from Follow the Money

There is a consensus: China needs to consume more

December 7, 2005

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See Olivier Blanchard and Francesco Giavazzi's latest paper on China.   Blanchard (last seen on these pages back in September) and Giavazzi have laid out a comprehensive economic program for China, one that I heartily endorse. 

Their core recommendations:

  1. To reduce private precautionary savings: "A more robust retirement system," "the provision of health insurance," "the development of private insurance" and steps to encourage the banks to be demand less collateral to back their lending.
  2. To reallocate capital from the export sector (gradually): an RMB appreciation
  3. To limit inequalities and increase the size of the service sector: an increase in "the public provision of health and other public services ... in such a way that these are especially targeted at the country side."   This is important because "the appreciation will redistribute income from rural to urban incomes" because it will reduce the RMB price of imported food.

They actually have a fourth recommendation as well: a bit of fiscal stimulus.  That would help to reduce the risk of a recession during the transition from an investment and export led to a consumption led expansion: "Given the current growth and interest rate, debt dynamics allow for potentially large primary deficits."  In other words, the government need not raise taxes to finance an expansion of the health care system.

The net result: an economy that saves less, consumes more, lives better and depends less on exports for growth ...   read their paper!

More on:

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