Can China Save the World?

Globe and Mail declared on September 24, 2011 that by injecting 570 billion dollars in its economy during the recession of 2008 China saved the world economy from collapse and wondered if it will do so again during the current downturn. It may be noted that the U.S. injected nearly a trillion dollars in its economy with no clear uptick although many have argued without proof that it may have averted a much worse disaster.

Before wondering about saving the world this time we have to question the premise that China saved the world the last time. Yes, the injection of a large amount of cash in building infrastructure created employment there, supported industry and maintained growth momentum albeit on a slightly smaller scale and it helped the energy and raw material suppliers of Australia, Brazil, Russia and Canada. But it did nothing for much of the developing world, the consuming countries of Europe and America. In fact, by keeping its currency fixed at an artificially low level it exacerbated their problems. China followed the rule of Keynesian economics: the governments should save money in good times to reduce the possibility of overexpansion and spend during the recession to provide jobs to the people. The reason the massive state investment worked in China was that the country had money in the savings accounts of both the state and the citizens that it could spend. It did not work well in the U.S. and Europe because they had to borrow the money they used in their attempts to prop their economies. Keynes’ principle works only when both sides of the advice are followed. Disregarding the first part by cutting taxes in good times and causing the economy to balloon rather than building reserves and following the second part by borrowing to the hilt in bad times misrepresents the advice of the great economist and it does not work for long. Such misguided policies are the cause of recession in the U.S. and the current debt crisis in southern Europe.

If you look at the statistics, Chinese intervention in its economy did not save the economy of the West any more than buying American bonds saved the U.S. from bankruptcy. Any yardstick you look at, the situation is worse in the resource poor industrial countries than it was at any time in this millennium. The incomes are declining and the employment situation is unprecedented – 16% real unemployment would be scary in a socialist economy, in a capitalist country with the social philosophy of every one on his own it is catastrophic. The clamour for change in Washington and the increasing support for the contradictory policies advocated by TEA party are the symptoms not only of the decline of a once great country but also of a desperate population ready for measures certain to be disastrous in the long term.

The truth is that China has saved its economy by its self-serving policies while hammering a nail in the economic coffin of the West. Without the revival of manufacturing industries and with continued shifting of the technical and managerial jobs to the East, the only jobs available to a large portion of the population are serving hamburgers and loading shelves in Wal-Mart with cheap goods made in China and they are unlikely to satisfy ambitious Americans for long. Replacement of middle class used to buying bigger and better cars and homes every few years by hordes of college graduates scraping an existence on two or more part time minimum wage jobs in a country with the military might to destroy the planet several times over should cause more anxiety about the future of humanity than it seems to be doing. While growth of China along with the growth in the West as dreamed by leaders of recent years would have been a most welcome development, recent events have demonstrated that the domination of China is increasing over declining Western economies. This is a portent of major conflict in the offing because a nation with the pride and destructive capacity of the U.S., including the ability to kill anyone anywhere by missiles fired from remote controlled unmanned aircraft, will not tolerate economic subjugation for long.

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