Global Trends by Martin Khor
Monday 22 March 2010
Promoting global economic recovery
Blaming China's currency for United States' economic woes is counter-productive.
A new report on the global economy suggests the US
should solve its over-consumption while Germany,
Japan and China should boost
their domestic consumption to spur global demand and economic recovery.
For the past few weeks, there has been a shrill
attack on Chinese economic policy emanating from United States' Congress members and
economists. According to them, China's policy of linking its currency to the US
dollar has undervalued the yuan, led to China's
large trade surplus and is a major reason for America's economic problems. Some
economists even try to blame this for the imbalances in the world economy.
This blame game is now going beyond the rhetorical
or the academic realm. If the US Treasury labels China
as a country practising currency manipulation in a report on 15 April,
it could trigger actions in the Congress to slap on an import surcharge
on Chinese goods. The economist Paul Krugman, one of those urging actions
to “take on China”, is suggesting a hefty 25%
Such drastic measures could trigger a trade war,
which nobody needs today when the global economy is trying to find its
feet following the worst recession in 60 years.
A recent report of the South Centre by its Special
Economic Advisor Yilmaz Akyuz (formerly Chief Economist of UNCTAD) throws
interesting light on the global economic imbalances, the situation in
the major countries, and what needs to be done.
The report, “Global economic prospects: The recession
may be over but where next?” recognises that the US economy (that has high household
debt and trade deficit) has to adjust, and its over-consumption problem
has to be tackled.
But this adjustment will cause its own problems
for many developing countries as it may result in increased interest
rates (which is bad for indebted countries) and a higher dollar (exerting
a downward pressure on currencies in developing countries in deficit,
and on commodity prices).
So far, the US
have adopted the strongest policy response to the crisis with big fiscal
stimulus packages and aggressive easing of monetary policy.
there has been a high growth in exports, and this in turn accounted
for one third of Chinese GDP growth in the years before the crisis.
But in the debate on the global economy, attention
has focused on the US-China relation, to the neglect of the role of
Germany and Japan, according to the report.
These countries, like China,
have been having large current account surpluses (7.5% of GDP in Germany and 4.8% in Japan, before the crisis). They also
have large trade surpluses with the US
($50 billion for Germany and $75 billion for Japan).
The overall trade surplus of China
(11% of GDP) and its trade surplus with the US ($270 billion) is higher. “However
the contribution of Japan and Germany
to global demand and growth is much smaller than China's and their reliance on exports
is much greater,” says the report.
Firstly, the real domestic value of China's trade surplus with the US is actually
lower than the gross figure because there are a lot of imported components
in Chinese exports. Thus in 2005, the trade surplus of China
with the US was $172 billion
in conventional terms, but it was only $40 billion in value-added terms
(the amount after deducting the import content of the exports of both
In the same year Japan's
surplus with the US
was $85 billion. Since the foreign content of Japan's
exports is lower than the foreign content of US exports, in value added
terms Japan's surplus with the US turns out to be higher than China's surplus with the US.
Secondly, and more importantly, “Japan
and particularly Germany
have been siphoning global demand without adding much to global growth,”
says Akyuz. During 2002-07, exports grew 25 times faster than domestic
demand in Germany
and 8.5 times in Japan
while the figure is less than 3 for China.
While exports contributed 34% to GDP growth in
China, they contributed 50% to Japan's GDP growth and 143% to Germany's growth
in 2002-2007. In other words, even if there had been no export growth
in China, the GDP
would still have enjoyed high growth, but without export growth Germany's GDP
would have fallen by about 1% a year during 2002-07.
The paper cites under-consumption as a major problem
in Germany and Japan. In Germany, there has been high unemployment
and stagnant wages because of an over-focus on price stability. In
both countries, the share of wages has fallen, thus suppressing consumption.
These two advanced countries need to increase
their contribution to global demand (and thus to the global recovery)
by expanding their domestic consumption through faster wage growth.
Their increased domestic demand and higher growth is needed to spur
more imports and reduce their trade surplus, which would contribute
to other countries' exports and GDP growth.
through its high growth and its reliance on both its own domestic demand
and exports, has contributed relatively more than the two industrial
countries to global growth, the report implies.
obviously also needs to adjust. It cannot rely as much as previously
on exports due to the expected adjustment in the US and the slowdown
in Europe, and it thus has to generate domestic demand through significantly
increasing its consumption, whose share of GNP fell from 55% in the
late 1990s to 36% at present.
Under-consumption is thus a major problem. Consumption
has to grow faster than both national income and investment in China in the future. The significant
fall in the share of wages would need to be reversed.
Akyuz suggests a combination of policies promoting
higher wages, elimination of the gap between wage and productivity growth,
increased budgetary transfers especially to rural households, and increased
public spending on health, education and housing in order to reduce
household precautionary savings.
However, even if China maintains its high GDP growth
by switching from exports to domestic demand, it cannot be expected
to become the locomotive for global growth. This is because there is
a lot of imported inputs going into China's exports, whereas imports make up only 8%
“Consequently, a $100 shift in the composition
of aggregate demand from exports to domestic consumption would reduce
Chinese imports by some $40,” says the report. This has serious implications
especially for South-east Asian countries which supplies a lot of the
parts and components to China for its exports.
As for exchange rates, the paper says that it
is an important issue in the adjusting of global trade imbalances, but
currency movements do not create additional demand for the global economy.
Thus they alter relative growth rates rather than raising the overall
“Briefly, currency movements cannot address the
problem of global under-consumption associated with sluggish wages,”
A depreciation of the dollar against the Chinese
currency could reduce Chinese exports and its trade surplus with the
US, but would not solve the under-consumption in
nor bring an increase in domestic demand to offset the decline in exports.
It could even aggravate the under-consumption problem. Thus the exchange
rate is not an appropriate instrument to address the under-consumption
problem and excessive reliance on exports in China.
The paper adds it is not clear how dollar depreciation
against the Chinese currency would address the root cause of the US problem of
over-consumption. It is unlikely to produce significantly faster growth
of exports to China. Even if it reduces China's
exports to the US,
this may be replaced by imports from other developing countries as long
as US consumers continue to live beyond their means.
Akyuz notes that the US
has run current account deficits in the past four decades regardless
of the strength of the dollar against the currencies of its main trading
partners, blaming Germany
in the 1970s, Japan
in the 1980s and now China.
The yen has been rising against the dollar during this period but this
had no impact on the surplus of Japan with the US.
Thus, concludes the paper: “The solution should
be sought primarily in national policies designed to address problems
of over-consumption in the US and under-consumption in surplus
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