Steroid-fuel growth

I do not share the enthusiasm of China’s spectacular GDP growth nor celebrate the “inevitable” rise of the country as the biggest economy of the world. Recently it has usurped Japan as the world’s second biggest economy and market sentiments are mixed, with one camp predicting the country to hurtle with the same feverish expansion rate while the other predicting a sluggish growth and possibly a collapse due to speculations and “gluts.” I lean towards the skeptics of China’s growth in the latter.

The New York times recently published this article on the Chinese government’s expansive (and expensive) influence in the economy. To be sure state mediated growth is crucial to a country’s development. On the other hand I doubt that the massive clout granted to State-Owned Enterprises in crowding out the private businesses in China is sustainable and efficient. In a country where the Gini Index (measuring income inequality) lingers around 40 (but admittedly improving from 2009 to 2010), I wonder how much of the growth in GDP actually trickles down to improving the quality of life of the working class citizens. Real-estate that is unfortunately plunged in feverish speculation remains out of reach and unaffordable to many.
Which poses an interesting thing to look into. Could the spectacular growth in GDP be mostly a circus performance of State Owned Enterprises exchanging money and overcrowding the domestic and international market with moderate impact in enhancing the quality of life for the workers toiling away in factories?
For fans of history, the Japanese model of Keiretsu could be seen as a classic market failure with severe repercussions on the economy. With a business alliance formed around a bank, corporations are under no pressure from shareholders or alternative capital markets to make wise investments and even worry about sustainable profit (if any at all). So the strategy was to break into the world market by pricing competitors out even though it means taking a hit in the short run. Eventually it all broke down and despite it’s technological progress, Japan was caught in a lost decade. (Insight gained from Paul Krugman’s “Return of Depression Economics”)
Similarly without the limitations imposed by private financial institutions, state-owned banks can dole out money like sugar daddy to state owned enterprises which might make imprudent investment decisions, and all the while crowding out efficient private businesses while they are at it. Apart from that, I wonder if there is really a demand for the capacity of the infrastructures constructed under the stimulus plan. All of these seems to point to a “growth-recession” to me.
Note: “Growth Recession” is when the economy is expanding but not enough to utilise its excess or “glut” of capacity. This is also something I learned from Krugman’s “Return of Depression Economics.”
I could be very wrong, but I don’t see any reason to celebrate China’s triumph but plenty of reasons to worry about it.

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