Transcript a new era of opening up - Columbia Business School

A NEW ERA OF OPENING UP
Joseph E. Stiglitz
China Development Forum
March 20, 2011
Beijing
China has had remarkable growth
for more than 30 years
• Benefitting greatly from globalization
– Trade
– Investment
– Technology
– Human Capital
• But economic model that worked well in
the past may not work in the future
– Changing economic circumstances of China
– Changing global picture
In the aftermath of the Great Recession
global economic order is changing
• Recovery in West slow and fragile,
especially with respect to employment
– Monetary policy at its limits, fiscal policy
constrained
– high unemployment will generate
protectionist pressures (already evident)
• New perspectives: global financial market
integration has substantial downside risks
– Importance of maintaining capital and
financial market regulations
Key Points
1. The broadening and strengthening of
China’s engagement with the rest of the
world—the new era of opening—should be
welcome
– Reflects China’s new role in global economy,
changing understandings about economics
Recycling Savings
2. There are great global needs for
investment—in developing countries and
response to climate change
– The world’s problem is not a savings glut
– The problem is the failure of global financial
markets to use savings well
– Deploying savings will be facilitated by the
creation of a global climate change risk
mitigation facility
Global Governance
3. This is an example of the need for new
approaches to global economic
governance
– Also a need for reforming global reserve
system
– China needs to take an active role in G20
– And in doing so, recognize that the global
economic architecture has major deficiencies
• Stability
• Inequities for developing countries
4. New Global Growth Pact
• Important to shift debate away from
exchange rate
• Higher global growth will facilitate
exchange rate adjustments
• Objective is to find common policies that
will promote growth
– Better income distributions (in both China and
US) will facilitate higher growth
– So too would new reserve currency system
A New Economic Strategy for
China
• China has to move away from export-led
growth to domestic-led growth
– Long recognized
– But exports as % of GDP grew from 19%
(average in ‘90s) to 29% (2001-2010 average),
current account balance grew from 2% (‘90s)
to 4% (2001-2010 average).
• Part of this will be based on more
consumption
– Requiring an increase in share of HH income
in GDP
• Though better safety net and better public
education will reduce incentives for HH savings
• One child policies leading to gender imbalance
may also be contributing to high savings rates
– And better financial markets, so small
businesses (critical to service sector) don’t
have to save as much
• Focusing on lending, not speculation or trading
• Including expanding local and regional banks
• Beware of the dangers of bubbles!
Restructuring economy
• Necessary to remain competitive as real wages increase
and to maintain growth, to avoid middle income trap
– Growth rate likely to decline
– But rapid convergence is still possible
• Government policies crucial
– Focus should be on sustainable increases in well being of all (or
most) citizens, not standard measure of GDP
• Key point of International Commission on the Measurement of Economic
Performance and Social Performance
• Restructuring
– Move away from manufacturing to services
– Within manufacturing, towards more environmentally sensitive
production, higher value added sectors, higher value added
within value added sectors
– And even more towards an innovation economy
• Will require more than rhetoric: carrots
and sticks
• Negative real interest rates contribute to
excessive capital utilization
• Exchange rate policies, while they may
provide some short run benefits, may
distort economic structure
• More fine turned industrial policies may be
required
• Financial sector reforms—strengthening
parts of financial sector focused on SME’s
• Tax policies designed to reshape economy
• Other institutional reforms
Rebalancing Economy
• Increased public spending on health and education
– Especially if goals of achieving a harmonious society are to be
achieved
• Increased public spending on infrastructure, including
public transportation
– Especially if goal of creating livable cities are to be achieved
• Increased public spending on research and higher
education and encouragement of more private spending
– Especially if goals of creating an innovation society are to be
achieved
•
•
•
% of firm revenues on R & D still low
Patents per capita in Korea 6 time global average
China 0.6 times global average
– Creating a developmentally oriented IPR regime
• One component of a national innovation system
• Markedly different from TRIPS
Elements of New Engagement
1.
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6.
Trade
FDI
Short term capital flows
Chinese investment overseas
Foreign assistance
Engagement in global governance
Elements of New Engagement
• Trade
– More “value added”
– Recognizing changing global landscape
• Necessary to address problem of trade surpluses
– May already in process of being corrected
• Trade and FDI policy need to be designed
to promote growth, restructuring
Foreign investment into China
– Identifying elements that are critical to China’s
future growth and ensuring that FDI is playing
appropriate role
•
•
•
•
Not money
But access to technology and foreign markets
Skills training
Careful attention to impacts on domestic
entrepreneurship
» Should not be given favorable tax or regulatory
benefits
• China’s “bargaining” position improved
– Larger market
– Continue working to improve institutional environment
Short term capital flows
– Short term financial flows can be destabilizing
• Capital and financial market liberalization not
related to growth
• Do contribute to instability
• Not necessary for FDI
• Represent on going concern, even with controls in
place
– $435 bn hot money 2010
– Divergent growth paths (robust growth in China, weak
growth in West) implies that this is going to be problem,
– Especially if US monetary authorities continue with QE
Responding to Short Term
Capital Flows
– Panoply of instruments—need to use whole
portfolio
– Maintain controls
– Impose capital gains taxes, property taxes
– Financial sector regulations
– Sensitivity to effects of interest rates
More Chinese investment
overseas
– Part of overall economic strategy
• Access to markets, technology, skills
• Ensured supply of resources
– Markets highly volatile
– Many market failures
• Higher returns on assets than buying T bills
More foreign assistance
– China has much to contribute to development
strategy of poorest countries
– China has ability to provide assistance
– Especially important as Western countries
may be cutting back on assistance (or
targeting assistance more strategically)
– Assistance has been part of strategy for most
developed countries
• Must be attentive to how badly designed policies
can impede development and have adverse
political impacts
New engagement in global
governance
• Reflecting changes in global balance of
power
• And new global order
– G-20 replaced G-8. Moving to multi-polar
system. Increasing influence of emerging
markets in determining rules of game
• Rules often were unfair to developing countries
• Emerging markets, including China, have an
opportunity to redress balance
• Many of key problems are global in nature:
– Global warming;
– global imbalances;
– global reserve system;
– global trading system;
– global intellectual property system;
– global food security;
– global poverty
However, problems will not be solved
without the active involvement of China,
the world’s second largest economy
• In designing new agreements, China
should be sensitive to developmental
impacts
– Doha Round agreement, as it now stands, is
not a development round
– TRIPS is not a developmentally oriented IPR
system, e.g. of the kind advocated by WIPO
– Investment agreements are typically not
balanced
Changes—new era of opening up combined
with restructuring and rebalancing will
enhance standards of living in China
And promote employment and other social
objectives
• But may only do a little to reduce China’s trade
imbalances, even less for global imbalances,
especially in SR
– Innovation, education will increase competitiveness
– Offsetting gradual adjustments in nominal exchange
rates, and even in domestic wages
– Import content of increased consumption is limited
– US trade deficit could even worsen
Global Consumption Patterns
• The planet will not survive if everyone tries to imitate US
consumption patterns
– America needs to correct its excessive carbon usage
• And to live up to commitments made in Rio Convention concerning
financing incremental costs of emission reductions and technology
transfer
– China has the opportunity today to try to avoid excessive carbon
usage
• Carbon tax and regulations are critical
– And the world needs to impose cross border carbon taxes on
any country that has not appropriately constrained carbon usage
• High standards of living can be consistent with low
carbon footprint
The World’s Problem is Not A
Savings Glut
• Accusation as attempt to shift blame away from
U.S. financial markets for misallocation of capital
• World is in great need for investments for
retrofitting the global economy for climate
change and promoting development
– Failure of financial markets to recycle savings to good
uses
– World needs global risk mitigation facilities to facilitate
recycling China’s saving to where it is globally needed
– China is already making major contribution to Africa’s
growth both indirectly (from increased demand for
commodities) and directly (from increased investment)
• 12th Five-Year Plan represents a continuation in
the restructuring of the Chinese economy
– Another step in “crossing the river by feeling the
stones”
– Central to its success will be a new era of opening up
– A new engagement with the global economy
– With new opportunities and new responsibilities
– Including active engagement in reshaping the global
economy