Robert Reich on US-China Economic Rebalancing
Extremely good column written by Robert Reich in the New York Times. I will say first off that there is absolutely nothing new in this article, and regular readers of the New York Times, the FT, the Economist, or any number of blogs (including this one) will not really learn anything they didn’t already know.
However, Reich’s treatment of the challenges facing China and the US when it comes to rebalancing their economies (and the bilateral trade relationship) is so well written that it really deserves a read. For what it’s worth, it is also an even-handed approach and doesn’t single out one country or the other as being “at fault” in a moral sense for current problems. This is a bit unusual for China commentary, particularly from American Lefties like Reich. He criticizes specific policies and leaves it at that, which is refreshing.
Reich ties together the relationship between the consumer vs. capital spending problems in both the US and China with the trade imbalance very neatly. I particularly like the way he acknowledges the “traditional” explanations for China’s high savings rate, yet explains that this only tells one part of the picture. He seems to be channeling Michael Pettis in this regard:
Many explanations have been offered for the parsimony of Chinese consumers. Social safety nets are still inadequate, so Chinese families have to cover the costs of health care, education and retirement. Young Chinese men outnumber young Chinese women by a wide margin, so households with sons have to accumulate and save enough assets to compete in the marriage market. Chinese society is aging quickly because the government has kept a tight lid on population growth, with the result that households are supporting lots of elderly dependents.
But the larger explanation is that China is oriented to production, not consumption. China wants to become the world’s pre-eminent producer nation.
Reich doesn’t bring in the last piece of the puzzle, the exchange rate system, but talking about export policy implies the other anyway.
Very good stuff, especially if you usually don’t pore over this subject on a regular basis. This will help you catch up quickly.
Not sure I agree that this is a good primer in understanding China’s strategy for rebalancing its economy. For one thing it confuses the government’s strategy for its stimulus package and how the package is actually being used. From much of what I have read, a significant portion of those funds are being misallocated to non-operational assets, including real estate and securities unrelated to core activities.
Moreover, Reich, neglects to mention that much of the stimulus package is geared towards SOE’s and not private businesses. This in itself would imply that shoring up its export economy is not the main goal of the stimulus package, but rather that the government is more concerned about its ownership of fixed assets and command of the economy.
One of the underlying assumptions Reich uses to carry his argument further is that China’s GDP must continue to grow to meet demands for jobs or face ‘massive disorder’ and ultimately upheaval – a common theme we heard in the beginning of the year in terms of GDP growth projections. He then suggests that China has created an export policy that is effectively a way to maintain stability. Regardless of the arguments for or against the theory of sustained growth of [plug in GDP growth forecast here] or face mass unrest, China’s GDP numbers fail to account for how the country is an export-led economy. With exports as total of GDP ranging from 40%, 20% to just 7% (net-exports of GDP and depending on who you want to cite), it is hard to justify China’s rebalancing efforts as being export-driven.
That being said, Reich seems to tow a line not unfamiliar to many China economic pundits that rely on questionable assumptions about government intentions and future realities. Sadly, sifting through the myriad of short-sighted opinion pieces it’s hard to find a cogent argument that puts together the whole picture.
Good points. I think part of the problem is that there is a disconnect between policy-as-stated and implementation.
SOEs are getting a lot of funds, true. But this does indeed go towards expanding capacity and has a significant impact on exports. Moreover, it is unclear if SOE receipt of funds has more to do with maintaining ownership of fixed asset by the State or simply because this is the traditional (i.e. easy) way to get money out there in the economy in the PRC. I have no idea.
A lot of money is leaking out to real estate and securities, but this is not the goal of policy, but rather a failure of implementation.
Figuring out how the export economy “fits” is a complicated matter, and Reich’s short column was not able to include a lot of nuance. I would say, however, that the debate over jobs and the export sector is very real and based on some valid assumptions. A lot of export industries deal with razor thin margins, and we saw last year what can happen when those firms are pushed over the cliff – lots of jobs lost. The importance of the export sector to the rest of the economy is a very strange matter, and I’ve never been able myself to understand how the numbers you cite figure with the overwhelming importance that most analysts attach to the sector – I plead ignorance on this.
I still like Reich’s piece as compared to other Op/Ed articles. For a piece in a major newspaper, it is far and above most of the crap put out there.