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China's policy lessons for the west

Financial Times, 11 March 2016.


Are state-owned enterprises so much worse than QE or negative interest rates? writes Joe Zhang,


Economic policymaking in the west has developed in radical ways since the global financial crisis. When Lehman Brothers collapsed in 2008, the US after some hesitation allowed the Federal Reserve to intervene in the markets. Afterwards, the European Central Bank did the same in response to the sovereign debt crisis in Greece and other EU states.


Since then, quantitative easing has had a real impact on western markets. So-called helicopter drops are now in vogue, and negative interest rates have gained acceptance in spite of widespread anxiety about their unknown effects. The fashion for unconventional monetary policy was highlighted yesterday with the ECB’s decision to cut interest rates in the eurozone to a record low and to expand its quantitative easing package.


But there are other ways of stimulating demand. Why, for instance, do western governments refuse to set up state-owned enterprises that will create jobs? Are they really so much worse than QE and low or negative interest rates?

A number of concerns surround the state sector. First, it is less efficient than private businesses. But when private investment falls well below a desired level, the state should step in to fill the gap. In any case, it is debatable whether state-run enterprises are less efficient than welfare spending, direct subsidies, QE or negative interest rates.


Second, will investment by the state sector necessarily displace (or “crowd out”, as economists like to say) the private sector? Evidence is mixed. In some cases, this may happen if the state competes with private companies for financing, pushing up borrowing costs. But the west today does not have to worry about that, since it is sliding into a zero-interest rate environment.


Moreover, evidence from around the world suggests that the state sector supports the operation of the private sector. It can even help to incubate new private industries by providing “patient capital” and basic infrastructure, as well as physical facilities.


There is not much that China can teach the rest of the world about economic policy. Nevertheless, its experience in the past century or so can be a useful reference point for policymakers. (for the rest of the essay, click the link below)


http://www.ft.com/intl/cms/s/0/f3a02f84-e6d0-11e5-a09b-1f8b0d268c39.html#axzz42WzZissx


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