In the first article I confined my attention to the abnormalities of the US in correcting global imbalances. Today I want to shift my emphasis more on Asia, and more specifically on China.
The following three tables are reproduced from the paper of Eswar S. Prasad’s article, published in May, 2009. (“Rebalancing Growth In Asia,” http://www.nber.org/papers/w15169, NBER, Working Paper 15169, July 2009.)
In this paper he discusses the issue of rebalancing growth in Asia. In addition to the deathly ill economy of the US, as discussed in previous column, another extreme opposite case is taking place in Asia. The current global problems, abnormalities in Asia, symbolized mostly by China, can be put as follows:
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The share of final consumption in overall GDP is not sufficient. Its share in Turkey’s GDP is 35 percent, whereas its share in the US’ GDP is 71 percent. Under the current conditions, this is a net welfare transfer to the residents in the US, provided that this is sustainable.
Another striking aspect of growth is the over emphasis on capital-based investment with less contribution from employment front. The rate of real growth in China between 2000 and 2008 is 10.2 percent. Almost 0.9 percent came from employment whereas 5 percentage points came from investment and 1.1 from net exports.
Excessive savings that stem from the systemic limitations and pressures. Gross national saving rate to GDP exceeds 50 percent. Net saving is also well above 40 percent.
Therefore, it is obvious that there must be a “correction” both in the US as well as in China in order to prevent a meltdown in the global economic architecture. In that regard, therefore, the rate of saving must be reduced in China in order to provide more contributions to GDP from domestic consumption and motivate more imports.
Although I agree with this perspective, Americans should also stop being an abnormal country as much as China. For instance, if a country such as the US has such big deficits, as mentioned above, the cost of life should be higher in parallel to that. This means that Americans should save more and consume less.
To sum up, leaving the paradigm of “lots of talk and doing nothing in reality” aside, a real reform should start, with sincere feelings, in order to create a new and multilateral global economic structure that works.
