There is no shortage of villains to blame for the global financial crisis.
One is the phenomenon of global macroeconomic imbalances–current account deficits in the U.S. and other advanced economies, matched by surpluses in many emerging market and oil-exporting economies. Even if they were not the key factor, global imbalances served as tinder for the financial crisis by providing cheap money that facilitated a consumption binge in the U.S. and encouraged financial shenanigans.
Remarkably, economies around the world are still looking to ride the U.S. coattails to a recovery. Emerging markets like China and advanced economies like Germany and Japan seem to be counting on the U.S. market to absorb more of their exports. This is clearly not in the cards if U.S. consumers remain reluctant to return to their spendthrift ways. And surely we do not want a resurgence of global imbalances.
So how then to rebalance the world economy? A key component of the overall global rebalancing effort is to fix growth imbalances in Asian emerging markets. This will not only help stabilize the world financial and economic systems but would also be in the direct interests of those countries to shake themselves free from export-led growth.
Since a country’s current account balance is simply the difference between national savings and investment, we first need to understand the evolution of national savings in Asia. Indeed, U.S. Federal Reserve Chairman Ben Bernanke famously argued that the Asian savings glut was the key global problem.
Looking at the three largest economies in Asia outside Japan, national saving rates have risen in China and India but fallen in South Korea. Which components of national saving have driven these patterns? During 2000-08, household saving rates rose gradually in China and India but fell sharply in Korea. Corporate savings surged across Asia during this period, becoming the main component of gross national savings in the region.
In terms of sheer magnitude, China’s national savings and current account surpluses dominate the region’s saving-investment balances. China accounts for just under half of GDP in Asia ex-Japan, but accounts for 60 percent of total gross national savings and nearly 90 percent of the region’s overall current account surplus. Thus, the Asian rebalancing story is largely one about China.
Surely this problem is on its way to being solved. After all, China has recorded tremendous growth during this decade and bounced back sharply from the end-2008 slowdown.
But this is not the full story. Bank-financed investment growth has dominated GDP growth in China during this decade. Combined with subsidized land and energy, this has encouraged capital-intensive production, an odd outcome for a labor-rich economy.
China has by far the lowest share of private consumption to GDP in Asia and, during this decade, has recorded the lowest rate of employment growth relative to GDP growth.
The recent stimulus package has boosted GDP growth by stoking an investment boom. This could make China even more dependent on exports if domestic employment and income growth do not keep pace with output growth. Stimulating private consumption is clearly a priority for Chinese policymakers.
In fact, household saving rates have been going up. From 1995 to 2008, the average urban household saving rate in China rose by 11 percentage points, to about 28 percent of disposable income. In joint research with Marcos Chamon of the IMF, we find that this is best explained by the rising private burden of expenditures on housing, education, and health care.
Moreover, households are saving more to buffer themselves from the effects of rising macroeconomic uncertainty during the transition towards a more market-oriented economy. Such precautionary saving has been amplified by the underdeveloped financial system, which provides low returns on bank deposits and constrains borrowing against future income.
These findings have clear implications for how to boost household consumption in China. Financial market development would give households the possibility of borrowing against future income, better opportunities for portfolio diversification, and better rates of return on their savings. Increasing spending on the social safety net and other government insurance mechanisms would reduce precautionary motives for saving.
Better provision and delivery of health care for older citizens is also important, especially in view of lengthening life spans and rising demand for health care. Increasing public provision of education could lower savings by reducing the need to accumulate assets to finance future education expenditures.
There is no single magic bullet for shifting growth away from an excessive dependence on exports and investment. A number of complementary policy measures are needed to boost private consumption and make growth more balanced. This will improve the welfare of Chinese citizens and also contribute to global financial stability.
[On the ongoing trade negotiations] If we’re serious about resolving the core issues that the U.S. has with China, then this is going to be a way station that’s going to require a lot more continued focus by the administration for a number of months if not years.