Edward K Y Chen Distinguished Lecture Series 2009, The University of Hong Kong

This evening, I just attended Edward K Y Chen Distinguished Lecture Series 2009 at The University of Hong Kong. The Title of The Lecture is 'Shifting Paradigms on Both Sides of the Global Economic Imbalance'. It was presented by Professor Justin Yifu Lin, Senior Vice President and Chief Economist, The World Bank. The lecture was indeed insightful. It provided detailed picture of the present issue of Global Imbalances. He mentioned that the content of the seminar is not the representative view of The World Bank, it is mainly his own opinions.

I will try to summarize the main points of the lecture in this short note.

As we all know, currently there is a very present issue regarding the Global Imbalance in the World Economy. The United States has a great amount of large fiscal deficit, amount up to 7% of its GDP, in which the fast increase of the fiscal deficit mainly occurs after the dot-com bubble in 2000-01. On the other hand, China has a great amount of trade surplus, from the extensive export activities to many other developed countries. This is the imbalance.

First, let's take a look at the US economy. The US fiscal deficit increased in the much faster rate, after the dot-com bubble in 2000-01. After the dot-com bubble burst, The US Government used monetary policy extensively, by lowering interest rate as many as 27 times from 6% to 1% (in a very short period of time, from August 2001 - March 2003), to stimulate the economy. The US Government also spent a large amount of money on war in Middle-East and borrowing a large amount of money from China through selling Government Bonds, which worsen the US budget status.

Second, let’s take a look at the China economy. China has been a net exporter for the last decade. China has competitive advantage due to its ‘undervalued’ RMB currency. It made the goods produced in China to be relatively cheaper, which many countries ended up to import things from China, including the US. It led China to be a net exporter and having huge trade surplus.

Now, there has been argument that so-called ‘undervalued’ RMB was the main cause of this Global Imbalance. But is this a valid argument?

The data does not show favor to this common argument. One data shows that although the US fiscal deficit grew in faster rate after 2000-01, China’s trade with US only accounts for one third of the US fiscal deficit (which the proportion has been relatively constant over the last 8 years or so). Professor Justin Yifu Lin argued that the World could not blame China’s ‘undervalued’ RMB to be the main cause of Global Imbalance, or US fiscal deficit. What about the other two-third of the deficit?

He also argued that if China let RMB to appreciate it will worsen the Global Problem, as the goods produced in China will be more expensive, and countries must buy the products at the more expensive price (whether from China or from other countries), which will decrease the purchasing power of countries, and will slow down the economic recovery.

The other factor which caused this Global Imbalance was over-capacity. The World Bank forecasted that the over-capacity problem will not be solved until 2013. This over-capacity problem slow down the economy activity, because every goods produced must be sold somewhere. Now, the demand is less than the supply.

Another issue is the saving ratio of China and of the US. The US has been long known for its low saving ratio, whereas China has been known as one of countries with highest-saving ratio. (up to 50%). There has been an argument that China should spend more to balance the economy. But if we look at the data, out of 50% saving ratio, 25% is corporate saving. Then it leaves only 25% saving ratio for individuals. This 50% saving ratio is very close to India’s saving rate. This high corporate saving ratio is due to income disparity in China. The rich has lower propensity to consume, whereas the poor has higher propensity to consume. And in the end, the corporate saved more.

He also mentioned about the effectiveness of Keynesian Solution. Keynes argued that fiscal policy will boost economy. It will work well if Ricardian Equivalence is not happening. If Ricardian Equivalence is happening, The Keynesian Solution will not work. Ricardian Equivalence says that if government gives money to the public now (by subsidy or lowering taxes), the public will expect that they need to pay higher taxes in the future, which makes the public to save even more.

This summary is not exhaustive. There are other details and arguments which I could not remember clearly. The lecture was full of economic analysis.