FX MACROECONOMICS Yet structural proved elusive. adjustment has As the Soviets
discovered in the 1980s, a productivity renaissance cannot be brought about by fiat. Nor are government and state enterprise elites going to allow a significant reduction in the state’s share of the national income pie for the sake of stimulating h o u s e h o l d consumpt ion. As long as the economy is dominated by the state, switching to a new “mode of growth” is not a real possibility.
China is now facing a sustained dec eler a tion. In the absence of any other driver, GDP growth is not going to pick up until investment recovers. But with the return on investment continuing to decline, such a recovery will prove to be short-lived.
DEFENDING THE MOTHERLAND
Slower growth will pose an existential
problem for the
Chinese Communist Party. Ever since the end of the Maoist era in 1978, economic development has been the Party’s primary source of legitimacy.
slowdown will weaken its hold on
power in much
A prolonged the
same way that crop failures during
blame China’s economic failures on the machinations of foreign powers, even as Mao Zedong did in his famous speech proclaiming the founding of the People’s Republic
in 1949. The fact
that China had “fallen behind,” he said, was “due entirely to oppression and ex p lo it a t io n by foreign imp e r i a l i sm and domestic r e a c t i o n a r y governments.”
It will also be easy to put the Chinese economy on a war footing. China’s central p l a n n ing i n s t i t u t i o n s are actually b e tte r suited
to
imperial times undermined the emperor’s claim to the ‘mandate of heaven’.
If China is not going
to be ‘number one’ after all, some other justification for Party rule will be urgently needed.
The Party’s best bet will be to play the nationalist card, making the defense of the ‘motherland’ its primary mission. This will not be difficult.
14 FX TRADER MAGAZINE October - December 2013 for defense the
mob il iza t ion of resources industries
than It will be easy to
they are to the management of peacetime economic activity. A military buildup would also help to alleviate excess capacity problems in heavy industry. Total excess capacity in the steel sector, for example, already exceeds total US capacity. Arms manufacturing is likely to be seen as a good way to put idle plants back online.
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