China's $586 billion plan – is it enough?

VK, Mumbai — Tue, 18 Nov 2008 02:50:42 GMT

So far, the Chinese startegy has been to harness exports to create employment and keep the internal migrants employed. It is time to shift gears and now focus on increasing domestic consumption. Unlike the US and Europe, Chinese have a high savings rate and the government should target to have that money flowing into the economy instead of sitting as bank deposits or cash. Taxes should be lowered so that people have more discretionary income and can spend more on aspirational items. Investment in public works projects should be directed at the undeveloped parts of the country so people have less of an incentive to migrate to the cities.

Just as in India, money hoarding (or black money) forms a large part of the economy. This money is unaccounted for and forms a parallel economy. The Chinese government should announce a one-time amnesty to allow that money to re-enter the 'mainstream' system. It should be taxed but just the incentive of having that burden lifted should be an incentive for hoarders to take advantage of the amnesty. This is an unpleasant step and effectively means forgiving, and rewarding, people who have cheated the law but these are dire times. All the focus should be on getting more money flowing through the economy. The higher the throughput, the more momentum the economy will gather to power it's way out of this crisis.