From the Peterson Institute of International Economy:
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New Book
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The global financial crisis and ensuing economic downturn has raised many questions concerning the future of global economic growth. Prior to the financial crisis, global growth was characterized by growing imbalances, reflected primarily in large trade surpluses in China, Japan, Germany, and the oil exporting countries and rapidly growing deficits, primarily in the United States. The global crisis raises the question of whether the previous growth model of low consumption, high saving countries such as China is obsolete. Although a strong and rapid policy response beginning in the early fall of 2008 made China the first globally significant economy to come off the bottom and begin to grow more rapidly, critics charged that China's recovery was based on the old growth model, relying primarily on burgeoning investment in the short run and the expectation of a revival of expanding net exports once global recovery gained traction. Critics also argued that, as government-financed investment inevitably tapered off, the likelihood was that global recovery would not be sufficiently strong for China's exports to resume their former role as a major contributor to China's economic expansion. The prospect, in the eyes of these critics, is that China's growth will inevitably falter.
This study examines China's response to the global crisis, the prospects for altering its model of economic growth that dominated the first decade of this century, and the implications for the United States and the global economy of successful Chinese rebalancing. On the first it analyzes the strengths and weaknesses of China's stimulus program. On the second it analyzes the nature of origins of the imbalances in China's economy and the array of policy options that the government can use to transition to more consumption-driven growth. On the third successful rebalancing would mean that more rapid growth of consumption would offset the drag on growth from a shrinkage of China's external surplus. Successful rebalancing would mean China would no longer be a source of financing for any ongoing US external deficit. From a global perspective China would no longer be a source of the global economic imbalances that contributed to the recent global financial crisis and great recession.
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Op-ed
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For almost a decade, China has followed a mercantilist growth strategy, which has involved maintaining a deliberately cheap exchange rate to boost exports and growth. Crucial to this policy has been China's choice to keep the economy relatively closed to foreign financial flows. Had it not done so, foreign capital chasing the high returns in China would have put upward pressure on the Chinese exchange rate and undercut its ability to export.
India, on the other hand, is steadily if stealthily dismantling its capital controls, foregoing the ability to emulate the Chinese growth strategy. For reasons still unclear, the world, and hence Indian policymakers, are in thrall to the narrative of "imbalance" surrounding Chinese mercantilism. In this view, mercantilism has been a problem for China, creating distortions and reducing welfare, and a problem for the world.
Chinese mercantilism has not been costless, and these costs may well be rising. But this imbalance narrative has obscured the first-order and potentially paradigm-shifting lesson about Chinese mercantilism: It promoted unprecedented growth, raised consumption dramatically, reduced vulnerability to risk, and facilitated China's rise as an economic superpower. India should avoid egregious Chinese mercantilism. But there is no reason India should, by liberalizing capital flows, deprive itself of the tools to prevent currency overvaluation, lower growth, and greater susceptibility to macroeconomic crises. There is a middle path between repelling the capital inherent in Chinese mercantilism and recklessly embracing it as India has chosen.
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