The IMF semi-annual review is out and Oliver Blanchard, the IMF Chief Economist is quoted saying: ?A decrease in China?s current account surplus would help increase demand and sustain the US recovery. That would result in more US imports, which would sustain world recovery.?
This is economic gobbledygook from someone who knows better. China represents 5% of global GDP. If it had a massive fiscal boost of 10% of its GDP and was lucky to achieve 10% growth in demand, and generously let 50% of that growth leak abroad by pushing up its exchange rate, the resulting growth in global demand would be just 0.2%. This is tiny enough to be lost in a statistician?s revision. To boost global demand by a more noticeable 1%, China would have to let 20 percentage points of its GDP leak abroad, and for this not to lead to a recession in a country that is growing rapidly but is still relatively poor, it would mean an unheard of fiscal boost in the order of 30%-plus, with the majority of it being encouraged to leak abroad through an exchange rate that would eviscerate the export sector and the coastal cities.
Is this sensible for the Chinese to do? Of course not. It is insane to think that a country that represents one-twentieth of the world economy could save it, and odd to think that it should spend its poor tax payers? money to bail out the rich economies from their own folly, which they committed while lecturing everybody else about their own superior economic and cultural position. This is the problem with a decade of champagne-popping overconsumption; it is followed by a painful decade of saving. US commentators blamed Asia for financing their consumption orgy and now they?re blaming Asia for not bailing them out.
During the boom a British columnist waxed lyrical about how the protestant work ethic was the key to economic growth. What should we now think about the role of the protestant work ethic in allowing an overpaid, socially less than useful financial sector in the US, the UK and Europe, poorly regulated, to bring down the global economy?
The story of the Chinese surpluses is like an Agatha Christie murder story, where the murder has taken place in a locked room with 12 people and they are all blaming the butler downstairs. The recent trends in current accounts continue to belie the American fantasy that the cause of US overconsumption, as evidenced by a US current account deficit, was Asian saving, evidenced by an Asian current account surplus. Over the past year the US current account deficit has shrunk by a staggering $436 bn, but this was not caused by Asia saving less; indeed, Asian savings have only shrunk by $45 bn. The big change has occurred in the surpluses of commodity exporters, whose savings were a direct result of consumption of their commodities. The Middle-East surplus has fallen by $300 bn in this last year.
This is entirely consistent with the traditional story that many US economists dismiss because it blames America. Easy money and loose fiscal policy supported overconsumption in the US that led to the big current account deficit and rising commodity prices. This was sustained because the US dollar is the world reserve currency and the current account surpluses that are the flip side of the US deficit are recycled into the US financial markets, allowing US consumers and government to borrow easily to support their excess consumption. US consumption fell back as the crisis hit, US deficits shrunk and global surpluses fell.
This has nothing to do with the Chinese exchange rate. How could it when China?s cumulative surpluses in the ten years to 2006 when the boom was fuelled were less than 10% of America?s cumulative deficits? But the US National Association of Manufacturers would like you to think so. This is reasonable?that a trade association should oversell its case. But we all know that Detroit is not bust because of the value of the renminbi. What is unreasonable is that this story should be adopted by the IMF of all places.
You would think that by now the IMF would have learned that by illegitimately focusing on the narrow interests of a shrinking part of the world economy will make it increasingly irrelevant. The Europeans do not like the way that European power has been eclipsed by Asia and they do not like the possibility that the US recovery will be built off exports that compete with European exports. And so they want Asia to bear the brunt of the US?s beggar-thy-neighbour policy of a weak exchange rate. They want Asia to bail out the world by reducing their GDP through massive exchange rate appreciations, too big to be offset by any reasonably sized fiscal stimulus and they think they can kid us into thinking this is the right thing to do for Asia?the conceited arrogance of it all. India is keeping quiet, but it should vocally object to this crass economics because one day it too will fall foul of the logic that whatever happens to America, it is Asia?s fault.
The author is chairman of Intelligence Capital Ltd, chairman of the Warwick Commission, and member of the UN Commission of Experts on Financial Reform