Stiglitz on China and Why U.S. Economic Advice is Discounted
Joseph Stiglitz of Columbia University, winner of the Nobel Prize in economics in 2001, discusses why yuan revaluation will have little effect on the trade balance, why yuan revaluation could be bad for the U.S., why China wants a stable exchange rate, and why China has little reason to take economic advice from this administration:
US has little to teach China about steady economy, By Joseph Stiglitz, FT: As excitement over China’s revaluation has died down ... it is time for a calmer assessment about what it does and does not mean for China, for the US and for the global economy. … whether this, or a succession of revaluations, eliminates China’s trade surplus will have little effect on the more important problem of global trade imbalances, and particularly on the US trade deficit. Much of China’s recent gains in textile sales … came at the expense of other developing countries. America will once again be buying from them, and so total imports will be little changed. … Unless domestic investment goes down or domestic savings go up, the trade deficit will persist, unabated. The trade deficit could diminish but if it does, it will not be a pretty picture. Domestic investment, for instance, could go down if we succeed in getting our wish and China’s trade surplus disappears; with China no longer using the money from its trade surplus to fund our huge fiscal deficit, medium- and long-term interest rates would rise. The economic downturn, and the decrease in investment, would be compounded if the increase in interest rates pricked the housing bubble. … There is a high cost to exchange rate volatility, and countries where governments have intervened judiciously to stabilise their exchange rate have, by and large, done better than those that have not. Exchange rate risks impose huge costs on companies; it is costly and often impossible to divest themselves of this risk, especially in developing countries. … The US economy is growing at a third the pace of China’s. Poverty is rising and median household incomes are, in real terms, declining. America’s total net savings are much less than China’s. China produces far more of the engineers and scientists that are necessary to compete in the global economy than the US, while America is cutting its expenditures on basic research as it increases military spending. Meanwhile, as America’s debt continues to balloon, its president wants to make tax cuts for the richest people permanent. With all this in mind, China’s leaders may not feel they need to seek advice from the US on how to manage either the exchange rate or the economy.
Posted by Mark Thoma on Tuesday, July 26, 2005 at 06:30 PM in China, Economics, International Finance |
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