COMMENTARY: MONETARY POLICY
A joke popular in China in recent years tells of an old Chinese woman and an old American woman who meet in heaven. “Just before I died, I could finally afford to buy a house,” the Chinese lady says. The American responds, “Just before I died, I finally paid off my mortgage.” Though premised on stereotypes of spendthrift Americans and frugal Chinese, the story helps explain how an imbalanced world economy lost its bearings.
Two dimensions of the crisis distinguish it from past economic disruptions and explain its tenacity. The first is the paradox of credit, which is simultaneously dynamic and destabilizing. The expansion and dominance of global finance opened the gate for faster capital accumulation and material abundance, but at the same time sowed the seeds of crisis. In the United States, relaxed monetary policies and esoteric financial engineering gave consumers easy access to luxuries like bigger homes, better cars and more vacations, even if they had no savings.
A credit surplus in wealthy countries resulted in a production surplus in emerging, export-oriented countries like China and Brazil. These imbalances have had negative effects for both sides. In the West, manufacturing has been hollowing out for decades as industrialists migrate to developing countries, where labor, equipment and materials are cheaper. Moreover, the middle class has shrunk, as the returns of a finance-driven economy have flowed to “fat cats” who control the levers of credit. In emerging economies, urbanization and industrialization have lifted hundreds of millions of people out of poverty but have also exacted a heavy toll on the environment.
The second dimension of the crisis is its interconnected nature. The world is not flat; it is more like a rapidly contracting fishbowl. Globalization explains why the thrashing of a small fish like Greece, which represents 2.3 percent of Europe’s economic output, has threatened to drown the Continent. It also explains the plight of a goose farmer I got to know in a remote, mountainous part of Anhui Province. Before the crisis, the down from a single goose could be sold for about 13 yuan (about $2), but after the crisis the same amount of down sold for less than 7 yuan. The farmer’s son, a migrant worker, was laid off from a factory, after numerous orders from overseas were canceled.
In the 1970s and 1980s, countries like China and India began to reform their economies, while information technology revolutionised production and marketing. But the global boom that resulted, with fast growth and low inflation, cannot be reproduced. The world economy has not found a new source of momentum since the Internet bubble burst in 2000. Instead, financial institutions, governments and consumers tried to achieve prosperity through reckless lending and borrowing (much of it for housing).
Now rising labor and resource costs, growing inflation pressure and large sovereign debts have made fiscal and monetary policy less effective. What can be done? First, we cannot expect neoliberalism — privatization, deregulation, free trade — to revive growth. The credit paradox is only narrowly a financial crisis — it is a crisis of faith, one that summons us to turn away from a capital-centered economy to a human-centered one.
Capital cannot be expected to be self-policing. To prevent it from mortgaging humanity’s future, governments must reject laissez-faire attitudes. The “visible hand” of government is needed to manage the markets, revamp regulatory systems and bridle reckless behavior. Governments should encourage businesses to invest in the “real” economy — to promote technological innovation and job creation rather than speculation and profiteering. Second, the world’s largest economies — the United States, China, the European Union — must improve coordination on macroeconomic policies, as well as regulation and trade, and resist the temptation of protectionism.
Third, balance must be restored: between the financial sector and the real economy; between domestic and overseas demand; between developed and developing countries. China has moved to encourage domestic consumption instead of relying solely on exports. The Great Depression and the Second World War were followed by revolutions in aeronautics, nuclear energy and space exploration. The oil crisis of the 1970s was followed by an information-technology revolution.
Only further innovation in science and technology can promote productivity and eventually lead the world out of the current crisis. While it is crucial for the United States and China to bolster their own development, they also need to strengthen cooperation in trade, investment, finance, infrastructure, technology and other fields. The two economies have become highly interdependent; last year, bilateral trade topped $450 billion.
Frictions are hardly avoidable, but what’s important is for the two sides to handle their differences through coordination based on equality and mutual understanding. Only by acknowledging our extreme interdependence will we make the fishbowl effect work for humanity, rather than against it.
Li Congjun is the president of Xinhua News Agency, the official press agency of the People’s Republic of China.
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