How can China fight the current financial crisis and maintain long-term stable development?

中國如何才能對抗當前的金融危機，保持長期穩定的發展呢？

After three decades of reform and opening, China’s economy has always maintained high-speed development. GDP from around 362 billion Yuan in1978 increased to around 30 trillion Yuan in 2008, which had grown by over 80 times(National Bureau of Statistic of China ,2009) .However, although China has benefited from globalization in the last three decades, China has also got many serious troubles from globalization, such as environmental problems, inequality and corruption. In addition, the current global financial crisis is one of the big troubles from the current neoliberal globalization and the dream of free market capitalism has been shattered (Wolf, 2008).

經過三十年的改革開放，中國經濟一直保持著高速的發展。從大約362十億萬元GDP in1978增加到2008年的約30萬億元，其中已增長了80倍（中國國家統計局的統計， 2009年）。然而，盡管中國已經受益于全球化在過去的三十年里，中國有還得到了來自全球化許多嚴重的麻煩，比如環境問題，不平等和腐敗。此外，當前的全球金融危機是從目前的新自由主義全球化的大麻煩之一，自由市場資本主義的夢想已經破滅（沃爾夫， 2008） 。http://www.400190.com/kjzy/ 

Neoliberalism is a political philosophy, a continuance and redefinition of the neoclassical theories of economicscentral principle of neoliberal policy. The central principle of neoliberal policy is untrammelled free markets and free trade including free capital flows（Chang，2007）. Neoliberal movements ultimately changed the world#39;s economies in many ways, such as growth in international trade and cross-border capital flows, elimination of trade barriers, cutbacks in defense spending and in public sector employment, higher living standards, increasing technology transfer and innovation. However, its negative effects are also very serious. More and more economists claim high inequality is spurred by neoliberal policies which produce profound political, social, economic, health, and environmental constraints and problems.  Unfortunately, all these disasters have happened in China.

新自由主義是一種政治理念，新自由主義政策的economicscentral原則的新古典主義理論的連續性和重新定義。新自由主義政策的核心原則是不受約束的自由市場和自由貿易，包括資本自由流動的（Chang， 2007） 。新自由主義的運動，最終改變了整個世界＃ 39 ;各經濟體在很多方面，如生長在國際貿易和跨境資本流動，消除貿易壁壘，在國防開支和公共部門就業削減，更高的生活水平，增加技術轉讓和創新。然而，其負面影響也非常嚴重。越來越多的經濟學家聲稱高度的不平等是由它產生深刻的政治，社會，經濟，健康和環境的制約和問題，新自由主義政策刺激。不幸的是，所有這些災害都發生在中國。#p#分頁標題#e#

So, how can China respond to the financial crisis and further development? In this paper, Keynesianism is highly suggested to lend guidance to fighting the financial crisis; furthermore, improving education can help China maintain long-term stable development.

Keynesianism is a macroeconomic theory based on the ideas of 20th-century British economist John Maynard Keynes. Keynesian economics argues that private sector decisions sometimes lead to inefficient macroeconomic outcomes, and therefore advocates active policy responses by the public sector, including monetary policy actions by the central bank and fiscal policy actions by the government, to stabilize output over the business cycle(Sheffrin, 2003).Keynes contended that aggregate demand for goods might be insufficient during economic downturns. Therefore, government policies could be used to increase aggregate demand, thus increasing economic activity and reducing unemployment and deflation. Likewise, during economic overheating, government policies could be used to eliminate inflation to balance and stabilize the economy.

business cycle To many the true success of Keynesian policy can be seen at the onset of economic recessionsWorld War II, which provided a kick to the world economy, removed uncertainty, and forced the rebuilding of destroyed capital. Keynesian ideas became almost official in social-democratic Europe after the war and in the U.S. in the 1960s. Also the success can be seen in the last few years in China. In the wake of the financial crisis of 2007-2009 the free-market consensus began to attract negative comment even by mainstream opinion formers from the economic Right. In March 2008, free-market guru Martin Wolf, chief economics commentator at the Financial Time announced the death of the dream of global free-market capitalism, and quoted Josef Ackermann, chief executive of Deustsche Bank, as saying "I no longer believe in the market#39;s self-healing power."(Financial Times). Macro economist James K Galbraith, used the 25th Annual Milton Friedman Distinguished Lecture to launch a sweeping attack against the consensus for monetarist economics and argued that Keynesian economics were far more relevant for tackling the emerging crises (Galbraith,2009) . Starting in 2008, high level policy makers in the world#39;s modern economies have shown a renewed interest in implementing economic solutions in accordance with the recommendations of Keynesian economics— such as fiscal stimulus and government intervention (Kale, 2008). Keynesian Keynesian thinking influences U.S. President Barack ObamaBarack Obama. In a speech on 8 January 2009, President Obama unveiled a plan for extensive domestic spending to combat recession, further reflecting Keynesian thinking (BBC wedside). For policymakers and their supporters around the world, Keynesian solutions are currently seen as representing the best option for saving their nations from the finacial crisis.

 

The following will discuss why and how China should adopt Keynesianism to fight the current financial crisis and maintain sustainable development from three aspects: stimulating domestic market, optimizing the import and export structure, continuing to implement macro-economic regulations.

 

Firstly, stimulating the domestic market is an urgent task for the government. Keynes argued that government policies could be used to increase aggregate demand, thus increasing economic activity and reducing unemployment deflation(Alan, 2002). According to Keynesianism, China should reinforce the domestic market as a way to fend off the global reverberations from the economic downturn.First, China’s overdependence on international trade is very vulnerable ,which is sometimes effected by the global uncertainty . According to National Bureau of Statistics of China, in the last few years, the total exports count for around 40% of the China’s GDP. However, the current crisis has greatly shrunk external demand, which has resulted in the closure of thousands of factories and a rise in unemployment, especially in developed coastal areas. Masses of unemployed workers will cause great concern over  social and political instability in the next several years. Second, the export-oriented growth model cultivates strong inertia, locking China in at the lower end of the value-added chain. If China is going to keep its position as the “world’s factory” — a place of low-cost assembly lines — the country cannot substantially improve its real productivity in terms of research and development and manufacturing technology. For example, many state-owned firms became assembly lines for foreign-brand cars, and the major profits went to foreign investors. Third, overdependence on international demand has weakened Chinese foreign policy. This external dependency limits China’s policy options when it comes to responding to such issues as human rights, Taiwan, trade friction and even quarrels with Japan over history textbooks. Chinese leaders often face the accusation of not doing enough and being too soft.

 

In order to extend the domestic demand and stimulate the domestic market, the Chinese government should take the following effective measures. Firstly, the government should continue to put additional investments in the infrastructure projects. The Keynesian economists argue that fiscal stimulus raises the market for business output, raising cash flow and profitability, spurring business optimism. To Keynes, this accelerator effect means that government and business could be complements rather than substitutes in this situation. Second, as the stimulus occurs, gross domestic product rises, raising the amount of saving, helping to finance the increase in fixed investment. Finally, government outlays need not always be wasteful: government investment in public goods that will not be provided by profit-seekers will encourage the private sector#39;s growth. That is, government spending on such things as basic research, public health, education, and infrastructure could help the long-term growth of potential output. In November 2008, the Chinese government announced that it will undertake an economic stimulus program to assist the domestic economy. A $586 billion economic stimulus spending package was announced that includes developing infrastructure projects as a means of sustaining the Chinese economy (the Earth Times). According to Keynesianism, China is on the right track and the government should continue to do so.#p#分頁標題#e#

 

Also,boosting per-capita income is a way to accomplish this.Keynes suggest to raise the per-capita income during the economic recession. He argued that to boost employment, real wages had to go down: nominal wages would have to fall more than prices. However, doing so would reduce consumer demand,  so that the aggregate demand for goods would drop. This would in turn reduce business sales revenues and expected profits. Investment in new plants and equipment—perhaps already discouraged by previous excesses—would then become more risky, less likely. Instead of raising business expectations, wage cuts could make matters much worse. Further, if wages and prices were falling, people would start to expect them to fall. This could make the economy spiral downward as those who had money would simply wait as falling prices made it more valuable—rather than spending. Falling prices can make a depression deeper as falling prices and wages made pre-existing nominal debts more valuable in real terms.If all economy actors reduced their expenditure and cut wages, “they will all be worse off”( Chang,2007:145).  However, the current wage level in China is too low,which affects the healthy development of the consumer market. Low-wage policies become a barrier or domestic market development. Moreover,as the income gap widens, the rich consume luxury imported products . Therefore, the domestic consumer market is still in a state of atrophy.  Low-wage policies underestimating the value of human capital, resulting in a vicious circle. low-wage policies is not conducive to enterprises to adopt advanced technologies and lock the enterprises in the development of labor-intensive industries. Opposing to low-wage policies does not mean suggesting high-wage policy, but facilitates the coordination of the relationship between accumulation and consumption.Beijing has seen some success with recent policy changes, such as raising the minimum threshold for income tax and hiking salaries for civil servants. But becouse of curruption ,many civil servants are already rich. Therefore the government should raise the income of teachers and workers.however, it is also not easy to be implimented because of corruption. As a result, the increased salary can not reach the people or reach them very late. Domestic demand cannot be boosted immediately.

 

More importantly, the Chinese government should offer better education and social welfare, including medical insurance and pensions. That#39;s because nervous Chinese today put too much money into "precautionary savings," They know they might get hit by a health-care bill, that they have to put their kids through school and also save for old age, because there is no pension system for 80% of the Chinese people(Chan,2006).To Keynes, excessive saving, i.e. saving beyond planned investment, was a serious problem, encouraging recession or evendepression depression. Excessive saving results if investment falls, perhaps due to falling consumer demand, over-investment in earlier years, or pessimistic business expectations, and if saving does not immediately fall in step, the economy would decline.Once the government takes on these responsibilities, people will be inclined to save less and spend more. On another aspect, according to the founder of Chinese reform Denxiaoping, China will let some poeple become rich, and then help the poor. Offering better education and social welfare is one of the best ways to help the poor.  Unfortunately, that’s not likely to happen in the near term.#p#分頁標題#e#