Issue link: https://maltatoday.uberflip.com/i/1487759
5.12.19 12 OPINION 8.12.2022 Alexiei Dingli and Rose Marie Azzopardi Prof Alexiei Dingli is a Professor of AI at the University of Malta and has been conducting research and working in the field of AI for more than two decades, assisting different companies to implement AI solutions. He forms part of the Malta.AI task-force, set up by the Maltese government, aimed at making Malta one of the top AI countries in the world Chinese economic growth may never recover from COVID – here's why M any countries have had to navigate the balanc- ing act of keeping the economy alive versus protecting citizens from COVID in recent years. In China, patience with its zero-COVID policy – one of the world's toughest strategies for dealing with the pandemic – are wearing thin among workers and students. Sporadic protests have erupted all over China in recent weeks, triggered by the deaths of ten people in a fire in an apart- ment block in Ürümchi, Xinjiang in November. But even with signs that re- strictions are starting to relax across the country, the impact on the economy will not be as straightforward as the Chinese government might hope. e conundrum for China is that the state has promised its citizens safety from the vi- rus through its zero-COVID policy, which has led to large sections of the vulnerable pop- ulation being unvaccinated. No government wants to concede it may have been wrong about something, but it's particular- ly important for the credibility of the social contract between the Chinese Communist Party and the people. e authorities guarantee social and economic stability and the freedom to get rich, in exchange for absolute power. But with the slowing of China's GDP growth, rising graduate unemployment (youth unem- ployment reached 20% in July), and increasing economic hard- ship, China's social contract is starting to unravel. Chinese government decision making e upside of authoritarian governance is that decisions can be made quickly in times of crisis. e Chinese govern- ment was quick to react to the 2008 global financial crisis with a 4 trillion yuan (£470 billion) fiscal package. After a sharp fall in GDP in 2008, the economy grew by 8.7% in 2009 and over 10% in 2010. e rate of growth then settled at a healthy but sus- tainable 6.8%. When dealing with the pan- demic, after the initial con- fusion about its source and apportionment of blame, the government acted swiftly to lock down the economy and flatten the curve. e result was that only 5,233 COVID deaths had been reported as of Decem- ber 2022, compared to 1.1 mil- lion in the US. But daily COVID cases in Chi- na were at 37,828 on November 30 2022. is is higher than the peak in April when the eco- nomically damaging lockdown in Shanghai was imposed. And GDP fell by 2.6% in the second quarter of this year before re- covering with a 3.6% rise in the next quarter. So clearly there is a trade-off to consider between the eco- nomic and social cost of China's zero-COVID policy and the health benefits for the vulner- able. is means it's important to consider the short-term cost of the lockdown, as well as any long-term consequences. e immediate costs have been the disruption to production and global supply chains, but the domestic service sector was also particularly hard hit. e chart below shows how economic growth has moved from a steady quarterly rate of 1.7% following the 2008 global financial crisis, to a collapse and recovery in 2020 and a second downturn in quarter two of 2022. e likely long-term economic impact is the uncertainty caused by policy changes, which has affected domestic and foreign investment and caused supply chain disruption. Real GDP per capita (real GDP divided by the population) is projected to grow at 6.3% a year in China and, ac- cording to my calculations us- ing Federal Reserve Economic Data (FRED) and population figures from the World Bank, this would put the cost of long- term lost output at a massive 72% of real GDP per capita rela- tive to 2018 GDP. is is a huge loss for the Chi- nese economy and research shows that output loss on this scale is rarely recovered in the long term. Foreign firms are rethinking their supply chain arrangements and the all-im- portant human capital brought by foreign workers to China has been heading for the exit. As with after the financial cri- sis, the pandemic could lead to a new, lower trend growth rate that will only emerge with time. Other economic headwinds Of course, repositioning supply takes time and China is secure in the knowledge it remains the workshop of the world for now. But there are other headwinds: debt to GDP rose to 270% in 2020 driven by credit advances to real estate developers and also to local governments for infrastructure spending. Central government debt as a percentage of GDP has also ris- en from 20% in 1998 to nearly 70% in 2020. Government debt is set to rise to 78% in 2022. ese are large figures for an emerging economy. And if Chi- na is to keep to its promise of protecting its vulnerable citi- zens, higher spending on health for its ageing population could cause this debt ratio to rise fur- ther. e pandemic has raised gov- ernment spending in China, as it has done in all countries. is has created business opportu- nities, but has also highlight- ed a difference between local government decision making and central government edicts. Sometimes, an overcautious re- gional response goes beyond the guidelines set by central gov- ernment – for example, when provinces enforce longer lock- downs than the recommended five days, or impose centralised quarantines rather than asking people to stay at home. is also affects the economy and must be taken into account by China's government. But of course, this is not just about economic costs, people's wellbeing and health must also be considered. And things may even be worse in China than ob- servers realise – recent research suggests that autocratic govern- ments can overstate economic growth by as much as 35%. China's anti-COVID protests are more than about COVID. ey are expressions of frus- tration with a system that is opaque and unaccountable. Re- laxing the restrictions is a step in the right direction, the effect depends very much on the de- cisions the government makes from now on.