China, Wall Street, and the financial crisis: Francis Fukuyama talks with Henry Paulson
Scholar Francis Fukuyama and former Treasury Secretary Henry Paulson talk about China, Wall Street, and the global financial crisis.
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Paulson: I’ve heard those arguments, and I understand them, but I don’t believe that tariffs or protectionism is the answer. And there are, of course, a number of countries in the world that don’t have market-determined currencies, but what is so extraordinary here is to have an economy that is so important, so large, and so integrated into the global economy in terms of goods and services but does not yet have a market-driven currency or an open financial system.Skip to next paragraph
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So it is important for China to move more quickly toward a market determined currency, which is its stated goal. But, it should not be the job of the United States alone to make the case. The International Monetary Fund, for example, also has an important role to play, as do its other trading partners. And again, factors other than the currency are important here, such as the extent to which corporate savings are not paid out in dividends.
The picture that emerges is a complex one. I believe that China is committed to reform, and it is very much in their interest to continue to move the currency. We need to encourage speeding this process up while working to address our own imbalances.
Fukuyama: Let me ask you about the Chinese response to the crisis. Right now everyone is giving the Chinese plaudits for their really big stimulus, and for the fact that they only suffered for a quarter or so. (The last quarter showed almost 10 percent growth again.)
They’re obviously feeling quite good about themselves as a result. But it seems to me that their response to the crisis was just to do more of what they’ve traditionally done, which is to fill in for missing external demand through huge infrastructure spending that greatly privileges the coastal manufacturers against the rural consumer population. Do you think this is sustainable?
Paulson: First of all, in terms of their response, I think one of the benefits of the SED was that we had active engagement and built up a relationship of trust. So the Chinese were quite constructive and supportive as we worked through the crisis. We talked to them regularly and this benefited both countries.
Secondly, we all needed China’s economy to keep growing. If it hadn’t, we’d be much worse off today. I give the Chinese a lot of credit for their stimulus. I believe their most important action was increasing bank lending by more than $1 trillion. There will certainly be some repercussions from that, not all of them attractive, but I think that was a net positive.
I do believe, too, that the Chinese understand there’s more to do. There are a number of countries in the world in which the gap between the top and bottom rungs of the economic ladder is widening, and this is something the Chinese are concerned about in their own country. I believe their commitment to reform includes finding ways to spread wealth more broadly. One way to do that is to encourage an increase in domestic consumption and less reliance on exports for growth.
That will certainly take time. But again, the imbalances are bilateral and we can’t overlook our own penchant to overspend, overconsume, and overborrow. We will, and we should, continue to forcefully engage with the Chinese, but we’ve got important responsibilities of our own to deal with. It will do us no good to shirk those responsibilities by focusing too much on China.