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Notes on China Blog
Cong Cao, Research Fellow, Levin Institute 
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How Should China Stimulate Its Economy?
Tue,11/18/08
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As the subprime mortgage meltdown in the United States rapidly leads to an unprecedented global economic crisis, the world turns its eyes to China. This is not only because with an enormous foreign currency reserve to tap into, China has the muscle to get the world out of the woods, but also because as an emerging economic power it may point to a new direction of development for the economy.
This is why the responses have been positive toward the announcement from China that it would put up a 4-trillion yuan (US$586 billion) economic stimulus package. The money will be used domestically to fund extensive infrastructure projects, aid poor farmers and subsidize exports, thereby helping keep jobs and prop up domestic consumer spending. Notably, among the areas where the Chinese government plans to spend the money are science and education.
This is exactly what China did during the Asian financial crisis in the late 1990s. Back then, the country’s economic growth had stagnated and even declined. Accordingly, China needed new stimulation, and higher education was deemed the most appropriate vehicle. It would not only increase domestic consumption through tuition and related spending among the students and their families, but also lead to an upgrade in the infrastructure at universities, thus helping to fuel a significant construction boom, which in turn would generate new employment as well as new consumption by employees.
The higher education expansion since 1999 has yielded unintended consequences. Quantitative expansion has been undertaken at the expense of quality, university-town projects, which turned out to be lucrative real-estate development initiatives. Graduates have had difficulty finding jobs related to their studies and with satisfying compensation. Nevertheless, the spending on higher education will eventually pay off, especially given that in a decade or so China will be entering an aging society, at which time it will have fewer college-bound youth.
Of course, the current economic stimulus package should avoid the same kind of mistake. But there is no doubt that money spent on education and science will have a more long-term, positive impact on China’s social and economic development than that spent on infrastructure improvement. In particular, China should use the money wisely in research related to the environment and climate change and in attracting first-rate scientists from abroad.
China’s economic growth in the last 30 years has been a story of both miracles and disasters. At the same time it was creating wealth and lifting its citizens out of poverty, China’s growth was having devastating effects on the environment, which is unsustainable. While China has to follow a different path – characterized by greater efficiency and productivity gains and based on new knowledge – focusing on environment-friendly technology should be the way to go.
For example, various infrastructure projects should encourage the use of renewable energy and energy-efficient technologies. China also should develop new technology for its automobile industry, which has been and will continue to be one of the country’s pillar industries. Otherwise, the increasing demand for passenger cars could only worsen China’s energy shortage and cause more environmental catastrophes in the years to come.
In the meantime, there is a new sense of urgency among the leaders that China lacks first-rate scientists who are able to lead the nation’s innovation push. Instead of acquiring facilities, which are already advanced and sophisticated by international standards, China should be willing to spend money, big money, bringing back a select group of Chinese scholars who are active at the frontiers of international research.
By giving them an environment conducive to creative work and time to innovate, China could not only enjoy the benefits from products “made in China” but also witness the next breakthrough, products “created in China.” In this way, the economic stimulus package could leave a more positive and lasting legacy. |
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