the past decade. Around 800 million Chinese still live on US$2 a day or less. This is despite GDP growth averaging around 9.5% over the past two decades.

The fiscal stimulus plan relies heavily on bulking up China's state-led fixed investment strategy. For example, massive infrastructure construction projects such as railways, roads, and airports are planned. Tax credits will be given to businesses to buy machinery. Unfortunately, putting more and more money into a strategy that is becoming less effective will simply lead to more capital waste, which Beijing can hardly afford.

There are some positive aspects to the plan. Earmarking money for post-earthquake reconstruction in Sichuan province makes sense, although the devil is very much in the detail. If there are no more fundamental changes in the post-earthquake economy, consumption in these regions is most likely to return to the same levels as before the disaster. However, strengthening medical services is welcome, since out-of-pocket expenses for healthcare place a heavy restriction on consumer spending.

Any drop in growth below 7% would be a virtual recession for China. Chinese leaders know that a growth rate of 7% is needed to maintain the current levels of employment. Increased unemployment means social instability, which could threaten the regime's hold on power. China's political situation is a lot less secure than many realize.

The stimulus plan is therefore much more about maintaining employment and achieving political goals than it is about reorienting China's economy. It offers more hay to the fixed investment horse, but does little about revitalizing the consumption donkey.

To set China on a more sustainable economic path, Beijing needs to offer greater support to its private sector, which has shown itself to be resourceful despite its lack of access to capital and markets. It is also much more proficient at creating jobs than the state sector.

Developing private enterprise is China's best hope of raising across-the-board household incomes and therefore domestic consumption, which has been correctly identified by Beijing as the primary goal. But as massive as the stimulus package is, its focus on the state-owned sector means it simply won't do the job.
 

Leegimeremover

Alfrescian
Loyal
http://courses.nus.edu.sg/course/ecstabey/APC_04.pdf

Read this paper by NUS. Consumption to GDP ratio has been droping since LKY came into power. Paper recommends that housing be kept affordable for consumption to rise. High consumption ratios are necessary to fend off the adverse effects of global cycles and events like this one ready to burst. So either Singaporeans will receive a lot of candy money and cheaper housing or Singaporeans will totally get fucked. Importing FTs will not solve low consumption ratios.
 
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