Economic Growth

How much consumption is (just) enough for an economy?

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A Ferrari 458 Spider is loaded onto a truck after being bought by a young Chinese at its showroom in Shenzhen in this May 28, 2012 file picture. Luxury brands banking on a China rebound to boost sales may be in for an unpleasant surprise: weak demand in the world's second largest luxury market may last longer than the economic slowdown as Beijing cracks down on conspicuous consumption. The government imposed a "frugal working style" rule on its civil servants, which goes into effect on October 1, 2012, barring them from spending public money on lavish banquets or fancy cars, and from accepting expensive gifts. REUTERS/Bobby Yip/Files (CHINA - Tags: SOCIETY BUSINESS TRANSPORT)

China wants to complement its singular success in exporting goods with more domestic consumption. Image: REUTERS/Bobby Yip

John Letzing
Digital Editor, Economics, World Economic Forum
This article is part of: Annual Meeting of the New Champions
  • China wants to rebalance its manufacturing-based economy with more consumer spending.
  • It’s a challenging task being frequently discussed at the World Economic Forum’s Annual Meeting of the New Champions, or ‘Summer Davos,’ in Tianjin, China.
  • It also comes at a time when other economic powers including the US are pressing in the other direction.

It was a perfect storm of sudden wealth, weekends, and new ways to sell happiness.

Between the end of the 19th century and the middle of the 20th, productivity in the US surged, the number of weekly hours clocked by workers declined, and retailers honed the use of advertising to soak up as much disposable income as possible by making the simple act of buying something seem like a fulfilling ritual.

Spending on personal consumption in America is by now a cultural touchstone that accounts for nearly 70% of the country’s GDP.

On the other side of the global seesaw, China is trying to boost its own domestic consumption with a mix of incentives. A country that’s cultivated manufacturing to the point of becoming the world's factory now aims to rebalance, by cutting its reliance on exports.

That means the world’s two biggest economies are effectively pressing in opposite directions. China may crave consumer spending, but the US wants desperately to pair its own heavy spending with more production. The contrasting agendas raise the question: how much consumption is the right amount?

“One could certainly argue that the US is not necessarily the right benchmark,” Cornell University economist Eswar Prasad said on the sidelines of Summer Davos. The country saves relatively little, and its trade deficit is glaring. In China, on the other hand, a high rate of savings signals that people feel the need to compensate for what Prasad described as a “threadbare” social safety net.

“We don't have a clear measure of how much savings should be ideal,” he said, but China is clearly an outlier. And the excess capacity being churned out by some of its domestic industries only makes spurring consumption more imperative.

Practically every government economic policy document where they talk about big policy changes talks about the need," Prasad said.

Manufacturing-based growth and Barbies

Affordable goods multiplied in America in the 1890s. Artemas Ward, a pioneering advertising executive, perfected the use of jingles and devised a stunt that sent a sailor in an alarmingly tiny boat on a trans-Atlantic voyage to promote a soap brand. Around this time, the phrase conspicuous consumption was coined – to describe flaunting an ability to buy the best available “food, drink, narcotics, shelter, services, ornaments, apparel, weapons and accoutrements, amusements, amulets, and idols or divinities.”

US consumer spending continued to flourish into the second half of the 20th century. A corresponding manufacturing boom did not. Globalization, after all, meant that more things could simply be imported.

China joined the World Trade Organization in 2001. Two decades later its economy was 13 times bigger, and the US was relying on it for nearly a fifth of its imports – while running a $355 billion trade deficit with its fast-moving rival.

Eventually, this seemed like a questionable proposition to an increasing number of people and politicians. Consumption could keep the US economy in business, but it wasn't a proper anchor. Reindustrialization became the order of the day. But there’s a catch, Johns Hopkins University Political Economy Professor Yuen Yuen Ang said during a Summer Davos session.

“There is no tried and tested playbook for reindustrialization,” she said. “We know how to become industrialized, but we don't really know what you do when you already are industrialized, but you move all your production abroad – and now you want to bring it back.”

As the US manufacturing base receded, China’s manufacturing-based growth generated more wealth and spending. The US tried to tap into it by sending over some of its own exports. An expensive attempt to popularize Barbie dolls in China fell flat.

A flagship Barbie store opened in Shanghai in 2009 to much fanfare.
A flagship Barbie store opened in Shanghai in 2009 to much fanfare. Image: REUTERS/Aly Song

Other items have translated better domestically, like Swiss watches. A wavering of Chinese appetite for the expensive timepieces has had a decisive impact on the stock prices of Swiss watchmakers.

Recently, flagging Chinese consumer sentiment has been a concern. Prasad said real progress had been made on the issue, but then the pandemic hit: “China is building factories, it is churning out a lot more electric vehicles, for instance. But the demand is not quite there.”

Meanwhile the US is still relying heavily on consumer spending to buoy its own economy, as reindustrialization remains a work in progress.

Researchers have tried to identify a cultural element to the disparity. One study suggested that “countries with Confucian traditions” have consumption rates much lower than the global norm. But that may be as questionable as the “Protestant work ethic” often assigned to an America that also consumes lavishly.

A healthier balance in both countries could pay serious dividends. Finding it without letting the present asymmetry feed greater animosity would be an ideal outcome.

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