Rebalancing the world economy after recession
If the US revives consumption and China revives exports, nothing will change.
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With the Obama administration intent on propping up the housing market as best as it can with government credit, with the Fed on hold at near-zero rates, and with the US exhortations to other countries to spend eliciting little enthusiasm at the recently concluded G-20 meetings, change seems very far away.Skip to next paragraph
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Different incentives in China
What about the Chinese household? Here again, policies are important.
While undoubtedly, the absence of a significant old-age safety net (and the paucity of children, the traditional Asian safety net) offers Chinese households a strong incentive to save, Chinese household savings rates are not significantly higher than savings rates in other Asian countries.
China’s overall savings rate has gone up in recent years because Chinese corporations are earning and saving more, while Chinese household consumption is low because Chinese households earn a much lower fraction of the income generated by the economy than in other countries.
Why is this? Because the Chinese economy has a strong bias favoring its corporations and against its households; interest rates on household bank deposits are really low so that corporations can get cheap credit and so that the central bank can maintain an undervalued exchange rate; corporations get cheap inputs like energy, natural resources and land; taxes on corporations are low, so their after-tax profit is high; and state-owned corporations pay very little of the gigantic profits they generate back to the state as dividends. As a result, household after-tax income is low, and consumption is low.
All this means that if China is to rebalance growth, it has to start being kinder to its households. The recent willingness of the Chinese authorities to tolerate worker strikes for higher wages suggests they want to increase household incomes. Higher deposit interest rates, higher corporate taxes (with a commensurate reduction in household taxes), and fewer subsidized inputs for corporations will also help.
But these changes will not come easily, for they will put enormous pressure on corporate profits, something corporations will resist. And profitable corporations have a lot of power of resistance, even in a one-party state. Moreover, the Chinese authorities will be wary of imposing large adjustment costs on corporations too quickly and causing large job losses.
The recent crisis has convinced the Chinese of the dangers of relying so much on foreign demand, so they do want to boost household consumption, but the steps they take will again be gradual.
The bottom line is that rebalancing requires more than cultural change, it requires policy changes that will imply considerable political pain in the short term. After this brutal recession, the natural tendency is to try to go back to the old patterns of growth before attempting change – the US is trying to revive consumption while China is trying to revive exports.
Unfortunately, though, it is unlikely that if the will to change is not found in the midst of a deep crisis, it will be found as the recovery gathers steam. It is easier for politicians to emphasize the need for other countries to change while neglecting their own responsibilities. Stay tuned, but don’t hold your breath.