Protectionism – good or bad? It depends……

February 4, 2009

Links I liked: Rodrik reflates; Brown goes Green; Ireland backslides on aid; plus Life of Brian

February 4, 2009

Is The Economist going socialist?

February 4, 2009
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The back half of The Economist (business, finance and economics) is having an excellent crisis. If you’re willing to filter out the gratuitous (and increasingly defensive) neoclassical riffs, there is some really excellent analysis in there and even some (perhaps inadvertent) progressive thinking. This week’s edition includes a three page briefing on the Asian economies and a handy summary of the numbers on current fiscal stimulus packages.

Let’s get to the crypto-Socialism. The magazine argues ‘the Asian financial crisis a decade ago was caused by Asia’s excessive dependence on foreign capital. This time the tigers have been tripped up by their excessive dependence on exports.’ It paints Asia as suffering from twin recessions – domestic and external, and, assuming there will be no rebound in global markets any time soon, asks ‘might domestic demand now take up some of the slack?’

The options for increased state spending look good, at least compared to anywhere else. Asian banks and government accounts are in a better state than in most countries (apart from South Korea, which some years ago abandoned caution in favour of boom-bust deregulation). Many Asian countries also have massive war chests of international reserves. All except India have low ratios of public debt to GDP. This means governments have money to spend, and functioning finance systems to get the economy moving, and the region is already acting both on cutting interest rates and government spending. China, Singapore, South Korea and Taiwan will all enjoy a fiscal stimulus of at least 3% of GDP in 2009.

In the longer term, the Economist thinks Asia may be coming to the end of its period of export-driven growth – the US is unlikely to return to its debt-fuelled ‘consumer of last resort’ role. So Asia will have to lift consumption, and that means raising wages as a percentage of GDP – for example, in China the share of wages dropped from 53% to 40% of GDP between 1998 and 2007. This will need job creation and a shift from capital intensive to labour intensive industries.

Another problem is insecurity: ‘Inadequate social-welfare nets encourage people to save. So higher public spending on health, education and welfare support could encourage households to save less and spend more. The recent news that China plans to spend 850 billion yuan ($125 billion) over the next three years to provide basic health care for at least 90% of the population by 2011 is therefore welcome.’

So there you have it. To get Asia growing again, The Economist is arguing for a public spending binge, income redistribution from capital to labour, and higher public spending on social services and safety nets. Strange times we live in, eh?


  1. I really find the argument that inadequate social provision will trigger personal savings and hence people will spend to trigger the economy-so, so warped.

    What the hell, if this kind of economic advise that drives governments to invest in health and education. SO BE IT.

    Among the reason for high maternal mortality in Zimbabwe in early 1990s was because of commercialising and introducing user-fee for Health access.Oxfam campaigned against the user fee and finally the GOZ- relented and reversed the order.

    Low income families in India have known to spend for higher proportion of income accessing health these days. It would be interesting to see if the Indian governement will follow China.

    Anyway, I suspect that low income family will benefit from greater social provision and if there is any saving that will go for food.

    I suppose spending on food indirectly fires-up the economy!

    I welcome more such New Econimic of the Economist kind- advise.

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