From Arthur Kroeber, in China Economic Quarterly “Economic rebalancing —
Twin peaks: fiscal and financial reform” [not online]:
A major theme of recent discussions of China’s economy is the need for “rebalancing” — a shift away from an investment- and export-intensive growth model that created excess industrial capacity, big trade surpluses and bloated corporate profits, to a more domestically-driven growth pattern
where consumer spending plays a bigger role.
The house view on this hot topic is straightforward. We believe that China’s
external “imbalance” — a current account surplus that peaked at over 11% of GDP in 2007 — mainly reflected domestic structural problems. The undervalued exchange rate that obsesses foreign analysts was decidedly
secondary. The path to rebalancing therefore lies in comprehensive domestic reforms, including increased social service spending (to reduce household precautionary saving), deregulation of service markets (to encourage more private investment in non-tradable sectors), infrastructure
investment (to better integrate domestic markets) and financial and fiscal reforms to discourage excessive investment in heavy industry and real estate. If these reforms occur — and some are already underway — then exchange-rate policy can play a useful supporting role. If they do not, currency revaluation by itself will accomplish little.
For a recent debate on Yuan revaluation, see here.
Kroeber highlights the implications of the Lewis-Fei-Ranis dual economy model, wherein expanding labor demand eventually induces rising labor costs (e.g., [NYT]; this diminishes capital’s share, and increases labor’s.
…Over the next decade, a sharp decline in the supply of young workers will reverse the trend: wages will tend to grow faster than GDP, and the household share of national income will begin to rise again. This will boost consumer spending and reduce the current account surplus — which has already fallen to around 5% of GDP, less than half its peak level.
Kroeber seems to be arguing implicitly that a floating yuan would not change the exchange rate.
Do we believe that?
As for factors affecting domestic spending: another important consideration is the availability of debt. Wnen I first went to Hungary in the early 1990’s, there were no mortgages. If you wanted to buy a residence, you showed up with a bag of cash. Literally. (It’s quite an experience to show up with $50,000 in a paper lunch bag.) As a result, a high savings rate was critical to save up for a residence.
But then came financial innovation. By 2005, Hungarians were happily speculating on Swiss franc-denominated mortgages, and lo!, Hungary has a little debt crisis.
Three Cheers for Steven Kopits! Without a doubt, expanding debt to international creditors will erode a country’s terms of trade.
I would expand on that theme to observe that sociologically, countries experiencing recent existential financial collapse, will culturally exhibit thrift. Russia, Japan, and Germany all fit this profile.
A culture where survival is taken more for granted, due to imperial hubris and more remote economic collapse is more likely to fall prey to the enticement of immediate gratification and the resulting current account trade deficit. The US is the obvious example of this behavior.
It is interesting that there simply are no free market economists included in such discussions. Certainly it is difficult to find free market economists, central planning pays so well, but without discussing free markets it is arguing over how many angels can dance on the head of a pin.
Kroeber, along with Roach, appears to subscribe to the doctrine of ‘immaculate transfer.’ The source of their views may also be the same. But why do you give it credence on your site? Hasn’t Krugman made this stuff clear enough?
Rebalancing in the West and East is primarily a political problem, not an economic one. And it also involves growing income inequality as much as trade flows.
purple, I disagree. “Imbalancs” are mistakes in the structure of production. Production geared to the unsustainable export market, for instance, is a misallocation of resources…the stuff of recessions. It is very much economic, tho’ the mistakes may well have been pollitically engendered.