Employment, too, grew robustly. The fear of massive unemployment among migrant workers never materialised, and indeed government officials estimated that aggregate employment grew by 8.5 million in the first three quarters of 2009 and could reach 12 million by year-end (Yang, 2009).
But the costs were high. First, all of the growth came from investment which jumped to 66% of GDP, and investment in infrastructure leaped to 18% of GDP. As seen in Figure 8, gross capital formation contributed 8.7% of GDP to growth, equal to total net growth in 2009. This was nearly double the 4.6% in 2008. More importantly, the 96% share of growth from capital formation was double the already high level of 48% during 2003-07, raising alarms about the efficiency of investment and project selection. It also set back the policy goal, pronounced annually since 2003/04 and enshrined in both the 11th and 12th five-year plans (2006-10 and 2011-15), to rebalance the economy toward more consumption and move away from the investment-driven growth model of the past.
Second, in the rush to ensure quick implementation of the stimulus programme, the government went beyond pumping in new fiscal spending and easing monetary policy to changing fiscal rules and liberalising financial regulations. While these changes were on the whole consistent with market reforms, they were sometimes pushed too far and too fast amidst the campaign-style rhetoric coming from both the government and the party urging “support” for the stimulus programme. In the process, much painstaking progress on governance reform was reversed – building professionalism in the banking sector and cleaning up balance sheets, improving budgeting and public investment management, refocusing local governments on public service provision rather than investment, etc. When combined with the huge spike in easy credit that allowed state-owned enterprises and government agencies (especially at the local levels) to extend their reach, the process has also seen the private sector being squeezed out in some industries and services, reversing the decades-long retreat of the state from economic activities.14
Employment, too, grew robustly. The fear of massive unemployment among migrant workers never materialised, and indeed government officials estimated that aggregate employment grew by 8.5 million in the first three quarters of 2009 and could reach 12 million by year-end (Yang, 2009).
But the costs were high. First, all of the growth came from investment which jumped to 66% of GDP, and investment in infrastructure leaped to 18% of GDP. As seen in Figure 8, gross capital formation contributed 8.7% of GDP to growth, equal to total net growth in 2009. This was nearly double the 4.6% in 2008. More importantly, the 96% share of growth from capital formation was double the already high level of 48% during 2003-07, raising alarms about the efficiency of investment and project selection. It also set back the policy goal, pronounced annually since 2003/04 and enshrined in both the 11th and 12th five-year plans (2006-10 and 2011-15), to rebalance the economy toward more consumption and move away from the investment-driven growth model of the past.
Second, in the rush to ensure quick implementation of the stimulus programme, the government went beyond pumping in new fiscal spending and easing monetary policy to changing fiscal rules and liberalising financial regulations. While these changes were on the whole consistent with market reforms, they were sometimes pushed too far and too fast amidst the campaign-style rhetoric coming from both the government and the party urging “support” for the stimulus programme. In the process, much painstaking progress on governance reform was reversed – building professionalism in the banking sector and cleaning up balance sheets, improving budgeting and public investment management, refocusing local governments on public service provision rather than investment, etc. When combined with the huge spike in easy credit that allowed state-owned enterprises and government agencies (especially at the local levels) to extend their reach, the process has also seen the private sector being squeezed out in some industries and services, reversing the decades-long retreat of the state from economic activities.14
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