There was a somewhat depressing message on offer in London yesterday from David Dollar, the director in charge of the World Bank's China Mission. Depressing because he refused to agree with the premise of a Standard Chartered-Oxford University conference that China can become an engine for world economic growth. Or not in the short term at least, or without fundamental reform which will be difficult to enact and take time to deliver.
Mr Dollar's underlying message was that the once-prosperous West shouldn't look to China, one of the few major economies in the world still to be growing relatively strongly, to help us out of our economic malaise. Since quite a lot of hope is indeed vested in this idea, that China can pull us all along in the wake of its continued growth story, in much the same way as America has historically, it is worth repeating some of his arguments.
As Mr Dollar points out, much of China's growth over the past decade has relied on US consumption. That's now come to an end. To keep progressing, China needs a new growth model. If a magic wand could be waved and the teaming masses of China could be persuaded to start consuming a bit more than they have, then things wouldn't look so bad.
Unfortunately, even combining Chinese consumption with that of the other two big surplus nations – Germany and Japan – still doesn't come anywhere close to matching that of the US. China responded quickly to the collapse in exports that occurred in October last year by enacting a substantial fiscal stimulus, but this has done very little to boost consumer demand in China. With manifest overcapacity in most areas of manufacturing, private investment has also remained subdued.
The bottom line is that though there are potentially an awful lot of them, Chinese consumers are not about to substitute for American ones. If an economy is producing primarily for export, it tends to pay its workers as little as possible.
To generate the holy grail of sustained domestic demand, you have to pay your workers enough to buy the products they are producing. That's not yet happened in China on anything like the scale necessary to prompt a virtuous circle of growth. Limited access to credit further prevents the development of sustained domestic demand.
Obviously, these issues can be addressed through reform, but with good reason the Chinese authorities are wary of liberalising too fast. However unsustainable the imbalances generated by the previous export-led model, they must seem politically more palatable to the Chinese than attempting to fast forward the alternatives.
The same may be true of the US. The recession has caused a substantial reduction in the trade deficit, but further out, will the Obama administration be able to deliver the more balanced economy it aims for, or will America's addiction to consumption prove politically too hard to kick? Monetary policy is hell bent on trying to revive consumption right now. It would be all too easy to slip back into the errors of the past. Old habits and models die hard, even after the worst financial crisis in living memory.
Still, let's not get too downhearted. There's good reason for optimism about emerging market economies, not least India, which has demonstrated its maturity as a democracy by voting for stability and a continuation of the reform agenda pursued by the government of Manmohan Singh.
This is not going to help the West very much in the short run, but to my mind, the more balanced, market-led model of economic development being pursued by India is a more promising one that will ultimately prove less disruptive, domestically and internationally, than China's. No wonder the Indian Sensex soared 17 per cent yesterday in celebration.