After airing his positive Moring Coffee spin on China and India's remarkable growth, Brad DeLong highlights Willem Buiter's pessimism re: China and India's recent stellar rise. Buiter identifies financial "credit boom" risks, political risks, and most importantly environmental risks going forward. In follow-up commentary, DeLong adds a fourth, intertwined with Buiter's first: "The People's Bank of China is acting like the world's most enormous hedge fund in reverse."
Willem BuiterBrad DeLong, again in follow-up comments to the FT.com Economists' Forum post, says:
[comment following Ft.Com Economists' forum post, 3/20/07]
Both India and China are in the terminal stages of a credit boom…. If the monetary and fiscal authorities act in time (they appear to be well behind the curve in both countries) and if they have the right instruments and the political will and freedom to use them (doubtful in both countries) the credit boom can end with a whimper. A hard landing seems more likely, however.
Second, a domestic political question mark… political risk to growth is seriously under-priced by the domestic and global communities of investors. In China economic liberalisation is proceeding side by side with continued political repression through the monopoly on political power of the Communist Party…. The sustainability of such a social-political-economic configuration has never been tested. India has had an open and representative form of government for sixty years. I believe this to be an important socio-political safety valve….
Third and probably most importantly, an environmental question mark. Environmental supply-side constraints on growth in Chindia… invalidates the growth accounting exercise by Bosworth and Collins, reported by Martin [Wolf]…. [O]utput is seriously mis-measured and a key input - the services yielded by the stock of environmental capital - is ignored completely. For Chindia, this omission matters even in the medium run…. It is the local (national) natural resources of clean fresh water and fertile land (some would add clean air as well) that are not only important domestic 'consumer durables' but also key inputs into the production of the goods and services that are captured by conventionally measured GDP indices…. The water constraint is likely to be the first one to become binding in both China and India, certainly within 10 years. It will impair even the production of those goods and services included in conventional GDP measures….
Chindia urgently needs to re-orients its growth policies towards environmental sustainability. Pricing all water and power use (including agricultural) at long-run marginal social cost would be a good start. Without such a radical re-orientation, the 21st century may well become the century of China and India for a very different reason from the one prophesied by the current uncritical Chindia cheerleaders…
Brad DeLongFinally, a DeLong reader points to Bill McKibbon's recent Mother Jones commentary, Reversal of Fortune, and highlights:
I would add a fourth worry, in addition to the environmental, infrastructure, education, and political legitimacy worries that have already been aired. The People's Bank of China is acting like the world's most enormous hedge fund in reverse. Unless there is significant inflation in China or a rapid reversal of global imbalances, the PBoC is likely to have to write off the largest amount of capital of any institution anywhere, anytime, anyhow—with either China's savers or China's taxpayers holding the bag. The political consequences of that may be a further important source of risk.
Bill McKibbenSo many environmental concerns, so little time!
… If we do try to keep going, with the entire world aiming for an economy structured like America's, it won't be just oil that we'll run short of. Here are the numbers we have to contend with: Given current rates of growth in the Chinese economy, the 1.3 billion residents of that nation alone will, by 2031, be about as rich as we are. If they then eat meat, milk, and eggs at the rate that we do, calculates ecostatistician Lester Brown, they will consume 1,352 million tons of grain each year—equal to two-thirds of the world's entire 2004 grain harvest. They will use 99 million barrels of oil a day, 15 million more than the entire world consumes at present. They will use more steel than all the West combined, double the world's production of paper, and drive 1.1 billion cars—1.5 times as many as the current world total. And that's just China; by then, India will have a bigger population, and its economy is growing almost as fast. And then there's the rest of the world.
Trying to meet that kind of demand will stress the earth past its breaking point in an almost endless number of ways ….