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China’s stimulus powers world economies
Question of the Day
While politicians in Washington debate whether President Obama’s stimulus program is helping to pull the U.S. economy out of a recession, economists have already declared the winner in the stimulus race, and it’s China.
The Asian giant’s massive $586 billion stimulus package — implemented with speed in November just as the world economy was crashing — is credited with helping to stabilize world markets and contribute to a budding recovery in Asia, Europe and the United States, where the stimulus package came too late to prevent the worst recession in modern times.
China’s adroit and timely move to bolster the global economy is fueling support for giving the world’s third largest economy greater power in international venues as the Group of 20 meets this month in Pittsburgh.
“This year may be the first in which China’s economy has played a substantial role in determining the path of the global economy,” said John Makin, a Wall Street economist and visiting scholar at American Enterprise Institute.
“Their response was among the quickest,” Mr. Makin said. “In November, they announced their massive public works program that would, over a period of about two years, be the equivalent of 14 percent of [economic output] — an extraordinary amount by any measure. Japan’s largest stimulus packages during its ‘lost decade’ seldom reached 4 percent,” he said. The U.S. stimulus is expected to peak at about 6 percent of economic activity in the next few months.
Treasury Secretary Timothy F. Geithner last week hailed China’s role in helping stabilize the world economy. He said it was an important reason the G-20 finance ministers took further steps at a meeting in London this weekend to give China and other major emerging economies a greater say in world economic affairs.
“The actions of China and India were very important,” Mr. Geithner said. “Their commitment to cooperative force was a necessary complement to all the things we did in the U.S.”
Although the Chinese economy is still criticized for overreliance on exports for growth, Mr. Makin estimates that China’s stimulus, including a generous bank lending program, sent growth surging in China from a 2 percent rate in the fourth quarter to a 16 percent rate in the second quarter, giving a powerful lift to key trading partners in Asia such as South Korea and Japan.
China’s rapid rebound fueled major market rallies that spread around the world and prompted a surge in oil and other commodity markets.
In the United States, the transition of political power at the end of last year produced gridlock for a stimulus plan that economists say could have been just as significant.
Shortly after winning election in November, Mr. Obama asked President Bush to work with Democratic leaders in Congress to enact a stimulus package. But Mr. Bush refused, and congressional Republicans balked.
Congress did not pass a stimulus bill until February, shortly after Mr. Obama took office — too late to prevent the deep economic contraction from October to April. Mr. Makin estimates that the government spent less than it usually does in the first quarter, contributing to a 6.4 percent drop in economic output.
By the second quarter, which started in April, a trickle of funding from the $787 billion package of public works and social spending gave a 1.1 percent lift to economic output and helped to hold the contraction in the economy to 1 percent, Mr. Makin said.
“Fiscal measures [in the U.S.] did not contribute much until the second quarter of 2009 because countercyclical fiscal policy measures need time to produce their effects,” he said.
But inaction by the United States and other countries enabled China to shine. “No one can still doubt the power of Chinese policy measures to boost the economy and financial markets of China, Asia and the G-7 economies,” Mr. Makin said.
About the Author
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