Willem Buiter's Doubts on Continuing China/India's Meteoric Rise

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 Buiter
[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 DeLong, again in follow-up comments to the FT.com Economists' Forum post, says:

Brad DeLong
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.

Finally, a DeLong reader points to Bill McKibben's recent Mother Jones commentary, Reversal of Fortune, and highlights:

Bill McKibben
… 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 ….

So many environmental concerns, so little time!

[Posted from Economic Dreams-Nightmares]

Comments

[Chris Miller]

Can you please expand on this for us mere humans? I get the McKibben POV. I understand the environmental risks - though I'd suggest "downside" might be a better term, if a bit weak. Easy.

I don't get the "hedge fund in reverse" part; that implies something that would increase the spread on risk (a hedge fund is supposed to offset risk spread, right?).

What does "political risk to growth" mean? Here in Maine US we have this meme called GrowSmartMaine - where the political class (developers, bankers, foreign corporations) are framing last-ditch "growth" to their advantage - is that it? Or is it the Chavez challenge to neo-(liberalism|conservativism)? Or just us run-of-the-mill citizens fed up with burning trash/PCBs/mercury/lead/toxics upwind as "economic development". Ooops, sorry, that's a FELONY in Maine now, to post a billboard on the gate to the incinerator putting a statement like that into *writing*. Bust me.

...political risk to growth is seriously under-priced by the domestic and global communities of investors...

What does that mean? "political risk to growth is seriously underpriced" Is it me, fed up with Hannafords' aka Albertsons' aka one-of-half-a-dozen-food-merchants totalizing the food chain? Vegetables worth only half what they were (nutritionally) 50 years ago because of soil depletion. Toxic waste comes to mind. Or is it Nigeria; a whole other order of magnitude economically, structurally and environmentally?

WTF does "political risk to growth" mean? On the face of it, that there is a political risk to growth - not at all the consensus trance.

cfm in Gray, ME

[Dave Iverson]

CM: "I don't get the "hedge fund in reverse" part; that implies something that would increase the spread on risk (a hedge fund is supposed to offset risk spread, right?)."

I think I started to blog international finance/personal finance in order to better understand the risks and benefits of hedge funds. I'm still confused. But this might help answer your question:

From answers.com, "hedge fund":
http://www.answers.com/topic/hedge-fund

"It is important to note that hedging is actually the practice of attempting to reduce risk, but the goal of most hedge funds is to maximize return on investment."

Back to my notions: I think that Brad DeLong was referring to the fact that the People's Bank of China dumps surplus dollars into US Treasury (they buy our public debt) knowing that they will very likely get less in return for their "investment" than they put in, which wouldn't do for a hedge fund 'cause hedge funds are about seeking 'alpha' (return) and lots of it.

In a broader picture, China is getting a lot out of the deal, at least for now: lots of hot-money foreign investment into their economic "private sector," accumulating a lot of knowledge- and technological- capital, etc. AND: They may be hoping to do as the US did early in the last century : wrest control of the World's number one currency from the "Hegemon" -- from the US. Most observers doubt that China is seriously fishing for this, although there are distinct advantages that they'd like to have and the US doesn't want to lose. For all this China is willing to write down a lot of their declared "capital". Such is the geopolitical game as I understand it.

CM: "What does 'political risk to growth' mean?"

I think Buiter's point is that nobody has tried the type capitalistic regime, as Robert Heilbroner would call it, that China is now trying. PS. Heilbroner calls our form of capitalism/government a regime too. See his very good little book BEHIND THE VEIL OF ECONOMICS.

CM: "...political risk to growth is seriously under-priced by the domestic and global communities of investors..." What does that mean?

I think that Buiter is referencing the notion that politics might kill the momentum of what I like to call the bubble markets. And that short-sighted investors are betting on the world as it has been, not the world that might be. (Yes, despite all the chatter of markets pricing-in all future decisions, markets are notorious for periods of irrationality: optimism AND pessimism). Political risks include: protectionist US politics (e.g. from the Dems seeking jobs protection for workers and unions), or some political upheaval in China from those who might stand to lose if the play turns worse for China than for the US, and many believe it will, e.g. hot markets turn cold, Japan style troubles for China, AND the troubles with capital write-offs that Brad DeLong talks about as the US Dollar continues it treck downward. DeLong's point is, I think, that China is pandering to its new-found capitalists at the expense of the people. Has a familiar ring on this side of the pond, no?