The timing of China's fiscal announcement this weekend is notable. It comes just ahead of the White House economic summit of G20 countries. As that meeting approaches, an outgoing US president, a not-yet-US-president, and a lame-duck US Congress are discussing a second stimulus plan costing maybe $100 billion to $200 billion--which might happen before the inauguration, or possibly not. Meanwhile China's government stuns global markets by promising to inject nearly $600 billion of spending on infrastructure and social welfare this year and next. Supposing the US plan ends up providing $200 billion, that would be roughly 1.5 per cent of US GDP; $600 billion is roughly 15 per cent of China's GDP. Remind me, which country is taking the lead in managing the global economy?
True, doubts surround the details of China's proposal. It's unclear how much of what they are proposing is really additional to existing plans. And of course the timing was not determined entirely by the approaching summit. Figures about to be released are expected to show a sharp deceleration in Chinese growth; announcing a big stimulus in anticipation of this makes sense domestically. Nonetheless, the new initiative--described by Chinese officials as "massive"--sure gives President Hu Jintao something talk about when he meets George Bush later this week. Up to now, the US and the West have been urging China to do more to help stabilize the world economy. Suddenly, China is setting the pace and it is the US and Europe that are dragging their feet. A sign of things to come?
While giving that some thought, here is some useful prep on the summit. Morris Goldstein at the Peterson Institute for International Economics reiterates his "ten-plus-ten" plan with characteristic force and clarity. And in a remarkable feat of timeliness, VoxEU publishes a collection of short and (putting China's announcement to one side) bang up-to-date essays in an electronic volume edited by Barry Eichengreen and Richard Baldwin, "What G20 leaders must do to stabilise the economy and fix the financial system". It includes fast accessible pieces by many of the best international-economics and finance scholars in the world, including Willem Buiter, Raghuram Rajan, Dani Rodrik, Michael Spence and others. By the way, my spirits lifted to see Dani, who is usually inclined to pick holes in the orthodox case for open markets on the grounds that it is all so complicated, propose these refreshingly simple-minded phrases for inclusion in the final communique:
The weeks and months ahead will be trying times for economic policymakers everywhere, as they try to contain the fallout for output and employment. Raising trade barriers against imports will be a temptation, especially when currencies fluctuate so much. But the experience with the Great Depression teaches us that this is the surest way to magnify the costs of the crisis, and to spread it to other countries. Hence the most serious challenge for the global trading regime at the present is to ensure that the financial and economic crisis does not lead to a vicious cycle of protectionism, greatly exacerbating the economic downturn.
So we jointly commit ourselves in public to not raising protectionist barriers in response to perceived threats to employment from imports. We further ask the secretariat of the World Trade Organization to monitor and report unilateral changes in trade policy, with the purpose of "naming and shaming" G20 members that depart from this commitment.
5 year plans *always* sound like great stimuli. Somehow, I doubt that a "$600 billion" investment by the Chinese government will have anything like the kind of positive impact that $200 billion could have from the US government.
(This is separate from the issue of whether the US government's stimulus is being handled intelligently - I don't think it is, but that doesn't change the fact that the Chinese government flatly won't be efficient distributors of that wealth.)
The VoxEU essays were fascinating - thanks for the link. One common thread that I noticed was a call for greater international regulatory standards. Do you think that's feasible? I have a hard time imagining the US adopting narrow banking like Paul De Grauwe proposes, or letting an international bankruptcy court preside over American companies.
MikeF: Narrow banking appeals to me intellectually, and some years ago I did a piece or two for The Economist's economics column discussing the idea. But getting there from here just does not seem feasible. An international bankruptcy court is also a good idea in principle, but one I find hard to imagine governments getting behind. I think the idea set out in Eichengreen paper for Vox is more feasible: a WTO-type body to ensure that different national regulations conform to some basic agreed principles. I can see that happening--maybe not overseen by a brand new institution, but by the IMF?
Regarding the "China to US..." you have understated the size of the US bailout/stimulus package. Recall that the US began bailing out US companies many weeks ago. Remember AIG? The AIG bailout is now at over $162 billion; chump change, because then came the $700 billion agglomerated bailout (which, with incentives to congress actually cost over $850 billion), and then came another $25 billion for the auto industry, and now the wee $100 to 200 additional has been proposed. You are right, this last crumb ain't much, but you forgot the previous few weeks.
Altogether the US has proposed, and spent, a much larger amount in real dollars, at least, than that proposed by China.
In percentage of the economy, perhaps the China bailout is bigger, but who really knows the size of the Chinese economy? James Fallows, perhaps?