Enlightenment from the Guano Economy
My friend Mr. Guo Xueming once wrote an article titled “Disaster After Economic Prosperity.” He told a story about the Peruvian guano economy:
Over tens of thousands of years, a lot of bird droppings accumulated on the coast of Peru. In the 19th century, Europe discovered that this was a good fertilizer, so they began to import bird droppings in large quantities. Peru hired many workers from the world to dig up this bird droppings and export it. Since the bird droppings were right on the coast, they could be sold as soon as they were dug up and loaded onto ships, and the profits were very high. For a time, Peru’s economy developed rapidly, and government revenue increased significantly.
But the problem is, what to do with this income? They supported increasingly large institutions and more and more personnel, supported a huge army, launched various projects, and spent money lavishly. But the salable bird droppings became less and less, and the government’s fiscal revenue gradually decreased. What to do? Institutions and personnel still have to be supported, projects still have to be invested, and the habit of spending money lavishly cannot be changed in a short time. Therefore, they can only increase the tax burden. We know that the heavier the tax burden, the less vitality the economy has. Therefore, under the heavy tax burden, the economy and society gradually lost their vitality, and finally led to an economic crisis.
From this, we can see the entire process and logic from rapid economic growth, a large increase in fiscal revenue, to a slowdown in economic growth, a decrease in fiscal expenditure, and then to having to increase the tax burden in order to maintain fiscal expenditure, and finally to the economic and social being overwhelmed.
In fact, if you think about it carefully, China’s rapid economic development in the past 40 years also has certain characteristics of the guano economy. Because the reason for this rapid development is that many conditions conducive to development have come together. The problem is, what did we do when the economy was developing rapidly and government revenue was increasing significantly? In fact, it’s almost the same as what Peru did, also supporting more and more institutions and personnel, launching more and more and larger projects, and spending money lavishly.
The problem is, you can’t always maintain such a high growth rate. Now, the economy has begun to enter a new normal, the speed has begun to slow down, and the growth of fiscal revenue is not so fast, but what about the fiscal expenditure that expanded during the economic expansion period? Who do you let go home with such large institutions and so many personnel? Don’t you continue to invest in the projects that are halfway through? Can the bad habit of spending money lavishly be changed in a short time? In addition, we have to do great things, and we also have various expenditure projects unique to us.
Thus, the dilemma of today is formed: such fiscal expansion is not only difficult to sustain, but also, if considering debt and social burden, it may be difficult to maintain the existing scale in the future.
The Current Dilemma
First of all, the debt burden is overwhelming. At present, the debt of both the government and enterprises has reached a considerable high level: according to the data of the Bank for International Settlements, by the middle of 2017, China’s debt had reached 256% of GDP, which not only exceeded the overall level of 190% of emerging market countries, but also exceeded the 250% of the United States. Some people estimate that China’s annual macro-form interest burden (about 12 trillion yuan) has already exceeded the annual nominal GDP growth (8-9 trillion yuan). In other words, the wealth created each year is not even enough to pay interest.
Among them, the most directly related to the issues discussed here is government debt. He Keng, deputy director of the Financial and Economic Affairs Committee of the National People’s Congress, revealed that China’s local government debt is currently about 40 trillion yuan. According to the investigation of Liu Shijin, deputy director of the Economic Committee of the National Committee of the Chinese People’s Political Consultative Conference, China’s local government debt has many names, and it is difficult to figure out how much there is. Judging from the local areas that have been surveyed, some have reached three times the public figures. More importantly, as He Keng said, “There is no local government that wants to repay the debt, and the government’s credit is worse than the enterprise’s credit.” “Now if you ask him to repay the debt, he says that I can’t even pay my wages, and the finances are very difficult, what should I do? Now these debts are not to mention repaying the principal, many places can’t even afford the interest.”
At the same time that the debt is becoming increasingly heavy and even unsustainable, China’s economy and society have begun to enter a period of contraction. From an economic point of view, some people predict that if the international environment deteriorates, the possibility of China’s economic growth rate falling to 4-5% or even lower exists. From a social point of view, the three provinces in Northeast China have already entered a shrinking society in terms of population, and the whole country will enter this stage in a few years. In a shrinking society, due to changes in population structure and total population, the social economy will be in a period of overall contraction. In this shrinking society, the burden of old-age care will increase, the labor force will begin to be in short supply, and many problems will be in a difficult situation. In particular, as some experts have pointed out, in a shrinking society, it is impossible to continue to support an expanding government.
And from another perspective, we are facing an important economic transformation. The economic transformation I am talking about here specifically refers to the transition from the stage centered on housing to the stage of improving the quality of life, and the essence of this stage is a process of consumption upgrading. If this step can be taken, the driving force for China’s future economic development will be formed, and China’s economy will enter a new stage. And consumption upgrading depends on both supply and demand, but more importantly, demand. And demand depends on the consumption capacity and consumption desire of the people. In this sense, China needs a period of light taxes and light burdens to preserve more resources and wealth in the private sector. Whether this can be done will determine the prospects of China’s economy.
True Courage to Cut Off the Wrist
Therefore, in this situation, in thinking, there should be a fundamental change, changing the expansionary thinking to contractionary thinking, and making a firm determination to shrink the appetite of fiscal expenditure that was expanded during the economic expansion period.
First of all, government downsizing. Due to China’s unique power structure, the broad government has multiple sets of systems running in parallel (several systems represented by several major leading groups), the overall structure contains many departments, and the administrative levels are many (central, provincial, municipal, district and county, township streets, village and neighborhood committees), and there are many personnel supported by the fiscal budget. Due to the excessive number of people eating from the fiscal budget, a considerable part of the national fiscal expenditure is used for personnel expenses. In the case of a slowdown in economic growth, a shrinking social structure, a decrease in non-routine income such as land sales, and unsustainable debt, it is necessary to make a firm determination to streamline institutions, reduce redundant personnel, and reduce the social burden.
Secondly, reduce government investment and subsidies. In analyzing the phenomenon in Northeast China, I once proposed that the government should not do things and not make trouble. In the expansion period of the economy, especially when the labor force is relatively abundant, it is appropriate to do more major things, especially infrastructure construction. But the current situation is obviously different. In the contraction period of the economy and society, especially when the government is already heavily in debt, it is necessary to drastically reduce expenditure in this area (many places are now suspending PPP projects, and the central and local governments are canceling many subsidy projects, which is correct). In this matter, more resources should be used for social security and for tax reduction.
Thirdly, restrain the behavior of extracting resources from the private sector and enrich the people. Many people now have a romantic sentiment for the national system of concentrating resources to do great things. That’s right, the advantage of the national system is that it can concentrate its strength to do great things, but the premise of concentrating its strength to do great things is the concentration of a large amount of resources, that is, extracting a large amount of resources from the private sector and concentrating them in the hands of the government. And as mentioned earlier, now is a critical period of economic transformation in China, a critical period of consumption upgrading. If we overemphasize concentrating our strength to do great things and concentrate too many resources in the hands of the government, it will inevitably weaken the consumption capacity of the private sector, thereby increasing the difficulty of economic transformation and upgrading.
A few days ago, I proposed the question of “Will China usher in a difficult decade?” Putting the above issues in this context may make it clearer.
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