Transcript China`s Policy Response to the Global Financial Crisis

China’s Policy Response to
the Global Financial Crisis
Joseph E. Stiglitz
Beijing
March 2009
A Deep and Prolonged Downturn
• The first truly global downturn of the
modern era of globalization
• Downturn in the U.S. will be the most
severe since the Great Depression
– And may be even more difficult to deal with
– With huge losses in the financial sector
The Myth of Decoupling
• All countries are being affected
– America exported its toxic mortgages
– America exported its deregulatory philosophy
– Now America has exported its recession
• Developing countries that have been most successful in
enmeshing themselves in the global economy are likely
to be most adversely affected
– Through unprecedented decreases in exports
– Through massive changes in capital flows
• Irony: capital is flowing back to the US from which the crisis
originated
– Even countries that have pursued good economic policies (e.g.
better bank regulation than the U.S.) are being affected
This crisis will put great strains on
all countries
• Not only decreased exports, but also lower
investment
• Anxieties about future income, decreases
in wealth, reduced ability to borrow, higher
unemployment all contribute to lower
consumption
• Risk of high unemployment
• Reverse migration—new strains on rural
sector
A Global Crisis Requires a Global
Response
• Yet responses are still at the national level
• Because of “externalities” (benefits that
accrue to others) the size of the stimulus is
likely to be too small
• And countries are likely to try to maximize
domestic multipliers—undermining
effectiveness of global multipliers
• Implying that the global recovery will be
slower than it otherwise would be
Designing a Good Stimulus
• Big global multiplier
• Help redirect economy in ways consistent
with the “vision” of the future—and
address long standing needs—not
recreating failed system of the past
• Good investments create an asset,
offsetting the liability of increased
government deficits (or reduced reserves)
• Flexible—automatic stabilizers, that spend
more when and if more is needed
• Plans for sequential stimuli if more is
needed
• Sensitive to micro-economics—where are
jobs being lost, where are they being
created
This is an Opportunity for China
• 11th Five Year Plan set out an agenda for
harmonious, sustainable growth —a long run
vision
– Increasing domestic consumption and investment,
less export dependent
– An innovation economy
– More environmentally sustainable growth
– Helping the rural sector
– More broadly promoting social harmony
• Crisis may provide an opportunity to carry
forward this agenda—but it will not be
easy
• China has always adapted policies to
changing circumstances
• These are dramatic changes in
circumstances
Large and well designed
stimulus
Providing basis of long term growth
• As it stimulates the economy in short run
• Just as measures taken in 1997/1998 crisis provided
foundations for growth in subsequent decade
1. Public works—including infrastructure
(especially railroads, help address global
warming problems, long run productivity
benefits)
2. Helping move to an
innovation economy
• Support science and technology
– Good time to attract to China scientists that
are having difficulty getting jobs elsewhere
• Creating a knowledge
economy/knowledge society
3. Improved social protections
and services
• healthcare up 38%, education 24%
• Double benefit—can encourage more
consumption
• Especially important in rural sector, with
returning migrant workers
– Better financial markets--Micro-credit may
enable gainful employment
• Other measures to help poor
– focusing on low income housing (up 171%)—
could help labor mobility
4. Economic restructuring
• Helping transform the economy to less
export dependence
– Promoting consumption of certain goods to
take up slack from drop of exports
• Industrial restructuring
– To improve efficiency
Some Questions
• Will industrial consolidation reduce
competition?
• Is there enough support for small and
medium sized enterprises, the real job
creators—e.g. through increased available
of finance?
• Will it be possible to increase consumption
significantly, in a time of economic
anxiety?
Confidence in government’s determination
and ability to maintain economic strength
in spite of adverse external conditions
Even if growth is less than targeted, will be
real achievement
Greater challenge is ensure that actions
today are consistent with long run goals
A Deeper Look: Why is China’s
Savings Rate So High?
• Household savings rate only slightly too high—better
social protections would have both direct and indirect
effects on consumption
• Small businesses have a high savings rate because of
lack of access to capital
• Unusually high level of income in corporate sector,
unusually high profits, and unusually high retained
earnings—partially reflection of low wages
– Need to develop provincial and local banking system—
encourage small and medium sized enterprises (often labor
intensive)
– Competition for labor might lead to higher wages
– Competition for funds might lead to higher payouts
• High profits contribute to high level of
investment
– Resulting in mismatch between growth in
supply and growth in demand
• Disparity made up by exports
• But that may be difficult now
– With resulting deflationary pressures
– With accompanying macro-economic risks
• May be key sectors with market distortions
– Underpricing of natural resources—full pricing would
generate public revenues for public investment, e.g.
in research and environment
– Telecom—problem in many countries of the world
KEY ISSUE IS CONTINUING THE
TRANSFORMATION OF THE CHINESE
ECONOMY TO A MARKET ECONOMY—BUT A
MORE HARMONIOUS AND SUSTAINABLE
MARKET ECONOMY
Concern about America’s
Response
• Costly delay—often takes months before
full effects are stimulus are felt
• Stimulus too small, given the magnitude of
the problem
– About half offset by “negative” stimulus from
states and localities
• Stimulus not well designed
– About a third in tax cuts, likely to have limited
effect
Disappointment in financial
restructuring
• Bank bail-out very costly, not restarting lending
– Backward looking, rather than forward looking
• $700 billion in a new lending facility, leveraged 10 to 1, would
have created $7 trillion in lending capacity
– Worry--Zombie banks being kept alive, needing
repeated funds, perverse incentives, not in national
interests
– Government getting bad deal (as little as 25 cents on
the dollar in shares, shares plummeting in value,
remaining share value related to bail-out option)
• Huge government borrowing needs, increased deficits
compromising governments ability to undertake other
objectives
• Government buying bad assets at too high a price or
assuming downside risks is NOT the solution—simply
shifts losses from private sector to public
• Socializing losses while leaving gains in private sector is
recipe for disaster
Learning the Lessons from
America’s failure
• Better regulation, especially in the financial sector
– But also in corporate governance—perverse incentive structures
• And better regulatory structures—enforcement matters
• Competition policy—we allowed banks to grow too big to
fail
• Monetary policy framework flawed
– Need to pay attention not just to inflation
• Many seemed to think that low inflation was necessary and almost
sufficient for strong growth
• Never was evidence or good theory in support of this view
• Now it is clear how wrong that view was
Need also to pay attention to financial stability
Learning the Lessons from and for
Globalization
•
•
Globalization can bring benefits
But also problems—contagion
– Crises can spread quickly around the world
– China needs to be careful about financial and capital market liberalization
•
Spirit and letter of international agreements are being broken
– Worry about protectionism
– But “Buy America” provision is protectionist, and details of wording may be
worse, discriminating against developing countries
– Subsidies (bail-outs, guarantees, some government lending facilities) are even
more distorting of global market place than tariffs
• Developing countries can’t match
• No longer question of a level playing field, especially in financial services
• Long run implications for the nature of an “open, competitive, fair” global market place
•
Worry that some international agreements hamper flexibility needed to
respond to crisis
– Restrictions on imposing needed regulatory reforms
This is a global crisis requiring
global response
• New global regulatory system—must be comprehensive
to avoid regulatory arbitrage, go well beyond just
transparency
• Problem shifting to developing countries
– They don’t have funds to respond
– Need for additional financial support
• Without usual counterproductive procyclical conditionality
– If this doesn’t happen, global imbalances will growth, robust
recovery will be at risk
• Reforms needed in international financial institutions
– Not only didn’t address problems before they occurred
– Pushed policies that contributed to the crisis
– Those with liquid funds have inadequate voice
Three Key Recommendations of
UN Commission
• A new Global Credit Facility, with better
governance than existing institutions
• A Global Economic Coordinating Council
• A new Global Reserve System
– Problems in global reserve system at heart of global
imbalances
– Contributing to insufficiency of global aggregate
demand
– Problem long recognized (Keynes)
– Current system is fraying
– Now is the time to initiate reforms
China has vital role to play in global
recovery
• Maintaining strength of its own economy through
appropriate macro-economic policies
• Contributing to a balanced global recovery,
through assistance to developing countries
• Working, through G-20 and the UN, to make the
reforms that will be necessary to restore
confidence and make a more stable global
economy