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Post-crisis Competing ModelsAlbert Keidel
The Atlantic Council of the United [email protected]
forThe Transatlantic Academy
September 28, 2010At The German Marshall Fund of the United States
1744 R Street, NWWashington, DC, USA
Copyright © 2010 Albert Keidel III
2
The controversy: Government’s proper role
1.Different at different development stages.
2.Not bigger or smaller – but better.
3.Free markets need strong government.
4.“Efficiency” can imply less liberalization and more regulatory oversight.
5.National economic leadership requires well-designed institutions.
China is not the challenge
• The financial crisis humbled old models.
• Failed development has lasted 60 years.
• Poor countries can’t afford infrastructure.
• Nearly all of East Asia is a model.
• Corruption cripples rich and poor states.
• Whence world liquidity - only U.S. credit?
• Regulatory effectiveness must be global.3
China’s real model - misunderstood
1. China’s growth has not been export-led.
2. China is not mercantilist.
3. The RMB exchange rate is not out of line.
4. China was not at all a cause of the crisis.
5. China’s financial system is fairly efficient.
6. The managed capital account is optimal.
7. China’s gov’t structure has legitimacy.4
Chinese GDP GrowthIndependence from U.S. GDP Fluctuations
-5
0
5
10
15
1988
1990
1991
1992
1994
1995
1996
1997
1999
2000
2001
2002
2003
2004
2005
USA China
Germany + Netherlands Japan S. Korea Philippines
Percent
5
6
Annual GDP Growth and Inflation, 1980-2010
-5
0
5
10
15
20
1980
1982
1984
1986
1988
1990
1992
1994
1996
1998
2000
2002
2004
2006
2008
2010
GDP Inflation
GDP Growth
Percent (y-o-y)
7
Was this caused by the exchange rate?
1999 2000 2001 2002 2003 2004 2005 2006 2007 2008 2009
Exports Imports hi
Bil. US$ (log scale)
Exports
ImportsChina'sGoods& ServicesExports and Imports
140
210
310
460
690
1030
130
8
Is the RMB too low? … or too high?!After the euro fell in July, 2008 China decidednot to let the RMB depreciate against the US$
6.5
7.0
7.5
8.0
8.5
9.0
9.5
10.01.1
1.2
1.3
1.4
1.5
1.6
1.7
1.8
2005 2006 2007 2008 2009 2010Euro (US$/€) RMB (yuan/US$)
US$ per Euro RMB per US$
Euro
RMB
9
Is the RMB too low? … or too high?!After the euro fell in July, 2008 China decidednot to let the RMB depreciate against the US$
6.5
7.0
7.5
8.0
8.5
9.0
9.5
10.01.1
1.2
1.3
1.4
1.5
1.6
1.7
1.8
2005 2006 2007 2008 2009 2010Euro (US$/€) RMB (yuan/US$) RMB hypothetical 'basket' value (yuan/US$)
US$ per Euro RMB per US$
Euro
RMB
10
U.S. Consumer Credit and Current Account Balance
-6
-4
-2
0
2
4
6
8
1980
1982
1984
1986
1988
1990
1992
1994
1996
1998
2000
2002
2004
2006
2008
China Current Account Balance (% of U.S. GDP)
U.S. Consumer Debt (%-points above 12% of GDP)
U.S. Current Account balance (% of GDP)
U.S. Current Account
U.S. Consumer Debt
%
China Current Account
Current Account Imbalances for the U.S., China and Rest of the World
-6
-4
-2
0
2
4
1960
1962
1964
1966
1968
1970
1972
1974
1976
1978
1980
1982
1984
1986
1988
1990
1992
1994
1996
1998
2000
2002
2004
2006
2008
United StatesChinaRest of the World
Current Account Balance as Percent of U.S. GDP
United States
China
Rest of the World%
12
Where were the Surpluses?China is there too, but came to the party late …
-6
-4
-2
0
2
4
6
8
10
12
1990
1992
1994
1996
1998
2000
2002
2004
2006
2008
Current Account Balances as Percent of U.S. GDPand U.S. Housing Price % Changes*
UnitedStates
China
%
Northern Europe, Non-mainland-China East
Asia and Oil exporters
% Change inU.S. Housing
Prices*
* Inflation-corrected (CPI-corrected) housing prices (source: www.clevelandfed.org)
13
Credit Growth: China and Germany did not follow the U.S. lead
0
50
100
150
200
1971
1973
1975
1977
1979
1981
1983
1985
1987
1989
1991
1993
1995
1997
1999
2001
2003
2005
2007
2009
U.S. China Germany U.K.
% of GDP
U.S.
China
Germany
U.K.
Easy characterizations don’t hold up; instead:
4. China’s financial system is fairly efficient.
5. The managed capital account is optimal.
6. China’s gov’t structure has legitimacy.
14
Intellectual & Academic Foundations
• Friedrich List versus fake Adam Smith
• Theorem of the second best
• Pseudo Keynes versus Hyman Minsky
• State versus corporate capitalism15
What models will work?
• It depends on the development stage.
• Repressed finance in poor countries?
• Infant industry protection?
• Regulators independent of industry?
• Unions and a higher minimum wage?
16
Overall conclusion:
1. Financial crisis and East Asian success reveal serious flaws in liberal market models for poor countries.
2. The state must provide stronger and better quality leadership.
3. Rich countries with weak regulatory systems and deteriorating income distribution need corporate controls and expanded public investment and services.
17
19
How is China’s economy doing?
0
2
4
6
8
10
12
14
Annual
20062004200220001998
GDP Growth, % yoy
11.1%
2008
13.0%
2010
10.0%
20
Quarterly trend shows the strong recovery.
0
2
4
6
8
10
12
14
Annual Quarterly Y-o-Y
20062004200220001998
GDP Growth, Percent yoy
11.1%
14.9%
6.5 %
2008
11.9%13.0%
2010
10.4%
21
Quarterly GDP Growth, Year-on-Year, 2008-10
0
2
4
6
8
10
12
14
16
Qtr
-1
Qtr
-2
Qtr
-3
Qtr
-4
Qtr
-1
Qtr
-2
Qtr
-3
Qtr
-4
Qtr
-1
Qtr
-2
Qtr
-3
Qtr
-4
Quarterly Year-on-Year2008 2009 2010
%
10.4%
6.5%
22
Quarter-on-Quarter, Seasonally Adjusted
0
2
4
6
8
10
12
14
16Q
tr-1
Qtr
-2
Qtr
-3
Qtr
-4
Qtr
-1
Qtr
-2
Qtr
-3
Qtr
-4
Qtr
-1
Qtr
-2
Qtr
-3
Qtr
-4
Quarter-to-Quarter SA Quarterly Year-on-Year2008 2009 2010
% Annualized
10.4%
15.0%
2.6%
6.5%
9.1%
23
Quarterly Trade, 2009-2010
Nominal Surplus %Bil. US$ Exports Imports Surplus Growth y/y2009 Q1 246 183 62 54
Q2 276 242 34 -40 Q3 325 286 39 -54 Q4 355 294 61 -46
2010.1-2 204 182 22 -50 Source: China Customs, with calculations
Chinese Quarterly Trade, 2009-10
24
Monthly Trade and Balances, 2009-2010 Feb.
Nominal Surplus %Bil. US$ Exports Imports Surplus Growth y/y2009.01 90 51 39 103 2009.02 65 60 5 -41 2009.03 90 72 18 41 2009.04 92 79 13 -21 2009.05 89 76 13 -34 2009.06 95 87 8 -61 2009.07 105 95 10 -59 2009.08 104 88 16 -46 2009.09 116 103 13 -56 2009.10 111 87 24 -32 2009.11 114 95 19 -52 2009.12 131 112 18 -53 2010.01 110 95 14 -64 2010.02 95 87 8 58
2010.1-2 204 182 22 -50 Source: China Customs, with calculations
Chinese Monthly Trade Data, 2009-2010 February
25
-6
-3
0
3
6
9
12
15
Q1 Q2 Q3 Q4 Q1 Q2 Q3 Q4Domestic Demand Foreign Trade GDP Growth
2008 2009
Percentage Points of Growth
Growth: Domestic & Foreign Demand, 2008-09
Current Account Imbalances for the U.S., China and Rest of the World
-6
-4
-2
0
2
4
1960
1962
1964
1966
1968
1970
1972
1974
1976
1978
1980
1982
1984
1986
1988
1990
1992
1994
1996
1998
2000
2002
2004
2006
2008
United StatesChinaRest of the World
Current Account Balance as Percent of U.S. GDP
United States
China
Rest of the World%
27
What caused China’s surpluses? Fighting inflation from the SARS
epidemic.China’s exchange rate didn’t do this:
1999 2000 2001 2002 2003 2004 2005 2006 2007 2008 2009
Exports Imports hi
Bil. US$ (log scale)
Exports
ImportsChina'sGoods& ServicesExports and Imports
140
210
310
460
690
1030
130
28
Did RMB shifts cause this trade pattern? No.U.S. and Chinese quarterly commodity trade balances
-240
-180
-120
-60
0
60
19
99
Q1
Q3
20
00
Q1
Q3
20
01
Q1
Q3
20
02
Q1
Q3
20
03
Q1
Q3
20
04
Q1
Q3
20
05
Q1
Q3
20
06
Q1
Q3
20
07
Q1
Q3
20
08
Q1
Q3
20
09
Q1
Q3
20
10
Q1
Chinese Surplus U.S. Deficit
Billion US$
21
147
115
221185
28
115
120
7
Chinese Surplus
U.S. Deficit
62
Foreign Reserves as a Share of Money Supply, 1994-2007 (%)
0
10
20
30
40
50
60
70
80
90
100
1994
1995
1996
1997
1998
1999
2000
2001
2002
2003
2004
2005
2006
2007
China India S. Korea Malaysia Singapore
20%
Percent
China
India
Singapore
Malaysia
S. Korea
Foreign Reserves as a Share of Money Supply
96%
73%
29
30
200
980
410
700
755
770
900
500
700
985
900
0 200 400 600 800 1000 1200
Unaccounted for
Foreign Other
Asia Other
Europe
China
Japan
Other U.S. Investors
State & Local Gov'ts
Mutual Funds
Banks, pensions, Insurance &c.
U.S. Federal Reserve
Ownership of U.S. Debt, Late 2009 (rounded)
Billion US$
