While China′s growth in the last two decades has transformed the impoverished giant into an economic powerhouse, daunting problems loom. And if the world′s most populous country′s transition to prosperity is not managed well, the global economy is in for big trouble.
In the latest issue of The Milken Institute Review, David Dollar, the World Bank′s top representative in China, argues that the main threats to the country′s future are financial imbalances (notably, its reliance on export-led growth), scarcity of vital resources (notably water), burgeoning energy needs, killer pollution and winner-take-all income distribution that has left rural Chinese in the dust.
"The Chinese economy is already so big that failure to manage its financial system, to adjust rationally to natural resource scarcity, or to cope with its enormous air and water pollution problems will be felt by its neighbors, its trading partners and its geopolitical rivals alike," he writes. "No less important, its failure to deal with the remaining poverty would represent a global moral failing as well as a potential threat to the political stability of the world′s largest country."
Given the world′s dependence on the country as an engine of growth, he adds, "It seems downright foolhardy not to help China succeed."
Also in this issue of the Milken Institute′s quarterly economic journal, Timothy Taylor, managing editor of The Journal of Economic Perspectives, explains why Medicare is the 900-pound-gorilla almost certain to mangle even the best-laid plans for fiscal stability.
While projected revenue shortfalls for Medicare (at least $8.6 trillion over the next 75 years) would drown Washington in a sea of red ink, no politician with a survival instinct is willing to take steps to slow the hemorrhage. Nor, for that matter, is anyone willing to explore ways to pay for a cornucopia of services that promise longer, healthier lives.
"I cannot imagine that Medicare will march unobstructed toward the multi-trillion dollar horizon," he writes. "But I cannot imagine the alternatives, either."
Other highlights from the new Review:
- G. Pascal Zachary, a senor writer for Business 2.0, explains how nuclear power — once the bete noire of energy alternatives — is almost back in fashion, thanks to $60-per-barrel oil and fears of global warming. "After decades of being reviled as the energy source from hell, nuclear power could be on the verge of a comeback in the United States."
- Clark Johnson, a consultant on international finance, argues that the International Monetary Fund has got it all wrong. "Western advice and cash to countries in financial crisis tend to come with a hefty portion of fire and brimstone, which follows from the idea that crises are triggered by monetary excess and fiscal profligacy."
- Rene M. Stulz, a professor of money and banking at Ohio State University, tells everything you need to know about financial derivatives but were afraid to ask. Yes, he writes, derivatives have a way of blowing up venerable financial institutions when least expected. Yet, "most of us choose to fly on airplanes even though they sometimes crash. But we also insist that planes are made as safe as it makes economic sense for them to be. The same logic should apply to derivatives."
- Glenn Yago, director of Capital Studies at the Milken Institute, and James Prince, president of the Los Angeles-based Democracy Council, offer an upbeat assessment of how a Palestinian economy could succeed once it′s independent from Israel — and improve the chances for peace in the process. "Like Israel, Palestine lacks natural resources, but has a wealthy Diaspora, a cultural commitment to education and strong entrepreneurial and trading traditions vital to a modern, skills-based economy. Palestine could also capitalize on the goodwill and proximity to the Arab world; if it builds efficient capital markets, Palestine could become a financial and commercial-services center for the Arab East."
This issue also includes: lively exchanges between Michael Milken and three Nobel Prize-winning economists — Gary Becker, Myron Scholes and Ed Prescott; an excerpt from the remarkable The Company of Strangers: A Natural History of Economic Life, by Paul Seabright of the University of Toulouse; a Charticle by Institute Senior Fellow William Frey explaining which states are getting oldest fastest; and yet another offbeat, end-of-book "Lists."
The Milken Institute Review is sent quarterly to the world′s leading business and financial executives, senior policy makers and journalists. Its editor is Peter Passell, former economics columnist for The New York Times.