U.S., China Have a ‘Credibility’ Gap on G-20’s Economic Pledge
A push from U.S. President Barack Obama and Chinese leader Hu Jintao to shrink trade and investment imbalances is probably years away from being fulfilled, according to comments from their own officials.
Group of 20 leaders met in Pittsburgh yesterday aiming to reduce global capital imbalances blamed for contributing to the financial crisis, including a U.S. reliance on borrowing from abroad to finance spending, and Chinese dependence on exports.
“That’s not a simple thing to achieve, you don’t get that by writing a communique,” David Nelson, acting U.S. assistant secretary of State for Economic, Energy and Business Affairs, said in an interview. Ma Xin, an official at China’s government planning agency, warned that his nation’s “low” consumer spending is a problem that has “accumulated over many years and it is a structural problem.”
Failure to accelerate a shift toward domestic demand in Asia, and to diminished U.S. borrowing, risks laying the ground for future crises. Federal Reserve Chairman Ben S. Bernanke has said the influx of savings from Asian nations contributed to depressing U.S. interest rates in the middle of the decade, when the credit boom that preceded the current crisis began.
G-20 Statement
The G-20 yesterday released a joint statement saying that “ensuring a strong recovery will necessitate adjustments across different parts of the global economy, while requiring macroeconomic policies that promote adequate and balanced global demand.”
“Whatever the communique says, it’s up against a very, very difficult change for China to make, and they’re not convinced they have to make it,” said Derek Scissors, Asia economic policy fellow at the Heritage Foundation in Washington, said in a telephone interview. On the U.S. side, its record budget deficit means “we don’t have any credibility,” he said.
The G-20, which groups the largest developed and emerging nations and was established after the 1997-98 Asian financial crisis, concluded its third summit yesterday. The meetings were elevated to the leaders’ level in November.
“There is value in having leaders meet and agree conceptually, but that’s not the end of the road,” said Nelson of the State Department. “It takes a lot of work, a lot of initiatives.”
Budget Deficit
The U.S. will post a federal budget deficit this year of $1.59 trillion, up from $459 billion last year, according to Congressional Budget Office projections.
While American households increased their savings rate to 4.2 percent by July from a low of 0.8 percent in April 2008, it remains less than half the 8.9 percent average of the 1960s and 1970s.
Similarly, even as China has this year seen its economy accelerate without relying on export gains, it has done little to reduce savings as a share of the economy. Household and corporate savings amount to almost 51 percent of gross domestic product, compared with about 48 percent in 2005, International Monetary Fund figures show faxless cash advances.
“The saving rate in the U.S. is growing and we believe that it is a correction of the old model” of economic growth reliant on debt-financed spending, Ma, director-general of international cooperation at the National Development and Reform Commission, China’s top planning agency, said in Pittsburgh.
China’s Understanding
Ma, speaking to reporters, added that “China also understands that its economic-growth model has some flaws. One of them is low consumption capability.”
Before arriving in Pittsburgh, Obama said redressing global imbalances would be a priority.
“We can’t go back to the era where the Chinese or the Germans or other countries just are selling everything to us,” the president said in an interview with CNN broadcast Sept. 20. G-20 leaders need to make “sure that there’s a more balanced economy.”
Treasury Secretary Timothy Geithner said this week that the higher savings rate is an “encouraging sign.” He added in a press briefing that “one of the great strengths of this country is that we adjust quickly, we move quickly.”
After “a long period of time living beyond our means, you see people already changing behavior,” the Treasury chief said in Pittsburgh. “That’s one reason why we can stand here today and express some measured optimism about our capacity to put in place a more sustainable recovery.”
‘Root Cause’
China’s President Hu told the G-20 yesterday that “the issue of global economic imbalances has drawn close attention from the international community.” The “root cause is the yawning development gap between North and South,” he said, according to an English translation of his text, referring to developed and poorer nations.
Hu’s government is overseeing a 4 trillion yuan ($586 billion) stimulus plan — coupled with record lending, tax cuts and subsidies — to spur the nation’s economy. While exports dropped for a 10th month in August, retail sales climbed 15 percent from the same month a year ago as consumers snapped up everything from televisions to automobiles.
Even so, it will take years for China to build a social safety net, with health care and retirement protections, that would reduce incentives for “precautionary” savings, said Nicholas Lardy, a China economy specialist at the Peterson Institute for International Economics in Washington.
To reduce further its export reliance, China should eliminate manufacturing subsidies that make its exports cheaper, and allow the yuan to appreciate against the dollar, Lardy said.