China Must Change Its Economic Model

China Must Change Its Economic Model
by Colum Murphy

Posted May 13, 2009

Charlene Barshefsky, the former United States trade representative (served 1997 - 2001) says China's economic model must change to retain stability in the current recession. She talked to REVIEW deputy editor Colum Murphy about Asia's role in the world economy and attitudes that will benefit China as it moves forward in international trade.

Basically the belief of our contributors was that this global economic crisis was going to have an impact on Asia on several different levels. What do you think will be the impact of this economic crisis on Asia?

I think the effects of this crisis will be many and varied with respect to Asia's fundamental economic model, which is highly export dependent, relying on wealthier countries to spend more and Asia relying on its own population to spend less. This model is no longer viable.

As a global aggregate of savings you have a very few number of countries that spend spend spend and an enormous number of countries that save save save. Those that save and have large surpluses essentially are depending upon a relatively few nations to spend their way into bankruptcy. It's been said for some time that model is inherently unstable and we see today, of course, it is. There is no balance on the spending countries; there is no balance on the savings countries.

Fundamentally, the economic model of both the savers and the spenders must change.

In what way do you see that change manifesting itself?

That model will have to change from export dependency and suppressed domestic consumption to heightened domestic consumption with less reliance on exports for growth. That doesn't mean Asia is going to stop exporting. It does mean that the balance of growth within Asia must and will change and that balance will be effectuated by a diminution in savings and increase in domestic consumption and a corresponding decrease in exports as the sole basis of growth.

Do you think that the government in China is consciously taking steps to move toward more domestic consumption?

Certainly every nation is looking for growth. So what are the sources of growth? For China, it had been (outside) purchases. Those purchases have stopped, so China must look internally for growth. But this is a high savings country in uncertain economic times and a drastic slowdown in China's own economy. So the source of growth is now the government, as it is worldwide; it's stimulus.

You have now trillions and trillions of dollars pumped in globally by governments to stimulate growth, to re-create growth. That growth will largely be retained internally. For China, you will see this increase in domestic growth within China. That alone is unsustainable. There are a variety of ways in which to increase growth generally; that needs to then be translated into the allocation of that stimulus in a manner best directed to promote domestic demand-led growth.

We've already seen greater demands in terms of "buy American" or "buy domestically" so do you see this type of government-led spending could actually lead to an increase in trade protectionism?

I certainly hope not because there is no surer way to reignite global crisis than to see a rapid downturn in trade. We see some protectionist action now by most major countries. The aggregate effect of which, as an economic matter, has been tiny. The larger concern is one does not want to see a mentality develop among governments that it's the foreigners' fault. Number two, one doesn't want to see governments believe that the solution to their problems is to shut trade down or out because this is the way one actually accelerates recessionary conditions. And certainly, one wants to ensure that the WTO remains strong as the organization that can settle trade disputes in a way acceptable both politically and with respect to security.

How would you evaluate the Obama administration in terms of its trade policies toward Asia and its growing calls for protectionism amongst certain sections in Congress, for example?

I worry less about that because I don't see either for the U.S. or globally any fundamental rollback in relatively open trade. Globalization is deeply embedded for every country for the major businesses of every country as an economic matter. Globalization has added extraordinary sums-trillions of dollars-to global wealth on an aggregate basis.

Second of all, many trade agreements around the world-and I daresay most of the free trade agreements around the world-are less economic agreements than they are agreements designed to build and cement alliances. Trade and economics are critical tools for that and I don't see global leadership turning away from that critical tool especially in times of crisis.

What does this crisis mean for Asia and for China?

Certainly China as a country with a large current account surplus and extraordinary foreign exchange reserves has demonstrated already that it is in a more influential position. Do I think that suggests that China is a superpower? No. Do I think China wants to be a superpower at this juncture? No. I think that China is quite focused internally and externally insofar as it helps secure China's internal strength and internal stability. But I do think certainly China, as a re-emerging economy, is doing so at a very impressive rate and I think that is a welcome development for the global economy; not a development, certainly at this juncture, to be feared.

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