Thursday, October 20, 2005

Planning or Pure Luck?

To prevent overheating, China has initiated a macro retrenchment programme since early last year. What sets this latest retrenchment programme apart from those which came before is that the economy does not come to a grinding halt as a result. In the first 9 months of this year, the economy grew by 9.4%.

Goldman Sachs economist Hong Liang told Wall Street Journal reporter (subscription required) the success can be attributed to two factors:

(1) a fresh group of savvy technocrats with access to better-quality data that have enabled them to fine-tune economic management;
(2) good luck

For reason 1, you can almost picture a bunch of rocket scientists gathering in a small room endlessly shifting the IS-LM curves around in order to figure out the best monetary-fiscal policy mix for China's economy. How can that be?

As private sector grows in importance in the Chinese economy, it should be MORE, not less, difficult for these rocket scientists to do good to the economy. This should be so in spite of the improving quality of the data mentioned by Liang.

Bottom line: Given the two reasons provided by Liang, I would bet money on luck to be THE ONLY reason that explains why China can avoid overheating without slowing the economy.

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