1 Post-crisis Competing Models Albert Keidel The Atlantic Council of the United States for The Transatlantic Academy September 28, 2010 At The German Marshall Fund of the United States 1744 R Street, NW Washington, DC, USA Copyright © 2010 Albert Keidel III

2 The controversy: Government’s proper role 1.Different at different development stages. 2.Not bigger or smaller – but better. 3.Free markets need strong government. 4.“Efficiency” can imply less liberalization and more regulatory oversight. 5.National economic leadership requires well-designed institutions.

China is not the challenge The financial crisis humbled old models. Failed development has lasted 60 years. Poor countries can’t afford infrastructure. Nearly all of East Asia is a model. Corruption cripples rich and poor states. Whence world liquidity - only U.S. credit? Regulatory effectiveness must be global. 3

China’s real model - misunderstood 1.China’s growth has not been export-led. 2.China is not mercantilist. 3.The RMB exchange rate is not out of line. 4.China was not at all a cause of the crisis. 5.China’s financial system is fairly efficient. 6.The managed capital account is optimal. 7.China’s gov’t structure has legitimacy. 4

Chinese GDP Growth Independence from U.S. GDP Fluctuations 5

6 Annual GDP Growth and Inflation,

7 Was this caused by the exchange rate?

8 Is the RMB too low? … or too high?! After the euro fell in July, 2008 China decided not to let the RMB depreciate against the US$

9 Is the RMB too low? … or too high?! After the euro fell in July, 2008 China decided not to let the RMB depreciate against the US$

10 U.S. Consumer Credit and Current Account Balance

Current Account Imbalances for the U.S., China and Rest of the World

12 Where were the Surpluses? China is there too, but came to the party late …

13 Credit Growth: China and Germany did not follow the U.S. lead

Easy characterizations don’t hold up; instead: 4. China’s financial system is fairly efficient. 5. The managed capital account is optimal. 6. China’s gov’t structure has legitimacy. 14

Intellectual & Academic Foundations Friedrich List versus fake Adam Smith Theorem of the second best Pseudo Keynes versus Hyman Minsky State versus corporate capitalism 15

What models will work? It depends on the development stage. Repressed finance in poor countries? Infant industry protection? Regulators independent of industry? Unions and a higher minimum wage? 16

Overall conclusion: 1.Financial crisis and East Asian success reveal serious flaws in liberal market models for poor countries. 2.The state must provide stronger and better quality leadership. 3.Rich countries with weak regulatory systems and deteriorating income distribution need corporate controls and expanded public investment and services. 17

18 The End Thank you

19 How is China’s economy doing?

20 Quarterly trend shows the strong recovery.

21 Quarterly GDP Growth, Year-on-Year,

22 Quarter-on-Quarter, Seasonally Adjusted

23 Quarterly Trade,

24 Monthly Trade and Balances, Feb.

25 Growth: Domestic & Foreign Demand,

Current Account Imbalances for the U.S., China and Rest of the World

27 What caused China’s surpluses? Fighting inflation from the SARS epidemic. China’s exchange rate didn’t do this:

28 Did RMB shifts cause this trade pattern? No. U.S. and Chinese quarterly commodity trade balances

Foreign Reserves as a Share of Money Supply, (%) 29

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