JOIN USChina's low growth target raises brows
The recent announcement of Chinese prime minister Wen Jiabao that Chinese economy’s target growth rate for 2012 is only 7.5 per cent against the 9.2 per cent achieved in 2011 has resulted in much debates and discussions.
It has generated lots of rethinking in the western economies that are trying hard to recover from the impact of the prolonged recessionary phase in their growth trend. Even in India with an over optimistic target growth rate of 7.9 per cent for 2012 the deliberate lowering of the target growth rate in China, has raised lots of concerns.
What is the logic behind such a deliberate lowering of the target growth rate?
Interestingly China has opted for this low growth rate at a time when it is capable of achieving higher growth rates. To the Chinese Prime Minister, the purpose of targeting a lower growth rate is, “to guide people in all sectors to focus their work on accelerating the transformation of the pattern of economic development and making economic development more sustainable and efficient”.
This target growth rate is an 8-year low and by fixing this growth rate China wants to boost up consumer demand. They also want to wean the economy off its reliance on external demand and foreign capital. They are aiming at promoting steady and robust economic development, keep prices stable and guard against financial risks by keeping the total money and credit supply at an appropriate level, and taking a cautious and flexible approach.
Confucianist thrift
Growth rate of the economy depends on the rate of investment. Higher the investment rates higher the growth rate. The main source of investment is savings. The Chinese are known for their saving habits .They are still influenced by Confucianist thrift and their savings are 50 per cent of their GDP and the investment rate too has reached 50 per cent of GDP. This investment, especially in fixed assets like real estate is beyond the absorption capacity of the Chinese economy. The Chinese government has realised the dangers of higher investments and over production of goods. Increases in production unsupported by sufficient demand for the produced goods can lead to severe recessions and even depression. General over production and deficiency in effective demand were the main reasons of the Great Depression that has resulted in 40 per cent reduction in employment and 30 per cent decline in GDP in the American economy in the 1930s.
In India the current savings and investment rates are 34 per cent and 36.7 per cent of the GDP respectively. According to the chief economic advisor to the Prime Minister, Kaushik Basu these rates are expected to fall in 2012.
The Chinese government is guided by sustainability considerations also. The rate of investment in physical capital that is more than an economy’s absorption capacity will result in the deterioration of investment quality. This can adversely impact the long term growth of the economy and the sustainability of that growth. In the post reform period China has demonstrated spectacular technological dynamism. Technological progress will not always generate sustained growth. If growth becomes fully dependent on technological innovation, fast technological change makes efficient production less likely, since producers and social institutions cannot adapt sufficiently fast to move to the Production possibility frontier. So the Chinese economy is now trying to promote growth without sacrificing the quality of growth by restructuring investments. As a policy initiative the Chinese government is now considering more investments in human capital and the social sectors.
The limit to growth approach is not new to economists. First explained in the 1972 book by the same name the theory of limits to growth has undergone much metamorphosis, especially in the domains of environmental and ecological economics. The changes in industrial production, food production and pollution are all in line with the book’s predictions of economic and societal collapse in the 21st century. The theory in its original version argues for the need for controlling the unchecked economic growth by setting limits on the growth rates. Limits to growth become an imperative in view of the finite nature of global resource supplies. This becomes all the more critical in countries where the economic system has out grown the ecological system.
The Chinese policy makers seem to take precautions by fixing low target growth rate and thus trying to make economic growth more sustainable and efficient.