China can’t keep feeding global economy
This imbalance is unsustainable. And the quest to bring nations into "alignment," for lack of a more user-friendly term, will define this century no less than the challenge of climate change.
Ostensibly, the heads of government were preoccupied with preventing another global economic meltdown. They agreed on higher capital reserves for banks to cushion them from the blow of the next pandemic of soured loans and investments. And there was a compromise of sorts on outlandish pay for financiers, with a meeting of minds on at least "clawing back" bonuses to dealmakers whose gambits later go sour.
But the real news in America’s former steel city was that the divergent socio-economic practices of developed and developing nations – and all the consequences that flow from them – were on the table for the first time at a summit of world leaders.
Much is said of the role played by errant financiers in the recent economic crisis. We hear less about the more significant factor of the global imbalance between China’s hoarding of U.S. treasuries, making it America’s largest creditor, and the "easy money" that resulted and fuelled America’s spendthrift ways.
As long as China was prepared earlier this decade to finance America’s growing indebtedness, U.S. interest rates stayed low, helping fuel the biggest U.S. housing boom-bust on record. Which of course triggered the global banking meltdown that in turn ushered in a sudden, severe worldwide recession. Among those to suffer was China, whose export volumes plummeted, and which was perhaps fastest out of the gate with a massive government stimulus program.
Some hard realities were finally confronted in Pittsburgh.
The world’s largest consumer economy cannot continue to be the principal driver of economic growth worldwide. Middle-class Americans have maxed out their personal credit in part because of a spendthrift culture, true. But the American middle class, the greatest driver of economic activity in history, has seen its income plateau over the past several decades, and actually decline when soaring costs for health care are taken into account.
Outsourcing and low-cost imports have gutted the U.S. manufacturing sector, and heavily damaged that of southern Ontario, as well.
Meanwhile, the last great blossoming of American innovation and the widespread job creation and wealth it creates – in Silicon Valley in the 1970s and 1980s – is getting long in the tooth. Meanwhile, the decades of monetary and trade deficits America has tolerated year after year since the Reagan era finally have caught up with it. America’s massive indebtedness, both government and individual, gives rise to America’s label among some economists as the most affluent of Third World nations.
The Chinese, meanwhile, are rapidly moving up the "value chain." Today’s Chinese appliances and cars have the same "Made in Japan" stigma that postwar Japanese exports suffered, before Japan became the global standard-setter in consumer electronics and then automaking.
It won’t be long before China’s reliable Haier washing machines and Chery and Geely autos begin displacing higher-cost Whirlpools, Fords and Toyotas in the North American market – as China’s Lenovo has already achieved in personal computing, and South Korea’s Samsung and LG have done in cellphones and consumer electronics.
China serves as a convenient proxy for emerging economic superpowers that trace their growing affluence to the Western preference for low-cost goods made in China, India, Brazil, South Korea, Malaysia and so on. To this point, Beijing has rejected out of hand growing concern expressed by the U.S. about an artificially undervalued Chinese currency that makes its exports so competitive that a Western consumer would be almost foolish not to favour them over locally made goods. China and other emerging economies have complained, each time they hear this concern, that the West, having established its affluence, would deny them the fast-track industrial revolutions in which they’re swept up. But this phenomenon is not sustainable.
The new framework for "mutual assessment" that U.S. President Barack Obama called for at Pittsburgh is a polite way of saying both Western and emerging-economy cultures must change. America, which will be flirting with insolvency by mid-decade, must start saving at a rate far higher than the current household rate of 3.2 per cent. (The Canadian equivalent is a pitiful 4.9 per cent.) And if America’s prospects for continued prosperity rest on becoming more fully a "knowledge-based" economy, there’s no time like the present to improve on the U.S.’s abysmal literacy and numeracy ranking of 20 among nations.
As for China, our understandable fixation on its rapid economic rise obscures what in fact is a troubled society. If not for the repressive regime in Beijing, the country quite likely would fly apart, Balkans-style, given its similar multitude of ethnic and nationalist dissidents. On a more prosaic level, the scores of Chinese factory closings caused by the global downturn prompted rioting in China’s industrial coastal cities. These centres have been magnets for in-country migrants who left peasantry for urban life, only to find themselves suddenly without work in an urban centre with far higher living costs than on the farms they left.
The recession pushed China’s leadership to the realization that the nation must develop a vibrant internal economy, like that which has served America so well for most of its history. It desperately needs a social safety net common in the West if it hopes to maintain social stability. And its household savings rate is much too high at a current 40 per cent. Unlike Canada, which suffered a paucity of internal capital in its early decades, China has sufficient internal funds to build a social-services, transportation and energy infrastructure worthy of the globe’s largest population.
In recent years Beijing has been investing heavily in infrastructure, although it unfathomably continues to lack unemployment relief and other social protections – China’s best hope of forging a truly united country held together by something other than force of arms.
"We approve of countries strengthening their macroeconomic policy coordination and together pushing forward the sustainable and balanced development of the world economy," China’s Foreign Ministry said in a statement last week.
It’s easy to quibble about the vagueness of such statements. Except that China has never expressed anything remotely like that sentiment before.
Pittsburgh was an apt venue for first broaching the jarring transformation ahead. Once an affluent steelmaker to the world, it was eclipsed by low-cost Pacific Rim producers. Then the quintessential Rust Belt city gradually reinvented itself as a centre of medical, environmental and cultural innovation around its two world-class universities, University of Pittsburgh and Carnegie Mellon University, to become a more sustainably thriving community.
The change was painful, very much of necessity rather than choice. It has taken more than two decades to bring about, and some vestiges of the old Pittsburgh remain. Yet the Economist recently declared Pittsburgh to be America’s most livable city.
On the world stage, a similar renaissance needn’t be as laggard. The alarms have been sounding a long time now. The examples of what works and the consequences of inaction are abundant. And the stakes couldn’t be higher.
dolive@thestar.ca
Filed under: legal by Forest