Multiple equilibria: A simple model of growth crises

Posted: February 19, 2013 in economy
Tags: , ,

TYLER COWEN says he “still [does] not believe that the Chinese ‘recovery’ is for real”. He quotes a recent Financial Times story, which reads in part:Chinese credit issuance surged to a record high in January on the back of a boom in shadow banking, stoking concerns that the economy could overheat.And he adds:I will admit, at the very least, to needing to revise my views on how often the fires can be restoked. I had been expecting 3 to 5 percent “real growth” for China in 2012.Mr Cowen goes on to cite some interesting new estimates of Chinese growth for 2011 and 2012. One, by Standard Chartered economist Stephen Green, suggests that the economy expanded by just 7.2% in 2011 and 5.5% in 2012. What exactly is Mr Cowen worried about? Well, there are plenty of ways for an economy in China’s position to fail. One, and this may be Mr Cowen’s worry, is to squander resources needed to secure future growth. China, in other words, may be misdirecting investment in an effort to prop up growth, leading to a corresponding underinvestment in public goods needed to maintain future growth and development. Future growth might then prove disappointing, leading to downward revisions of assessments of China’s ability to service public and private debts, thereby sparking a period of stagnation or crisis.I don’t know how much to fear such things. Is China actually skimping on important …

via Economic Crisis http://www.economist.com/blogs/freeexchange/2013/02/multiple-equilibria?fsrc=rss

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