Stock markets continue to respond strongly to China’s economic woes, fearing a crippling slowdown since China suddenly devalued its currency two weeks ago — a move widely interpreted as a desperate attempt to support growth.
But Chinese growth in the future will be limited until the government makes fairly substantive structural reforms.
China’s growth model is one in which the role of the state in the economy has become more intrusive. For years, many US observers hailed China’s government-led and investment-heavy model as a pillar of strength. Their favorite comparison is between the spunky new airports in Beijing and Shanghai and the supposedly dilapidated New York JFK and Los Angeles airports. While comparison has an element of convenience to it — you have to depart from a US airport and arrive at a Chinese airport when you visit China — the “airportology’’ is flawed, because it doesn’t take into account that China has clearly overbuilt, and at a considerable cost to its middle class.
Director of MIT Sloan’s Office of International Programs Stuart Krusell
What do the economies of Latin America and China have in common? They are both extremely interdependent on the other for growth.
China purchases a significant percentage of raw materials from Latin America, which are used in the manufacturing of goods. Many of those goods are then sold back to Latin America. This cycle has increased over the last decade, as China’s trade with the region has surged more than 20-fold since 2000. So while they are competitors, they also are trade partners. It’s a slice of globalization that is representative of the larger world.
China and Latin America’s relationship becomes even more intriguing when you consider the geo-political environments of both regions. What is the impact of Brazil’s elections on its trade partnership? Populist rhetoric to keep jobs local and not to be so dependent on China is appealing to many, but what happens to the region’s economy if trade with China decreases? Further, how do the corruption investigations in China impact trade? If China’s GDP is affected, it could mean the country is buying fewer natural resources from Latin America.
The visible effect of pollution in China is undeniable. I recently spent two weeks in Beijing, where I grew up, with my family. For the first seven days, the sun did not shine. A hazy layer of greyish-white smog hung over us. Every morning, I checked the air quality index, which uses guidelines set by the US Environmental Protection Agency (EPA), on my smartphone app and the results were alarming.
Air quality came in at around 300. According to the EPA, levels between 301 and 500 are considered “hazardous”, meaning people should steer clear of all outdoor activity. Essentially, it’s like breathing in the fumes from a forest fire. (For comparison, Boston’s air quality is about 45.)
Imagine confusing the following two statements from a cancer doctor: 1) “You may die from cancer” and 2) “I want you to die from cancer.” It is not hard to see a rudimentary difference between these two statements. The first statement is a prediction — it is saying that something may happen given certain conditions (in this case death conditional upon having cancer). The second statement is a preference, a desire, or a wish for a world to one’s particular liking.
What began as a singular sovereign debt problem in Greece in 2009 quickly spread to the rest of Europe. First Ireland; then Portugal and Spain and Italy. Today—only three years after the first signs of trouble—virtually all Europeans have felt the destructive effects of the euro zone turmoil, and its impact is being felt around the world.
Contagion, a phenomenon where financial tumult in one country or region spreads to another country, is now a fact of life. The globalization of finance has, in many ways, made contagion inevitable. The world has become much more integrated through trade, investors, and banks, and these ties have caused countries’ financial markets to move together more closely during good times and bad. Read More »