Download Balanced Global Economy Growth: Responsibility and Policy of China and USA

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Balanced Global Economy Growth: Responsibility and Policy of
China and USA
CHEN Qiqing
Economics Department, Central Committee Party School, China, 100091
[email protected]
Abstract: Debate continues about the global imbalances that began in the latter half of the 1990s. The
aim of this paper is to describe these imbalances and to suggest measures that the US and China might
take to make balanced growth. We argue that the imbalances occurred because of the reserve-currency
role of the dollar and inappropriate US macroeconomic policies. A cooperative approach to adjustment
with participation by both the US and China is preferable to no adjustment and to adjustment by China
or the US alone.
Keywords: Balanced growth, Imbalance, International monetary system
1 Introduction
At the Pittsburgh Summit, President Obama proposed a frame of policy for an aggressive and
sustainable balanced increase in the economy. Such frame focuses on the issue of imbalance in the
global economy which economists have different opinions on the definition thereof. Taylor (1996) and
Obstfeld (2004) considered the imbalance in the global economy as the weight of the Current Account
of all countries in global GDP. Some of US economists such as Cooper (2005), Bordo (2005) and
Hausmann (2005) regarded the imbalance of the global economy as the deficit in the US current account
and the increase of American liabilities to outsiders. In real life, the imbalance in today’s global
economy displays a huge deficit in America’s current account and the correspondent surplus in the
current account of East Asian export countries and oil export countries.
The imbalance in the global economy is an historical problem for human beings as well as the deficit of
America’s current account. However, after the sub-prime crisis, many American state officers and
specialists made up a new story upon the imbalance of the global economy, the basic logic of it is that
the US believed countries from east Asia especially China had accumulated numerous reserves of
foreign accounts by means of encouraging exports and underestimating the exchange rate. Such huge
investment of these reserves in the US market sequentially led to an asset bubble in the US which finally
popped and triggered the financial crisis. The US also proposed a policy on the basis of such story for
the adjustment of imbalances in the global economy. However, I think this logic was wrong. The cause
of imbalance is not from the export-oriented countries but America.
2 America Is the Starting Point of the Imbalance in the Global Economy
Why the US is blamed for the start point of global economic imbalance? As a matter of fact, the US
today remains the global most important international currency issuer, such advantageous position
enables the US to buy the products and services directly and globally by issuing the money only rather
than through real trading with the other countries of the world. For other countries, they have to export
their products or services in exchange of international currency (namely foreign exchange) for buying
the products or services on the international market. After 1973, the US dollar was no longer linked to
the gold, the restrictions on the issuance of US dollar are gradually removed. The super position of the
US dollar enables the US to receive the products and services from the global market without real
exchange. The reality tells us that the deficit of current account of the US keeps on rising since 1970s as
the US exports its currency to the global market through current account, the exported US dollar
becomes the foreign exchange assets of the other countries, and these foreign exchange assets are
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returned to the US financial market through the US financial account. The flow of huge capital into the
US financial market contributes to the asset bubble, the crashes of the asset bubble leads to the US
financial crisis. Under the US foreign transaction items, the US economy is closely linked to the other
economies through current account and capital account, so when the US financial crisis broke out, it
spread throughout the world quickly, the global financial crisis forms.
Reviewing the past, we can see that that the first deficit of current account of the US took place in 1970s,
and such deficit keeps on rising after 1980s and loses the control. There are two huge deficits of current
account of the US, the first deficit of current account started in 1980, accounting for 0.17% of the GDP,
and later increased to 3.39% of the GDP in 1987, then the deficit fell down, the current account had the
surplus. During this period, the US experienced a ten-year long saving crisis. The second deficit started
in 1992, the deficit kept on increasing. In 2006, the deficit accounted for 6.4% of the GDP, and
diminished later. During this period, crash of Internet economy crashed in 2000, and the sub prime crisis
followed.
Figure 1 is the balances of current account and financial account of the US. The chart shows that the US
exports more and more its currency to the global market through current account, and imports the huge
USD-denominated assets through financial account. The balances of current account and financial
account correlate both in scale and fluctuation trend.
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Figure 1 Current Account and Financial Account of the US (1960-2008)
Source: BEA
The Chart also reveals the amount of the capital flowing into the US a year. Looking at the balance of
international payments of the US, we can see that the capital flowing into the US in 2007 through
financial account for buying the assets of the US totals US$2.1295 trillion. As a result, the foreign
capital owns astronomical financial asset of the US. By the end of 2008, the US financial assets owned
by foreign capital are US$23.3574 trillion, accounting for 162% of its GDP. These assets are owned by
the foreign capital in accordance with the law, but they are bought by the foreign capital in UD dollar.
Had it not been for the US to issue the dollar to the global market, export the dollar through current
account and to overspend, the other countries are very hard to acquire the large amount of US dollar, so
it can be concluded that the US is the origin of the global economic imbalance.
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3 China—Not a Major Contributor to the Global Economic Imbalance
First, from the perspective of history, China is not the major contributor to the deficit of the US in terms
of time. The Chart 2 below shows that the first continuous deficit of current account of the US occurred
in the 1980s, the balance of international payments of China was deficit in most of the years during that
period; when the second continuous deficit of current account of the US took place in 1990s, the balance
of international payments of China had surplus, but the surplus was quite small during that period, and it
was not a major source of the deficit of current account of the US. The Chart 2 reveals that the surplus
of current account of China did not have substantial increase until 2003. Prior to 2003, the deficit of
current account of US already exists. So, in terms of time, China is by no means the major contributor to
the long-standing deficit of current account of the US.
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Figure 2 Balances of Current Accounts of US and China
Source: BEA, State Administration of Foreign Exchange of China
Secondly, from the perspective of the scale, China does not constitute the major source country of deficit
of US current account. Before 2005, the surplus of China’s current account accounts for less than 10%
of the US deficit of current account. For instance, in 2000, China’s deficit of current account was only
US$20.5 billion, the US deficit of current account was US$417.4 billion at that time, so the former is
only 4.92% of the latter, and this percentage keeps on rising in recent years. In 2008, the percentage has
risen to 60.35%, it seems that China has become the major source of US deficit of current account.
However, we must pay attention to the two facts: First, supernormal growth of China’s surplus of
current account in recent years obviously runs counter to the general economic law. We can conclude
that huge amount of hot money has flowed into China through current account for gaining the benefits
of RMB appreciation. Second, the trade surplus is the major part of the surplus of current account, and
such trade surplus is not contributed by the foreign-funded enterprises or multinational companies in
China rather than the local Chinese enterprises. In 2003, the foreign-funded enterprises contributed the
33.01% of the trade surplus of China. With the growing trade surplus of China, this percentage is also
rising dramatically. In 2008, this percentage has risen to 60.92%.
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4 How to Realize Balanced Growth for the Global Economy
The global economic imbalance under the globalization is the result of interaction of the economic
activities of the countries, so all the countries shall take common action and adopt comprehensive
policies and measures for regulating the global imbalances. Any unilateral policy will not work for this
purpose and will be very hard to achieve the expected result. To regulate the global imbalances, the
policies and countermeasures must be taken at two different levels, namely at the levels of international
community and countries.
Looking at the level of international community, the new world economic and financial order must be
established. To this end, the first step is to push forward the reform of international monetary system.
Now there are many discussions on the reform of international monetary system. In the long run, a
super-sovereign currency may be a good option for such reform. However, in the near term, it is very
hard to be accomplished. Some people propose the diversification of international settlement currency, it
is also an option toward that goal, but we still believe that it is still an arduous task impossible to be
accomplished in the near term, just as the RMB globalization is not able to be accomplished just in a
few years. In our opinion, what we can do now is to impose a set of oversight rules on the international
monetary system dominated by the US dollar so as to regulate this system rather than allow the US to
decide the supply of international money based on its own interests and benefits.
The US has received huge benefits from the issuance of international currency. Now it is the right time
for constrain the US to share the benefits and bear the responsibilities. The second step is to reform the
International Monetary Fund so as to have a fundamental transformation of the functions of the IMF,
that is, the IMF shall switch itself from exchange rate oversight to the balance oversight. Under the
present international financial system, the exchange rate is universally deemed as the major means for
regulating the global imbalances, so IMF is also actively overseeing the floating exchange rate regime of
the countries.
Looking at the economic mathematical model, the exchange rate indeed can regulate the outside
imbalances. However, the theory of economics tells us that such role of exchange rate is subject to the
specific conditions. In the real economy, we find that the exchange rate is not the effective means
affecting the deficit of current account or trade deficit, it is particularly right for the developing countries.
The research of the UN indicates that the exchange rate only contribute 2.5% of the change of trade
surplus and deficit of the developing countries. For the developing countries, the trade surplus mainly
depends on the economic growth of the developed countries.
Looking at the level of country, the economic structure of trade surplus countries and trade deficit
countries shall be reformed. All the countries must actively undertake the responsibilities. Any unilateral
adjustment is impossible to realize the positive economic structure.
For the US, it shall increase the saving and reduce the fiscal deficit and expand the exports. Since the
outbreak of financial crisis, the saving ratio of the US is on the rise. However, we must pay attention to
the fact that it is the passive adjustment of US consumers under the financial crisis and is the short-term
behavior, so the effective measures must be taken to guide the US consumers to adjust their
consumption actively and turn the short-term behavior into the long-term behavior. To increase the
saving ratio, the consumption must be cut. For a country, it must change the development mode of
realizing economic prosperity through financial prosperity, for an individual, he must change the
consumption behavior based on the financial assets appreciation and over drafting. The fiscal
expenditure shall be more prudent to lower the fiscal deficit. The US government shall actively
encourage the export of its competitive industries, lift the restriction on the export of high technologies
and expand the exports.
For China, it needs to expand the domestic demand and lower the saving ratio and increase the imports.
The low income of the Chinese people is the major factor containing the domestic demand. To stimulate
the domestic demand and enhance the role of consumption in driving the economic development, every
effort shall be made to improve the income of the people. To this end, the following measures shall be
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taken: First, expand the proportion of the people’s income in the national revenue. Second, adjust the
income distribution policy to promote the fairness of income. Third, make great efforts to develop the
capital market to increase the property income. Fourth, make every efforts to increase farmers’ income.
In the parallel development, the social security system shall be further improved to increase the
willingness of the people. The following measures shall be taken: first, continue to improve the social
security system covering the urban residents endowment, medical care and unemployment insurances
and relief, enhance the standards for the payments of these insurances; Second, a national rural-urban
uniform social security system covering the whole society shall be put in place, the investment on the
rural social security system construction shall be further increased so as to expand the coverage of rural
endowment and medical care insurances in the rural areas and enhance the payment capacity of social
security fund; third, the people not covered by the present social security system shall be included in the
present social security system as soon as possible. The social security for the rural migrant workers shall
be established, the national overall planning of social security for migrant workers shall be introduced.
At the same time, social security system for the urban flexible employees shall also be put in place.
5 Conclusion
We argue that the imbalances occurred because of the reserve-currency role of the dollar and
inappropriate US macroeconomic policies, such as holding interest rates low for too long and running
large government deficits. US must undertake the responsibilities of balancing economic growth. As US
and China’s economy has been related so deeply, a cooperative approach to adjustment with
participation by both the US and China is preferable to no adjustment and to adjustment by China or the
US alone. National savings will have to increase in the US and decrease in China.
References
[1]. Corden, W. Max. China’s Exchange Rate Policy, Its Current Account Surplus and the Global
Imbalances. Economic Journal, 119, November 2009: 430-441
[2]. Keidel, Albert.Global Imbalances and China”, paper presented at the conference entitled Crisis –
Towards a “New Economic Multilateralism”, Shanghai: April 2009
[3]. Obstfeld, Maurice and Kenneth Rogoff Global Imbalances and the Financial Crisis: Products of
Common Causes, November , 2009
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