FROM COMMUNISM TO KEYNESIANISM

How effective is deficit spending in reviving economic growth? A recent test case of applying Keynesian-style cyclical cures to resolve structural problems can be seen in Japan. Since the end of its "bubble economy", most of Japan's additional public-sector expenditures were financed by deficits. With government spending exceeding 800 trillion yen it was fives times greater than U.S. public spending in the eighties. Despite massive expeditures combined with expansionary credit policies and zero interest rate Japanese economic growth in the nineties was reached at 1,1,%. Tokyo's outstanding public debt arose from 56% of GDP to an amazing 130%. Many credit rating agencies announced much higher figure. Some similarities between China and Japan inevitably exist. Both countires small and medium enterprises are starved out of capital while industrial behemonts are kept alive. Rising incomes and redcing unemployment in both coutries could induce policy changes so a new class of entrepreneurs can be a new sustainable basis of future growth. Even despite high level of saving in both countries, the allocation of these funds is largely inefficient. Japan and China suffer from a lack of a well-functioning domestic capital markets. An obvious problem with bank-lending is the vulnerability to political pressures. Indeed, the politicization of decisions on capital formation is at the core of the serious financial sector problems in China and Japan. Both countries need domestic stock and bond markets that are wider and deeper. Since capital markets require greater transparency and accountability, massive failures are less likely. Restructuring needs to be aimed in Japan and China as well. Proper and dynamic restructuring certainly requires very deep reform of management practices and government involvement in the economy.

Read Christopher Lingel's column here.