Arthur Kroeber: observation

Transcript context

…Why is it the case that middle-income countries are especially in a bad position with having a high debt to GDP ratio? You would think naively that they're in a position to have higher growth over coming years, so it may make sense for them to take on more debt so they can use that to finance the greater growth that will come—theoretically assuming they use it to invest in high return things—as opposed to the US or Japan where you're just going to be stuck with this debt load for a long time. One of the things that you could say about debt historically in China was that it tended in general to finance productive assets, whether it was industrial production or infrastructure. For many years China was a very infrastructure short country relative to its needs. So you could justify quite substantial debt-financed infrastructure investments on the basis of these would deliver good economic returns for many decades. The case for that is a lot weaker now than it was before. The problem is how you essentially retire this enormous stock of very low-productivity, infrastructure investments, debt-financed. How do you sort of move on and have a more productive return on capital in future? There are ways for solving that problem. To me the fundamental issue is they have too much of a supply-side strategy, not enough of a demand-side strategy. It's really a macroeconomic issue. If they had stronger domestic demand, that would generate more profits for companies. They would be able to have more pricing power for companies. You would get a little bit of inflation. So you would have more cash flows within the economies that would enable people, and local governments, to pay down debt. A little bit of inflation would erode the real value of the debt. That's essentially how they got out of their last debt problem in the late 1990s. They had gigantic bad debts in the banking system, essentially representing legacy loans to state-owned enterprises. They had no way of paying them back. They had a very, very growth friendly program that generated a lot of growth, a lot of inflation. That basically strengthened their debt problem. What they need now is a kind of a revamped, updated version of that strategy. They do a lot more to promote domestic demand, to get more profits, more cash flows, and a little bit more inflation into the system. That would probably solve the debt problem over a decade or two. I want to keep asking you more questions about the nitty gritty of the situation, but before we keep deep diving I want to step back and ask this question. The valence of things you've said so far has been, “Look, they've been remarkably competent even at the things which economists criticize them most for. For the majority of the period of these schemes they've actually worked out quite well. For example, this local government financing through land sales on estimated future income and so forth.” Obviously we've been talking about the Chinese industry and how that's been successful in many key sectors. I guess a big picture question is this. They're still at like a fifth of American national income per capita, a third of similar countries in East Asia, like Japan, Taiwan, and South Korea. How do we explain the relative poverty on a per capita basis in China? How do we explain obviously bad decisions like Zero-Covid? I guess I'm having trouble squaring the circle. If they're making all these great calls, why isn't China more successful?…

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