By: Lincoln Feng

Lincoln Feng — Tue, 21 Apr 2009 05:30:33 +0000

Although I don’t have hard information at hand to either support or dispute most of the main points in this article, I do wish to debate two or three points in the article, albeit from a more theoretical point of view. Hope it can stimulate more debate and different thinking.
The first one is related to whether the economy of Japan or any other countries should rely, or “over rely” on exports, or they should restructure away from exports to achieve stability. It is true that if you trade with other countries and suddenly some or all of those economies slow down or decline, you will experience a lower external demand and as a result, your economy may experience some instability. This is a clear potential or real drawback if you engage in international trade or use another almost forgotten but often used in the past for sometime integrate with the world economy. Should economies restructure their economy in the face of this fear or threat? The answer is probably more likely to be no, when one consider the benefit from trade and world economic integration.
The second one is how one should calculate how much of the Chinese stimulus was new. It was argued in the article that, “only $173 billion of the $587 billion plan is actually “new” money. The rest was either previously committed Sichuan earthquake relief funding or money to be spent by local governments, banks, or the private sector in support of central government directives. The timeliness and full funding of these efforts remains uncertain.” It was clear enough that any of the previously committed Sichuan earthquake relief funding was not new. However, at least some of the money to be spent by local governments, banks, or the private sector in support of central government directives would have been new. Why shouldn’t the new spending of other layers of government than the central one to support the directives be counted as new? Aren’t they government spending or aren’t they new? Therefore it was not only $173 but more of the $587 billion plan was actually new money.
The third one discusses the following from the article:
“There are no guarantees that China will successfully adapt to an era of significantly slower growth or significantly change its overall development model that has resulted in skyrocketing trade imbalances. The export- and investment-driven model of the past three decades, fuelled by excessive Western consumption, is broken. A sustained U.S. recovery is increasingly unlikely this year, and when it does return it will not be as vibrant, or as reckless, as in the past. Without dramatically expanded domestic consumption, China risks a significant overcapacity problem and sustained unemployment.”
Let’s leave aside the guarantee issue for the moment and focus on whether China can adapt to an era of significantly slower growth or significantly change its overall development model that has resulted in skyrocketing trade imbalances. China has showed, at least in the past three decades, it can reform and open up its economy and done so successfully. Most people would probably understand that during that time, the conventional or predominant view in terms of economic development and growth was about the benefits of trade and specialisation, trade liberalisation, trade agreement, economic integration, export orientation, benefits of well defined or private ownership and capitalism, problems with communism, command economy and centralised economic planning, etc. China adopted economic reform policies and open-door policy that have met with great success. Trade, not only its exports but imports as well boomed and they far exceeded the overall economic growth. As a result, the share of exports in GDT rose significantly. It has become a trade surplus country from a deficit one. Its international reserve now tops the world. However, now people have come to the other side and say, hi, you should not have so large trade surplus and so high savings, because it created international imbalance.
It spears that there are several implications from the change in the tune of the chorus or the dance of the dominant international circus. Are we overreact to the current crisis, although it has been very serious (I would call it a quasi depressional recession), that is, when there is a problem now do we need to change everything and abandon the well established principles, such as free trade and free international capital flow? Secondly, when there is a problem (like the current international imbalance. To be frank, I am not sure an international imbalance is problematic no not), should we blame the weaker ones and take them as the scapegoat for causing that problem? One should not forget that in the late 1990’s when the Asia financial crisis happened, those countries in crisis (and possibly some other developing economies too) were criticised for their poor governance and trade deficits. Now guess what, it is China that has been said to be the root of the problem of low or negative savings in the US and the imbalance. Are we logic? Or are we just bullying those who are weak at will? Thirdly should we be so pessimistic when we are in difficult so that we would lose confidence about the robustness of the international economy to recover and individual economies to adapt to new reality, new environment or new development model? We need a bit of courage and be more resilient.
Further, assume that the whole external economic environment for China has changed or will change significantly and it will be permanent and become structural. Can China adapt to that successfully? Yes, it is true that there are no guarantees of that success and that is always right, perhaps universally. Successes are seldom guaranteed. But at the beginning of China’s reforms, were there guarantees? Was there any precedence of economic reforms at such a scale under a centralised command economy? Were they any easier than known reforms in a historical perspective? Have they succeeded? Have the Chinese changed to different people in terms of courage, intelligence or skills I don’t need to provide an answer to these questions, and unfortunately I can’t answer whether China can adapt successfully or not with complete certainty, but I have a reasonable degree of confidence.

Comments on: Can China lift Japan out of recession?

By: Lincoln Feng