Recently an article appeared in the Wall Street Journal entitled “There’s a China-Shaped Hole in the Global Economy”. This drew attention to how China’s desire to restrict domestic consumption to run huge current account surpluses caused severe problems for other countries which are forced to run trade deficits with China or adopt restrictive fiscal and monetary policies with adverse consequences for domestic employment and growth. Consumption in China is less than 40% of GDP whereas in the US it is around 70%. Even in Japan and South Korea, all countries which believe in the merits of exporting over importing, consumption is over 50%, according to figures supplied by the Rhodium Group. Rhodium estimates that the gap between China’s consumption share and that of Europe or Japan amounts to US$2.7 trillion, an amount equivalent to the GDP of Italy and about 2% of global demand.

The Chinese leader Xi believes that China should make as much and import as little as possible, a repudiation of static classical trade theory, involving two countries and two products, which holds that both countries can gain from trade by specialising in what they can produce cheapest, even if one country can produce both goods more cheaply. Xi’s ultimate aim is for China to manufacture everything and import nothing except raw materials. While China is establishing new industries such as semiconductors and electric vehicles, it is making strenuous efforts not to cede any ground to developing country rivals even in low tech industries. This philosophy is encapsulated by the instruction, “Establish the new before breaking the old”, which XI has reportedly issued to Chinese bureaucrats.

A slightly weaker form of this mercantilist philosophy (that all wealth comes from manufacturing and that consumption is bad while investment is good) was the view of the Cambridge Economic Policy Group, (CEPG) known as “New Cambridge” when I studied there in the 1980s. The CEPG advocated such an industrial strategy for the UK. Interestingly, they were already warning in the 1980s that the US was showing signs of the UK manufacturing malaise, long before a flood of low cost Chinese imports destroyed a huge swathe of manufacturing jobs in the US in the early 2000s, so it’s no surprise that the policies they advocated have been taken up by Trump and his policy advisers and now by both Harris and Trump.

The consequences for the global economy of China’s beggar-my-neighbour economic policies and desire to accumulate claims on other countries is dire. They are least severe for the US which since it controls the world’s reserve currency can just print money to finance its deficits. However if the US is unwilling to accomodate China by running a deficit to offset the Chinese surplus then the burden of adjustment falls on other countries which have the unpalatable choice of restricting growth and employment to balance their current account or letting their currency depreciate or in extreme circumstances collapse. China’s policies are not unique since they were adopted by Japan, South Korea and Germany but due to the huge size of the Chinese economy and its extreme competitiveness the adverse consequences are far more severe. These policies are not even in China’s interests because the failure to expand domestic demand to rebalance the economy away from investment and towards consumption has resulted in a severe slowdown in China’s growth rate and a postponement, perhaps forever given China’s shrinking population, of the date when it will overtake the US as the world’s largest economy, measured at market prices.

The reason I have harped on China is not as an academic exercise but because the PAP have the same mercantilist mindset. Since independence they have pursued a policy of forced saving through CPF, large government surpluses and high prices for housing and other necessities enabled by their control of land and much of the economy. This has restricted domestic consumption so effectively that as a percentage of GDP it fell. from an already super low 37% in 2013 to 31% in 2023. Meanwhile net exports have surged from an already extreme 23% to 37% of GDP over the same period (see here).

The PAP defend their policies by pointing to the necessity of building up the reserves so as to protect our currency and to provide for future generations. However the need for reserve accumulation must surely be approaching satisfaction now that the reserves have risen to a figure which I have inferred to be at least $3 trillion or so. Also when the native born population is set on a path of seemingly intractable decline and even our traditional sources of immigrants (China and India along with much of the rest of Asia) set to see worsening population decline, we surely do not need to continue to accumulate reserves at what appears to be an accelerating rate.

Indeed the PAP’s desire to impose austerity and its indifference to the suffering of ordinary Singaporeans in order to continue to build up assets (or possibly to staunch losses since we are given no information), is undoubtedly self-defeating. Failure to invest more in Singaporeans’ welfare, which it terms “populist” as though the reserves belong to the PAP and not the people, is a major factor in the decline in the birth rate. With $3 trillion in assets we can undoubtedly afford to spend at least 3% per annum or $90 billion, which would be $65 billion or so more than the current Net Investment Returns Contribution (NIRC) which is largely saved anyway. Additionally the Government could reduce the percentage of employees’ income deducted for CPF and allow more of Medisave balances to be use to fund out of pocket expenditures. They should also consider reducing indirect taxes like GST which fall more on those on low to middle incomes than the wealthy. Of course when the PAP talk about providing for future generations they fail to mention that an increasing share of these future generations will be foreign born if our population is not to shrink.

The PAP obviously feel confident that they can spend as little as possible on Singaporeans because there is and always will be a ready supply of cheap(ish) labour from other countries, even if other Asian countries start to experience shrinking populations. Or else they are deceiving Singaporeans and really don’t have the money due to mismanagement of the reserves. Whatever the reason Singaporeans need to keep the pressure on the PAP by electing a growing number of Opposition MPs like me who will be fearless in continuing to press for answers and ultimately replacing the PAP in government if Lawrence Wong, Lee Hsien Loong and the rest of the Cabinet refuse to provide them.

Published by kjeyaretnam

I'm a Singaporean economist who became an opposition activist. I blog to provide an alternative to the porkies that the Pinkies tell. It just so happens that my alternative is the truth. That's why I've never been sued in any civil or criminal court no matter how hard hitting my criticism. I'm quoted and interviewed and asked to speak across the world but largely censored in Singapore in an effort to silence my political opinions. The left hate me because they think I split their vote and because I eschew their outmoded economic models. Models that don't work. The Right and the Conservatives hate me because I'm a liberal. I'm not sure what the middle think of me. I don't think there are more than a handful of people in the middle, here in Singapore. I'm a Singaporean born and bred, dual heritage, my parents Singaporean established here before the State of Singapore was created. I'm not Eurasian. I read economics at Cambridge and could be broadly described as from the Keynesian school but I believe in interventions. I was formerly a successful hedge fund manager. After economics and politics my greatest interests are history, film and Makan. I run but I run so I can eat like a Singaporean. View all posts by kjeyaretnam