HONG KONG — The world’s financial leaders are gathering in Washington this weekend for crucial annual meetings of the International Monetary Fund and World Bank. Never has the world so needed leadership, imagination and creative thinking, yet never has it been so lacking, with leaders sticking their heads in the ground like ostriches or, worse, trying to export their way to economic growth, a game in which there can be few winners.
The delicately balanced scenario that confronts the financial leaders is a world economy that is growing again, barely, but in difficult and potentially dangerous ways. In the developed countries a near-jobless recovery is under way, with the potential to undermine the fast growth in developing countries, especially China and India, and the hopeful prospects emerging from Africa.
Dominique Strauss-Kahn, aka DSK, the managing director of the IMF, has put on a cautiously optimistic face, saying he does not expect a double-dip recession, even in the United States, but he warned of the need to create more jobs, saying “The Great Recession has left behind a wasteland of unemployment.”
The recession may be officially over, but it is not for millions of people who have lost their jobs and businesses that cannot get access to funds, even though interest rates are at record lows.
Brazil’s Finance Minister Guido Mantega warned last week that the world was in an “international currency war,” with no country wanting the burdens of a strong currency. Thailand’s Finance Minister Korn Chatikavanij said his country was facing difficulties of a strong baht, but so far it had not had an impact on rising exports. On the other hand, once mighty Japan intervened in forex markets to weaken the yen, a move that had some success for a week, before the yen started rising again.
Nobel laureate Joe Stiglitz said weakening the U.S. dollar would probably be the best weapon to get the economy moving again, something that Mantega is worried about. Both DSK and U.S. Treasury Secretary Tim Geithner play down fears of a currency war, but someone should tell the U.S. Congress and China.
The U.S. House of Representatives last week passed a bill to allow U.S. companies to petition for duties on imports from China to compensate for an undervalued currency. If ever there was a case of irresponsibility, this was it. The bill will put pressure on the Senate to respond in kind and on President Barack Obama to do something if he wants to avoid a crushing defeat in next month’s midterm elections. Any actual move to impose tariffs on Chinese goods would be somewhere between dangerous and disastrous, for the U.S. and China and the world.
Robert Reich, U.S. labor secretary under President Bill Clinton, who is now an economics professor at Berkeley, acknowledged that with elections weeks away, politicians wanted to show they’re committed to getting jobs back and so had adopted a policy to get tough against China. But this, he said, is “a dangerous ploy based on wishful thinking.”
Yes, the renminbi could and should be stronger — for the good of China as much as for the better and more balanced growth of the world — but, as Reich warned: “It’s naive to assume all we have to do to get Chinese to do what we want is to threaten them with tariffs. They might retaliate.” It is already costing China large sums, in the form of its accumulating dollar reserves, to keep the renminbi undervalued.
Quick lurches in the value of the currency are potentially destablizing and may have dangerous consequences, economic as well as political. The best remedy is to keep the pressure on Beijing to let its currency appreciate as part of a move toward increasing growth through domestic consumption.
In the past few weeks, Beijing’s leaders have seemed more statesmanlike. Premier Wen Jiabao, in a CNN interview broadcast last weekend, admitted that China’s economic development “lacks balance, coordination and sustainability,” adding that “We can rely on stimulating domestic demand to stabilize and further grow the Chinese economy.”
It may be too soon to conclude that Wen and China see the importance of domestic consumption. China’s economy is unbalanced to an unprecedented degree, as Yves Smith noted in the “Naked Capitalism” blog. China’s exports plus investment account for half of gross domestic product, an unheard of level. The share of investment is actually higher than exports and is increasingly unproductive. It takes $7 of borrowing to create each $1 of GDP growth, even higher than in the U.S., where the figure is $4 to $5.
China also has the largest foreign exchange reserves to GDP of any country in modern history. As professor Michael Pettis pointed out, the next two biggest were the U.S. on the eve of the Great Depression and Japan at the end of the “bubble.” It is high time for Beijing to turn away from mercantilism, as Wen has perhaps realized. On the other hand, Beijing has shown itself to be adept at saying what it thinks the world wants to hear: Witness the announcement of the move to a more market-based currency to head off a firestorm of criticism at the Group of 20 meeting.
China’s ability to debate and reach sensible conclusions earlier on these economic issues might have been aided if there had been helpful contributions from Hong Kong or Japan — the former because of its key role in China’s great economic leap forward, and the latter because of its experience of creating prosperity from the ashes of war and defeat.
Hong Kong’s entrepreneurs were active in China’s recent great economic growth. To quote a recent commentary: “The presence of Hong Kong meant that China could make full use of modern Western institutions, such as a reliable legal system, property rights, efficient services, etc., without having to go through the cumbersome decades-long hassle of building these at home.”
Hong Kong Chief Executive Donald Tsang has said little about the recent global economic turmoil. Perhaps he thinks that this is part of foreign policy — and thus out of bounds for Hong Kong — or maybe he fears that Beijing might make him a hero by sacking him if he dared speak of Hong Kong’s concerns. Has he forgotten that the much-maligned colonial officials in Hong Kong were always prepared to speak up for the territory against Britain when London ignored Hong Kong’s interests?
There is debate in China about the shape and direction of the economy, with captains of the state-owned industries and the east coast exporters fighting to keep their privileges. This is precisely where Hong Kong can contribute from its experience and wisdom. But is has been the mouse that failed to roar.
Kevin Rafferty is editor in chief of PlainWords Media, a consortium of journalists interested in development issues.