Wednesday, February 1, 2012

Slower Chinese Growth Could Be Good for the Global Economy

. Wednesday, February 1, 2012

One thing that we hear a lot is that global economic performance increasingly depends on the BRICSAM countries, particularly China which is now the world's second largest economy. If China's astonishing growth slows, this thinking goes, then they can drag down the rest of the world.

That could be true, but it doesn't have to be. There is a scenario in which slower measured Chinese growth is actually good for the global economy, and also good for the Chinese. I do not refer to beggar-thy-neighbor mercantilism, in which the rest of the world expropriates from China, but to an arrangement that is Pareto-improving in aggregate. To see why we just need to remember our Econ 101 national accounting device:

GDP = C + I + G + (X - M)

See that minus sign in there? If China increases its imports without anything else changing then its measured GDP growth would be negative. Yet this would in no way be a bad thing... everyone agrees that Chinese citizens should be consuming more, some of which should probably be imported goods, and many also argue that the macroeconomic imbalances contributed to by China's large trade surplus increases financial instability. Meanwhile, many countries outside of China would like to increase the exports in order to boost job growth. Narrowing the gap between 'X' and 'M' would be a positive for China and for the rest of the world as well. Some of this might be happening. Chinese consumption has been growing faster than GDP, and imports had been growing faster than exports until last month. A prolonged, multi-year trend of this sort would be good for everyone... and would also show up in the data as a slowdown in Chinese GDP growth.  

A broader point is that we often pretend that GDP measures one thing -- the well-being of a society -- when it's really measuring something different -- the composition of economic activity in a society. Well-being can increase under a variety of scenarios including the increase of imports, which drags down the GDP measure. Or GDP could increase in a way that doesn't benefit society, if e.g. the government spends $100mn building a skyscraper then another $100mn knocking it down. Broad measures like GDP are often useful as proxies for other quantities we're interested in, but not always.

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Slower Chinese Growth Could Be Good for the Global Economy
 
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