DannyQuah

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Tag Archives: inequality

Global Tensions from a Rising East

Will the East slow before it counts? Is the East only big enough to be culpable but not mature enough to be responsible?


[TEDxLSE – Danny Quah – Global Tensions from a Rising East, 17 March 2012]

Today I want to talk to you about the rise of the East, the shifting global economy. Most of us, at different levels, are aware of such changes going on around us. We might have heard about how all iPhones, while lovingly designed in California, are actually manufactured in Shenzhen China. We might have heard about how the Eurozone looked East for rescue on its sovereign-debt problems. We might have read newspaper editorials reflect on how the decade since 9/11 has been one where the three most important words for the US have emerged to be, no, not “major terrorist attack” but “Made in China”.

The questions I want to explore with you are two: Will the East slow down before the East can matter for the world? In the current economic crises that have haunted the world since the mid-2000s, that some have blamed on Asian Thrift and the resulting global imbalances, is the East only large enough to be culpable but not mature enough to be responsible?

The fact is undisputed that the developed economies continue to hold the world’s primary spheres of political influence: Thus, the reasoning goes, if the rise of the emerging economies — the Great Shift East — challenges anything in the global order, that challenge can be only apparent and its perception only transient. The emerging economies’ fast growth is nothing more than their picking low-hanging fruit, i.e., doing the easy things that allow economic development. Emerging economies will slow long before they count. After all, with the export-oriented development strategies that so many emerging economies have undertaken, if the developed countries were to stop consuming and importing, surely growth in the emerging economies would grind to a halt.

In this presentation, I will address two broad sets of issues. First, what are the already-extant contours of the Great Shift East, and what is the likelihood of their reversal? I will conclude that those changes are more pronounced and more entrenched — and thus less reversible — than might at first appear and certainly so when compared to other recent historical episodes. This holds enormous promise for improving the lot of humanity: the Great Shift East will continue to lift out of deep absolute poverty hundreds of millions of the world’s very poorest people.

These changes, however, take nothing away from how it is the developed countries that will remain the centre of global political influence. As a result the Great Shift East will produce massive global economic and political misalignment: the world’s economic and political centres of gravity will separate and drift further apart. And that, in turn, will raise staggering challenges: these latter comprise the other focus of my presentation. How will the global political system adjust to these ongoing economic changes on the scale that have already occurred and will almost surely continue?

Take back from those even poorer

What -ism is it when you castigate your top 1%


From: Vanity Fair, May 2011

and try to aid your middle class …

How the US lost out on iPhone work
From: New York Times, 22 January 2012

… by taking back from those even poorer elsewhere in the world.


From: Asia Development Bank: Asia’s Poor. Financial Crisis? Every day.

A small proposal to rebalance the global economy: Just let China grow

Many take as fact that the current pattern of global imbalances — large and persistent trade deficits and surpluses across different parts of the world, eventually unsustainable — is due to China and the rest of East Asia consuming too little and saving too much. Since the global economy is a closed trading system, trade deficits and surpluses across all national economies must sum exactly to zero always. Therefore, that one part of the world saves too much and thereby runs trade surpluses means other parts of the world — notably the US — must be running trade deficits.

However, just because deficits and surpluses are tightly inter-connected does not mean that trade surpluses in China, say, have been responsible for US trade deficits: absent further information, causality could well have flowed in the opposite direction. Moreover, China’s high savings might be dynamically welfare-optimizing for its citizens — for instance, private enterprise in China might find self-accumulation the only way to generate investment funds — and, at the same time, only minimally if at all welfare-reducing for already-rich US citizens. Finally, it might be that global imbalances should best be viewed not as a bilateral (US-China) problem but instead a multi-lateral one.

Be all that as it may, many US policy-makers focusing on US trade deficits and China’s trade surpluses urge policy actions against China to rebalance the global economy. Those policy actions include punitive tariffs against Chinese imports and tagging China a currency-manipulator — and thus moving it yet further from official free-market status. Some observers remark that without such external pressure, China will find it domestically too difficult to shift away from its reliance on export promotion, infrastructure investment, and restrained consumption towards a more balanced growth path (e.g., Michael Pettis, Nouriel Roubini, Martin Wolf).

The problem: To raise China’s domestic aggregate demand, especially consumption. The difficulty: China’s consumption cannot increase quickly enough to compensate for the shortfall in aggregate demand should both investment and exports decline. The danger: a hard landing for China and the global economy.

I want to suggest that such a re-direction need not be that difficult. My proposal: Let China grow rich as quickly as possible. Why might this do the trick?

Regional incomes in China

First, consumption within China is already rising faster than both income and investment, provided that we look at those parts of China where incomes per head exceed US$8,800 (Figures 1 and 2). Of course, China’s current per capita income overall now is only US$2200, less than 6% that of the US. What this suggests, however, is as China’s income grows, its overall savings rate will naturally fall. The right policy is to encourage growth, not adopt punitive actions that might retard that growth.

China's regional consumption

Figure 2a China’s regional consumption

(I took Figures 1-3 from a term paper that Daisy Wang wrote for my course Ec204 The Global Economy at the LSE-PKU Summer School, August 2011. The underlying data are from China’s National Bureau of Statistics.)

Second, as John Ross reminds us, investment too is aggregate demand. But, third, continuing to increase China’s investment in, among other things, infrastructure and transportation can help further as it allows those western, poorer regions in China (again Figure 2) better to integrate both nationally and globally, and thus become richer through raising demand and productivity.

China’s regional investment

Figure 2b China’s regional investment

While many observers make much of China’s high investment to income ratio, it is useful to note that that ratio is high not just because its numerator is being driven up, but also because the denominator remains so low. The right state variable for dynamic analysis in a neoclassical growth model is capital per head, not capital per unit of income. And here (Figure 3):

China's  per capita investment

Figure 3 China’s per capita investment

we see how China still has a long way to go on the upside.

Finally, Figure 4:

“The Chinese led the way in the rush to the Boxing Day sales, flocking to department stores to grab designer goods”, The Times of London, 27 December 2011

Figure 4: “The Chinese led the way in the rush to the Boxing Day sales, flocking to department stores to grab designer goods”, The Times of London, 27 December 2011

However much anyone might doubt those China statistics I used above, auxiliary evidence shows that rich Chinese consumers have no difficulty increasing consumption.

The evidence I’ve described doesn’t of course say that global imbalances can be easily erased through just more economic growth in China. However, the algebraic signs of the required relations seem to me to point at least in the right direction. Careful work to quantify these effects might end up showing that their magnitudes aren’t large enough. But, as far as I know, that calibration has not been done, which makes me wonder why some observers can be so certain that China’s current growth trajectory can only exacerbate global imbalances.

When China becomes rich, that will also dramatically lower inequality in the world — globally, the difference in incomes per head across nations overwhelms that across individuals within a single country. No one I know arguing for a more egalitarian society also says that that push for equality should stop at their nation’s borders and be kept from applying seamlessly across humanity’s 7 billion.


Also:

  1. “A small proposal to rebalance the global economy:  Just let China grow” EconoMonitor, 30 December 2011
  2.  “China’s growth could address imbalance”, China.org.cn, 02 January 2012
  3.  “Just let China grow”, The Edge Malaysia, 09 January 2012, p. 64
  4. 恢复全球经济平衡的一个小建议:让中国尽快变得富有, Blog.Sina, 13 January 2012
  5. Reprinted “A small proposal to rebalance the global economy:  Just let China grow”, Global Policy Journal, 11 October 2012
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