China's Rapid Recovery in the Great Recession of 2007 - 2009

China's performance during the economic meltdown of 2007-2009 calls for a reexamination of the received doctrine of mainstream macroeconomic paradigms in the West.
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During the recession of 2007-2009 China's exports dropped 15-18 percent causing 23 million workers to be laid off, but 98% readily found jobs as the economy bounced back and the unemployment rate dropped to 4% with a $586 billion stimulus package. The strategy was to create employment directly through fiscal means as President Roosevelt did during the Great Depression of the 1930s. In the great recession of 2007-2009, President Bush and Obama's monetary stimulus have not reduced U.S. unemployment rate below 9% as of this date..China is indeed back on track having 11.9 percent growth of GDP for the first quarter of 2010.

It is now U.S.'s second largest trading partner, largest holder of U.S. public debt, is the number one producer of solar energy, second to the U.S. in energy consumption, is the biggest producer of greenhouse gasses, and the number one market for U.S. autos. China has a trade surplus with the U.S. in the amount of $238 billion. It intentionally keeps the value of its currency renminbi (yuan) low against the dollar to promote its favorable trade surplus. China has a de-facto G-2 partnership with the U.S. power sharing deal,

The U.S. and China have common and divergent interests as China is becoming a global power house. China is holding $1.295 trillion of U.S. securities, an increase of 6.4 fold since 2002. China's per capita income is $6,546 as compared to $40,208 for the U.S. The GDP is $9 trillion as compared to $14 trillion for the U.S.. If China's economic performance continues at the same rate as in the last 30 years, its per capita income will converge with that of the U.S. by the year 2040 assuming it remains politically stable.

China's reform started in the 1980s just about in the same time as President Richard Nixon's visit to China which opened the way for China's incursion into international trade and economic growth. Since then, more than 250 million Chinese have been lifted out of poverty -- a remarkable achievement.

China's system cannot be emulated by other nations because of its unique institutional framework, nor is it intending to export its system. Some of its leaders fear that adopting Western democracy may cause turbulence in society. Its main objective in dealing with foreign countries is economic opportunity, trade and development in a pragmatic way. Political leadership of a one-party system is elected every five years. China has a market authoritarian form of a system in which a free market is allowed to operate with the government holding a very firm hand on political activity in the country. Last year 10,000 small protests were tolerated. Currently over half of China's GDP is produced by privately controlled enterprises.Currently China's unemployment is at 4% by adopting a policy of employing labor into the factories in contrast to engaging private loans through micro-financing schemes as is prevalent in India and Latin America or through short term manipulation of the supply of money as being practiced in the U.S. Further, it is most notable that China escaped three global financial meltdowns since 1990 including the Japanese severe credit implosion, the developing Asian economies who suffered foreign reserve meltdown caused by money flight due to fixed exchange rate regimes and the 2007-2011 great recession that engulfed most of the world's economy except China. The 2007-2011 great recessions were contagious and China's strong globalization orientation was expected to push the Chinese economy into the transmittable and turbulent global meltdown, but ironically China escaped.

Thus the Chinese rapid economic performance draws attention to the Western neoclassical synthesis concerning management of macroeconomic stability, macro/monetary policy and efficacy of countercyclical measures in the short run and in the long run. What is it that distinguishes China's approach in contrast to the rest of the world? Essentially the Chinese performance suggests a reexamination of the received doctrine of mainstream macroeconomic paradigms in the West as the costs of the economic meltdown of 2007-2009 and on previous occasions point to the limitations of the existing remedies of macroeconomic and financial framework.

Nake M. Kamrany is professor of economics and director of program in law and economics at the University of Southern California. This article is a synopsis of a chapter in the forthcoming book, "China After the Global Financial Crisis," to be published by International Research Institute in November, 2011.

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