Archive for October 12th, 2009

Monday, October 12, 2009

Wanted: Changes on the Global Supply Side

Justin Yifu Lin (林毅夫), chief economist with the World Bank, credits China’s stimulus program with the country’s current growth: government reflation works better in low-to-middle-income countries (such as China) than in high-income countries, because the former have a larger deficit in infrastructure, and therefore more demand for investment in it. At the same time, Lin suggests, the stimulus renders the task of getting exports under control a good service: the investments don’t contribute directly to (an increase in) production capacity.

Less could be more: container ship heading for Hamburg, Germany, September 2009

Less could be more: container ship heading for Hamburg, Germany, September 2009

Michael Pettis, professor at Beijing University’s Guanghua School of Management, is less optimistic. He remains focused on problems with China’s exports. US economic growth is expected to be at 3%, he writes, but s far as China is concerned it is not the future growth in the US economy that matters so much as future growth in US consumption. [For a link to Pettis’ blog, see footnote at the end of this post.1)] Jobless people – and the US numbers remain ugly – won’t help to push consumption. The IMF, Pettis suggests, starts agreeing that there are imbalances in global trade, and quotes from the institution’s report that many economies that have followed export-led growth strategies and have run current account surpluses will need to rely more on domestic demand and imports. The IMF report adds that

to accommodate demand-side shifts, there will need to be changes on the supply side. This will require actions on many fronts, including measures to repair financial systems, improve corporate governance and financial intermediation, support public investment, and reform social safety nets to lower precautionary saving.

Beijing has addressed some of these required actions, partly in deed, partly in words – much of it in words. Loan security in the provinces is mostly in the dark, and as for financial intermediation, Lin, China’s man at the World Bank, certainly sees problems:

“Common people put their money into the financial system and their earnings from it are relatively low. So they are subsidizing big corporations. That’s the reason why big corporations have such high profit. They are subsidized through lower wages and lower capital costs.”

Support for public investment in China, at least at first glance, leaves little to be desired – the stimulus is huge. And when it comes to reforming social safety nets to lower precautionary saving, Chinese premier Wen Jiabao habitually demonstrates awareness:

“Matters of the peoples’ livelihood are related to clothing, food, and accommodation, but what is now most important is equal opportunities in education, carrying out vigorous employment policies, narrowing the gaps in income distribution, and building and covering urban and countryside social security systems.”

Commenting on Wen’s (apparently March 2007) speech, filmmaker and freelance journalist Shi Ming recently pointed out in an interview with the Voice of Germany 2) that the Chinese government “has made this a declared goal now, but as an open-ended process”, and that first reforms, as early in the 1980s, had already been aiming at making basic healthcare accessible for everyone. Once again, Shi says, social security reforms are declared as goals, while huge US-$ reserves are stockpiled in China. “This is rather an oath of disclosure, than an assurance for the future”.

Just as employment, social insurance (and therefore less incentives to save money) would be ingredients for rebalancing foreign trade. Maybe that’s why China’s government is – feelgood speeches aside – so reluctant to subscribe to that goal.

But for all that, the Economist argued in June that the BRIC (Brazil, Russia, India, and China) nations are more decoupled from the global economy than both high-income and low-income countries. That doesn’t remove the challenges as described by Pettis or the IMF – but might reclassify their weight to some extent.

You would expect less decoupling as a result of globalisation, writes the Economist. The cycles of output, consumption and investment should become more closely aligned in countries engaged in world trade. But a 2008 study by Ayhan Kose of the IMF, Christopher Otrok of the University of Virginia and Eswar Prasad of Cornell University found that

the cycles of output, consumption and investment did indeed become more closely aligned in rich countries. And the same thing happened in emerging markets. But when the authors compared the two groups, they found they were diverging. The business cycles of America and Europe converged. The business cycles of India and China converged. The business cycles of rich and emerging markets had decoupled.

The BRIC countries, explains the paper, depend less on export than many other emerging markets. Even China’s exports are smaller in value than they look. Though exports were 34% of GDP in 2008, these included “processing exports”—goods imported into China, processed and exported without much value having been added. In addition, these countries’ size – and the diversity of their economies – helped to keep them comparatively immune against the global crisis.

But obviously, this doesn’t mean that exports channels can be ditched without substitution. The Economist predicts a rise in the role of government: such a rise

is probably inevitable. China and, to a lesser extent, Brazil and India, benefited hugely from America’s appetite for imports in 2000-08. That appetite has fallen and is likely to remain low for years, as American consumers adjust their spending and savings habits. The rise may also be difficult to reverse: the experience of the West has been that the public sector expands relentlessly until it reaches between 40% and 50% of GDP. But if the BRICs cannot export their way out of recession, the expansion of government is the main alternative to the slump being endured in those other big capital exporters, Germany and Japan.

Even if the Chinese people were as acquiescent as adscript peasants in czarist Russia, Wen Jiabao and his successors would still have a lot of good reasons to talk less, and to do more.

1) The permalink system on Mr Pettis’ blog has been out of order for a while. To find this particular post of October 3rd nevertheless, I recommend to enter Although I think most economists are expecting that US economic growth in the third quarter was a fairly healthy 3% – with quotation marks – at Google and to add
Update (Oct 18 2009): The permalink system is back.

2) Deutsche Welle (German service), “Welt im Fokus”, Sept. 30, 2009
Reform without Zijiren, October 5, 2009
The Great Trade Surficit, September 19, 2009

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