Saturday, April 04, 2009

Imbalances and the Global Crisis

A number of erudite commentators point to 'underlying economic imbalances' as a major factor in the current global crisis. They argue that the situation where some parts of the world produce and save more than they consume, while others live beyond their means, has helped create the conditions for the financial speculation that has led us to the present meltdown. Paul Krugman makes a case something like this here and here.

When boiled down to its bare bones, the argument goes more or less as follows: China keeps selling things to the West and saving the money. It then lends that money back to allow Westerners to continue their spendthrift ways and put it on the tab. But this is unsustainable, and eventually all that debt has to be unwound. A solution would have to involve Western consumers being more prudent and creditors like the Chinese spending more.

The way it's described makes it sound like millions of thrifty Chinese shopkeepers being tight with their cash and refusing to spend on luxuries. Easy for readers to visualize, but surely this isn't the reality? China is an authoritarian state, with the exchange rate controlled centrally, and if the earnings from exports are banked, this is not done by individual workers but by the government and corporate elites. Surely the problem isn't that the Chinese masses prefer holding US Treasury bills to consuming goods and services, but that they are paid much less than the real value of their labour? 'China' might save too much, but it's questionable whether Chinese do.

Meanwhile, the situation of China has a flow-on effect on the rest of the world. Thomas Pogge argues here that by winning the race to the bottom in terms of labour and environmental standards, China has restricted the potential for export-led growth in other developing nations. So those who control China's economy could be denying not only their own citizens, but those of other countries, the possibility to consume in line with their productive ability.

If imbalances in the real economy are behind the bursting financial bubbles, would it be suprising if these were in turn underlaid by imbalances of power and resources that are essentially political?

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