The decline in investment on an international scale

Slide 10 shows the changes in components of GDP in Japan – again in monetary, current price, terms. It is evident from the figures that there is a very severe economic crisis in Japan – all major components of the economy have turned down. But as Slide 14 shows it is the decline in investment, which accounts for nearly two thirds of the downturn in Japanese GDP. In short it is the investment downturn that is driving the Japanese recession.

Slide 10

Slide 11 shows the situation in Germany. In Germany consumption has actually risen during the recession. There is undoubtedly a serious situation regarding trade in Germany, but again the dominant factor is the decline in investment which has taken place.

Slide 11

Slide 12 shows the situation in France. France shows the same pattern as the US – that the decline in investment is even larger than the decline in GDP.

Slide 12

Slide 13 shows the UK. Again two thirds of the fall in GDP is accounted for by the decline in investment.

Slide 13

Slide 14 shows Italy. Seventy percent of the fall in GDP is accounted for by the decline in investment.

Slide 14

Considering these major economies therefore the pattern is totally clear. What is taking place internationally is a huge economic downturn driven by a collapse in investment.

China’s success in responding to the international financial crisis

To see why China has come very successfully through the financial crisis look at Slide 15 which compares urban fixed investment in China with fixed investment in the US. Attention should not be fixed on the precise quantitative aspect. China, unlike the US, does not publish quarterly figures for total fixed investment but the overwhelming majority of Chinese investment, 86% in 2008, is, of course, urban so the qualitative comparison is clear.

The difference in pattern between China and the US, as well as all the other countries we have looked at, is evident. Far from there being a collapse in investment in China, China has used its state sector and its state control of the banks to create a huge increase in investment. Urban fixed investment in China is up by over 30%.

Slide 15

The result of the fact that investment in China went up strongly, while investment in the US declined very sharply, is that China’s GDP has risen strongly while that of the US has fallen sharply – this is shown in Slide 16.

Slide 16

Why has China been able to achieve this result? And why were other countries not able to do so? It is because China still maintains a state sector which is large enough to control the investment level in the economy.

What you are seeing in practice is what Deng Xiaoping called ‘socialism with Chinese characteristics’ and which is now termed by China a ‘socialist market economy’. Some people think this means ‘capitalism’ but it doesn’t – and you can see very clearly from these figures that this doesn’t function like a capitalist economy. But neither is it like the planned economy which existed in the Soviet Union. China does not have a system whereby it attempts to administer thousands of prices in the economy, and where it attempts to administratively plan the economy. China however maintains within the realm of the state a sufficiently large part of the economy that it can determine the macro-economic level of investment in it. You can, of course, also describe this in the terms used by Keynes a ‘somewhat comprehensive socialisation of investment’ is what has occurred. As I said the words used for description are not crucial.

The level of investments in China is very high indeed – over 40% of GDP. Urban investment in 2009 was divided between 45% state investment and 55% non-state investment. China can therefore used that almost twenty percent of GDP which is investment controlled by the state to determine the overall investment level in the economy. Secondly, reinforcing the direct state investment, the state owns the chief banks. China therefore does not find itself in a situation, as happens in the United State or Britain, where the Minister of Finance sends a letter to banks requesting them to lend more money to industry – which is then ignored . The Chinese banks receive an instruction from the government that they will lend more money to companies which they have not option but to comply with.

Of course, the Chinese authorities understand that the proportion of bad loans that will occur from these instructions to lend more will go up somewhat. Their economic policy makers are not stupid and they simultaneously increase the provision for bad bank loans and instruct the banks to raise new capital. But the macroeconomic growth that will take place through sustaining investment will allow recapitalisation of the banks and extra provision for bad loans if this becomes necessary. In other words the bad loans will be more than covered by the macroeconomic gains. The result is that China has no decline in investment and its economy continues to go strongly.

The changing financial balance between China and the US

Finally in this section let us look at the results of the financial crisis and the responses of the US and China to it. First the US will be considered, then China, and then the changing relation between the two.

Slide 17 shows total US gross finance available for investment (savings) as a percentage of GDP. The trend is clear. US finance available for investment were deeply depressed at the depth of the Great Depression in 1929-34, then rose steadily until a peak in the 1960s, and then began to fall again steadily with a new leap downwards under the impact of the current financial crisis.

Slide 17

This trend becomes even more striking if Slide 18 is considered. This shows both gross capital available for finance and capital consumption as a percentage of US GDP. The striking feature is that under the impact of the financial crisis US savings, that is US generated finance available for investment, has now actually fallen to a lower level than capital consumption. The last time this occurred was in 1934. As the US is currently consuming more capital than it saves there is a rather paradoxical situation that the world’s number one capitalist economy is currently producing no net capital!

Slide 18

In order to show the consequence of this more clearly Slide 19 shows US net capital formation, that is net saving, in the US as a percentage of GDP. As may be seen US net capital formation is actually currently negative. To the degree that capital formation in the US exceeds capital consumption it is currently exclusively due to inflow of capital from abroad.

Slide 19

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