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Pumping up power of consumption(2)

2013-06-20 09:38 China Daily Web Editor: Wang Fan
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Zhu Tian, professor of economics at China Europe International Business School, or CEIBS, in Shanghai, believes the former World Bank vice-president has made an important contribution to the debate.

"In economic theory there is actually no such thing as consumption-driven growth. No serious academic would ever use the term and you can't find it in any textbook. In theory, low consumption is not a bad but a good thing. When the IMF and the World Bank refer to African and Latin American countries, they are talking about the need for sustained investment growth.

"Most of sub-Saharan Africa is poor, not because they don't know how to consume but because they don't have the production capacity, both human and physical."

Tomas Sedlacek, the leading Czech economist and author of the best-selling book, Economics of Good and Evil, also warned of the dangers of going down the consumption-driven road.

"I actually believe it is fine that GDP is boosted by investment (in infrastructure) and by exports rather than driven by consumption as in China," he says.

He said that if China were to go on a spending spree, like that in the West before the financial crisis, it could end up in a similar mess with lower consumption than now.

"Consumption must not be fueled by credit. Historically, with previous global crises, there was nothing to eat as such after a bad harvest. It was a crisis of insufficient supply. Now in the Western world, there is a crisis of demand. There are enough cars and razor blades, but we don't have sufficient consumers."

Retracing steps

China's consumption hasn't always been low. In the 1950s and 1960s it averaged around 60 percent of GDP, hitting a peak of 71 percent in 1962.

Following reform and opening-up in the late 1970s, the government embarked on a program of unprecedented investment to modernize the economy, resulting in the current economic structure.

There is some evidence of that structure already changing. Domestic consumption was a bigger driver of economic growth than investment in the first quarter of this year, contributing 55.8 percent of the 7.7 percent total, compared with 29.8 percent from capital formation and 14.2 percent from exports.

Kwok at HSBC said the government faces the same risks as the early reform administrations when they attempted to alter the economic structure again toward higher levels of consumption.

"As with any structural reform policy, the risk is if the pace and intensity with which reforms are introduced are inappropriate.

"If too slow, structural adjustment fails to occur. If too fast, then new imbalances could be created in other aspects of the economy."

Hans Hendrischke, professor of Chinese business and management at the University of Sydney Business School, said there is a problem with the consumption debate when it ceases to become one between economists and involves the press and other commentators.

"This is what you have when you have a debate that starts off in strictly economic terms and then becomes translated into those who say we must have more consumption because we are against all these investment people. In reality, it is actually quite complex and the two alternatives - consumption and investment - are not actually mutually exclusive."

One significant argument obsessing many economists is whether China's consumption is weak at all.

Zhu at CEIBS pointed out that between 1990 and 2010 China's consumption grew by 8.6 percent per annum (adjusted for inflation), nearly three times the global average of 3 percent.

"In the US, consumption growth was less than 2 percent during this period and in Europe it was 2 percent. Nobody actually needs consumption. It is an outcome of economic growth and not a reason for it. A family cannot get rich by consuming."

It also seems something of a paradox to talk about a lack of consumption when people see nothing but conspicuous consumption by the Chinese, going around the world buying luxury handbags, vintage wines and art.

"For some it is something of a puzzle but that's because of the sheer size of the Chinese economy and its consumer market," said Chang at Barclays.

"It may only be a small percentage going to places like London and Milan but it is enough to make this big difference."

A number of economists also believe the official figures on Chinese consumption may underestimate spending.

These figures are based on household surveys, where a sample of the population completes questionnaires on their consumption patterns.

Zhu at CEIBS said they are weighted to the poorest sections of society who are keen to pick up the small payment made for completing the survey. He estimates that consumption in China could be between 60 and 65 percent, not far below Western levels.

"Poor people appreciate the (financial) compensation they receive for filling in the survey. As for rich people, they might be concerned that some of their income is not so legitimate," he said.

The government has so far attempted to boost consumption by focusing on education and welfare, particularly a universal pensions system, which have been the traditional barriers to consumption, forcing people to save.

It has also increased the minimum wage across the country. Future reforms across the banking system are also likely to make consumer credit more widely available.

The government would also like to see migrant workers settle in new cities with their families as part of the country's urbanization program. They are then likely to spend more, rather than remitting nearly all their wages to families in their hometowns and villages.

Kuijs at Royal Bank of Scotland believes the government has put in place many of the right measures to boost consumption.

"Since 2005, the Chinese government under the previous administration - which is sometimes criticized for the pace of its reforms - has done an impressive job in putting in place many of the measures necessary."

Chang at Barclays said there is no need for the government to "drop money from a helicopter" to boost consumption by such measures as tax cuts or creating the conditions for a credit boom.

"Maybe in a crisis period like a recession, you might need some emergency kind of tool, but what China needs is some deepening of the so-called structural reforms. It also needs to focus on income distribution and improving the social safety net."

She believes that Chinese people will naturally consume more when they reach a higher average income level, particularly on service goods in such areas as recreation, tourism and cultural pursuits.

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