Tuesday, October 9, 2007

Chinese Economy and Costs of Growth

Readers Qu. how china using pro growth policies can cover all the negative externalities of growth through its net inflow of income. any ideas???

Yesterday I wrote about some of the Problems of Chinese Economic Growth

China is trying to maintain growth as fast as it can. In particular their current economic policy includes:

  1. Undervalued Yuan. The Chinese currency is undervalued against most currencies. Tied to the dollar it has dropped further in the past 12 months. A weak currency makes Chinese exports cheaper and increases exports. This helps to boost demand in the economy.
  2. Relatively Low Interest rates. Chinese interest rates are relatively low for its stage in the economic cycle. (although they have increased interest rates this year) The one year lending rate is 7.02%. The rate for deposits is 3.6%
  3. Done little to reduce the housing and property price boom
The high economic growth and exports has created a current account surplus. (value of exports greater than imports). This has given the Chinese economy a surplus of foreign currency. They mostly invest this overseas. For example, buying US bonds. I presume this is what they mean by net income flow of money.

The Chinese government should also receive greater tax receipts as a result of the strong economic growth.

Negative Externalities of Chinese Growth include:

  • Pollution
  • Inequality
  • Regional inequality
  • Unemployment
  • Congestion
(see problems of Chinese growth for more details)

Can the Proceeds of Growth be Used to Combat these negative Externalities?

  • Higher incomes should enable the government to invest in measures to reduce pollution. E.g. public transport.
  • Taxes could be raised on the use of cars and polluting industries.
  • Growth is the best solution for the unemployment created by privatisation. If growth slowed down it would be difficult to create jobs.
  • The regional inequality is more difficult to address. Despite government attempts there is a strong incentive to set up a business in the South East, near to ports. Therefore, there continues to be a flow of people from north to South
  • Shortage of power and raw materials is also difficult to deal with. Especially since creating more power is likely to cause more negative externalities.
However, just because the Chinese government could use extra income to combat pollution, it doesn't mean that it is doing so effectively. At the moment, they seem relatively unconcerned about taking steps which will reduce pollution.

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