Prospects and Risks for East Asia in the Next Decade Presentation to the World Knowledge Forum Dean Baker Co-Director Center for Economic and Policy Research October 14, 2009 Presentation to the World Knowledge Forum Dean Baker Co-Director Center for Economic and Policy Research October 14, 2009

Prospects and Risks for East Asia in the Next Decade 1.Relative growth of China, India, and the United States 2.Risks to growth: a) Bad trade path b) Stagnation in the U.S. c) More asset bubbles 1.Relative growth of China, India, and the United States 2.Risks to growth: a) Bad trade path b) Stagnation in the U.S. c) More asset bubbles

Risk 1: The Bad Trade Path 1) Continued loss of U.S.-European manufacturing – growing inequality in wealthy countries. 2) Growing protection for drug patents, software copyrights, and entertainment copyrights – increased inefficiency and rent-seeking. (Story of bad drugs.)

Figure 8: Patent Protection in Prescription Drugs in the U.S.

Risk 2: Deficit Obsessions and Destructive Trade Policy 1)East Asian countries hold up the value of the dollar against their currencies. 2)The U.S. runs low budget deficits to keep interest rates from rising. 3) Slow growth in U.S., slow growth in Asian exports. 4) Remember accounting identities: Foreign savings = Public savings + Private savings X-M = (T-G) + (S-I) 1)East Asian countries hold up the value of the dollar against their currencies. 2)The U.S. runs low budget deficits to keep interest rates from rising. 3) Slow growth in U.S., slow growth in Asian exports. 4) Remember accounting identities: Foreign savings = Public savings + Private savings X-M = (T-G) + (S-I)

Risk 3: Another Asset Bubble 1)Too big to fail doctrine has been formalized in U.S. 2)Bank executives have incentives to take big risks. 3)Regulators have not gotten any smarter (or more accountable) 4)An asset bubble may be the only way to boost growth in the U.S. 1)Too big to fail doctrine has been formalized in U.S. 2)Bank executives have incentives to take big risks. 3)Regulators have not gotten any smarter (or more accountable) 4)An asset bubble may be the only way to boost growth in the U.S.

Conclusion Asia has very bright prospects, it will be the center of economic activity in the next decade. The biggest risk would be to focus too much on the United States. Asia has very bright prospects, it will be the center of economic activity in the next decade. The biggest risk would be to focus too much on the United States.