Tackling economic imbalances

The notion of "global economic imbalance" widely discussed these days can be typically seen in China and the United States. China allegedly saves and exports too much, the US' problem is just the opposite.

Critics now want to flip the scenario by seeing the population of China consume more and people in the US save more, with the exchange rate policy involved to correct the imbalance. That view is somewhat biased.

The imbalance does exist, but I am skeptical of its size. In other words, we should re-examine whether the US' savings rate is really that low. The crux is the traditional definition of "savings" and "consumption", the two basic concepts in modern economics that were formed more than a century ago. In the current national accounting system, spending on human capital is measured as part of consumption. Such a classification is dubious.

For example, education, culture, study, adventure and tourism are activities critical for enhancing human capital, considered the key driving force for modern economies, especially for the most advanced economies such as the US. In China, investments on fixed assets, including buying equipment and building factories, are the key engines for growth.

The economic growth of the US is no longer driven by "hardware" investments - investments largely on fixed assets such as infrastructure and facilities - but fueled by wealth of knowledge and technological innovation. It is noticeable that expenditures in these fields make up a very high proportion of the US' total GDP (gross domestic product).

In my observation, while the proportion of US companies among the world's top 500 enterprises has dropped from more than 30 percent two years ago to approximately 28 percent today, their leading positions in technological innovation, standard-setting and branding have never faltered.

The US is still the most advanced and powerful nation in the field of information technology, bioengineering, aviation and other high-tech industries, even in the agricultural sector of crop seeds, fertilizers and pesticides. These advantages are not forged in massive fixed asset investments, but from hefty spending on training, R&D and design. I believe spending in these areas should not be cataloged as consumption.

However, the US does spend too much in certain areas, such as the energy sector. The US has 5 percent of the world's population, while its energy consumption accounts for 21 percent of the total.

Another sector is medical care. Spending on medical treatment is remarkably high in the US, accounting for 17 percent of the total GDP. In the legal service sector, lawyer fees in the US are much higher than the average level in other countries. The US should consider cutting down spending in these areas; its consumers should be more thrifty when buying daily consumable goods as well.

There is a great sense of inevitability and legitimacy embedded in the imbalance between China and the US. The two countries are at different stages of development. China is in the process of industrialization, while the US has entered a post-industrialization era. The Chinese economy is dominated by material production and heavily relies on factory input, while the US economy is primarily led by the service industry and technological innovation.

Many admire China's gigantic foreign exchange reserves. Indeed, even though the US and European countries do not hold that much in the way of financial assets, their fixed capital is several times more than that of China. Besides, they each have about 10 times more ecological wealth and much more invaluable intellectual wealth and human capital.

Fundamentally, the trade and capital account imbalance between China and the US is due to the fact that China focuses on producing low value-added products, while the US concentrates on high value-added products. China's growth model is energy-intensive and environmentally unfriendly to some degree, while the US is seeking ways to improve the ecological environment.

Against such a backdrop, China has to maintain a high capital accumulation ratio and export capital to the US, while the US could control global resources with the help of its industrial, technological and financial advantages.

Liberalization of the renminbi's foreign exchange regime also won't help solve the economic imbalance between China and the US. Admittedly, it is necessary to reform China's interest rate and exchange rate policies toward a more market-oriented view so that market forces could play a greater role in upgrading industrialization. But will reform of China's exchange rate policy correct the imbalance fundamentally? Not likely.

Labor cost in China is significantly lower than that of the US, about one tenth in comparison. The imbalance can't possibly be solved until the Chinese reach the same living standards as the US population, which will take a long time to achieve.

Moreover, even if China is no longer the country with the biggest surplus, that position will be taken by Vietnam, India, Indonesia and other developing countries, just like China took over the position from Japan, the Republic of Korea and the East Asian tigers a couple of years ago. Hence, it will not mitigate the problem of the manufacturing industry's exit in the US.

It is an irreversible trend that pure capital or labor-intensive industries will be gradually phased out in the US, and the country will have to focus more and more on industries heavily leaning on knowledge, technology and management expertise. Such structural change is the so-called industrial upgrading - a quandary faced by many countries nowadays.

There is an urgent need to reform the global economic growth model. The current production and consumption model must be replaced. Taking economic globalization as a backdrop, sustainable development does not come simply with efforts made by any single or several countries alone. Each country should do its part and find out its own sustainable and environmentally friendly growth model.

The author is chairman of China Construction Bank and former head of China's State Administration of Foreign Exchange.

(China Daily 01/21/2010 page8)