China and other Asian nations are rebounding from the financial crisis while the U.S. and Europe remain deep in recession. Why is Asia up, while Western Europe and the U.S. are flat? Perhaps, it has something to do with Asia’s embrace of pro-growth principles, while the U.S. moves toward increased central planning and government control.
Asia is leaving the U.S. and the EU economies in the dust. — The United States and Europe experienced negative growth in 2009 and have projected growth of 3% or less for 2010. In comparison, China has nearly become the second largest economy in the world—it is forecast to grow at a brisk 10% this year and it achieved 8.7% growth in 2009. Not far behind, India’s economy is projected to grow at 7.3% this year and achieved 5.6% growth in 2009.
The Asian recipe for recovery is simple: rather than responding to the crisis with bailouts and increased government control, Asian nations responded by investing in real infrastructure projects, cutting taxes, expanding their internal markets and launching their companies on world markets—and these policies are reaping real benefits.
Like the U.S., China adopted an expensive stimulus plan to get its economy on its feet. While some were shocked by the cost of the stimulus–which brought China’s 2009 deficit to a historic 3% of its GDP, it is nothing compared to the US’s 2009 deficit of almost 10% of our GDP.
China’s stimulus spending was spent primarily on infrastructure projects. Infrastructure projects not only create jobs but also leave a country with lasting improvements like highways, bridges, rail systems and communication equipment which enhance a nation’s productivity in future years. In comparison, despite much rhetoric about our stimulus spending money on “shovel ready projects”, a huge amount of our stimulus went to filling holes in state budgets and for direct payments to individuals. These direct payments include extension of unemployment benefits, health care, Medicaid, and transfers to people who don’t pay any taxes (cleverly styled as “tax cuts” by the Obama administration). The Chinese seem to have received far more value for their stimulus investment.
At the same time, Asian nations cut taxes and kept rates low. “Communist” China just lowered its corporate tax rate to 25%, matching Vietnam. Thailand and Singapore are even lower at 17%, a rate of which American companies can only dream. Back in the United States, Congress wants to raise individual and corporate taxes in vain hopes of stemming our deficit — despite the harm it would do to our economy as a whole.
In terms of trade, China’s economy has faced serious challenges during these past few years as the consumption of Chinese goods overseas plummeted. But now China has started to look inward to its own domestic market to fuel purchases of Chinese goods. In 2009, the Chinese government encouraged its citizens to purchase more consumer goods, successfully driving up domestic consumption. This initiative is considered partially responsible for China’s healthy growth in 2009. Asian consumers are a driving part of the economic recovery in their countries, with emerging-market consumers outspending U.S. consumers for the first time in 2009. And consumption of consumer goods in these countries is still in its infancy —with lots of potential for growth down the road.
Some Asian nations are also making great strides in privatizing their state-owned enterprises and in opening up their economies. In 2007, as the economic crisis was beginning, Chinese companies accounted for fully 71% of the value of all Initial Public Offerings (IPOs) in the entire world. Many formerly state-owned Chinese companies, in industries like construction and energy, went public on domestic and world markets. And currently, China is the world’s largest source of companies going public.
In the last five years, Chinese companies have raised over $210 billion in IPOs globally while U.S. companies have raised only $184 billion over the same period. Chinese stock exchanges (Hong Kong and mainland combined) raised twice as much capital in 2009 as U.S. exchanges, perhaps in part because companies listing on these exchanges are not subject to burdensome regulations such as Sarbanes-Oxley. These listings have brought billions into the Chinese economy and helped fuel growth.
As Asia privatizes, we are moving in the opposite direction. It is Asia that is looking to small and large private businesses to grow their economies. In contrast, our economy is increasingly managed through central planning and government control—take much of our domestic car industry and largest financial institutions, for a start.
Asian countries like China and India cut short their recession by adopting growth-oriented policies, while we languish in a recession that is long and deep. And capital is flowing from us to them. Investors hear and see the signals: the emerging markets of Asia are moving towards greater economic freedom. We have broadcast the message of economic freedom, and it has been heard—in Asia, but at home no longer.
Mallory Factor is the co-chairman and co-founder of the Monday Meeting, an influential meeting of economic conservatives, journalists and corporate leaders in New York City. Mr. Factor is a well-known merchant banker and speaks and writes frequently on economic and fiscal topics for news stations, leading newspapers and other print and online publications. Mr. Factor writes frequently for the Fox Forum and is seen regularly on Fox News Channel. He can be reached at mallory.factor@malloryfactor.com.
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