Opinion

Chrystia Freeland

Lessons from Beijing

By Chrystia Freeland
October 27, 2010

Following her chat with Glenn Hutchins at the Quebec City Conference about how globalization is changing corporate strategy, Chrystia interviewed NYU Economics Professor A. Michael Spence about how globalization is bringing about structural change in the world’s leading economies.

Spence, a 2001 winner of the Nobel Prize, chairs the Commission on Growth and Development, a multilateral effort to determine the practical conditions developing nations need to implement in order to achieve high growth. Given his expertise in emerging markets, it comes as no surprise that he thinks their future is bright. Spence was impressed with emerging markets’, especially China’s, brisk comeback following the capital flight and collapse in world trade that resulted from the financial crisis, and he thought they would be able to sustain their current growth rates:

American policymakers — and other Nobel Prize winners – are far less impressed with China’s resurgence, which they view as the result of the malevolent Chinese policy of keeping the yuan undervalued. Spence, however, argued that a one-off revaluation of the sort Washington demands will not only be bad for China, since it will destabilize most of the country’s export-oriented businesses. But it would also be bad for the global economy, since China is the engine for growth in large parts of the world. Instead, he said, China should focus on finding a way to make necessary structural changes while sustaining growth:

China is in a complex set of transitions, and one of the objectives of Chinese policy in navigating through this next five years, is going to be to increase domestic consumption and domestic incomes and let that drive the economy. Part of that will involve a reduction in excess savings in China… That’s in China’s interest; it’s also in the global economy’s interest. But what the global economy wants from China is success in making these structural changes in such a way that the growth is sustained. Chinese growth is an enormously important factor in the global economy and especially in the emerging markets. I mean, I think it’s widely known that the growth in Latin America–which is running at a rate of 4.5% real–is dependent on the growth in Asia.

Finally, Spence told Chrystia that as the United States looks for ways to pay for much-needed investments in education and infrastructure, it has much to learn China, particularly in the area of self-sacrifice:

I mean, look, I know people don’t get it in the Western world, so let me describe China thirty years ago. Thirty years ago China had a per capita income of $500, changed direction, and started saving at 35% and investing at 35%. OK? Now when you have a $400 income and you’re saving at 35%, that means you’re consuming 66% of $400. That is a huge commitment to the future as opposed to the present, right? Now you either make the commitment, as the Chinese did and all the other high-growth developing countries, or you don’t. And there’s lots of developing countries that haven’t made the commitment and the investment and savings rates are down around 15%, and you just can’t sustain high growth on that.

Posted by Peter Rudegeair

Comments
6 comments so far | RSS Comments RSS

I love it that globalization is now being sold to us under different premises. China was allowed into the WTO because it was going to grow up and become like us. Oops. Now we are supposed to ‘grow down’ and become like them. Should we scrap democracy too? As someone working for a living, I would like more information from economists as to how exactly I should submit my future and my children’s welfare to their Brave New World.

Also, in the interest of full disclosure, I would like to know how much Mr Spence has made as an advisor for Chinese business or its govt. How many all expenses paid junkets has he taken to China?

I think the degree to which the advocates of China get money from that advocacy should be part of the public record. Or, oops – have we lost that right too, in our quest to be ‘more like the Chinese’?

Posted by nyet | Report as abusive
 

Tell me why we need China?

For raw materials? for fuel? for new technology and innovation? for fish? for what?

Only for multi-nationals sake.

My God – we have lost control of our country.

We have all the brains and brawn to be such a strong nation – self production most of what we need.

Instead we are brainwashed to believe the economists that are taking us down the rat-hole of 3 world fiance.

All for the multi-nationals who want the whole world to be 3rd world – so the kings and queens can rule us with ease. What the F happened to our founding father’s vision. It sure was not for Wal-Marts and greedy wall street scum – or cheap lead tops coming from China.

Posted by Butch_from_PA | Report as abusive
 

“Now when you have a $400 income and you’re saving at 35%, that means you’re consuming 66% of $400. That is a huge commitment to the future as opposed to the present, right?”

How on earth can any economist believe that Chinese earning $400 per year “save” 35% (on average?) and that this represents a “huge commitment to the future”? If savings is calculated as the residual of income minus expenditure, then it includes debt repayment as well as money socked away for retirement. These farmers are more likely loaded with debt.

Happy thought: if they continue to pay off their debts for the rest of their lives, they are demonstrating commendable foresight! But they really should be encouraged to consume! Maybe a little more debt . . . .

The refusal to factor in inequalities in the distribution of income AND wealth — including the negative wealth of heavy debt that impacts income as “savings” when debt is repaid — is virtually the defining characteristic of modern macro-economic theorists. They know inequality exists (Saez) but they refuse to let it intrude on pristine models that would compromise the formal elegance of classical theory.

High rates of savings are characteristic of all highly unequal societies; the lower strata have negative wealth and are paying off debt; the higher strata have too much money to consume as “efficient” demand. They “invest” it or put it in the bank. When they are scared off investing (or inflating asset values?) they leave it in the bank. The result is underconsumption — and high “savings.”

Posted by jbernar | Report as abusive
 

NYET: You got the facts upside down.

WTO ruled Against the United States in our attempt to restrict poultry import from China.

The direction of Congress violates the WTO rules, at least on this count.

Don’t keep talking trash like this. You’ll make us a laughing stock. You make me embarrassed as an American.

http://www.cbsnews.com/stories/2010/09/2 9/business/main6911749.shtml

Posted by Janeallen | Report as abusive
 

Butch_from_PA:
Without the low interest loans from China,
our economy would have collapsed.
Not a recession, not even a depression, but a total collapse.
And you said we did not need it. China was like out bank, who loaned us cash to avoid a catastrophe.

The point of this article is: what lessons can we learn?

The lesson is not about which system has the bragging rights–capitalist, socialist, or pseudo-communist society like China.
Rather, any culture which is willing to work hard, does no over-spend, and put their children and grandchildren’s future at a higher priority their own– such a culture does not require JFK to encourage them to ask what they can do for their society. Many Americans scorned them for working too hard, for focussing too much on their families and not on current happiness(namely, Derek and Sissela Bok’s assertion on happiness), but may not be as wise as they believe themselves to be. Even Harvard President was not that smart or correct.

Posted by CommonSensLogic | Report as abusive
 

The quality of Reuters reporting such as this is probably unique.

One wonders if such knowledge would be as readily available in China?

Similarly the work ethic and the achievement of the people of America are incredible. Happy Days was not just a nice sitcom. It was a reflection of real achievement.

China has grown on the achievements of America, its people imitate America and want to move to the USA.

The world is without a doubt a better place because of the good aspects of the American dream and hopefully you will, as this article reflects, continue your adaptation and management of that adaptation – To match the good side of your high standards.

Posted by Reliability | Report as abusive
 

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