“The Chinese economy’s secret recipe”: Competent economists
Fan Gang is Professor of Economics at Beijing University and the Chinese Academy of Social Sciences, Director of China’s National Economic Research Institute, Secretary-General of the China Reform Foundation, and a member of the Monetary Policy Committee of the People’s Bank of China. In a recent short article for Project Syndicate he argues that China’s unmatched “sustained rapid economic growth for 30 years without significant fluctuations or interruption” is due to its superior competence at “modern economics” compared to Western nations. By “modern economics” Gang means post-neoclassical economics, most especially Keynes. He says that for someone who has read Keynes “there is nothing more abnormal about China’s unbroken pattern of growth than effective macroeconomic intervention in boom times”. Unlike Western governments, China’s central government has “put brakes on the economy whenever there is a tendency toward over-heating”.
Economic theory holds that all crises are caused by bubbles or over-heating, so if you can manage to prevent bubbles, you can prevent crises. The most important thing for “ironing out cycles” is not the stimulus policy implemented after a crash has already occurred, but to be proactive in boom times and stop bubbles in their early stages.
I am not quite sure whether all Chinese policymakers are good students of modern economics. But it seems that what they have been doing in practice happened to be better than what their counterparts in some other countries were doing – a lot on “de-regulation,” but too little on cooling things down when the economy was booming and bubbles were forming.
The problem for the world economy is that everybody remembered Keynes’s lesson about the need for countercyclical policies only when the crisis erupted, after demanding to be left alone – with no symmetric policy intervention – during the preceding boom. But managing the boom is more important, because it addresses what causes crises in the first place.
In a sense, what China has been doing seems to me to be the creation of a true “Keynesian world”: more private business and freer price competition at the micro level, and active countercyclical policy intervention at the macro level.
There may be other factors that could slow down or interrupt China’s growth. I only hope that policymakers’ vigilance will prevail (and be improved upon), enabling China’s high-growth story to continue for another 10, 20, or 30 years.
The full article can be read here: http://www.project-syndicate.org/commentary/fan16/English