December 7, 2010


China Needs a U.S. Lesson (Alberto Alesina and Luigi Zingales, 12/07/10, Bloomberg)

Tear down this Chinese wall.

In his famous 1987 speech in Berlin, U.S. President Ronald Reagan delivered the exhortation to Soviet leader Mikhail Gorbachev: “Tear down this wall.” Contrary to everybody’s expectation, the wall started to come down only two years later.

It is about time to give the same directive to communist China. The Chinese wall is metaphorical, but equally hideous: It limits freedom of expression, assembly and movement. It prevents the Chinese from pursuing their happiness and choices freely. If there weren’t enough moral and humanitarian reasons to make that exhortation, here is an economic one: The lack of freedom in China is the main cause of imbalances in the world. [...]

For every country, the current account is equal to the difference between the income produced and the sum of domestic investment and consumption. When a country consumes and invests less than it produces, it is bound to have a current-account surplus.

In the case of China, a country that grows 9 percent a year and invests 43 percent of its gross domestic product, it is hard to argue that it invests too little. But it is very easy to argue that it saves too much: 54 percent of GDP versus an average of 33 percent among developing countries and 17 percent among Organization for Economic Cooperation and Development economies. So China’s surplus is due to its excessive saving, not to its undervalued currency.

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Posted by Orrin Judd at December 7, 2010 6:29 AM
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