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Paul Krugmann
by Paul Krugman
Opinion columnist
Two years ago, China had the wind in its sails. Decades of miraculous expansion had turned a desperately deficient country into an economic superpower, with a gross domestic product that, in some ways, is greater than that of the United States. China’s competitive reaction to Covid has been widely praised; its Belt and Road Initiative, a vast program of infrastructure investment around the world, obviously an attempt at global influence, perhaps even supremacy.
But now China is stumbling. His “covid zero” policy of closing cities at the first sign of an outbreak proved unsustainable, but abandoning the policy did not produce the expected economic boost. In fact, China is experiencing deflation lately, inspiring comparisons to Japan’s slowdown in the 1990s (though Japan has done much more than legend has it).
Can China buck its trend, and how will the rest of the world, the United States in particular, react?
Some analysts attribute China’s stumble to the policies of its existing leaders. A recent influential article by Adam Posen, president of the Peterson Institute for International Economics, suggests that China is suffering from a “prolonged economic covid,” a decline in personal sector confidence caused through arbitrary government intervention, which began before the pandemic but has intensified since then.
But while Xi Jinping’s moves have been truly erratic, I’m in the camp of economists like Michael Pettis of the Carnegie Endowment who see the country’s messes as more systemic.
The basic point is that China, in various ways, suppresses personal consumption, leaving the country with massive savings that want to be invested in one form or another. It wasn’t too complicated 15 or 20 years ago, when China’s GDP could grow. Through up to 10% annually, largely by catching up with Western technology: a developing economy can make smart use of large amounts of capital. -The age population has stopped developing and has begun to decline.
Inevitably, therefore, the expansion has slowed. The International Monetary Fund estimates that, in the medium term, China can expect an expansion rate of less than 4%. That’s not bad: It’s nearly double the maximum expansion observers expect for the United States. But China is still looking to invest more than 40% of its GDP, which is unimaginable given the drop in expansion.
This looming challenge has been evident for a decade or more, but China has been able to mask it largely by creating an immensely inflated real estate sector. This strategy, however, is unsustainable. Xi’s trial and error would likely be complex on the day of judgment, but in the absence of basic reform, China’s current situation is only a matter of time.
Is Posen right that this is “the end of the Chinese economic miracle”?
I wouldn’t count on that. As Adam Smith once said, “There is much ruin in a nation. China is already a superpower, and its existing stumbles are unlikely to end with that status. Moreover, while the Chinese government has been strangely resistant to reforms that may make its expansion sustainable, we assume that this resistance will continue indefinitely.
And what do China’s disorders mean for the United States?The Biden administration has taken a very hard line on China, much more difficult in practice than that of Donald Trump, who has spoken harshly but commonly agitated ineffectively. The U. S. government. The U. S. government is now encouraging semiconductor production. to lessen dependence on China, seeking to block exports of complex silicon chips and, more recently, banning some high-tech investments in China.
Are those movements dead now that China’s path to global domination seems to be disappearing?
You don’t have to be xenophobic to worry about the imaginable long-term moves of a superpower whose leadership grows more autocratic and erratic every year. Trying to diminish this superpower’s ability to do harm makes sense, even if it makes many other people nervous. And the option that China is rarely a superpower as many hoped does not replace that calculation.
On the contrary, China’s disorders may warrant preventive action. China’s leaders have long relied on economic achievements to give them legitimacy. They now face unrest on the home front, at most without delay in the form of an immediate increase in young people. How will they react?
Ideally, as I said, they will put in place long-sought reforms that put more income in the hands of families, so that the increased income can actualize unsustainable investments. Regimes respond to internal difficulties by seeking to distract the population with foreign adventures.
I’m saying that will happen. But realistically, China’s domestic turmoil makes it more or less a danger to global security.
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Paul Krugman has been an opinion columnist since 2000 and is also a prominent professor at the Graduate Center of the City University of New York. He won the Nobel Prize in Economics in 2008 for his paintings on foreign industry and the geography económica. @PaulKrugman
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