国际金融危机下的中国经济 China's Economy in the International Financial Crisis

China's Economy in the International Financial Crisis has moved

2010-01-07T00:24:00.000-08:00

This blog has moved. For readers outside China it can now be found at http://ablog.typepad.com/citifc/.

For readers in China it may be better to find this blog at http://www.chinaintheinternationalfinancialcrisis.com/.

China’s investment surge aids its own and the world economy

2009-05-14T16:26:00.000-07:00

The publication of data for April paints a graphic picture of the present interplay of forces within China’s economy. They also show, so far, the broad correctness of the policies undertaken by China’s government in meeting the international financial crisis and, simultaneously, illuminate the very serious errors of writers such as Martin Wolf, chief economics commentator of the Financial Times, who advocated an entirely different course.

Externally China’s economy continues to be struck with great force by the current collapse in world trade produced by the international financial crisis. China’s April exports were down 22.6% compared to a year earlier. This is a lesser fall than for most countries but necessarily applies severe contractionary pressure to China’s economy.

Internally the Chinese government’s stimulus programme has led to a 30.5% rise in investment in fixed assets in the first four months of 2009 – an increase from the 28.6% year on year increase in the first quarter. Simultaneously China's retail sales in the year to April grew by 14.8%.

The result of the contradictory impact of the negative pressure from the decline in export, and the positive one from internal economic expansion, was the 7.3% year on year increase in industrial output to April. This is relatively low by China’s recent standards but stellar by those of almost all other countries which are suffering major declines in industrial production.

As China’s investment is rising more rapidly than consumption the share of investment in China’s GDP is necessarily rising. While precise quantitative data on the composition of GDP will not be available for some time nevertheless it is possible to judge orders of magnitude.

If it is assumed that China’s overall consumption rises at the same rate as retail sales (which is probably on the high side but no alternative objective measure is available at present),and that retail sales and investment continue to rise for the rest of the year at the same rate as in the first four months, while it is simultaneously assumed the balance of payments surplus declines by 30%, then this implies fixed investment would rise from 43% of China’s GDP in 2007 to approximately 46% in 2009. Evidently there are a considerable number of assumptions in such an estimate regarding trends in the rest of the year but it gives a rough yardstick.

Calculations done by Jing Ulrich, chairwoman of China equities at JP Morgan in Beijing, give a slightly lower estimate - that at present rates of growth investment will account for 45% of China’s GDP this year. Whatever the exact final outcome, therefore, it is clear that the share of investment in China’s GDP is rising.

In the present circumstances this has necessary consequences for China’s balance of payments surplus – given that such a surplus is necessarily equal to the surplus of domestic savings over domestic investment.

It is wholly unlikely that China's total savings level is rising at present given that the state budget is projected to move from balance to a 3% deficit this year, and company profits, the main source of China’s high savings level, are falling as a proportion of GDP under the impact of the financial crisis. China this year will at best have the same savings level as last year, or more probably its savings rate will decline somewhat.

As China’s savings rate is static or falling, and investment is rising, this implies a fall in China’s balance of payments surplus during 2009. China’s broader balance of payments figures will not be available for some time but balance of trade figures are available to April - and the trade balance dominates China’s overall balance of payments position.

The trade figures indicate that China’s monthly trade surplus fell from a peak of $40.1 billion in December to $13.1 billion in April. This figure, however, does not take into account seasonal fluctuations and a comparison with April last year shows a smaller reduction from $16.7 billion to $13.1 billion. The trend in the balance of payments surplus at present, however, is downwards. China’s balance of payments surplus, in short, is likely to fall as domestic investment rises.

This development may be sharply contrasted to the course advocated by Martin Wolf, and others, that China should close the gap between its savings and investment levels primarily by cutting its savings level rather than increasing its investment rate. As has been frequently pointed out on this blog there is a clear factual, as well as theoretical, positive correlation between a high rate of investment and a high rate of growth. China’s economy would slow if it were to reduce its investment rate – something which is not merely undesirable from the point of view of China but, particularly given the present international financial circumstances, is also highly undesirable from the point of view of the world economy. The present course of the Chinese government, which is increasing China’s investment rate, is therefore far preferable to the course advocated by Wolf not only from the point of view of China but from the point of view of the world economy.

Regarding China’s balance of payments surplus itself, while China requires a high rate of investment for a high rate of economic growth there is no reason to be found in economic theory, nor is there any evidence to suggest, that a high balance of payments surplus is any sense a precondition for rapid economic growth. Indeed, as a balance of payment surplus necessarily means that resources are not being productively invested in China, but are being invested in US Treasury bonds, it would be preferable, and secure a higher rate of return, for China to productively use a larger proportion of its assets within China – or put in other terms, the preferable way for China to use its high savings rate would be to increase its domestic investment rate from its previous level.

The argument that has appeared in sections of the foreign language media that China should not increase investment because this will increase ‘overcapacity’ is entirely fallacious theoretically. A high level of investment does not consist in creating more production capacity of the same type at the same levels of technology, efficiency, or productivity – the proposal that China should create more low value added production capacity is evidently false. The issue is high investment to upgrade China’s economy technologically and in terms of productivity and efficiency. Moreover, factually, China is at the beginning of this upgrading of its investment capacity. Capital stock per US worker or per West European worker is very much higher than per Chinese employee. To overcome this lag requires that the investment stock per Chinese worker rise more rapidly than in the US or Europe for a prolonged period.

In addition to direct investment in the workplace the efficiency of any economy, its level of productivity, does not rely only on extra machinery but on the efficiency of a country’s entire productive system including transport, communications, education etc. China has many decades of rapid investment to go through not only in machinery but in infrastructure before its level of capital stock, and therefore overall economic efficiency, even remotely approaches that of the US or Europe. This is merely another way of stating that, in order to achieve the technological and productivity level of the US and Europe, China must go through many decades in which its rate of growth of investment must exceed that of the US and Europe.

Nor, contrary to what is sometimes argued, is a high rate of investment contrary to the environmental needs of China – the exact opposite is true. Environmentally protective policies, for example low carbon emission power generation, is likely to be more expensive than environmentally damaging technology in the short term - although not necessarily in the longer one. To maintain a high level of economic growth in an environmentally protective fashion will therefore require a higher level of investment in China to maintain the same rate of growth – although such investment, of course, will not be in the same technologies as at present.

Increasing its level of investment, therefore, means the technological and productivity upgrading of China – both in terms of immediate productive capacity and the other indirect forms of investment supporting it, and not a merely quantitative expansion of existing technological and productivity levels. In short the argument that extra investment is wrong because it will create ‘overcapacity’ is entirely economically fallacious.

Purely abstractly, from a financial point of view, the highest possible utilisation of China’s savings for a still higher investment within China itself is desirable – which of course, as a by-product, would eliminate the balance of payments surplus. However such abstract financial considerations are subordinate to more practical constraints.

First, in the medium and long run the population of China will gain most from a high rate of economic growth, which requires a high level of investment. That is, the gain in sustainable consumption, both individual and social, which flows from a high growth rate and high investment level exceeds that which would be gained from increasing the share of consumption in GDP. Nevertheless such medium and short term gains must be balanced against short term consumption – with the key criteria being the welfare of the population and therefore its support for the economic system which has brought such success.

Second the rate of investment must be used to upgrade environmentally protective technologies and to replace, not expand, environmentally damaging ones.

Third handling very large investment programmes is not merely a question of allocation of finance but involves material organisation of the economy. As the author is aware of not only from theory but from experience of dealing with large infrastructure projects in London it is considerably easier to make allocations of finance than it is to ensure the efficient delivery of very large scale investment programmes. Whether China possesses the capacity to achieve the latter on any specified scale is a concrete issue that only those in the centre of the relevant economic decisions making have the information to take. Furthermore social, as well as strategic economic growth decisions, must be taken into account.

From an overall financial point of view under the conditions that prevailed in the first half of 2008 prior to the financial crisis, when the Chinese economy faced over- heating and rising inflation, it would, of course, have been dangerous and irresponsible to increase investment further. But now China’s economy is faced not with overheating but an international economic downturn and a potential, if not yet extremely serious, threat of domestic deflation rather than inflation – China’s consumer price index fell by 1.5% in the year to April and its producer price index fell by 6.6% in the same period. Under those circumstances an increase in the rate of investment does not pose the threat of overheating.

China’s investment surge is therefore not only good for its own economy but good for the world economy. Those, such as Martin Wolf, who proposed an alternative course that China should reduce its savings and investment rates were dangerously wrong.

Investment, Savings and Growth - International Experience in Relation to Some Current Economic Issues Facing China

2009-05-07T16:33:00.000-07:00

The following study on the international relation of investment, savings and economic growth is based on a paper produced by the author, John Ross, for Antai College of Economics and Management, Jiao Tong University Shanghai.

* * *

Introduction

This is the first of two papers devoted to the evidence on the relation between investment, savings and growth with particular regard to present economic issues facing China in relation to the international financial crisis. The two papers, although interrelated, are produced separately for the following reasons.

The first paper is an historical and comparative examination of the factual relation between investment rates and economic growth rates. The economic evidence it produces is clear. A very high rate of investment is required for rapid economic growth of the 8% a year level China requires. It is a high level of investment, not a high level of consumption, which is indispensable for rapid economic growth rates – there are no examples of countries with low rates of investment and very high economic growth. Those who argue that China, to maintain its level of economic growth, must increase its consumption level and reduce its rate of investment must produce evidence to justify that claim – and will be unable to do so.

However, from an underlying strategic economic issue such as the above, it is not possible in a one to one mechanical way to derive immediate policy conclusions – something the present author is acutely aware of from both theoretical considerations and practical experience. In order to judge a specific immediate policy it is necessary to have not only an overall framework but also detailed knowledge of concrete economic circumstances. The issues dealt with here affect economic strategy and other concrete factors must be taken into account in framing short term economic policy responses.

Investment and savings

In relation to the international financial crisis significant discussion has taken place regarding the US and China’s savings rate. However, from the point of view of China’s economic growth rate, the issue with the most direct effect is China’s rate of investment. The savings’ rate’s effect on growth is indirect.

This distinction may be easily illustrated by noting that while savings are necessarily required to finance investment it is both theoretically and practically possible, for example, for a country to have a high savings rate but to have relatively low or moderate investment and economic growth rates – Saudi Arabia and Libya are examples. In such cases a high savings rate is not used to maintain a high rate of domestic investment, with an associated high rate of economic growth, but instead foreign assets or exchange reserves are accumulated.

It is therefore investment which directly affects the rate of national economic growth. For that reason, regarding the potential for strategic economic growth, analysis should commence with the investment rate.

Confusion of domestic demand and domestic consumption

This strategic issue relates to a further, more immediate, economic question. In sections of the media stimulation of ‘domestic demand’ is sometimes treated as though it were the same issue as the stimulation of ‘domestic consumption’. This is self-evidently theoretically false. Domestic demand consists of two components, investment and consumption. Stimulation of domestic investment is just as much stimulation of domestic demand as is stimulation of domestic consumption.

The consequences of different allocations of GDP resources to investment and consumption are, however, extremely different from the point of view of China’s economic growth. As will be seen in detail below a very high level of fixed investment in GDP is a precondition for a high economic growth rate in any country - including China. Lowering the proportion of China’s investment in GDP, that is raising the proportion of consumption in GDP, will lead to a much slower rate of growth of China’s GDP. From this more immediate angle also the first key macro-economic issue that should be examined is the investment rate.

This paper, therefore, examines the relation of the rate of investment and the rate of economic growth both from a fundamental historical perspective and from the point of view of the recent international experience of high growth rate economies.

The tendency of the proportion of the economy devoted to fixed investment to rise

Considering first the investment rate from a long term historical perspective, one of the most factually well established historical trends of economics is that the proportion of the economy devoted to fixed investment historically rises with time - and that this rise is correlated with increasingly rapid rates of economic growth.

This process can be clearly measured over a three hundred year period, and can also be seen to operate dramatically in the period since World War II. All major economies that have grown rapidly have a high level of fixed investment. There are no examples of major economies which have grown rapidly with a low rate of investment.

These facts have evident conclusions for the discussion of the model of economic growth and for China’s investment level.

After considering this from the point of view of a long timescale, setting out the factual data, it will be examined from the point of view of the experience of high growth economies since World War II.

The historical trend of the proportion of investment in GDP

Figure 1 shows the percentage of fixed investment (gross fixed capital formation) in GDP for a series of major countries over the longest periods of time for which data is available.[1]

Figure 1

The pattern is evidently clear and striking. By far the strongest trend is for the proportion of GDP devoted to fixed investment (gross domestic fixed capital formation) to rise with time. This in turn, as will be shown, is associated with progressively rising rates of economic growth.

The historical correlation of increasing proportions of GDP devoted to investment with rising rates of GDP growth

Considering this historical trend in more detail, and analysing countries in the chronological order in which a new peak in the proportion of GDP devoted to gross fixed domestic capital formation appeared, the following is the historical pattern.

- Commencing with the period immediately antedating the industrial revolution, the proportion of GDP devoted to fixed investment in England and Wales, at the end of the 17th century, was 5-7 per cent. [2] This rose slightly, although current estimates are that it did not rise greatly, during the 19th century - peaking at over ten percent of UK GDP prior to World War I.

This level of investment was sufficient to launch the first industrialisation of any country but at a rate of growth which, while unprecedented at the time, was extremely slow by contemporary international standards - about two per cent a year.

- Turning to the latter part of the 19th century, the proportion of US GDP devoted to fixed investment had risen to considerably exceed that for the UK – reaching a level of 18-20 per cent of GDP by the last decades of the century.

A sharp fall in the proportion of the US economy devoted to fixed investment commenced in the late 19th century, and was particularly pronounced during the period between World War I and World War II – being associated with the great depression of the inter-war period. After World War II the US resumed its pattern of 18-20 per cent of GDP being devoted to gross fixed capital formation. This generated an average growth rate of 3.5 per cent a year. With such a growth rate an economy doubles in size every 20 years and quadruples in size every 40 years. It was on the basis of this historical level of investment, and growth rate, that the US overtook Britain to become the world’s greatest economic power.

- In the period following World War II Germany achieved a level of fixed investment exceeding 25 per cent of GDP – peaking at 26.6 per cent in 1964. This period 1951-64 was that of the post-war German ‘economic miracle’ with average growth of 6.8 per cent a year - with such a growth rate an economy doubles in size every 11 years and quadruples in 22 years.

- Starting at the beginning of the 1960s Japan achieved a level of gross domestic fixed capital formation of more than 30 per cent of GDP. This reached a peak in the early 1970s, at 35 per cent of GDP, before later sharply falling. During the period of a high and rising rate of investment in GDP the average annual rate of growth of the Japanese economy was 8.6 per cent.

- From the 1970s onwards, South Korea similarly achieved a level of fixed investment of 30 per cent of GDP. During the 1980s this rose above 35 per cent of GDP. The other East Asian ‘Tiger’ economies – Singapore, Hong Kong and Taiwan – showed a similar pattern. South Korea’s economy confirmed the relation between fixed investment and economic growth illustrated by Japan by growing in this period by an average 8.3 per cent a year.

Such growth rates in Asia showed that something unprecedented in human history was now possible – that it was possible to industrialise an economy, and achieve a ‘first world’ level of development, in a single generation.

- From the early 1990s onwards China achieved sustained rates of fixed investment of 35 per cent of GDP with, from the beginning of the 21st century, this rising to more than 40 per cent of GDP – a level never before witnessed in human history. The result was average 9.8 per cent a year economic growth over a sustained period – also the most rapid sustained economic growth ever seen in human history.

In Vietnam the proportion of GDP devoted to fixed investment rose from 13 per cent in 1990 to 25 per cent in 1995 and then to 37 per cent in 2007. Economic growth has accelerated rapidly, rising to an average of 7.9 per cent a year in the five years up to 2007.

Considering these trends, such a high level of investment is a necessary condition for rapid economic growth. No substantial country without comparable high levels of fixed investment has achieved such rapid rates of growth on a sustained basis. But while such a high level of investment is a necessary condition for rapid economic growth it is not a sufficient condition. Other elements which must accompany a very high rate of investment in GDP to produce rapid economic growth are considered below.

Recent experience of countries with high rates of economic growth

Turning to analysing post-World War II examples of sustained high economic growth, only 21 countries have achieved 8% growth a year sustained over a 20 year period since World War II. Leaving aside two extremely small states, Botswana (population 1.6 million) and Swaziland (population 1.1 million), which have economies dominated by individual projects, these countries that have undergone at least an 8% growth rate over a twenty year period fall into only two categories.

The first are eight Asian economies which have experienced prolonged periods of rapid growth - China, Japan, Singapore, South Korea, North Korea, Taiwan, Thailand, and Hong Kong. These form the primary focus of this study as their economies are not dominated by direct and indirect effects of the single commodity oil.

The second group are oil producers, or states adjacent to oil producers, in which rapid economic growth has been due to the direct and indirect effects of producing this commodity.[3] Growth rates based on oil are evidently not available to countries that do not have oil reserves and therefore do not form a generalisable model of development or are not immediately adjacent to countries which are large oil producers – for this reason the growth pattern of economies dominated by oil production are not considered in detail here.

Investment levels in the high growth Asian economies

To illustrate the decisive role played by high investment rates in sustaining high growth rates the percentage of Gross Fixed Capital Formation (fixed investment) in GDP for six of the eight high growth Asian economies is shown in Figure 2 - comparable IMF data for North Korea and Taiwan is not available. India has been added to this comparison due to the size of its economy and its recent rapid growth.

The evident feature of these economies countries is that all have had, during their periods of rapid growth, very high percentages of Gross Domestic Fixed Capital Formation in GDP. Taking the peak years for each country, Gross Domestic Fixed Capital Formation reached 35.6% of GDP in Hong Kong, 36.4% of GDP in Japan, 39.1% of GDP in South Korea, 41.6% of GDP in Thailand, 42.7% of GDP in China and 47.4% of GDP in Singapore.

Figure 2

It may be seen that no cases at all of rapid sustained economic growth without such a high rate of investment are to be found in such high growth economies. It is therefore evident that the economic evidence demonstrates that a high percentage of gross domestic fixed capital formation is a precondition for rapid economic growth. It is a high proportion of investment in GDP, not a high proportion of consumption, that forms the precondition for rapid economic growth.

Furthermore detailed examination makes clear that in those countries in which investment declined as a proportion of GDP – Japan, Hong Kong, South Korea and Singapore – this led to a marked decline in economic growth. On the contrary in those economies in which investment rose as a percentage of GDP, China and India, economic growth accelerated. The correlation between a high rate of growth and a high rate of investment is therefore evident.

In the data below the annual rate of growth is stated as the average over a five year period - in order to smooth out purely short term fluctuations in business cycles.

Japan

Measured in PPP terms Japan is Asia’s second largest economy. Japan’s rate of Gross Domestic Fixed Capital Formation peaked at 36.4% of GDP in 1973 but then fell to 23.3% of GDP by 2007.

Over the same period of time Japan’s annual rate of GDP declined from the 8.4% per cent rate in 1973 to only 2.1% (see Figures 3 and 4).

Figure 3

Figure 4

South Korea

South Korea is the Asia’s 4th largest economy - after China, Japan and India. South Korea’s level of Gross Domestic Fixed Capital Formation in GDP peaked at 39.1% in 1991, although the 1996 level of 37.5% was only marginally lower.

Thereafter South Korea’s level of Gross Fixed Capital Formation declined sharply to 28.8% of GDP in 2007. South Korea’s annual rate of GDP growth fell in parallel from 9.4% in 1991, and 7.3% in 1996, to 4.4% in 2007 (see Figures 5 and 6).

Figure 5

Figure 6

Thailand

Thailand’s percentage of Gross Domestic Fixed Capital Formation peaked at 41.6% of GDP in 1990 and 41.1% of GDP in 1995. It then fell to 26.8% of GDP in 2007.

Thailand’s annual rate of GDP growth over the same period fell from 10.9% in 1991, and 8.6% in 1995, to 5.6% in 2007 (see Figures 7 and 8).

Figure 7

Figure 8

Singapore

Singapore saw one of the most sustained high levels of investment in GDP in any country in world history with more than 30% of GDP devoted to fixed investment for 30 years from 1970-2000. Singapore’s Gross Domestic Fixed Capital Formation peaked at 47.4% of GDP in 1984, remained at 38.7% of GDP in 1997 and fell to 24.9% of GDP in 2007.

Singapore’s annual rate of GDP growth over the same period fell from 8.5% a year in 1984, and 9.7% a year in 1997, to 7.1% a year in 2007 (see Figures 9 and 10).

Figure 9

Figure 10

Hong Kong

The percentage of Hong Kong’s GDP devoted to Gross Domestic Fixed Capital Formation, amid significant fluctuations, fell from 35.6% in 1964 to 35.6% and to 20.3% in 2007.

Hong Kong’s annual average growth rate fell from 10.5% in 1964 to 6.4% in 2007 (see Figures 11 and 12).

Figure 11

Figure 12

China and India

India and China show a clear contrast to Japan, South Korea, Singapore and Hong Kong.

Whereas in Japan, South Korea, Singapore and Hong Kong there was a decline in the proportion of the economy devoted to investment and a decline in the rate of economic growth, both India and China India have systematically increased the share of investment in their GDP and have seen an acceleration of their growth rates. Because this pattern in India and China is so strikingly different to Japan, South Korea, Singapore and Hong Kong it is worth looking at in some detail.

India’s Gross Domestic fixed Capital Formation increased from 17.9% of GDP in 1977 to 22.7% of GDP in 2000 and to 33.9% of GDP in 2007. By the third quarter of 2008, before the onset of the international financial crisis, India’s Gross Domestic Capital Formation reached 37.6% of GDP. Over the same period India’s annual GDP growth rate accelerated from 4.5% in 1977 to 6.0% in 2000 and to 8.8% in 2007.

Unlike those who advocate a reduction in investment and savings rates, Manmohan Singh, who is not only India Prime Minister but an excellently trained economist, has constantly stressed the need to raise India’s savings and investment rates and has made this a foundation of his economic policy – with considerable success, as has been seen, in terms of sustaining high growth rates.

Manmohan Singh considered China’s high savings and investment rates as the foundation of superior economic performance. For example in 2003 when asked, ‘is it legitimate to compare India and Chinese economies?,’ he replied: ‘There is nothing wrong in the comparison. It is good to try and achieve the growth rate of China. But we must remember that the Chinese savings rate is 42 per cent of the Gross Domestic Product, whereas savings in India is hovering at 24 per cent.’

Before he became Prime Minister in May 2004 Singh set out clearly the investment rate without which India’s target growth rate could not be achieved: ‘at a Delhi seminar, Dr Manmohan Singh spoke out regarding the targeted eight per cent growth rate in the Tenth Plan... he opined that an eight per cent growth rate would require a 30 per cent ratio of savings to income and a substantial rise in the tax-GDP ratio.’

Therefore in 2006, after assuming office, Prime Minister Singh noted with satisfaction the increase in India’s savings rate and set the goal of increasing it further together with a concomitant rise in the the investment rate: ‘Our statisticians now tell me that our savings rate has shot up in the last couple of years to about 27 to 28 percent of our GDP… we are a country where the proportion of young people to total population is increasing. All demographers tell me that if we can find productive jobs for this young labour force, that itself should bring about a significant increase in India's savings rate in the next five to ten years. If our savings rate goes up, let us say, in the next ten years, by 5 percent of GDP, we would have generated the resources for investment in the management of this new urban infrastructure that we need in order to make a success of our attempt at modernization and growth.’

By 2007 Prime Minister Singh therefore welcomed the further increase in India’s savings and investment rates. According to India’s premier financial paper, the Economic Times: ‘The investment and saving rate is as high as 35 percent of national economic output, Singh said at a meeting of his Congress party in this southern Indian city, the hub of a 50-billion-dollar IT industry at the vanguard of the country's economic resurgence.’

Similarly, India’s finance minister, P Chidambaram , called in February 2007 for a further increase in India’s savings and investment rates: ‘India’s savings and investment rate as percentage of GDP have gone up by 2 per cent each. But to sustain the revised growth rate of 9 per cent in the 11th Plan, he [ P Chidambaram] said: “Both savings and investment as proportion of GDP must be raised further.”

By February 2008 Prime Minister Singh noted the continued advance of the savings rate and the new high reached in India’s investment rate: ‘Highlighting the strong fundamentals of the economy, Dr. Singh said that the savings rate in the country has touched almost 35 per cent of Gross Domestic Product (GDP) and the investment rate is at an all time peak of over 36 per cent of the GDP.’

The orientation of India to very high savings and investment rates, and the relation of this to rapid economic growth, is therefore clear (see Figures 13 and 14)

Considering China its fixed investment increased from 27.8% of GDP in 1978 to 34.3% of GDP in 2000 and to 42.7 % of GDP in 2007 42.7%. In the same period China’s rate of GDP growth accelerated from 4.9% in 1978 to 8.6% in 2000 and to 10.8% in 2007.

Figure 13

Figure 14

Conclusion

The conclusion from economic evidence is therefore clear.

A high percentage of fixed investment in GDP is an indispensible precondition for a rapid rate of growth – there are no examples of countries with rapid rates of GDP growth and low proportions of the GDP devoted to fixed investment. It is a high level of investment in GDP, not a high rate of consumption, that is necessary for rapid GDP growth.

In those countries in which the rate of investment in GDP fell – Japan, South Korea, Singpore and Hong Kong – the rate of economic growth also fell substantially. In those countries – India and China – in which the percentage of GDP devoted to investment rose the rate of economic growth also increased.

In short all evidence establishes clearly that it is the high rate of investment which is decisive for rapid GDP growth.

This overwhelming factual evidence, of course, supports what is evident from a theoretical point of view. Consumption, by definition, does not add to productivity potential or production capacity and therefore increasing the rate of consumption does not raise GDP growth. If China lowers its proportion of the economy devoted to investment its economic growth rate will also fall - as is confirmed by the international experience noted above.

* * *

The paper draws on earlier material which appeared in 'Why Asia will continue to grow more rapidly than the US and Europe - a historical perspective' on the blog Key Trends in Globalisation.

References

[1] The figure for England for 1688 is that in Angus Maddison, The World Economy, OECD Paris 2006 p395. UK figures after 1688 and up to 1947 are calculated from One Hundred Years of Economic Statistics, The Economist, London 1989 p74. Figures from 1948 are calculated from International Monetary Fund, International Financial Statistics (August 2008) Minor adjustments have been made to chain the earlier statistics to be consistent with the IMF data – in no case does this make any significant difference to the pattern shown. The data for fixed investment for the earlier period used by The Economist One Hundred Years of Economic Statistics are based on calculations in C H Feinstein and Pollard Studies in Capital Formation in the United Kingdon 1750-1820, Oxford University Press, Oxford 1988. Other commentators have suggested that Feinstein and Pollard's figures are somewhat too high - see for example. N F R Crafts British Economic Growth during the Industrial Revolution, Clarendon, Oxford 1986 p73. None of these revisions and differences however is of sufficient magnitude to alter the fundamental pattern shown here.
US figures prior to 1948 are calculated from One Hundred Years of Economic Statistics, The Economist, London 1989 p74. Figures from 1948 are calculated from International Monetary Fund, International Financial Statistics (August 2008) Data for the earlier period give only private fixed capital formation whereas that after 1948 is for total fixed capital formation – i.e. including government fixed capital formation. There are no reliable estimates of government fixed capital formation in the earlier period and therefore data for the earlier period have been adjusted upward by the difference between the two in 1948 – which is slightly over two per cent of GDP. This has the effect of revising upwards slightly the percentage of GDP allocated to fixed investment in the earlier period but the difference is too small to affect the overall pattern.
Figures for Germany prior to 1960 are calculated from One Hundred Years of Economic Statistics, The Economist, London 1989 p202. Figures from 1960 are calculated from International Monetary Fund, International Financial Statistics(August 2008). There is however no significant statistical difference between the two.
Figures for Japan, South Korea, China, India and Vietnam calculated from International Monetary Fund, International Financial Statistics.

[2] Phyllis Deane and W A Cole in British Economic Growth 1688-1959, Cambridge University Press, Cambridge 1980 p2 being closer to the lower figure while further studies have tended to revise the figure upwards slightly. The higher estimates for the earlier period have been taken here so as to avoid any suggestion of exaggerating the degree to which the proportion of GDP devoted to Gross Domestic Fixed Capital Formation has risen. The precise figure used here is that calculated by Maddison in Angus Maddison, The World Economy, OECD Paris 2006 p395. The higher figure, as can be seen, makes no difference to the overall trend.

[3] These countries are Iran, Iraq, Equatorial Guinea, Kuwait, Israel, Jordan, Oman, Qatar, Saudi Arabia, Libya, Gabon, Equatorial Guinea, and the United Arab Emirates.

痉挛中的世界贸易

2009-03-24T02:41:00.001-07:00

我在本博客之前的一些文章里曾经分析过目前的金融市场包括股价已经历经了17个月的持续下滑，其下滑的速度之快可以和史上记载的最严重的一次金融危机（发生在1929年后）相提并论。从图表一看，虽然从3月9日－11日的交易日里华尔街的股价有所上升，但这不能打破整个下降的趋势。到目前的股价的小幅上升只是使其下降率向自2007年10月开始的下降趋势平均线靠拢。可以看到2007年10月之后的数周内道琼斯工业指数的下降率都高于平均下降水平。

图表一

从图表二可以看到，自2007年10月开始的道琼斯工业指数下降率已经接近1929年的下降速度，并且其下降速度已经远远超过20世纪以来除1929年外的其他几次主要的下跌期。

图表二

就像本人在这个月初的一篇文章里所指出的那样，如果考虑经济下滑和生产性经济之间的关系，主要的工业经济国家数据都显示折合年率的2008年最后三个月出口下降率事实上已经超过了1929年。

经济合作与发展组织（OECD）发布了截至到2008年世界贸易的最新统计数据。从其中一些国家最近几个月的数据来看可以断定这种急速下降的趋势呈现一种普遍的态势。

我们用三个指标来计算和衡量目前出口快速下滑的状况：2008年12月份同比下降率、自去年每个国家或地区相较其最高峰与2008年12月的出口率之间的变化值以及折合年率的最后三个月出口下降率。

为了能跟美国历史上出现过同等规模出口下降的情况进行比较，我们列举了以下出口下降率，1929-30年的22.5%、1930-1931年的32.7%、1932-1933年的4%，之后部分出口开始得以恢复。据资料记载美国出口下降最快的时期是20世纪30年代的大萧条时期, 1930-31年的出口下降率为32.7%，到1933年美国的出口下跌了66.2%，已经低于其1929年的水平。

如表格一所示，我们先把OECD区域看作是一个整体，再单独把欧洲分离出来进行比较。首先我们看到整个OECD区域的出口自2008年4月的最高峰以来出现了大概30%的下降。折合年率到截至去年12月的最后三个月出口下降率达到了惊人的64%。

另外其他主要的G7经济体的下降相对较缓些，自2008年6月最高峰以来出现26.9%的下滑，折合年率到去年最后三个月出口下降率也达到了57.8%。

在欧洲范围内，其折合年率截至到去年12月的最后三个月出口下降率达到了50.4%, 而如果把一些东欧国家也计算进去的话，OECD欧洲区域的年下降率为67.0%.

由此可见，在贸易领域和相关的金融市场，目前的下降速度完全可以和30年代初爆发的大萧条时期的衰退相提并论。两者之间的差别并不是他们下跌的速度有所不同，而是其下跌持续期。1929年后的出口下降持续了4年，而目前所发生的出口下滑才发生了一年。

表一

让我们再来看看每个国家的具体情况。表2显示了经济合作发展组织内最大七个国家-G7在2008年12月的出口情况，可以看到出口水平从去年最高水平下降了大约25%，而折合年率截至去年12月的最后三个月出口下降率都超过了50%。

总之，世界贸易正以30年代大衰退的下降速度在快速下滑，这种贸易急剧下滑不仅发生在小国家甚至已经完全影响到了世界大国。

表二

表三显示了非G7的经济合作发展组织内其他欧洲国家的出口下降率。可以看到表内的两个较小经济体国家-卢森堡和爱尔兰的跌幅要明显小于其他国家。其他国家的出口率与去年最高水平相比下降了至少25%，折合年率的出口下降率超过50%。

其中西班牙折合年率截至到08年12月的最后三个月出口下降率更是达到令人难以置信的99%，这或许可能是统计上有点失真。但是瑞典、波兰、挪威的出口下降也同样的严重，分别是79.1%、82.8%、83.1%。这样的下降率表明至少在短期内的出口不只是在下降而是濒临崩溃。

表三

让我们转而来看看非欧洲经济体国家的情况，如果不考虑其中两个小的经济体国家-新西兰和冰岛。如图四所示，中国2008年最后三个月折合年率的出口下降率为53.3%，这看起来比其他国家要稍缓和一些。墨西哥和韩国的同比出口下降率大概在30%左右.南非和土耳其已经与其顶峰水平相比下降了40％左右。其他几个国家如韩国、巴西、印尼、南美和土耳其的折合年率的出口下降率分别是70.7%、72.4%、78.2%、82.1%、90.1%，可以看到这样的出口下降率是灾难性的。

表四

表五所示，OECD关于今年1月的出口统计数据依然显示这样大幅下降的趋势正在延续。其主要的区别是1月的实际出口下滑相比与2008年下降率显得更加糟糕。

2009年1月出口数据跟各自的出口最高月数据相比，表内显示五个国家的出口下降变化率分别是瑞士（29.8%）、南非（41.1%）、瑞典（41.4%）、挪威（46.3%）、土耳其（47.5%）。没有任何的迹象表明目前这种出口快速下滑的趋势将有所改善。

表五

总结上面的数据，在列出的三十四个国家里有十四个国家的年出口下降跌幅超过70％，另外20个国家的下降率也超过了60％。有关去年最后三个月的出口下降率的公开报告显示日本的下降率为51.9%,中国为53％，美国为54％，这跟其他多数国家大幅下降的出口情况相比确实要缓和些。

然而如此糟糕的年出口下降率说明世界贸易已经遭受了严重的打击。去年最后三个月的数据显示目前的情况已经相当严重并且这样快速的下降显然已经成为一种趋势。同样令人担忧的是有七个国家的出口率与去年最高峰水平相比下降超过了40％，另外十九个国家超过了30％。

这里有必要指出当今的世界贸易在世界经济中扮演了极其重要的角色，其重要性已经远远超过了它在1929年的那次金融危机中所处的地位。现在美国的出口占美国GDP的12％，而其在1929年只占7％。而这个比例在大多数国家可能更高。即使在其他同等的条件下，单凭如此快速的持续贸易下降率已经足够说明现在的情况比1929年更加严重。

这中从金融业向生产性经济转移的机制在上述的下降趋势中表露无疑。就像先前提到的那样，目前金融市场的衰落程度几乎与1929年的金融危机相同，而金融市场跟生产性经济之间衰退并不完全一致。生产性经济虽然也遭受严重的创伤，但其受下降的程度并不完全与金融市场相当。但是这不能表明目前下降到底部的金融市场会复苏。同时，虽然生产性经济的下降趋势和统计数据落后于金融市场，但其也将向金融市场的下降趋势靠拢。

所有主要经济体的最近数据显示世界出口下降达到令人咋舌的程度。爆发在金融市场的危机正通过贸易萎缩开始影响到生产性经济。现在可以这么说在世界两大经济领域－金融市场和贸易中，两者的下降率都已经完全可以和1929年那次金融危机的规模相比。我们必须要仔细的研究这种从国际经济危机到国内经济危机转移的机制有多强大。同时，这种危机持续的时间也是至关重要的。到目前为止最严重的一次危机发生在1929年，这不仅是因为其快速的下降速度还在于它持续时间之长。20世纪30年代美国贸易和GDP持续下滑了长达四年，而目前金融市场的下滑已经持续了十七个月，贸易下滑还不足一年，GDP的下滑大概是六个月。

相当充分的数据表明世界贸易在2008年最后三个月内正处于痉挛的状态。和金融市场的急剧下滑一样，世界贸易也正快速的下滑，这使我们断定目前的世界贸易的急剧下跌标志着这场危机的严重程度不仅远甚于二战以后的几次衰退，也几乎赶上了1929年的那次金融危机。

表格注释－2008出口最高峰月

1. 2008年1月
2. 2008年3月
3. 2008年4月
4. 2008年5月
5. 2008年6月
6. 2008年7月
7. 2008年8月
8. 2008年9月

The convulsion in world trade

2009-03-24T02:40:00.000-07:00

This blog has analysed on several occasions that the current decline in financial markets, including share prices, has continued for 17 months to match in rapidity that after 1929 – i.e. the most severe recorded.

As may be seen from Figure 1 the rise in share prices on Wall Street in the trading week 9-13 March week did not break out of this declining trend. The shift so far has simply moved the rate of descent closer to the declining trendline that has been operating since October 2007 following several weeks of more precipitate than average falls.

Figure 1

As may be seen from the comparison in Figure 2 the rate of descent of the Dow Jones Industrial Average since October 2007 continues to be as rapid as in 1929 - i.e. it greatly exceeds in speed any other major share decline, apart from 1929, seen since the beginning of the 20th century.

Figure 2

Considering the relation between the financial decline and the productive economy, an article on this blog earlier this month also noted that, for the major industrialised economies, the annualised rate of decline in exports in the last three months has actually been more rapid than in 1929.

The latest statistical data released by the Organisation for Economic Co-operation and Development (OECD) for world trade up to December 2008, with data for more recent months in a few cases, allows the calculation of a picture for a wider range of countries that confirms this trend in striking fashion.

Due to the extremely rapid shift in the situation three indicators have been calculated for exports – the actual year on year decline to December 2008, the actual decline in exports since the peak month for each country or area last year, and the change during the three months to December 2008 on an annualised basis.

In order to give a historical scale of comparison the decline of US exports, in current prices, was 22.5% in 1929-30, 32.7% in 1930-31, 32.4% in 1931-32 and 4.0% in 1932-33 after which partial export recovery commenced - i.e. the most rapid annual rate of decline of US exports in the Great Depression, and the most rapid on record to date, was 32.7% in 1930-31. By 1933 US exports had fallen 66.2% below their 1929 level.

Considering first the OECD area as a whole, and the situation in the European region, the data is set out in Table 1. As can be seen for the OECD region as a whole exports have already declined by over 30% since their peak in April 2008 - essentially equaling the rates of decline of the worst year of the 1930s. The annualised rate of decline in three months up to December 2008 was an astonishing 64%.

For the major G7 economies the decline was only slightly less severe - with a decline of 26.9% since the peak in July and an annualised rate of decline of 57.8% in the three months to December 2008.

Within the Euro area the annualised rate of decline for the three months to December 2008 was 50.4% and for the OECD European region, which includes some East European states, the annualised rate of decline was 67.0%.

It may therefore be clearly said that in the field of trade, as in that of financial markets, the current decline is full comparable in speed of descent to the onset of the Great Depression. The difference, so far, is not in the speed of fall but in its duration. The decline in exports after 1929 continued for four years whereas so far the current decline has been occurring for a year.

Table 1

Turning to individual countries, Table 2 shows the figures for the largest OECD economies - the G7. As may be seen all have seen declines in exports of over 25% since their peak levels last year and in the three months to December 2008 all witnessed annualised rates of decline of more than 50%.

In short, the precipitate decline in world trade, at 1930s rates of descent, is not confined to smaller economies but fully affects the largest ones.

Table 2

Table 3 shows the rates of decline of exports for the non-G7 European OECD states. As may be seen with the exception of two small economies, Luxemburg and Ireland, which have done better than others, all OECD European countries have seen actual export declines of at least 25% and annualised rates of decline of 50% or more.

It is possible that the rate of decline for Spain, an incredible 99.7% annualised rate in the three months to December 2008, is a statistical freak or error but the annualised rates of decline for Sweden, Poland, and Norway are almost as severe - respectively, 79.1%, 82,8%, and 83.1%. Such rates may rightly be characterised not as decline but of collapse of exports in at least the short term.

Table 3

Turning to non-European economies, the data is set out in Table 4. Again, with the exception of the small economies of Iceland and New Zealand, the highly publicised decline of Chinese exports by 22.3% since their peak last year year, and at an annualised rate of 53.0% in the three months to December, are themselves actually significantly smaller than for other countries. Mexico and South Korea have already seen actual declines of exports of over 30% and South Africa and Turkey have seen falls of over 40%. The annualised rates of decline of exports for South Korea, Brazil, Indonesia, South Africa, and Turkey - at 70.7%, 72.4%, 78.2%, 82.1%, and 90.1% respectively - are clearly catastrophic.

Table 4

Countries for which OECD data is available for January confirm continuation of the same trend – as shown in Table 5. The chief difference is that with the extra month the actual declines in exports, as opposed to only the annualised rates of fall, have become more serious.

The actual falls recorded from the maximum levels of exports are 29.8% for Switzerland, 41.1% for South Africa, 41.4% for Sweden, 46.3% for Norway and 47.5% for Turkey. There is nothing in this pattern which indicates results for other countries are likely to show an improved tendency.

Table 5

Summarising the above data, of the 34 countries studied 14 had annualised rates of decline of exports of more than 70% and 20 had rates of decline of more than 60%. The widely publicised reports of declines of exports in the last three months of last year such as the annualised 51.9% for Japan, 53.0% for China, or 54.0% for the US, which attracted much publicity, are actually modest compared to the falls in most countries.

While the annualised rates of decline show the extremely striking implosion of world trade during the last three months of 2008 an annualised rate, naturally, indicates an, in this case extremely severe, tendency. What is equally disturbing is the factual falls in exports recorded from the maximum levels last year. Seven countries registered actual falls in exports of more than 40% and 19 of more than 30%.

It should be noted that trade today plays a more significant role in the world economy than at the onset of the 1929 crisis. Exports in an economy with relatively low exposure to trade such as the US now account for 12% of US GDP compared to 7% in 1929 - the figures for most countries are of course much higher. The result of any continuation of such rapid rates of decline of trade therefore, all other things being equal, would be more severe than in 1929.

The transmission mechanisms of the financial crisis into the productive economy are also made clear by such trends. As has been noted previously, initially in the present crisis there was a disjunction between the decline in financial markets, which was of 1929 magnitude, and the situation of the productive economy - which was of a severe but not equivalent decline. As such a disjunction is highly unlikely to continue either financial markets would recover, having overshot on the downside, or the trends and statistics in the productive economy would be shown to have been a lagging indicator and they would adjust downwards to the tendencies indicated in financial markets.

The extraordinarily powerful falls in world exports shown in the latest figures for all major economies indicate that the decline in trade is operating as a key mechanism by which the crisis revealed in financial markets is beginning to affect the productive economy. It may now be said that in two areas of the world economy, financial markets and trade, rates of decline are fully comparable to 1929 scale. How powerful the transmission mechanisms from the international sector are into domestic economies must clearly be carefully studied. The duration of the crisis is also critical - the so far unique severity of 1929 was not only due to the rapidity of the fall but by its duration. The decline in US trade and GDP in the 1930s continued for four years whereas the current decline in financial markets has lasted 17 months, the decline in trade slightly under one year, and the fall in GDP approximately six months.

Nevertheless quite sufficient data are now in to say with certainty that in the last three months of 2008 a convulsion in world trade occurred. The extreme rapidity of the fall in world trade, as with the situation in financial markets, confirms that the benchmark for present analyses must be not only post-World War II recessions but also 1929 itself.

* * *

This article originally appeared on Key Trends in Globalisation.

Notes to Tables - peak month for exports in 2008

1. Peak January 2008
2. Peak March 2008
3. Peak April 2008
4. Peak May 2008
5. Peak June 2008
6. Peak July 2008
7. Peak August 2008
8. Peak September 2008

Investment, Savings and Growth - International Experience in Relation to Some Current Economic Issues Facing China

2009-03-23T05:12:00.000-07:00

The following study on the international relation of investment, savings and economic growth is based on a paper produced by the author for Antai College of Economics and Management, Jiao Tong University Shanghai.

* * *

Introduction

Investment and savings

Confusion of domestic demand and domestic consumption

The tendency of the proportion of the economy devoted to fixed investment to rise

These facts have evident conclusions for the discussion of the model of economic growth and for China’s investment level.

The historical trend of the proportion of investment in GDP

Figure 1 shows the percentage of fixed investment (gross fixed capital formation) in GDP for a series of major countries over the longest periods of time for which data is available.[1]

Figure 1

The historical correlation of increasing proportions of GDP devoted to investment with rising rates of GDP growth

Recent experience of countries with high rates of economic growth

Investment levels in the high growth Asian economies

Figure 2

In the data below the annual rate of growth is stated as the average over a five year period - in order to smooth out purely short term fluctuations in business cycles.

Japan

Measured in PPP terms Japan is Asia’s second largest economy. Japan’s rate of Gross Domestic Fixed Capital Formation peaked at 36.4% of GDP in 1973 but then fell to 23.3% of GDP by 2007.

Over the same period of time Japan’s annual rate of GDP declined from the 8.4% per cent rate in 1973 to only 2.1% (see Figures 3 and 4).

Figure 3

Figure 4

South Korea

Figure 5

Figure 6

Thailand

Thailand’s percentage of Gross Domestic Fixed Capital Formation peaked at 41.6% of GDP in 1990 and 41.1% of GDP in 1995. It then fell to 26.8% of GDP in 2007.

Thailand’s annual rate of GDP growth over the same period fell from 10.9% in 1991, and 8.6% in 1995, to 5.6% in 2007 (see Figures 7 and 8).

Figure 7

Figure 8

Singapore

Singapore’s annual rate of GDP growth over the same period fell from 8.5% a year in 1984, and 9.7% a year in 1997, to 7.1% a year in 2007 (see Figures 9 and 10).

Figure 9

Figure 10

Hong Kong

The percentage of Hong Kong’s GDP devoted to Gross Domestic Fixed Capital Formation, amid significant fluctuations, fell from 35.6% in 1964 to 35.6% and to 20.3% in 2007.

Hong Kong’s annual average growth rate fell from 10.5% in 1964 to 6.4% in 2007 (see Figures 11 and 12).

Figure 11

Figure 12

China and India

India and China show a clear contrast to Japan, South Korea, Singapore and Hong Kong.

The orientation of India to very high savings and investment rates, and the relation of this to rapid economic growth, is therefore clear (see Figures 13 and 14)

Figure 13

Figure 14

Conclusion

The conclusion from economic evidence is therefore clear.

In short all evidence establishes clearly that it is the high rate of investment which is decisive for rapid GDP growth.

* * *

The paper draws on earlier material which appeared in 'Why Asia will continue to grow more rapidly than the US and Europe - a historical perspective' on the blog Key Trends in Globalisation.

References

[3] These countries are Iran, Iraq, Equatorial Guinea, Kuwait, Israel, Jordan, Oman, Qatar, Saudi Arabia, Libya, Gabon, Equatorial Guinea, and the United Arab Emirates.

Perspectives for China's exports

2009-03-19T06:26:00.000-07:00

Summary

1. The Chinese authorities have rightly taken the strongest possible stance against protectionism.

2. While such a stance is correct it is necessary to have an accurate estimate of the objective evolution of world trade as far from all elements are under the control of China itself. The chief conclusions which emerge from such a study are serious and clear.

3. The current decline in international trade is of much greater dimensions than any seen since World War II. The only scale of comparison approaching it is 1929. As regards the current speed of decline of trade, although not, of course, as yet in its duration, the current fall in trade is so far actually more rapid than at the onset of the Great Depression after 1929.

4. Given the magnitude of this trade decline there is no justification for any view that there will be a short term recovery of trade or any recovery of the world economy in the second half of 2009.

5. Based on present trends a favourable estimate of the time it will take for world trade and China's exports to recover to previous levels is three years. However the situation is continuing to deteriorate and this timescale may be too short. This minimum three year recovery period must therefore be included in forward planning.

6. The severity of the decline in trade means that contingency planning for all countries, including China, must therefore be based on examination of more unfavourable, and not more favourable, scenarios than those currently envisaged.

The reasons for these conclusions will become clearer if the present situation of world trade is briefly placed in the more general framework of the unfolding of the international financial crisis.

The Chinese authorities correct stance against protectionism

The Chinese authorities have rightly taken the strongest possible stance against protectionism since the beginning of the international financial crisis. This consists not only of positions at international meetings, and in public statements, but practical measures such as the dispatch of trade delegations, simplifying procedures for Chinese companies to invest abroad, boosting trade with Taiwan, making possible trade in RMB with Hong Kong, and similar steps. Such policies will clearly continue to be necessary.

While such a stance is correct far from all elements of the international economic situation are under China's control. It is therefore necessary to have an accurate estimate of the objective evolution of world trade. Other countries may simply be overwhelmed by objective factors, given the severity of international financial trends, or lapse into protectionist policies. This article, therefore, considers current declines in China's trade in an international context and placing it in a comparative historical context. The chief conclusions which emerge are serious and
clear.

The current decline in international trade is of a severity that substantially exceeds those of 1973 - following the first oil price increase crisis,1981-82 - during the US Volker-Reagan recession, or in the 1997 South East Asian devaluation and debt crisis - i.e the current decline in trade is of much greater dimensions than any seen since World War II. The only scale of comparison approaching the current decline of world trade is 1929. As regards the current speed of decline of trade, although not of course as yet its duration, the current fall is actually more
rapid than in the onset of the Great Depression after 1929.

Current declines on international financial markets

In order to assess the current trends in the international economy it is important to understand the real dimensions of the decline in financial markets. To do so Figure 1 compares the decline in the Dow Jones Industrial Average during the current crisis with that following 1929 - i.e in comparison with the most serious financial crisis so far in economic history. The graph shows the percentage decline of the Dow Jones Industrial Average compared to the peak in the preceding cycle, in both 1929 and 2007, measured against the number of trading days since that peak. As may be seen the rapidity of the decline since 2007 almost exactly follows that after 1929.

Figure 1

In order to illustrate that this current rate of decline in share markets is in no way typical of a cyclical decline Figure 2 also shows the similar rates of decline of share prices during the other two major stock market falls of the 20th and 21st centuries - i.e following the oil price increase of 1973 and following the bursting of the dot com bubble in 2000. As may be seen the share price declines after 2007 and after 1929 far exceed the falls in 1973 and 2000, making clear that the only suitable point of comparison as regards financial markets for the current crisis is with 1929.

Figure 2

It should also be noted that, as shown in Figure 3, the rise in share prices on Wall Street in recent trading did not break out of this declining trend. The shift so far has simply moved the rate of descent of US share prices closer to the declining trendline that has been operating since October 2007 after several weeks of even more rapid than average falls.

Figure 3

The situation of world trade

Having established that current falls on share markets greatly exceed in scale any seen since World War II it may be rapidly established also that current trade declines also far exceed in scale any seen since World War II. Furthermore, as will be seen, trade plays a major role in assessing the scale of the present economic crisis in regard to the relation between the speed of decline in financial markets and the development of the situation in the productive economy.

Whereas present rates of fall on financial markets are comparable to 1929 most published data on the productive economy indicates a lesser rate of decline – i.e. there is a disparity between the two indicators. An exception is the annualised figures for US GDP for the 4th quarter of 2008 for investment, exports and imports which do indicate rates of declines of post-1929 dimensions. However, the annualised figure for US GDP itself for the 4th quarter of 2008
indicates a rate of economic contraction about two thirds as fast as in 1929.

However part of this apparent difference between financial and productive economy indicators can be that while financial markets may be followed in real time there is a delay in the calculation and publication of statistics on the productive economy. Current rates of economic decline are sufficiently rapid that delays between the actual current situation in the productive economy and the publication of data regarding it may lead to significant distortion in the picture presented in some statistics.

This is most serious in the case of GDP data. This is, first, based on data over a whole quarter and second it is necessarily published with delay due to the time taken to calculate it. Revised data for US 4th quarter GDP figures only became available at the end of February and, as monthly GDP data is not calculated it did not indicate the speed of change during the quarter itself - it is known from other measures that the rate of economic decline was accelerating significantly during the quarter. For that reason other indices than GDP, which are available more rapidly and on a more frequent basis, may indicate more accurately, if more partially, actual trends. Industrial production data, however, which is frequently taken as a more recent measure of economic shifts may be misleading in countries which are heavily dominated by
service sector activities.

One of the most important of available data sources is trade. This furthermore relates directly to one of the key issues in the current economic downturn – globalisation and protectionism. During
periods of severe recession a process of trade ‘de-globalisation’ frequently occurs – i.e. exports and imports fall more rapidly than GDP and therefore trade contracts as a percentage of GDP. The most extreme case of trade ‘de-globalisation’ was following 1929 - when the decline in exports and imports was far greater than that for GDP in the US and other economies and was exceeded in magnitude only by the fall in investment.

A similar pattern of the falling share of trade in GDP, on a much smaller scale, was seen during the most severe post-World War II recessions – for example in the US in 1981-82.

The scale of the current decline in world trade

To assess current trends in world trade Figure 4 shows the year on year decline of exports for Organisation for Economic Cooperation and Development (OECD) member countries. As these account for the majority of world trade, and the main non-OECD economies such as China are considered below and show the same pattern, these trends clearly reflect the overall situation of world trade.

The trend shown in Figure 4 is clear. The year on year decline in OECD exports to December 2008 was 18.9 per cent - the most serious in the period since World War II.

Figure 4

Moreover world exports were declining sharply during the last three months of 2008, after having risen strongly, at the beginning of the year. The year on year comparison therefore understates the rapidity of the decline in trade at the end of the year. To illustrate this latter trend Figure 5 therefore shows the fall in exports for the last three months of 2008 on an annualised basis. The 64.5% annualised rate of decline of OECD exports for the last three months of 2008 far exceeds any fall seen in post-World War II history.

Figure 5

Given that the current decline in world trade considerably exceeds in magnitude any seen since World War II comparisons only with previous post-World War II recessions are misleading in that they significantly understate the dimensions of the fall.

Taking as a benchmark the most serious trade decline in world history, that following 1929, casts the magnitude of the present situation in a clearer light. Such comparison indicates that, as regards a whole series of countries, the current decline in trade is more rapid than that following 1929. If that process were to continue for any significant period of time the consequences, both in terms of the recessionary pressures that are implied and in terms of ‘de-globalisation’ and the rise of protectionist trends, would be extremely significant. These trends in trade, therefore, also provide some evidence that the deep pessimism in financial markets, with post-1929 speeds of decline, may be justified by events in the productive economy.

To give an initial benchmark Table 1 shows the decline in exports for countries for which data is available both for the total decline in exports in the period 1929-33 and in the first year
following 1929. The data is measured in current prices to make it comparable with the most recent data for the decline in exports from 2008 onwards. As may be seen all countries suffered major export declines in 1929-30 - the most severe contractions being in the UK, Canada, the US and Japan with, respectively, annual falls in exports in 1929-30 of 19.3%, 20.9%, 22.5%, and 28.1%. The US also suffered the most severe decline for the period 1929-33 as a whole - with a total decline in exports over a four year period of 66.2%.

Table 1

Current declines in world trade

The latest figures released by the Organisation for Economic Co-operation and Development (OECD) for world trade up to December 2008, with data for more recent months in the case of certain states, allows the calculation of a relatively comprehensive picture regarding world trade for the major economies. The pattern is extremely striking. The rates of decline of world trade in many case are more rapid than in 1929 and in a number of cases the decline in trade since 2008 is already approaching the declines for the 1929-33 period as a whole. In short the contraction of world trade is today of extreme rapidity.

In order to give a year by year historical scale of comparison the decline of US exports, in current prices, was 22.5% in 1929-30, 32.7% in 1930-31, 32.4% in 1931-32 and 4.0% in 1932-33 after which partial export recovery commenced - i.e. the most rapid annual rate of decline of US exports in the Great Depression, and the most rapid on record to date, was 32.7% in 1930-31. By 1933 US exports, as noted in Table 1, had fallen 66.2% below their 1929 level.

Considering first the OECD area as a whole, Table 2 sets out in more detail data already illustrated in Figures 4 and 5 and also analyses the situation in the OECD European region. As can be seen, for the OECD region as a whole exports have already declined by over 30% since their peak in April 2008 - essentially equalling the rates of decline of the worst year of the 1930s and exceeding the decline of US trade in 1929-30. The annualised rate of decline in the three months up to December 2008 was 64%.

For the major G7 economies the decline was only slightly less severe - with a decline of 26.9% since the peak in July 2008 and an annualised rate of decline of 57.8% in the three months to December 2008.

It may therefore be clearly said that in the field of trade, as in that of financial markets, the current decline is full comparable in speed of descent to the onset of the Great Depression. The difference, so far, is not in the speed of fall but in its duration - the decline in exports after 1929 continued for four years whereas so far the current decline has been occurring for a year. It remains to be seen for how long the current decline with continue.

Table 2

Turning to individual countries, Table 3 shows the figures for the largest OECD economies - the G7. As may be seen all G7 countries have seen declines in exports of over 25% since their peak levels last year and in the three months to December 2008 all witnessed annualised rates of decline of more than 50%.

In short, the precipitate decline in world trade, at 1930s rates of descent, is not confined to smaller economies but fully affects the largest ones. The actual decline in trade in all G7 countries since the peak in 2008 is greater than the fall in the US in 1929-30.

Table 3

Table 4 shows the rates of decline of exports for the non-G7 European OECD states. As may be seen with the exception of two small economies, Luxemburg and Ireland, which have done better than others, all OECD European countries have seen actual export declines of at least 25% and annualised rates of decline of 50% or more. Again the actual decline in trade since the peak in 2008 is already greater than for the US in 1929-30.

It is possible that the rate of decline for Spain, an incredible 99.7% annualised rate in the three months to December 2008, is a statistical freak or error but the annualised rates of decline for Sweden, Poland, and Norway are almost as severe - respectively 79.1%, 82,8%, and 83.1%. Such rates may rightly be characterised not as decline but of collapse of exports in at least the short term.

Table 4

Turning to non-European economies, the data is set out in Table 5. Again, with the exception of the small economies of Iceland and New Zealand, the highly publicised decline of Chinese exports by 22.3% since their peak last year year, and at an annualised rate of 53.0% in the three months to December, are themselves actually significantly smaller than for other countries. Mexico and South Korea have already seen actual declines of exports of over 30% and South Africa and Turkey have seen falls of over 40%. The annualised rates of decline of exports for South Korea, Brazil, Indonesia, South Africa, and Turkey - at 70.7%, 72.4%, 78.2%, 82.1%, and 90.1% respectively - are clearly catastrophic.

Table 5

Countries for which OECD data is available for January confirm continuation of the same trend – as shown in Table 6. The chief difference is that with the extra month the actual declines in exports, as opposed to only the annualised rates of fall, have become more serious.

Table 6

Summary of the current rends in world trade

While the annualised rates of decline show the extremely striking implosion of world trade during the last three months of 2008 an annualised rate, naturally, indicates an, in this case extremely severe, tendency. What is equally disturbing is the actual falls in exports recorded from the maximum levels last year. Seven countries registered actual falls in exports of more than 40% and 19 of more than 30%.

The relation of the decline in financial markets, trade and the productive economy

The transmission mechanisms of the financial crisis into the productive economy are also made clear by the trends outlined above. Initially in the present crisis there was a disjunction between the decline in financial markets, which was of 1929 magnitude, and the situation of the productive economy - which was of a severe but not equivalent decline. As such a disjunction is highly unlikely to continue either financial markets would recover, having overshot on the downside, or the trends and statistics in the productive economy would be shown to have been a lagging indicator and they would adjust downwards to the tendencies indicated in financial markets.

The extraordinarily powerful falls in world exports shown in the latest figures for all major economies indicate that the decline in trade is operating as a key mechanism by which the crisis revealed in financial markets is beginning to affect the productive economy. It may now be said that in two areas of the world economy, financial markets and trade, rates of decline significantly exceed any seen since World War II and are fully comparable to 1929 scale. How powerful the transmission mechanisms from the international sector are into domestic economies must clearly be carefully studied - trade today plays a more significant role in the world economy than at the onset of the 1929 crisis.

The duration of the crisis is also critical - the so far unique severity of 1929 was not only due to the rapidity of the fall but by its duration. The decline in US trade and GDP in the 1930s continued for four years whereas the current decline in financial markets has lasted 17 months, the decline in trade slightly under one year, and the fall in GDP approximately six months.

Quite sufficient data are now in to say with certainty that in the last three months of 2008 a convulsion in world trade occurred. The extreme rapidity of the fall in world trade, as with the situation in financial markets, confirms that the benchmark for present analyses must be not only, or primarily, post-World War II recessions but also 1929 itself.

Perspectives for China's exports

The above international situation provides the framework for estimates of perspectives for China's exports.

As may be seen from the figures above China's export decline is not exceptional by the standards of current trends in trade - on the contrary China's decline in exports is moderate compared to most countries. This makes it extremely unlikely that the decline in China's decline in exports seen since last year is due to some exceptional factor that can be easily reversed. On the contrary China's decline in exports is inextricably tied to trends in the world economy and depends on recovery in the world economy.

Figure 6 shows the trend in OECD country exports in dollar terms - Figure 7 shows the same data graphed on a log axis to show the rate of change. Both confirm that the decline in international trade since April 2008 is without precedent since World War II - the period covered includes both of the severe post-war trade crises in 1973 and 1981. As this unprecedented decline is not rooted in specific policies pursued by China it cannot be reversed by specific policies adopted by China.

The logarithmic graph also shows that there are no major 'leaps' in the growth of world trade i.e periods of extraordinarily rapid expansion. This is crucial as it indicates that recovery from any decline in trade cannot be immediate - it is rooted in the periods of time necessary to develop trade volme. Therefore, given the magnitude of the decline in exports, recovery from the present extremely severe decline in world trade will necessarily not be rapid.

Figure 6

Figure 7

This development of OECD trade also gives a framework for assessing China's trade - which is itself shown in Figures 8 and 9. To show both the absolute shifts and the rates of change Figures 8 and 9 again use both linear (Figure 8) and logarithmic (figure 9) axes. The again show that there are no 'leaps' in the expansion of trade - i.e. any recovery will take a significant period of time (technically R² is greater than 0.9 for the correlation between time and trade value).

Figure 8

Figure 9

In order to assess how long it will take China's exports to recover it may be noted that by January-February 2009 China's exports had declined to the level of the same period in 2006. Given that there is no evidence in the long term data of any possibility of radical upward 'leaps' in trade for either the OECD or China a reasonable working hypothesis would be that it will take China's exports at least three years to regain the level of August 2008.

However, it should be noted that the situation of world trade is continuing to deteriorate. The three year recovery period for China's exports flowing from this international data to December 2008 may well be, therefore, too optimistic. This again confirms that the working hypothesis should be that, based on trends within world trade, it will take at least three years for recovery of China's exports to their previous levels.

The implications for China's companies, economy and domestic stimulus programmes of the above trends are evident - if it is estimated that at least three years will be recovered for China's exports to recover to their levels of summer 2008 then planning for all three must take place on that basis.

Conclusion

Analyses which focus on comparisons with trade declines since World War II are too optimistic as the present decline in world trade far exceeds in its dimensions any seen since 1945. The present rate of decline of world trade is actually more rapid than in 1929 - although, of course, the duration of the fall is so far, of course, far shorter. Given such trends any perspective of rapid recovery of China's exports is excluded. The working scenario should be that it will take at least three years for China's exports to recover to their previous levels. If current trends of decline of world trade continue that period would have to be lengthened. Company and economic planning should, therefore, take place on that basis.

Notes to Tables - peak month for exports in 2008

1. Peak January 2008
2. Peak March 2008
3. Peak April 2008
4. Peak May 2008
5. Peak June 2008
6. Peak July 2008
7. Peak August 2008
8. Peak September 2008

美国四季度GDP数据显示1929时期的衰退速度

2009-03-04T03:53:00.000-08:00

媒体关于官方公布的第四季度的美国GDP数据的报告主要集中于GDP年下降比率的修改上，由最初的6.2%调整为现在的3.8%。报告强调这个下降比率比独立预测的平均下降5.4%严重的多。

然而，集中分析新闻标题中GDP数据，使得人们不去分析GDP组成成分的具体趋势。而其中很多部分又特别重要。

就像在全球化过程中的核心趋势中分析的那样，现在的国际金融危机中的明显的‘矛盾’就是金融市场的衰退速度和1929年的大致相仿，而实体经济中的衰退却没有1929年那么严重。

这样的矛盾是不大可能一直保持的。一种情况就是，金融市场过度反应了，衰退的过度了。生产将不会像1929年那样下降，金融市场也将恢复过来。这样的话，只会出现经济衰退，而不会出现大萧条。另一种情况就是，现在的金融市场的1929年程度的衰退是合理的，实体经济的1929年程度的衰退只是被推迟了，并将在不久后大幅下降。这样的话，经济就不是简单的衰退，而是走向大萧条。

美国4季度GDP数据的重要性在于，GDP各成分的下降预示着第二种情况更有可能发生。
这样的趋势，并不一定预示着美国经济就会出现和大萧条时期一样的GDP衰退-GDP下降29.7%。但是这预示着比二战后任何时期都大得多的衰退。在二战后最严重的衰退是1981-1982年的1.9%。

根据最新的数据，在第四季度，美国GDP以每年6.2%的速度下降。消费支出年下降4.3%，私人固定投资年下降20.8%，出口年下降23.6%，进口年下降16.0%。

美国投资的下降不局限于由于次贷危机影响住宅部门投资的下降。住宅部分投资下降22.2%，只比全部投资的下降比率高出一点点。

为了更好的理解这些数据，最好是将它们与1929-30年大萧条刚开始时的数据进行比较。在那年，GDP下降9.4%，消费支出下降6.7%，私人部分投资下降23.4%，出口下降15.4%，进口下降11.0%。

比较这两组数据可以看出，2008年美国GDP的下降大概是1929-1930年的三分之二，消费支出的下降也大概是大萧条开始第一年的三分之二。但是2008年第四季度投资的下降和1929-30年几乎一样严重，出口和进口的下降则比1929-30年更糟。

做这些比较需要注意的是，将第四季度的数据年度化以后的下降，并不能完全用来和1929年发生的真实的下降进行比较。还需要观察2009年美国经济的真实下降。然而2008年第四季度美国投资、进口和出口的下降已经完全可以和1929-30年相当了。

其它像1929年那种程度的下降的国际数据包括亚洲交易和工业生产水平的快速下降。比如2009年一月日本出口同比下降45.7%，工业生产同比下降30.0%。这些数据无疑会由于中国春节期间亚洲地区经济下滑进一步恶化。这样的下降完全和1929年相当。

总之，金融市场下滑速度和实体经济的下滑速度不匹配的矛盾正被一些国家实体经济的快速下滑所解决。这是不好的情形，像1929年，一开始实体经济就快速下降。这种趋势只是出现了，但是还没有被证实。然而这种趋势的出现意味着政府、政策制定者和企业不能只试图减少正在发生的事情的严重性。为最坏的情形做好准备是必不可少的。

只谈衰退是会产生误导的。应该讨论的是将要发生的是二战后最严重的衰退，还是一场即将发生的大萧条。

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这篇文章最初发表在博客： Key Trends in Globalisation.

4th Quarter US GDP figures show shift to post-1929 rates of decline

2009-03-04T01:10:00.001-08:00

Media reports on the latest release of official 4th quarter US GDP figures have concentrated on the headline revision of the annualised rate of decline of GDP from 3.8%, in the first published estimate, to 6.2% in the new one. It has also been stressed that this decline was significantly worse than the average of independent projections - which was for a 5.4% annualised fall.

However concentration on the headline GDP figure has distracted from examination of the detailed trends of the components of GDP, some of which are of very significant magnitude.

Until now the apparent ‘paradox’ of the international financial crisis was that, as Key Trends in Globalisation has analysed, the decline in financial markets was entirely comparable in rapidity to 1929, however the decline in the productive economy was far less severe than after 1929.

Such a paradox is highly unlikely to be maintained. The first possibility is that it will be shown that financial markets had overshot, that their decline is excessive, that there will not be anything approaching a post-1929 scale fall in production, and consequently financial markets will adjust back upwards – i.e. the variant that there will be an economic recession not a depression. An alternative is that it will be found that the 1929 scale financial falls are justified, and that it is merely a matter of a delay in time before the productive economy adjusts very severely downwards by the amounts that would justify a 1929 scale financial fall – i.e. the perspective not simply of a recession but of something approaching an economic depression.

The significance of the details of the 4th Quarter US GDP figures is that the rates of decline of components of GDP indicate that there is now a higher possibility of the second variant.

Such a trend does not, of course, necessarily imply that the scale of decline in US GDP will be the same as in the Great Depression - when GDP fell by 29.7%. But it would mean falls far exceeding in magnitude any post-World War II recession – the most severe recession in post-war US history being 1981-82 when GDP declined by 1.9%.

According to the new data, in the 4th quarter of 2008 US GDP declined at an annualised rate of 6.2%, consumer expenditure declined at an annualised 4.3%, private fixed investment fell at an annualised 20.8%, exports declined by an annualised 23.6%, and imports dropped at an annualised 16.0%.

The decline in US investment was not accounted for solely by the fall in the residential sector, produced by the sub-prime mortgage crisis, as the latter dropped by 22.2% - only marginally more than the overall investment decline.

To grasp the scale of magnitude of such rates of decline it is worth making a comparison to the actual falls in 1929-30 in the US – i.e. in the first year of the onset of the Great Depression. In that year US GDP fell by 9.4%, consumer expenditure by 6.7%, private fixed investment by 23.4%, exports by 15.4% and imports by 11.0%.

Comparing the two sets of figures, the annualised decline in US GDP in the fourth quarter of 2008 was about two thirds as rapid as the actual yearly decline in 1929-30 and the fall in consumer expenditure was similarly about two thirds of the first year of the Great Depression. But the rate of fall in investment in the 4th Quarter of 2008 was almost as severe as in 1929-30 and the rate of fall in US exports and imports was actually worse than in 1929-30.

Having made such a comparison it is necessary to state immediately that an annualised rate of decline is not the same as an actual annual rate of decline which has occurred as in 1929. It remains to be seen what will be the actual drop in US GDP during 2009. However the rates of decline of US investment, exports and imports in the last quarter of 2008 were fully comparable to those in 1929-30.

Other international data which goes in the same direction of post-1929 scales of fall are the extremely rapid rates of decline in Asian trade and industrial production. Exports by Japan, for example, dropped by 45.7% in January 2009 compared to a year earlier and its industrial production was down 30.0% over the same period. While these figures are undoubtedly exacerbated by the slowdown in the whole Asian economic region caused by the Chinese lunar New Year festival falling unusually early this year, in January, nevertheless anything approaching such scales of decline are figures fully comparable to 1929.

In short, elements are now appearing in the productive economy of a number of countries which overcome the’ paradox’ of the gap between the rate of decline of financial markets and the rate of decline of the productive economy in the negative variant – i.e. by the onset of declines in the productive economy of post-1929 magnitudes. Such trends are, of course, only just appearing and as yet are not consolidated. However the appearance of such tendencies clearly means that governments, policy makers and companies should not be seeking to minimise the gravity of what is taking place. It is more imperative at present to prepare for worse case scenarios than optimistic ones.

Talk simply of ‘recession’ is misleading. The issue is whether what will take place will be ‘merely’ the most serious recession since World War II or whether an actual economic depression will set in.

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This article originally appeared on the blog Key Trends in Globalisation.

US share price decline continues to match fall after 1929

2009-03-04T01:08:00.000-08:00

The latest market shifts confirm that to date in the present financial crisis the fall in US share prices continues to be at a post-1929 rate – see Figure 1.

Figure 1

Last Friday, 27 February, was the 352nd trading day since the all time high of the Dow Jones Industrial Average on 9 October 2007. Since its peak the Dow has declined by 50.1%. On the 352nd trading day following its 1929 high point the Dow had declined by 55.6%. The difference between the falls is within the range of short term fluctuations. Overall the rate of decline of US share prices since October 2007 is tracking the 1929 descent.

As may be seen from Figure 2 the current decline of share prices is far more rapid and deep than either of the other two major falls in the 20th century – that following the oil price increase of 1973 or following the implosion of the dot com share bubble in 2000. These trends confirm again that the only relevant scale of comparison for the current decline of US share prices is with 1929 itself.

Figure 2

The only fundamental difference between the current decline and that of 1929, so far, is the duration of the fall. After 1929 it took the Dow Jones 713 trading days to reach its bottom – the trough being on 8 July 1932 by which time the Dow it had lost 89.2% of its value. It remains to be seen for how long the current decline will continue. However although the duration of the drop is at least as yet not as great as after 1929 it is as rapid.

While the financial collapse is therefore genuinely on a scale to be compared to 1929, the overall declines registered in the productive economy are still far smaller than the post-1929 falls. However the declines in the productive economy have just commenced and data is still coming in. Some drops, such as in trade, are approaching scales seen post-1929. However the decline in US GDP in the 4th quarter, now revised downwards to an annualised decline of 6.2 per cent, is about two thirds of the 9.4 per cent drop in US GDP seen between 1929 and 1930 – however the rate of decline is accelerating.
While quite sufficient information is now in to make clear that the current financial crisis is only comparable to 1929, far exceeding the shifts seen in a normal recession, further data is still required to see whether it will be meaningful to compared the fall in production to that after 1929 or not.

Present rate of decline in world trade more rapid than in 1929 – by John Ross and Lu Yao

2009-03-04T01:05:00.000-08:00

A crucial question is assessing the current scale of the international economic crisis is examining the relation between the speed of decline in financial markets and the situation in the productive economy.

As this blog has analysed on several occasions the rates of present falls on financial markets are entirely comparable to those following 1929 – i.e. the most rapid declines in history. Most published data on the productive economy, however, indicates a rate of decline not approaching that of 1929 – i.e. there is a disparity between the two indicators. An exception is that annualised figures for US GDP for the 4th quarter of 2008 regarding investment, exports and imports indicate rates of declines of post-1929 dimensions. However the annualised figure for US GDP itself for the 4th quarter of 2008 indicates a rate of fall about two thirds as fast as in 1929.

However, a part of this apparent ‘paradox’ of the disparity between financial and productive economy data can be that while financial markets may be followed in real time there is a delay in the calculation and publication of statistics on the productive economy. Current rates of economic decline are sufficiently rapid that delays between the actual current situation in the productive economy and the publication of data regarding it may lead to a significant distortion in the picture presented by at least some statistics.

This is most serious in the case of GDP data which is necessarily published with considerable delay due to the time taken to calculate it – revised data for US 4th quarter GDP figures only became available at the end of February. For that reason other indices than GDP, which may be available more rapidly, may indicate more accurately, if more partially, actual trends. Industrial production data, however, which is frequently taken as a more immediate measure of economic shifts, may be misleading in countries which are heavily dominated by service sector activities.

One of the most important of the available data sources is trade. This also directly relates to one of the key issues in the current economic downturn – globalisation and protectionism. During periods of severe recession a process of trade ‘de-globalisation’ frequently occurs – i.e. exports and imports fall more rapidly than GDP and therefore trade contracts as a percentage of GDP. The most extreme case of such trade ‘de-globalisation’ was following 1929 - when the decline in exports and imports was far greater than that for GDP in the US and other economies and was exceeded in magnitude only by the fall in investment. A similar pattern of the falling share of trade in GDP, on a much smaller scale, was seen during the most severe post-World War II recessions – for example in the US in 1981-82.

This article, therefore, calculates data on recent declines in exports and, as a benchmark, compares these to declines after 1929. The results are extremely striking. They indicate that, at least as regards a series of major countries, the current decline in trade is more rapid than that following 1929. If that process were to continue for any significant period of time the consequences, both in terms of the recessionary pressures that are implied and in terms of ‘de-globalisation’ and the rise of protectionist trends, would be extremely significant. These trends in trade, therefore, also provide some evidence that the extreme pessimism in financial markets, with post-1929 speeds of decline, may be justified by events in the productive economy.

To give an initial benchmark Table 1 shows the decline in exports for countries for which data is available in the first year following 1929. This data is the actual year on year decline measured in current price terms. As may be seen all countries suffered major export declines - the most severe contractions being in the US, Japan, Canada and the UK.

For comparison Table 2 shows the export trends to December 2008 for a series of major trading countries. December has been taken as the cut off point as Asia’s, and to a lesser extent other regions, trade figures are highly distorted by the fact that the Chinese lunar New Year holiday fell unusually early this year in January. This distorts year on year comparisons for January and February 2009.¹

It should be stressed, therefore, in the light of the magnitude of the shifts revealed, that as the economic situation has been deteriorating the figures calculated to December indicate the scale of falls conservatively. It is likely trends worsened in January and February.

To indicate the rate of deterioration three figures are shown in Table 2 – the actual year on year fall in exports to December 2008, the six month June-December 2008 decline on an annualised basis, and the three month September to December fall on an annualised basis.

It may be seen that the rates of decline of exports in the last half of 2008 were of extraordinary magnitudes – even considerably exceeding the rates of decline seen in 1929-30. For the US to have suffered annualised rates of decline of exports of 32.6% for the last six months, and for 44.5% for the last three months is, respectively, half as much again as, and almost twice, the decline seen in 1929.

The annualised rates of decline for the last three months in South Korea and Japan, 71.8% and 81.5% respectively, may well have no equivalents for peacetime in major countries in history. Even the annualised figures for the rates of decline for exports for the last six months for Germany, South Korea, and Japan – 42.0%, 46.3% and 54.5% respectively – are at speeds which considerably exceed those for 1929.

An immediate caution must be made that an annualised rate of decline, even one based on a six month period, is not the same as an actual annual decline. In most countries the decline in exports commenced in July 2008 (in March 2008 in Japan and in October 2008 in Germany) and therefore actual year on year results for the period since then will not be available for some months. But the scales of drop in the last six months are so sharp that there would have to be an extremely great, and in the economic circumstances highly unrealistic, recovery of trade in the next few months for the declines in exports on a year by year basis not to be at least as bad, and probably worse, than those for 1929-30 – in some cases worse than 1929-30 by a significant margin.

As a further control on the data to avoid exaggeration Table 3 shows the actual (i.e. non-annualised) decline in exports since the peak month for the countries concerned. The trends, again, are evident. In all cases the actual drop in exports that has already taken place since the maximum levels last year is essentially equal to or exceeds that seen in 1929.

Such rates of decline cast further light on the apparent differences between the post-1929 scale of falls on financial market and the apparently much less severe declines in the published statistics for the productive economy. Such extreme falls in exports/trade increase the probability that financial markets are behaving rationally and that at least part of the apparent disparity between the post-1929 scales of decline in financial markets and the lesser falls in published statistical data is due to the time lag in statistical calculation – i.e. that the actual situation in the productive economy is worse than it appears from the necessarily time lagged published data.

Second, it indicates that the 4th quarter US GDP data, which indicated an extremely severe and rapid deterioration in trade, is not exceptional but may be repeated for other countries.

Such figures indicate that in at least one area, trade, the rate of decline in the productive economy is now at least as rapid as after 1929 – i.e. the most severe ever recorded in peacetime history.

Notes

¹ For example South Korea’s export figures show a 32.8% year on year decline for January 2009 compared to a similar 17.3% year on year drop for February with this being likely to reflect not a rebound but depressed figures for January due to the holiday.

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Antai College of Economic and Management at Jiao Tong University in Shanghai provided research facilities for this study.

谁是经济危机的幕后推手

2009-03-03T22:06:00.000-08:00

世界经济正在遭受1929年以来最严重的金融危机，这一点已经无须赘言了。人们也开始对这次经济危机所产生的后果有了更深刻的认识。就美国而言，政府对于经济管制越放越宽的时代已经终结，取而代之的是大规模的政府干预经济。

但是这次的危机到底属于哪种类型呢？这很大程度上决定了这次经济危机的最终结果究竟会如何。

在新闻小报和煽动性的政治演讲中，提出最平淡无奇而肤浅的解释是，这是一场非常严重的短时紊乱，始作俑者正是那些“金融投机者”和“买空者”。这就象是上世纪60年代英国首相Harold Wilson指责“苏黎世侏儒”的现代版本。但这种解释至少要比某些金融机构普遍持有的主观而错误的判断要稍强那么一点。一个与此相关的观点认为心理因素才是导致危机的根源。因此，有一种普遍观点宣称这次金融危机的核心问题是“信心”或是“信心缺失”。

如果上述观点都是正确的话，那么即使目前的金融动荡很严重，但是其随后的调整应该是相对较小的。一旦目前的心理状态发生转变，也就是大家能够重拾信心，那么就能恢复到接近先前的水平，当然肯定也会有个别的变化。

然而，这样的分析是不正确的。当前的金融危机不是源于心理或是主观失误，而是源于其长期的经济发展趋势。所以其根源是客观的而不是主观的。因为心理因素并不足以推动客观经济，心理因素是随这客观经济的变化所产生的。

金融危机的不断演变体现出了要考虑长期趋势和潜在发展的重要性，而不要像很多新闻评论里那样仅仅是注重短期的变化或是断章取义的个别因素。不能从全局看待问题就不能正确的理解前期的形势，这不可避免的导致对目前所处经济情况的困惑。

有关目前金融危机的真正驱动的力量的结果和结论将在这篇文章的结尾阐述。但首先，我们来罗列一些决定性的数据。

我在之前的文章《为何中国能继续比美国和欧洲更快速的增长》中曾经提到导致目前金融危机的最根本原因。这表明从投资经济占的比例来看，如今美国经济发展远远落后于主要的亚洲国家，其结果是美国经济的国际竞争力在不断下降。

大家可以从图表一可以看到这个趋势，这张图表曾在本博客之前文章里出现过。图表一显示美国、中国、印度的投资水平（国内固定资产投资总额）占其各自GDP的比例。美国的投资仅占其GDP的18-20%，而印度占30%，中国的投资甚至超过其GDP的40%。可以看到中国的经济以每年9%-11%的速度增长，印度的年增长是7%-9%，而美国仅为3%。

图表一

美国在投资方面呈现明显落后的态势。大家知道投资是提升其竞争力的关键因素。对于任一给定的汇率，美国经济正随着时间的推移逐渐的丧失其竞争力。如果美国不把它的投资水平提高到像其他经济体系那样，那么美国的竞争力还会继续下降，而保持其竞争力的唯一途径是不断降低汇率，也就是让美元逐步贬值。

图表二可以看到美国竞争力正在日益下降。众所周知，美国经受着巨大的国际收支逆差。这张图表显示的是其各阶段演变的过程。

图表二

美国的国际收支在80年代初期开始陷入大幅赤字，到80年代中期其赤字超过GDP的3%。美国的国际收支在90年代初有一个短暂的复苏，其原因是美元贬值，90年代初国内经济衰退，同时美国获得来自一笔来自海湾国家的钱，这些海湾国家的目的为了资助海湾战争。但这次复苏只是短暂的，1991年后美国的收支逆差变得更加严重，到2006年其收支逆差达到最高峰，超过GPD的6％，大约在每年7000亿美元左右。

图表三呈现了这种长期以来的发展态势。图表曲线表示了1956年来世界其他国家与美国之间的净借支。当这个数字为负值时，说明美国是在借入。这些趋势验证了美国经济竞争力的衰退。

图表三

美国的低投资意味着美国要保持其竞争力的唯一的基本机制就是美元贬值。图表四显示相对世界上其它三种非美元中的两种的货币-欧元、日元，美元汇率的一个长期走势。美元跟同一时期的第三种货币－人民币相比是没有意义的，因为直到20世纪80年代初中国一直都人为设定汇率，其用意就是不想参与世界贸易。

图表四

美元汇率经历了三个清晰的发展阶段:
- 从战后时期到70年初期，美国保持固定汇率的布雷顿森林货币体系。
- 从1973年直到80年代中期，美元汇率出现短期的大幅波动，实质性的美元贬值发生了。
- 从20世纪80年代中期以后，虽然有一些短期的波动，正式的浮动汇率机制已经开始实行了，事实上美元汇率呈现长期相对稳定的趋势。

已经如图表二所示，美国日益恶化的国际收支状况是80年代中期之后以下两种情况结合下的必然结果。

－美国较低投资率导致竞争力日益恶化

－稳定的美元汇率，即使采取贬值的措施也无法阻止竞争水平的下滑。

如图表二所示必定意味着美国国际收支逆差日益严重的趋势。换句话说，相对于美国潜在的竞争力，美元被逐渐高估了。

图表五显示，美元汇率保持稳定，尽管国际收支的日益恶化以及没有正式固定汇率。净国外购买的美国债务证券、国库债券和其他债券占GDP的比例从80年早初期的大约0%上升到2007年的5.6% ，大约是7700亿美元。国外国家对美国债务证券的大量投资使美国日益恶化的收支逆差得到平衡，也有利于维持稳定的美元汇率。

图表五

然而，想要欺骗任何经济力量是不可能成功的。所有有关经济的历史都告诉我们想要人为维持高汇率而不顾经济力量的压力最终还是会失败。所以，美元贬值会不可避免的发生。

高估美元的结果自然也就很清楚了。在国际环境中，由于美元的高估，这些用美元计价的资产价值也就必然被高估。因此，这些资产最终会价值回归到它们真实的水平，也就是更低的价值。一旦发生贬值，那么就会破坏或吞噬机构的资产负债表，从而引发美国的金融机构相继破产倒闭，这就是目前正在发生的情况。由于美元贬值和价值回归，其他两个的情况也就随之发生。

那些拥有美元资产的国外持有者损失惨重。单去年的流入的美国债务证券总计高达7700亿美元，其损失是巨大的。据估计日本大约持有8600亿美国债务证券包括国债和债券和拥有750亿美国最大的房地产抵押公司房地美和房利美的债券及担保证券，这两大房地产抵押机构已被美国国有化。中国持有美国大量的国债和高达4000亿房地美和房利的债券及担保证券。

美国资产的贬值也将引发美国各利益集团的政治斗争，谁将会承受这样的损失。

鉴于上述对美元的高估不可避免的导致金融危机的发生。目前美国的金融危机本质上就是其为了维持高估汇率所付出的代价，类似的危机也曾经在其他国家发生过，比如1982年墨西哥、1998年俄罗斯、2001年阿根廷都曾遭受此类危机。他们都曾因为企图维持高估汇率而最终都不可避免的溃败了。其国家金融机构也因此遭受了重创。而美国经济拥有更大的规模同时美国在全球经济发挥着至关重要的作用，这也导致了这次经济危机后果比以往都严重的多。

然而，如果这次的危机是相当典型的形式的话，那么就如本文开头概述的这次危机应该归于哪种类型呢？

前一时期很多评论家不考虑基本面和总体趋势，认为美国经济正在变的更有竞争力，以致于它创造了一个所谓的新经济。这种仅仅通过观察个别领域特别是高科技行业所得出的观点显然是不正确的。不可否认，美国在高科技领域的确具有很强的竞争力，但是，只要看一下整个美国国际收支情况，就可以看到美国经济正在不断的萎缩，而不是增强其竞争力。

所以金融危机并不是心理因素产生的，也不是在短期产生的，它是根植于一个长期客观经济的运行过程。事实上，可以说是政治因素决定了经济危机的演变和结果。

在以后的文章里，我还会阐述经济和政治因素之间的关联。但是导致目前金融危机的根本原因应该是非常清楚的，也符合上述的趋势。如果美国想要达到其亚洲竞争对手的投资水平，从短期来看，需要从消费到投资进行大规模的资源转移，这势必将会引起美国民众的不满从而导致政治局面不稳定。所以短期来看这种资源的转移应该不会发生。那么另外一个办法就是使其在短期内恢复竞争力，也就是让美元贬值。但是美元贬值会导致美元资产缩水，金融机构的资产负债表上表现为资不抵债，从而加剧金融的不稳定性。任何一种手段都会对美国民众的生活水平产生巨大的压力，因此也会对美国政治有巨大的影响。

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本文《谁是经济危机的幕后推手》最初发表在Key Trends in Globalisation.

参考[1] New York Times指出美国正遭受自1929年经济大萧条以来最严重的经济危机。

参考[2] Wall Street Journal 指出美国资本主义在金融动荡中正在建立新的规则。更准确的说：“这场自1929年经济大萧条之后出现的最大规模的金融危机正促使共和党财政部长和美联储主席大举采用政府干涉经济的措施，希望以此使经济免遭如同大萧条时期一样的巨大破坏。三月，美联储蓄废除了一个近半世纪的规定，即美联储只借钱给那些政府确认交付过保证金的银行。美联储宣称目前的情况是极不寻常而又十分紧急的，所以采纳很少使用的法规是必需的。美联储曾拨款拯救投资银行Bear Stearns ，美联储动用290亿纳税者资金已经向摩根大通公司提供资助，帮助后者收购贝尔斯登公司。这在当时看起来是一笔大买卖，但是在过去的两星期，美国政府开始采用大量反自由主义经济学的政策，成为私有企业的持有者。

－美国政府接管两大住房抵押贷款融资机构房利美和房地美公司（“两房”），用拿纳税人的钱注入抵押市场是其能够继续正常运作。

－美国政府对美国最大的保险巨头AIG实施拯救计划，强力注资AIG并解雇了AIG的首席执行官，对AIG资产进行拆分出售。

－在货币市场基金中实际将政府存款保险扩大到3.4万亿美元。

－暂时禁止799个主要的金融股票被卖空以防这些买空投机者从不断下跌的股价里获益。

－允许和鼓励美国四大投资银行中的第四大投资银行雷曼兄弟破产，美国第三大投资银行美林则被出售。

－要求美国国会到下周务必同意从金融机构冻结纳税人数千亿美元的非流动资产以帮助这些金融机构提高资金存量并能够继续开展借款业务

不到一星期前，美国财政部长鲍尔森在政府的救援计划里指出不会像之前给贝尔斯登救援那样再由政府出面来拯救雷曼兄弟，美国政府允许雷曼这样的投资银行倒闭破产。马萨诸塞州的民主党人、众议院金融服务委员会主席法兰克这周初讽刺说“政府的承诺仅仅持续了一天”。9月15日周一这天之前美国政府刚刚拒绝雷曼的求助，而这天之后美国政府却对AIG施以救援。 Financial Times评论道美国政府将在金融体系中扮演自20世纪30年代“大萧条”(Great Depression)以来和平时期的的最大角色，在许多人眼里，这似乎标志着里根式放松管制时代的终结。

参考[3] 英国BBC的著名财经编辑 Robert Peston：在过去的数年里，很大一部分银行高管一直不负责任的不按照银行的贷款规定办理相关贷款业务。

参考[4] Robert Peston：我们现在看到的是一个失去理性的股市，是一个完全被歇斯底里的热情所推动的股市。

Fundamental driving forces of the financial crisis

2009-03-03T22:05:00.000-08:00

It is superfluous to note on this blog that the world economy is passing through the most severe financial crisis since 1929.[1] Its results are also beginning to be well understood: the era of increasing deregulation has ended and instead increased, in the US very large scale, state intervention in the economy has begun.[2]

But what type of crisis is this - which greatly affects what its eventual outcome will be?

The most trivially superficial explanation, put forward in tabloid newspapers and demagogic political speeches, is that this is an extremely severe short term convulsion caused by the activities of ‘financial spivs’ and ‘short sellers’– modern embodiments of the ‘gnomes of Zurich’ denounced by British Prime Minister Harold Wilson in the 1960s, Slightly less superficially it is ascribed to subjective, widespread, miscalculation by financial institutions.[3] A related view is that the fundamental factor is psychology.[4] Therefore, there is a widely asserted view that the key issue is ‘confidence' or 'lack of confidence’.

If any of the above were true then, although the present financial convulsion is severe, the adjustments that will follow will eventually be relatively minor. Once current psychology is reversed, that is ‘confidence is restored’, there can be a return to something approximating the previous situation – doubtless with some individual changes.

Such analyses are false. The present financial crisis is not rooted in psychology or subjective mistakes. It is rooted in long term economic trends. Its roots are therefore objective not subjective. Psychology is not driving the objective economic forces but following them.

The unfolding of the financial crisis does, however, show the importance of considering long term trends, and underlying developments, rather than merely considering short term shifts or individual facts taken out of context - as occurs in many newspaper commentaries.

Misunderstanding of the preceding period, through failure to consider the overall situation, inevitably led to confusion regarding present events.

The outcomes, and conclusions regarding the real driving forces of the present financial crisis, will be considered at the end of this article. First, however, the decisive data on the situation will be set out.

The most fundamental cause driving the present financial crisis was dealt with in previous post on this blog - 'Why China will continue to grow more rapidly than the US or Europe'. This showed that the US now lags far behind the key Asian economies in the proportion of its economy which is invested - with a consequent continuing decline in the international competitiveness of the US economy.

This trend can be seen in Figure 1 - which is a simplified form of the graph in the previous post. It shows the investment levels (gross domestic fixed capital formation) as a proportion of GDP in the US, China and India. The US invests only 18-20 percent of its GDP whereas India invests over 30 percent and China more than 40 per cent. Similar, if less striking, graphs would show the same pattern for other key Asian economies. The result is China’s economy is growing at 9-11 percent a year, India’s at 7-9 per cent a year, and the US at only 3 percent a year.

Figure 1

Given this US lag in investment, which is a key factor in competitiveness, the US economy, at any given exchange rate, becomes progressively less competitive over time. Consequently, given this decreasing underlying competitiveness, as long as the US does not raise its investment levels to that of other economies the only way for it to remain competitive is to steadily lower its exchange rate – that is to progressively devalue the dollar.

This declining competitiveness of the US economy is illustrated clearly in Figure 2, showing the US balance of payments. That the US runs a large balance of payments deficit is well known, but this graph shows the phases in the unfolding of that process.

Figure 2

The US balance of payments first began to slide into sharp deficit in the early 1980s - the deficit initially reaching over 3 per cent of GDP by the mid-1980s.

There was a short lived recovery in the early 1990s - due to dollar devaluation, recession at the beginning of that decade, and a large one off payment from the Gulf states to finance the first Gulf war.

This short recovery was followed by an even greater US balance of payments deficit after 1991 - which reached a peak of well over 6 per cent of GDP, or over well $700 billion a year, by 2006.

To show this development over a longer period Figure 3 shows net US ‘lending’ to the rest of the world since 1956 – a negative number showing US borrowing from the rest of the world. The deterioration of the competitiveness of the US economy is evident from these trends.

Figure 3

Given that the low US level of investment means the only fundamental mechanism by which it can remain competitive is dollar devaluation therefore Figure 4 shows the long term exchange rate of the dollar against two of the world's three most important non-US currencies, the euro and the yen - comparisons over the same period with the third, the yuan, are not meaningful as until the early 1980s China had an artificially set exchange rate which was not aimed at participation in international trade.

Figure 4

Three clear periods of developments in the US exchange rate are evident.

- From the immediate post-war period to the early 1970s the US maintained fixed exchange rates under the Bretton Woods currency system.

- From 1973 until the mid-1980s, via sharp short term fluctuations, a substantial dollar devaluation took place.

- From the mid 1980s onwards, while there were considerable short term fluctuations, and formally a floating exchange rate system operated, in fact the long term trend of the dollar’s exchange rate was stable.

The worsening US balance of payments situation, already shown in Figure 2, was an inevitable result of the the two circumstances which operated after the mid-1980s. The combination of
a deteriorating competitiveness of the US due to its low investment rate with
a stable dollar exchange rate which prevented competitiveness being maintained by devaluation
necessarily meant an increasing movement into deficit of the US balance of payments - precisely as shown in Figure 2. In otherwords the dollar became progressively overvalued compared to the underlying competitiveness of the US economy.

The means whereby this dollar exchange rate remained stable, despite the worsening balance of payments deficit and the fact that the exchange rate was not formally fixed, is shown in Figure 5. Net foreign purchases of US debt instruments, Treasury Bonds and others, rose from around zero per cent of GDP in the early 1980s to 5.6 per cent of GDP in 2007 or $770 billion. The large inflow of investment in US debt instruments counterbalanced the deteriorating current exchange deficit to maintain a stable dollar exchange rate.

Figure 5

It is, however, impossible to cheat underlying economic forces. The history of all economies shows that attempts to artificially maintain a high exchange rate against the pressure of underlying economic forces will eventually fail. In short, at some point, there would inevitably be a dollar devaluation.

The consequences of an overvalued dollar for asset values denominated in dollars are also clear. The values of assets held in overvalued dollars are themselves necessarily overvalued in real international terms. There would, therefore, eventually be a revaluation of such assets downwards to their real, that is lower, values. As that downward revaluation takes place it will erode or destroy the balance sheet of the institutions holding such assets – this is the process which is at present occurring, unleashing the wave of bankruptcy of US financial institutions.
As the dollar devalues, and assets decline towards their real competitive values, two other processes occur.

Foreign holders of dollar assets suffer losses – given that last year alone such inflows, as noted, amounted to $770 billion in US debt instruments any such losses would be large. Japan is estimated to hold $860 billion in US debt instruments, including Treasury Bonds and $75 billion in debt issued previously by the recently nationalised US mortgage institutions Fannie May and Freddie Mac. China is estimated to hold large quantities of US Treasury Bonds and up to $400 billion in Fannie Mae and Freddie Mac debt.

Given the decline in the value of US assets, a political struggle breaks out between different groups in the US population over who will bear the cost of such a fall.

Given the preceding overvaluation of the dollar it is inevitable that such shifts should take place. In essence the current financial crisis in the US is a classic one of the attempt to maintain an overvalued exchange rate - the type of crisis which affected Mexico in 1982, Russia in 1998, or Argentina in 2001. In each of these cases the inevitable collapse of the attempt to maintain an overvalued currency wrought havoc on the financial institutions of the country concerned. In the case of the US the fact that its economy is on a much larger scale, and plays a pivotal role in the global economy, makes the consequences of such a crisis far more severe.

Why, however, If the crisis is of a rather classical form is there confusion over its driving forces - of the type outlined at the beginning of this article?

The confusion has arisen because a number of commentators in the preceeding period, instead of considering fundamentals and overall trends, took individual facts out of context and created a false ‘narrative’ regarding developments. This perspective was that the US economy was becoming more competitive - to the point where it had created a ‘new economy’. This false perspective was rationalised by looking at a few individual sectors, notably high technology, in which the US is indeed highly competitive. But, as shown in the balance of payments figures, overall the US economy was becoming less, not more, competitive.

The financial crisis is therefore not rooted in psychology nor in short term developments. It is rooted in objective economic processes operating over long periods. The outcome and unfolding of this crisis will, however, be determined by political factors.

The interrelation of these economic and political elements will be looked at in a future post. But the fundamental factors in the situation are clear and flow from the above trends.
If the US were to seek to achieve a level of investment to match its Asian rivals this would, in the short term, due to the huge transfer of resources from consumption to investment that would be required, unleash a wave of popular discontent in the US that would destabilise the political situation - for that reason it is highly unlikely to occur in the short term. The only other way to restore competitiveness in the short term, that is dollar devaluation, would cause radical financial destabilisation as the value of dollar assets declines - destroying the balance sheets of financial institutions holding such assets.Either course will produce strong pressure on the living standards of the US population and therefore have major political impact in the US.

* * *

This article was originally published as 'Fundamental driving forces of the financial crisis' on Key Trends in Globalisation .

References
[1] For the New York Times: ‘The nation is gripped by the worst financial crisis since the Great Depression.’ For the Wall Street Journal it is ‘Black September' which the papercharacerised simply as 'the worst financial crisis since the 1930s'. The Times characterised the US as suffering from: ‘the cataclysmic fall-out from the country’s worst financial crisis since the Great Depression of the 1930s.’ For the Guardian it was: ‘the most traumatic week on Wall Street since the Great Depression’ For Robert Peston of the BBC: ‘The US Government... admitted that the financial system was on the verge of total meltdown.’
The Wall Street Journal gave a particularly graphic account of the events of 19 September: ‘When government officials surveyed the flailing American financial system this week, they didn't see only a collapsed investment bank or the surrender of a giant insurance firm. They saw the circulatory system of the U.S. economy -- credit markets -- starting to fail.
‘Huddled in his office Wednesday with top advisers, Treasury Secretary Henry Paulson watched his financial-data terminal with alarm as one market after another began go haywire. Investors were fleeing money-market mutual funds, long considered ultra-safe. The market froze for the short-term loans that banks rely on to fund their day-to-day business. Without such mechanisms, the economy would grind to a halt. Companies would be unable to fund their daily operations. Soon, consumers would panic...
‘One day later, Mr. Paulson and Federal Reserve Chairman Ben Bernanke sped to Congress to seek approval for the biggest government intervention in financial markets since the 1930s. In a private meeting with lawmakers, according to a person present, one asked what would happen if the bill failed.
"If it doesn't pass, then heaven help us all," responded Mr. Paulson, according to several people familiar with the matter.’ Similarly: America was “literally maybe days away from a complete meltdown of our financial system, with all the implications here at home and globally,” Senator Christopher Dodd, Democrat chairman of the Banking, Housing and Urban Affairs Committee reported after the meeting.’
[2] As the Wall Street Journal put it: ‘In Turmoil, Capitalism in U.S. Sets New Course’. More precisely: ‘the biggest financial shock since the Great Depression, is prompting a Republican Treasury secretary and Federal Reserve chairman to devise the most muscular government intervention in the economy since the Great Depression in an effort to prevent the economic devastation of the Great Depression.’
'In March, the Federal Reserve shattered a half-century of tradition in which it had lent money only to banks whose deposits were insured by the government. Declaring circumstances to be "unusual and exigent," as required by a little-used statute, it lent to investment bank Bear Stearns and eventually risked $29 billion of taxpayer money to induce J.P. Morgan Chase to buy Bear. It seemed a very big deal at the time.
‘But in the past two weeks, the U.S. government, keeper of the flame of free markets and private enterprise, has:
‘- nationalized the two engines of the U.S. mortgage industry, Fannie Mae and Freddie Mac, and flooded the mortgage market with taxpayer funds to keep it going;
‘- crafted a deal to seize the nation's largest insurer, American International GroupInc., fired its chief executive and moved to sell it off in pieces.
‘- extended government insurance beyond bank deposits to $3.4 trillion in money-market mutual funds for a year;
‘- banned, for 799 financial stocks, a practice at the heart of stock trading, the short-selling in which investors seek to profit from falling stock prices.
‘- allowed or encouraged the collapse or sale of two of the four remaining, free-standing investment banks, Lehman Brothers and Merrill Lynch;
‘- asked Congress by next week to agree to stick taxpayers with hundreds of billions of dollars of illiquid assets from financial institutions so those institutions can raise capital and resume lending.
‘It was less than a week ago that Mr. Paulson appeared to draw a line at government bailouts, rebuffing Lehman's plea for a Bear Stearns-like rescue and allowing the investment bank to collapse into bankruptcy. "The national commitment to the free market lasted one day," Barney Frank, the Massachusetts Democrat who chairs the House Financial Services Committee, quipped earlier this week. That one day was Monday, Sept. 15. The day before the government rejected Lehman's cry for help; the day after it seized AIG.’
The Financial Times stated the US government: ‘envisage[s] the most extensive peacetime expansion of the role of government in the financial system since the Great Depression and appeared to many to mark the end of an era of Reaganite deregulation.’
[3] The BBC's respected business editor, Robert Peston, for example stated: ‘an entire generation of banking executives had behaved wholly irresponsibly in their lending practices for years’.
[4] Robert Peston, for example, suggesting that what we now have is ‘a stock market that is bereft of reason and is being driven almost purely by hysteria and momentum.’

从历史的角度看中国经济为什么能保持比美国和欧洲更快的增长

2009-03-03T22:04:00.000-08:00

投资与经济增长趋势的长期数据

这篇文章处理投资与经济增长的长期历史趋势。这看上去是相对深奥的话题，而实际上这有决定性和战略性的经济结果，特别是对于理解亚洲核心经济体相对于欧洲和美国的高增长率，以及它们是怎么保持这么长时间的高增长率。在处理这些问题以及其应用之前，先将实际的数据列出来。

图1显示了主要国家在数据可得时期内固定投资（固定资本形成总额）占GDP比例的趋势。

图 1

这种形状是清晰和显著的。到现在为止，最强的趋势就是固定投资（固定资本形成总额）占GDP的比例随时间不断上升。我们将接着看到这种趋势是和经济不断增长相关的。

考虑历史上新的固定投资比例高峰出现的时间顺序和国家：

- 从工业革命前的一段时间开始——17世纪，在英国和威尔士GDP中用来进行固定投资的部分为5-7个百分点[2]。在19世纪，第一次世界大战前，这比例缓慢的增长，最高峰时超过百分之十。

这种水平的投资足以支持任何国家的第一次工业化，在当时每年大约2%的增长率。用现在国际上的标准看这样的增长是十分缓慢的，但是对当时来说却是空前的。在这样的增长率下，经济需要35年才能翻倍，需要70年才能翻两番。

-再看19世纪后半叶，在19世纪最后十年里美国GDP中用于固定投资的比率提高到18-20个百分点，明显超过了当时的英国。

在19世纪后半叶，美国固定投资比例急剧下降，特别是在第一次世界大战与第二次世界大战之间的时期，在此期间发生了内战时期的大萧条。第二次世界大战之后，美国固定投资比例又恢复到18-20个百分点。这使得美国经济以每年3.5%的速度增长。以这样的速度，经济需要20年才能翻番，需要40年才能翻两番。正是由于这样的投资水平和经济增长速度，美国取代英国成为世界第一大经济体。

-在二战后的时期，德国的固定投资比例达到25个百分点，在1964年达到26.6%的高峰。1951-1964年的这段时期，德国创造了经济奇迹，每年增长6.8%。以这样的增长速度，经济每11年翻番，每22年翻两番。

-从20世纪60年代开始，日本固定投资比例占GDP的30%。在20世纪70年代达到最高峰35%，之后就大幅下降了。这段时期日本经济保持每年8.6%的增长。以这样的增长速度，经济每8.5年翻番，每17年翻两番。

-从20世纪70年代到现在，韩国的固定投资比例也达到了相同的30%。20世纪80年代上升到35%以上。其它东亚四小虎经济体——新加坡，香港和台湾都是同样的趋势。韩国的经济证实了由日本每年8.3%增长所揭示的固定投资与经济增长之间的关系。以这样的速度，经济每9年翻番，每18年翻两番。

亚洲经济的增长速度显示出曾经不可能的事情，现在变得可能了。现在只需要一代人的时间，就可能让一个国家工业化水平达到‘第一世界’的水平。

-从20世纪90年代开始，中国就保持着35%的固定投资比例，而且在21世纪，这一比例达到了人类历史上前所未有的40%的水平。这使得中国经济保持相当长一段时间平均9.8%的增长率。这也是人类历史上最长时间的快速增长。根据这样的速度，经济每7.5年翻番，每15年翻两番。

-为了完成年代顺序的图景，现在两个正在经历经济高速增长的国家——印度和越南的固定投资比例也被列出。印度的固定投资比例还没达到中国的水平，但也达到了2007年的34%的高水平。在此基础上，最近5年里印度经济的平均年增长率为8.8%。在这样的速度下，印度经济这需要略多于8年就能翻番，需要17年就能翻两番。

-在越南，固定投资比例从1990年的13%增长到1995年的25%到2007年的37%。经济增长也在加速，增长到2007年前5年平均7.9%每年的速度。

考虑到这些趋势，高投资成了经济快速增长必须得条件。还没有哪个重要的国家在没有达到如此之高的投资比例时就达到长期的高的经济增长速度。[3]但这不是充分条件：高投资对应着高的产出，高的产出要求国际市场的消化，特别是这么高的投资比例。

没有哪个国家的市场，即使是美国或中国，能够大到可以保持所有的生产有效。就像很多人强调的那样，高的增长率必然伴随着出口导向型经济。[4]正是出口导向型和高的投资比例造就了韩国，中国，印度和越南的快速经济增长。

不同投资水平的影响

这些趋势将会到来一些明显的结果（必须强调的是这些数据只处理中长期的趋势，并不解释短期的波动）。这其中最重要的就是：

-这为理解为什么现在亚洲高速的经济增长，以及为什么它们可以比美国和欧洲国家增长的快那么多。

-中国经济将表现的比印度更好，而且两者的差距将随时间变得越来越大，而不是像有的人所说的两者的差距将变小。

-并没有足够的历史证据证明经常被提及的中国的过度储蓄与过度投资。中国应该保持这样的储蓄与投资水平而不是减小它们。

-现在美国和英国的经济政策，过度强调微观上的资源的有效配置，而忽视了最重要的经济问题，这必将导致它们的不成功，这也将进一步加深亚洲核心经济增长比美国和欧洲快的趋势。这也为近期的信用危机提供了背景。

更具体的探讨这个问题：

首先，这些趋势发生在现在一些国家（主要是亚洲国家）经济快速增长的广阔的背景下。后者体现了越来越多的GDP用于固定投资的趋势。这些趋势为现在亚洲经济明显地比美国和欧洲经济增长的快，并将继续保持这样的态势提供了理论上的支持。亚洲经济投资比例不是异常的高，而仅仅是最新的历史趋势。

从长期来看，是美国和欧洲的储蓄和投资比例过低，而不是亚洲的储蓄和投资比例过高。

第二，给定这些历史的趋势，在现在宏观经济趋势的基础上，中国经济将比印度经济增长的更快，而且中国经济将领先后者。

这并不意味印度不是异常重要的市场。印度经济如果用购买力平价来计算是世界第四大经济体，仅次于美国，中国和日本。[6] 印度每年8-9%的增长速度，是世界主要经济国中增长第二快的国家，仅次于中国。然而，中国经济用购买力平价来计算的话现在是印度的2.5倍，并且，保持每年比印度经济增长快一到两个百分点。这些都意味着印度和中国经济的差距在不断扩大而不是缩小。也没有历史数据证明印度经济的增长比中国快，比如至关重要的人口数据。历史数据表明固定投资比例是至关重要的。事实是，中国的固定投资比例持续高于印度，中国43%对比印度的34%。这表明，除非印度在这方面赶上中国，否则中国将比印度经济增长的快。

第三，也没有历史数据表明中国面临过度储蓄和过度投资，因此需要降低总的储蓄水平并提高消费水平（注：储蓄包括个人的，公共的和企业的）。有这种看法的人包括金融时报首席经济评论员马丁•伍尔夫。[5]

中国的投资和储蓄水平明显的高于美国和英国。然而历史数据表明中国只是固定投资比例长期上升的最新阶段。长期上升的趋势使得在未来很可能有别的国家，或者中国，将会有更高的固定投资比例，并带来更高的经济增长速度。

当然，短期的震荡和调整是需要的，但是没有历史数据表明中国的储蓄和投资比例已经相当高了，它只不过是长期国际趋势的最新阶段而已。降低中国的投资和储蓄比例，不仅会导致中国经济的下滑。由于中国是世界经济的火车头，所以也会引起世界经济的下滑。应此，中国应该保持现在的高储蓄和投资比例，而不是减少它。

第四，也没有证据表明企业家精神对于经济的发展起着至关重要的作用。或者说，企业家精神和管理的效率是随机分布的，应此不能用来解释不同的经济增长率。只有企业家精神而没有高的固定投资比例是不能产生高的GDP增长率的。

第五，现在美国和英国的政策过于强调微观经济的有效性，这只强调了国际竞争力中相对与固定投资比例不足而言较小的问题。高速增长的亚洲经济的政策重点就比美国和英国明显更有效。

换句话说，长期趋势的政府政策的应用为，在微观资源配置有效性和高的储蓄和投资比例的平衡之间，考虑经济增长速度，高的储蓄和投资比例比微观资源配置有效性更为重要。

有一些合理的怀疑，韩国和中国的微观投资的分配的有效性，鉴于使用资助贷款，跨所有制形式的在不同的工业部门，提高资本/产出比率等，比美国或英国差。但是这些地方的经济增长率在很长一段时间内比美国和英国快。

从数量上说，美国和英国微观上资源配置的有效性，弥补了一部分低储蓄和投资比例，但是还没有证据证实。亚洲高的储蓄和投资比例占优于微观的有效性。亚洲快速增长的经济体的投资数量优势超过了美国和英国的微观经济的质量优势。

理想状况下，应该同时追求微观经济的有效性和高的投资储蓄比例。但是有证据表明这两者是有矛盾的。比如美国和英国的政策的实施伴随着储蓄比例大幅度的降低，这损害了它们的国际竞争力，并导致了现在的急剧的金融危机。现在美国和英国的经济政策很可能会不成功，这些国家忍受由于竞争力缺失带来的长时期的金融抑制。现在的信用危机就是美国和英国损失国际竞争力的证明。

结论：

以下清晰的结论可以由这些数据推导出:

本地固定资本投资总额占整个经济的比例有长期清晰的增长趋势。这是经济增长的决定因素。

历史上有五个核心的固定投资比例上升的阶段：英国在18世纪达到的支撑工业革命的5-7个百分点的投资比例；19世纪后半叶，以美国为主的一些国家的18-20%的固定投资比例，使得美国取代英国成为世界经济领导；二战后德国25%的固定投资比例，伴随着德国的经济奇迹；20世界60年代开始，日本以及东亚四小龙的高于30%的固定投资比例，使得他们的经济每年增长8%；20世纪90年代开始，中国超过35%的固定投资比例，造就了每年接近10%的经济增长速度。

在很长的一段时期里，在不同的投资比例的基础上，一些核心的亚洲经济体将继续保持比美国和欧洲高的经济增长速度。

中国将继续增长并领先于印度，即使印度经济将快速增长。

没有证据表明中国过度投资和储蓄，中国应该保持而不是减少现在的投资储蓄比例。

现在美国和英国的经济政策强调不重要的问题，应此将不太可能成功。

* * *

这篇文章最初名为：“为什么从历史的角度看亚洲比美国和欧洲经济增长快”发布在博客：Key Trends in Globalisation

参考文献

[1]英格兰1688年的数据来自安格斯麦迪森，世界经济，经合组织，巴黎2006 P395.英国1688到1947年的数据是从一百年经济数据中计算出来的，经济学家，伦敦1989p74. 1948年起的数据是从国际货币基金组织，国际金融数据（2008年八月）中计算得到的。本文对数据进行了小的调整以使得早期的数据能和IMF的数据连接上，但是要注意的是这并没有对趋势有大的影响。经济学家百年经济数据中用到的早年的固定投资数据是基于C H Feinstein 和 Pollard在英国1750-1820资本形成中的计算，牛津大学出版社，牛津1988。有些评论指出Feinstein 和 Pollard的数据有些偏高。比如NFR的初稿英国工业革命时期的经济增长，Clarendon，牛津 1986 p73.但没有一个更改和变化能很大程度的改变文中提及的趋势。美国1948年前的数据是从一百年经济数据中计算出来的，经济学家，伦敦1989p74. 1948年起的数据是从国际货币基金组织，国际金融数据（2008年八月）中计算得到的。早期的数据只是计算私人部门的资本形成，而1948年以后则是统计了总的资本形成，包括政府的固定资本形成。在早期没有政府固定投资的可靠数据，所以之前的数据就是按照1948年两者的差来进行调整的，大概只占GDP的2%。这将调高早期GDP中用于固定投资的比例。但是差别很小，不会影响到大体趋势。
德国1960年前的数据是从一百年经济数据中计算出来的，经济学家，伦敦1989p202. 1960年起的数据是从国际货币基金组织，国际金融数据（2008年八月）中计算得到的。这两个数据的差别不大。
日本，韩国，中国，印度和越南的数据是从国际货币基金组织，国际金融数据中计算得到的。

[2] Phyllis Deane 和 W A Cole在英国经济增长1688-1959，剑桥大学出版社，剑桥1920,p2中的数据接近于低的水平，而进一步的研究将这些数据上调了一些。早期的估计被调高了，以避免夸大固定投资比例上升。这里所用的精确数据是从安格斯麦迪森的麦迪森，世界经济，经合组织，巴黎2006 P395中得到的。较高的数据不会影响到总的趋势。

[3]唯一的例外就是那些很小的人口不足两百万的国家，像赤道几内亚和博茨瓦纳。这些国家的经济状况完全取决与外部的因素。

[4]一个特别清晰的理论解释可以参看N Lardy中国对外贸易与经济改革，剑桥大学出版社，剑桥1993.

[5]例如北京应该深入企业银行，中国应该采取更大胆的尝试。相同的观点可以参看增长报告：持续增长和包容性的发展的战略

[6]参看最近的这个领域的计算，点击http://en.wikipedia.org/wiki/List_of_countries_by_GDP_(PPP

Why China will continue to grow more rapidly than the US and Europe - a historical perspective

2009-03-03T22:03:00.000-08:00

Data on long term trends in investment and economic growth

This post deals with the historic trend of investment and economic growth. This may appear a relatively esoteric topic. In fact, however, it has decisive economic and strategic business consequences - in particular for understanding the more rapid growth of the key Asian economies relative to the US and Europe and why this will continue for a prolonged period. Before dealing with these and other more detailed implications, however, the factual data is set out.

Figure 1 shows the percentage of fixed investment (gross fixed capital formation) in GDP for a series of major countries over the longest periods of time for which data is available. [1]

Figure 1

The pattern is clear and striking. By far the strongest trend is for the proportion of GDP devoted to fixed investment (gross domestic fixed capital formation) to rise with time. This in turn, as will be shown, is associated with progressively rising rates of economic growth.

Considering countries in the chronological order in which a new peak in the proportion of GDP devoted to gross fixed domestic capital formation appeared the following is the historical pattern.
- Commencing with the period immediately antedating the industrial revolution, the proportion of GDP devoted to fixed investment in England and Wales, at the end of the 17th century, was 5-7 per cent. [2] This rose slightly, although current estimates are that it did not rise greatly, during the 19th century - peaking at over ten percent of UK GDP prior to World War I.

- Starting at the beginning of the 1960s Japan achieved a level of gross domestic fixed capital formation of more than 30 per cent of GDP. This reached a peak in the early 1970s, at 35 per cent of GDP, before later sharply falling. During that period the average annual rate of growth of the Japanese economy was 8.6 per cent. With such a growth rate an economy doubles in size in eight and half years and quadruples in size in 17 years.

- From the early 1990s onwards China achieved sustained rates of fixed investment of 35 per cent of GDP with, from the beginning of the 21st century, this rising to more than 40 per cent of GDP – a level never before winessed in human history. The result was average 9.8 per cent a year economic growth over a sustained period – also the most rapid sustained economic growth ever seen in human history. On that basis an economy doubles in size every seven and a half years and quadruples in size in 15 years.

- To complete the chronological picture, the proportion of GDP devoted to fixed investment for two countries recently undergoing rapid economic growth, India and Vietnam, is shown. The proportion of Indian GDP devoted to fixed investment has not reached the Chinese level but has become high – reaching 34 per cent of GDP in 2007. On this basis, in the last five years, India has achieved an average growth rate of 8.8 per cent a year. At that rate of growth India’s economy doubles in size in slightly over eight years and quadruples in sixteen and a half years.
In Vietnam the proportion of GDP devoted to fixed investment rose from 13 per cent in 1990 to 25 per cent in 1995 to 37 per cent in 2007. Economic growth has accelerated rapidly, rising to an average of 7.9 per cent a year in the five years up to 2007. At that rate of growth Vietnam’s economy doubles in slightly under 9 years and quadruples in size in 18 years.

Considering these trends, such a high level of investment is a necessary condition for rapid economic growth. No substantial country without comparable high levels of fixed investment has achieved such rapid rates of growth on a sustained basis. [3] But it is not a sufficient condition: the high level of investment is also linked to the scale of production, that is the size of the market being produced for. In a modern economy only large scale production can be efficient in the decisive sectors of production, requiring an orientation to the international market – this is particularly evident with such high levels of investment.

No purely national market, not even the US or China, is sufficiently large to maintain the most efficient level of production. As many others have frequently correctly stressed, high levels of investment must therefore be accompanied by an export orientation. [4] It is this high level of investment, accompanied by an export orientation, which was responsible for the rapid economic growth of South Korea, China, India and Vietnam.

Implications of different investment levels

There are a number of clear consequences of these factual trends (it must be stressed that this data, of course, deals only with long and medium term trends and is not a guide to short term fluctuations). Among the most important of these implications are:

- It provides a clear historical framework for understanding the present rapid growth of (primarily Asian) economies and why they will continue to grow far more rapidly than the US and Europe.

- China’s economy will continue to outperform India’s and the gap between the two will grow - and not shrink as some have suggested.

- There is no serious historical evidence for the thesis sometimes presented that China is oversaving/overinvesting. China therefore should seek to maintain, and not cut, its current savings and investment levels.

- Current US/UK economic policy, with its overwhelming emphasis on microeconomic efficiency of resource allocation, fails to address the most important economic issues and therefore will be unsuccessful – which will deepen the tendency for the key Asian economies to grow more rapidly than the US and Europe. The also provides a background to current issues in the credit crunch.
Taking these issues in more detail:

First, these trends place in wider historical context the present rapid growth of a number of (primarily Asian) economies. The latter represent the latest high point in the trend for higher and higher proportions of GDP to be devoted to fixed investment. Consideration of such trends therefore provides a clear theoretical underpinning for the evident current empirical fact that not only is Asia growing substantially more rapidly than the US and Europe but that it will continue to do so. The investment rates in the key Asian economies are not aberrantly high but merely the latest point in an historical trend.

Seen in long term historical perspective it is US and European savings and investment rates that are too low, not Asian savings and investment rates that are too high.

Second, given these historic trends, it is clear that on the basis of current macroeconomic trends China’s economy will continue to expand more rapidly than India's and that China will increase its economic lead over the latter.

This naturally does not mean anything other than that India is an extraordinarily important market. India’s economy is, at a realistic exchange rate, in Parity Purchasing Power (PPP) terms, the fourth largest economy in the world after the US, China and Japan.[6] India's economic growth, running at around at 8-9 per cent a year, is the second largest for any major economy in the world after China. However, China’s economy is already approximately two and a half times the size of India’s in PPP terms and is continuing to grow at one to two per cent a year more rapidly than India – this combination ensuring that the gap between China and India is widening and not narrowing. There is also no evidence from consideration of historical data that the factors invoked to claim that India’s economy will grow more rapidly than China’s, for example different demographic profiles, are crucial. The historical evidence is that it is the proportion of the economy devoted to gross fixed capital formation that is decisive. The fact that, until the present, the Chinese economy continues to devote a significantly higher proportion of the economy to fixed investment than India – 43 per cent compared to 34 per cent to take the latest available years, indicates that unless India catches up with China in terms of this area China will grow more rapidly than India.

Third, there is no evidence from this historical trend data for the argument that China is facing a basic crisis of oversaving/overinvestment, and therefore that China needs to lower its total savings level (i.e. savings including private, public and corporate saving) and to increase consumption - as some commentators, including the Financial Times chief economics commentator Martin Wolf, have stated. [5]

It is evident that China’s level of investment and saving is far higher than that of the US or UK. However the historical data make clear that China’s is simply the latest stage in the long term trend for an increasing proportion of GDP to be devoted to gross fixed capital formation. Given this rising historical trend it is entirely likely that in the future another country, or China itself, will have a higher proportion of GDP devoted to saving/investment than China today - yielding a higher rate of growth.

While, of course, short term fluctuations and adjustments may be required there is no historical evidence that China's savings and investment rate is excessively high - it is merely the latest stage in a long term international historical trend. Reduction of China’s investment and savings rate would lead to slowdown not only of China’s economy but also, because of its locomotive role in the world economy, a slowdown in the global economy. China should therefore be seeking to maintain, not reduce, its current high investment and savings levels.

Fourth, there is no evidence from the historical data that the 'quality of entrepreneurship' plays any crucial role in economic development. Or more precisely, and what is another way of saying the same thing, the quality of entrepreneurship and managerial effectiveness appears to be randomly distributed and therefore cannot explain differences in economic growth rates. There are no cases where, due to the 'quality of entrepreneurship', countries have experienced rapid growth without high levels of gross domestic fixed capital formation in GDP.

Fifth, present US/UK government economic policy, by according overwhelming centrality to dealing with microeconomic efficiency, is addressing relatively minor issues in terms of international competitiveness compared to that of dealing with inadequate saving and investment rates. The economic priorities of a number of rapidly growing Asian economies will therefore clearly be more effective than that of the US and UK.

Put in other terms, the implications for governments’ economic policies of the long term trends outlined here is that in a balance between seeking microeconomic efficiency in the allocation of resources, and seeking a high level of savings and investment, the high level of savings and investment is more important that the emphasis on microeconomic efficiency from the point of view of creating economic growth.

There is an entirely reasonable supposition that the microeconomic allocation of investment in South Korea or China, given the use of subsidised loans, cross forms of ownership in different branches of industry, higher capital/output ratios etc, is less microeconomically efficient than in the UK or the US. However the rate of growth of the South Korean or Chinese economies is much more rapid, over a sustained period, than that of the UK or US.

Quantitatively the greater microeconomic efficiencies in allocation of resources in the US or UK, to generate an equal rate of growth, would have to compensate for their lower savings and investment ratios and there is no evidence that it does so. It is the higher savings and investment rates in Asian economies that predominate over greater microeconomic efficiency. Therefore any quality of microeconomic priorities in the US and UK will be overwhelmed by the quantity of investment in the rapidly growing economies of Asia.

Ideally, of course, both high microeconomic efficiency and high savings/investment levels should be sought. However there is evidence that the two are contradictory. For example the policies pursued in the US and UK have been accompanied by massive declines of savings rates which have undermined the competitiveness of the economy – leading into present sharp financial problems. It is therefore likely that current US and UK economic policy will be unsuccessful, and these economies will remain under financial pressure created by lack of competitiveness for a prolonged period. The credit crunch is a one periodic form of the manifestation of this loss of competitiveness by the US and UK.

Conclusions

The following clear conclusion may be drawn from this data:

There is a clear historical trend for the proportion of the economy devoted to gross domestic fixed capital formation to rise. This is the key determinant of rising rates of economic growth.

Five key historic stages in the rise in this proportion of the economy devoted to fixed investment may be identified: the achievement of a 5-7 per cent investment rate in Britain in the 18th century permitting the launching of the industrial revolution; an 18-20 per cent of GDP fixed investment rate from the latter part of the 19th century, achieved by a number of countries led by the US, which permitted the United States to replace the UK as the world's leading economic power; a 25 per cent of GDP fixed investment rate in Germany in the immediate post-World War II period which accompanied the German 'economic miracle'; a more than 30 per cent of GDP rate of fixed investment achieved in Japan, and then the other East Asian 'Tiger' economies, from the mid-1960s which permitted growth rates of more than 8 per cent a year; a more than 35 per cent of GDP fixed investment rate in China from the 1990s onwards which has permitted sustained growth rates approaching 10 per cent a year.

On the basis of this differential in investment rates a number of the key Asian economies will continue to outperform the US and Europe in terms of economic growth for a prolonged period.
China will continue to increase its economic lead over India - although the latter will experience rapid economic growth.

There is no historical evidence China is oversaving or overinvesting and it should seek to strategically maintain, and not cut, its present investment and saving rates.
Current US and UK economic policy addresses secondary issues and therefore is unlikely to be successful.

* * *

This article originally appeared as 'Why Asia will continue to grow more rapidly than the US and Europe - a historical perspective' on Key Trends in Globalisation.

References

[1] The figure for England for 1688 is that in Angus Maddison, The World Economy, OECD Paris 2006 p395. UK figures after 1688 and up to 1947 are calculated from One Hundred Years of Economic Statistics, The Economist, London 1989 p74. Figures from 1948 are calculated from International Monetary Fund, International Financial Statistics (August 2008) Minor adjustments have been made to chain the earlier statistics to be consistent with the IMF data – in no case does this make any significant difference to the pattern shown. The data for fixed investment for the earlier period used by The Economist One Hundred Years of Economic Statistics are based on calculations in C H Feinstein and Pollard Studies in Capital Formation in the United Kingdon 1750-1820, Oxford University Press, Oxford 1988. Other commentators have suggested that Feinstein and Pollard's figures are somewhat too high - see for example. N F R Crafts British Economic Growth during the Industrial Revolution, Clarendon, Oxford 1986 p73. None of these revisions and differences however is of sufficient magnitude to alter the fundamental pattern shown here.
US figures prior to 1948 are calculated from One Hundred Years of Economic Statistics, The Economist, London 1989 p74. Figures from 1948 are calculated from International Monetary Fund, International Financial Statistics (August 2008) Data for the earlier period give only private fixed capital formation whereas that after 1948 is for total fixed capital formation – i.e. including government fixed capital formation. There are no reliable estimates of government fixed capital formation in the earlier period and therefore data for the earlier period have been adjusted upward by the difference between the two in 1948 – which is slightly over two per cent of GDP. This has the effect of revising upwards slightly the percentage of GDP allocated to fixed investment in the earlier period but the difference is too small to affect the overall pattern.
Figures for Germany prior to 1960 are calculated from One Hundred Years of Economic Statistics, The Economist, London 1989 p202. Figures from 1960 are calculated from International Monetary Fund, International Financial Statistics (August 2008). There is however no significant statistical difference between the two.
Figures for Japan, South Korea, China, India and Vietnam calculated from International Monetary Fund, International Financial Statistics.

[2] Phyllis Deane and W A Cole in British Economic Growth 1688-1959, Cambridge University Press, Cambridge 1980 p2 being closer to the lower figure while further studies have tended to revise the figure upwards slightly. The higher estimates for the earlier period have been taken here so as to avoid any suggestion of exaggerating the degree to which the proportion of GDP devoted to Gross Domestic Fixed Capital Formation has risen. The precise figure used here is that calculated by Maddison in Angus Maddison, The World Economy, OECD Paris 2006 p395. The higher figure, as can be seen, makes no difference to the overall trend.

[3] The only exceptions are the extremely small states, with populations of less than two million, of Equatorial Guinea and Botswana - which are so small their economic conditions can be essentially wholly determined by external factors.

[4] A particularly coherent theoretical explanation of this may be found in N Lardy Foreign Trade and Economic Reform in China, Cambridge University Press, Cambridge 1993.

[5] See for example Beijing should dip into China’s corporate bank and China should risk bolder trials. Similar views are expressed in The Growth Report: Strategies For Sustained Growth And Inclusive Development

[6] For a convenient survey of the latest calculations in this field see http://en.wikipedia.org/wiki/List_of_countries_by_GDP_(PPP.

New data on China's GDP and its total savings compared to the US

2009-01-25T05:22:00.000-08:00

Two important sets of GDP data for China have been published recently.

The first, which has received wide publicity, is that China's economy grew by 9.0 per cent last year and at an annualised rate of 6.8 per cent in the year to the last quarter of 2008. This, as widely reported, is a significant slowdown from China's 13.0 per cent growth rate in 2007 and the first time since 2002 that China's annual growth rate has been less than 10 per cent.

Given China's rapid economic growth earlier last year this implies nil, or only marginal, growth in the last quarter of 2008. China's growth performance for the year as a whole, however, is far more rapid than for any other major economy and even the weak last quarter still compares favourably to the sharp recession in the US, UK and Japan.

Ma Jiantang, China's Commissioner for the National Bureau of Statistics, in releasing the GDP figures stated that there were signs of some revival in December – noting an upturn of consumer spending. He stated: 'The overall performance of China's economy, which is steady and fast, has not changed. The unexpected international financial crisis will not change this. The deep-rooted and underlying fundamentals that drive China's growth remain unchanged.' China's money supply was also expanding rapidly by the end of the year - indicating a first effect of China's economic stimulus package. However future figures will be required to evaluate Mia Jiantang'sconclusions.

The second set of data, which are highly interesting, is that the IMF has released figures consistent with its international standards for China's GDP in 2007. This casts considerable light on key strategic issues confronting China and also on comparisons with the US.

Comparisons of China and the US typically focus either on the relative sizes of their economies or on particular sectors where China is catching up with or has overtaken the US in absolute terms – steel production, total manufacturing output, mobile phone usage, internet users etc. However, from the point of view of both the international financial situation and judging China's growth potential, a critical issue is that of China's fundamental macro-economic indicators – its savings and investment rates. China's savings, not simply personal savings but including savings by companies and government, are the measure of its finance available for domestic or foreign investment.

These are substantial statistical difficulties in calculating comparisons in savings between the US and China – in China's case the official exchange rate understates the size of its economy compared to calculations using more realistic Parity Purchasing Powers (PPPs), for the US there are significant divergences between different measures of savings etc. Nevertheless the ballpark comparisons that can be made on the basis of the new data are highly revealing.

At official exchange rates in 2007 China's GDP was 24 per cent of that of the US - $3.3 trillion compared to $13.8 trillion. As calculated by the IMF in PPP terms for the same year, China's GDP was 51 per cent of that of the US - $7.0 trillion compared to $13.8 trillion. Essentially similar figures have been calculated by the World Bank and the CIA. China's economy is between on quarter and one half the size of that of the US.

Savings are, by an accounting identity, necessarily equal to fixed investment, plus increase in inventories, plus the current account of the balance of payments. On IMF data US gross domestic capital formation plus inventories, minus its' balance of payments deficit was equal to 10.7 per cent of US GDPin 2007 - $1,477 billion. More direct measures of US savings give a figure of 14.2 per cent of GDP - $1,956 billion. The parameters of US total saving, that is finance available for investment, may therefore be taken as $1.5 - $2.0 trillion dollars.

The proportion of China's economy devoted to gross domestic fixed capital formation (fixed investment) rose to 42.7 per cent of GDP from 40.8 per cent in 2006, the highest level on record. Inventories grew by 2.0 per cent of GDP, giving a combined figure with fixed investment for 44.7 per cent of GDP - equivalent to $738 billion at official exchange rates and $1,566 billion at PPP exchange rates.

China's balance of payments surplus for 2007 was $372 billion – which, as China's trade is overwhelmingly denominated in foreign currency, may be directly compared in currency terms to the savings figures for the US. It implies China's balance of payments surplus is therefore equivalent to 11.3 per cent of GDP at official exchange rates and 5.3 per cent of GDP in PPP terms

Therefore adding domestic and international savings together gives a lower bound for the real value of China's savings, using official exchange rates, of $1,110 billion and a probable upper bound, using PPP figures, equivalent to $1,938 billion. This equates to savings rates for China of 56 per cent, if official exchange rates are used, and 50 per cent if a PPP exchange rate is used.

If even the lower figure is taken, that is 50 per cent of GDP, a necessary corollary is that China's total savings in absolute terms will be as large as those of the US when its economy is only half the size of that of the US. If the higher percentage is used then China's total savings will exceed those of the US before it is half the size of the US economy.

It may, therefore, already be the case that China's total savings have reached in absolute terms those of the US. More probably its savings are still somewhat lower than those of the US in absolute terms but they are already approaching it.

While China's GDP will not overtake that of the US in absolute terms for some time, China has therefore either already overtaken the US as the world's greatest source of finance for investment or will do so in a relatively short time frame.

Economic Reforms in Russia and China as seen in advance

2008-12-31T05:56:00.000-08:00

China and Russia have recently become relatively fashionable subjects of economic analysis - notably as two key components of BRIC (Brazil, Russia, India, China). Their importance is, however, far greater than that.

China and Russia are two of the largest economies in the world. They have combined populations of almost one and a half billion people. Together they occupy a large part of the world's landspace.

Both China and Russia emerged from centrally administratively planned economies but then they underwent the most diametrically counterposed economic developments in history. China experienced, in the last thirty years, the most rapid economic growth ever witnessed in human history. Russia underwent the greatest decline in GDP ever seen in any country in peacetime.

Events of such economic magnitude evidently merit the closest study. The lives of several billion people are directly and indirectly affected by both the practical outcomes and the theoretical policy conclusions drawn from such a scale of events. An economics that is incapable of explaining such events, which are among the greatest scale of economic shifts ever witnessed, is clearly not an economics adequate to explaining the real world.

The article republished below is, therefore, reproduced in part to show that China and Russia are not new objects of study for the author of this blog. And, more importantly, that it was perfectly possible, with the right analytical tools, to foresee in advance the counterposed outcomes in China and Russia of their respective 'economic reforms'. The article's date of writing, spring 1992, drawing on articles written in 1991, shows that this was not a retrospective rationalisation of events but a prediction of what was to come as the 1990s unfolded in China and Russia. Its original title, 'Why the Economic Reform Succeeded in China and will fail in Russia and Eastern Europe', is self-explanatory.

It is worth putting this article in its historical context. In January 1992 Russia embarked on the economic reform policy known as 'shock therapy' – full price liberalisation accompanied by the most rapid possible, and free, privatisation of state companies and assets. The alternative course adopted by China, when it launched its economic reforms a decade and a half earlier, was carried out without immediate full price liberalisation and without privatisation of existing large scale state owned companies, and is described below.

The 'shock therapy' course was implemented by the then Russian government headed by Yegor Gaidar, supported by the IMF, and advocated by journals such as The Economist and Financial Times. These also held that China would lose as a result of carrying out a 'half' reform compared to Russia.

The actual results, as noted, were the exact opposite - Russia suffered the greatest peacetime fall of production ever suffered by any country, while China enjoyed sixteen years of the greatest economic growth ever seen in human history.

It might be thought that such an outcome would have led to an abandonment of the theories which had led to predictions that were refuted by events. After all in physics, or any other branch of science, if a theory leads to predictions which are falsified by facts then the theory is abandoned - and a theory which does predict the facts is put in its place. Therefore, it might be imagined that those economists and commentators who had been in error would now be studying and advocating what China had done right, analysing why the policies pursued and advocated in Russia had produced such catastrophic economic decline, and noting which wrong theories had led to this mistaken policy and why China, in contrast, had pursued far more correct policies.

But in the real world, unfortunately, some branches of economics are more akin to dogmatic theology than science: if a theory does not fit the real world then it is the real world which is abandoned, not the theory. Such 'ostrich economics' might be mildly amusing if wrong economic decisions affecting real people were not taken, and large sums of money lost, based on such views. For these were not academic economic debates with no practical consequences.

For it was, as shown below, entirely possible to predict in advance what would be the consequences of the different 'economic reform' policies embarked on by China and Russia. The views of those who advocated that the policies of 'shock therapy' would lead to success and China would suffer in comparison, were simply falsified by facts. Those who argued, as in this article, that China would enjoy success, and Russia would suffer economic collapse, as a result of the policies adopted were vindicated by events. Sixteen years later there is no longer any ambiguity as to the outcome.

But economic theory is about more than history. It analyses, or at least correctly carried out it should analyse, material forces which in many cases continue to operate today.

It is evident that the economic tools deployed in the article below are not in themselves unusual. They analyse well known, but different, types of market - monopolistic, oligopolistic, and 'perfectly' competitive. They however do not assume that a homogeneous market, corresponding to something approaching perfect competition, either exists or can be created - a central fallacy of the theories which underlay 'shock therapy' and which continue to misunderstand the Chinese, and indeed most modern, economies. The stress in the article is how markets interact in a real economy.

Put another way, the article pivots around a single point: that an economic theory must analyse the real world, the real world does not have to conform to an economic theory. The attempt to apply a theoretical structure to an economy whose reality had little in common with it, as in Russia at the time of the introduction of its new economic policies in 1992, led to an economic catastrophe. The decision by China to ignore such advice, and to proceed with an economic reform which corresponded to a real structure of its economy, produced the greatest economic success seen in world history. The resulting differences were not purely theoretical but have transformed the situation of the world economy.

A number of the key theoretical analyses used in this article, and related ones written at the same time, therefore continue to be relevant to analysing the course of the world economy and those of individual countries - and guide analysis in this blog. These include that:

a market is not an abstract entity - something to be mystically mythologised as 'the market' in a way that obscures its actual material features. Any actual market must be analysed as a real structure - in which, for example, the different degrees of competition operating in different parts of it, or in different interacting markets, would produce different effects if essentially similar policies were applied to them.

that in the long term the proportion of GDP devoted to fixed investment plays a decisive role in economic growth rates. Indeed, provided that an international orientation is adopted by the economy, historical experience shows that the overall level of fixed investment is far more powerful in determining economic growth rates than pre-occupation with attempting to achieve the highest possible marginal efficiencies of capital via maximum market deregulation – for a detailed analysis of this read here.

that manipulation of relative prices, internationally via devaluation and similar measures, or internally in China in the early period of economic reform via controlling relative prices between the state and non-state, monopoly/oligopolised and non-monopoly, economic sectors is a powerful tool of economic management. That is, China showed that economic management can be carried out through market mechanisms as well as by administrative controls - a lesson, in different forms, China continues to demonstrate today.

China's short term transfer of resources into consumption, via a short term reduction in investment and a substantial cut in military expenditure, at the launching of its economic reform - which was used to provide the initial demand for the development of its consumer industries - has long since been bypassed. As the article notes: 'Over the 10 years 1978-88 reduction of the share of military expenditure in GNP was the chief means by which the increase in the share of personal consumption in GNP was financed... The increase in the share of personal consumption was initially financed by a reduction in the proportion of fixed investment in GNP... After 1981, however, the benefits of reduced military spending began to be felt, and the enormous increase in the share of personal consumption necessary to bring about the initial change in economic structure could be reduced. .. By 1984 the percentage of fixed investment in GNP had regained its 1978 level. The dynamic of the change on the demand side over the decade is therefore clear. Initially the proportion of consumption was raised by reducing fixed investment. Then, as military spending fell, the resources released were shifted into investment.' The proportion of China's GDP devoted to fixed investment has continued to rise since, until it has now become the highest experienced in world history – while simultaneously this has been accompanied by continuously rising living standards.

This article below is considerably longer and more technical than those which normally appear on this blog. The justification that is offered for this is the importance of the issues dealt with.

Confronted with what is now the overwhelming evidence of the success of China's economic reform, and the failure of the policies that were counterposed to it, there are only two courses that can be adopted regarding the relation between economic theory and reality.

The first is to deny the real world. To, Canute-like, ignore the incoming waves of events and declare that while China's economy has not failed 'yet' this is in fact just around the corner, This is why the literature 'predicting' that China will suffer crippling economic crisis 'next year' or in the short term - the prediction normally moving forward a year at a time, would now fill several bookshelves. A typical example, chosen relatively at random, is the The Economist's special supplement A Dragon Out of Puff: A Survey of China, dated 15 June 2002. This proclamation that China was 'out of puff', had the distinction of being produced just as the country was about to enter the most rapid sustained economic growth seen in human history – as those with an online account with The Economist can read. A large subsequent, and preceding, literature of the same ilk can be produced.

Current predictions of 'deep crisis' in China are as invalid as the similar ones made in the intervening 16 years since the events analysed below. China will inevitably encounter various significant frictional problems in dealing with the consequences of the international financial crisis. But China's economic fundamentals, launched by processes analysed in this article, ensure that not only will it continue to be the world's most rapidly growing economy but it will succeed in overcoming the current international financial crisis far more comfortably than the US and Western Europe.

The second path is the economics of reality. To understand that China's economic reform succeeded in producing the world's greatest ever economic growth for reasons that were entirely comprehensible. And that the different outcomes of the course of deepening 'economic reform' pursued in China and in Russia were predictable in advance – because, as will be seen, they were predicted in advance.

The article by the author of this blog originally appeared in Voprosy Economiki, in Russian, in September 1992.

* * *

Why the Economic Reform Succeeded in China and Will Fail in Russia and Eastern Europe

Given that Russia, China, and Eastern Europe all share a common historic economic structure any policy seeking a way out of Russia's economic crisis must confront a central question. Why has the economic reform in China since 1979 produced the greatest economic success in the world and the economic changes since 1989 in Eastern Europe and January 1992 in Russia produced the greatest economic disaster?

This is not simply an academic question. In the last seven months the Russian government has pursued a policy consistent with those followed in Eastern Europe for the last two and a half years. [1] These policies have produced probably the greatest economic disaster outside war in history. As the UN Economic Survey of Europe in 1991-92 notes regarding Eastern Europe: "The cumulative drop of output registered over the last two to three years in some countries has attained proportions that are unmatched even by the Great Depression of 1929-1933." Russia has suffered the greatest peacetime economic decline in its history. The contrast between the results after the start of the economic reforms in 1979 in China, and in 1989 in Eastern Europe, as shown in the figures of the OECD, IMF, and World Bank, illustrates the situation graphically.

- in the decade after 1979 Chinese Gross Domestic Product (GDP) grew at an average 8.8 per cent per year. The Chinese economy more than doubled in size - expanding by 135 per cent. In contrast Hungarian GDP fell by 11.7 per cent, Romanian GDP by 18.6 per cent, and Polish GDP by 19.0 per cent. Czech Net Material Product (NMP) fell by 12.8 per cent, the NMP of the former USSR by 16.0 per cent, and Bulgarian NMP by 30.9 per cent.

- Chinese industrial output expanded at an average 11.2 per cent a year. Chinese industrial production nearly tripled in 1979-89 - increasing by 195 per cent. In contrast from the beginning of 1990 to mid-1991 industrial output declined by 25.9 per cent in Czechoslovakia, 27.2 per cent in Hungary, 38.1 per cent in Bulgaria, and 40.1 per cent in Poland.

- Chinese employment increased by 3 per cent a year. Unemployment fell from 5.3 per cent to 2.6 per cent. Labour productivity grew by 5.9 per cent a year. In contrast, between 1989 and the middle of 1991, employment fell by 11.6 per cent in Rumania, 13.8 per cent in Czechoslovakia, 16.9 per cent in Poland, and 20.1 per cent in Bulgaria. As the fall in output in Eastern Europe was even more rapid than the decline in employment productivity sharply declined.

- In China growth of output of the most important goods for the Russian population - high quality food and consumer products - was even more rapid than that of the economy as whole. Total Chinese agricultural production expanded at 4.1 per cent a year. But sugar production increased by 8.5 per cent a year, butter by 8.6 per cent a year, eggs by 10.5 per cent a year, beef and veal by 17.0 per cent a year, oranges by 18.4 per cent a year, grapes by 19.3 per cent a year, and bananas by 21.9 per cent a year. Among consumer goods output of cigarettes grew at 13.0 per cent a year, cloth at 13.8 per cent a year, televisions at 36.7 per cent a year, and refrigerators by 65.0 per cent a year, while average housing space per person in rural China increased from 9.5 to 18.5 square metres. In contrast real wages fell by 20 per cent in Czechoslovakia and by 30 per cent in Poland.

- Even by the criteria the Russian government set itself, the promotion of private enterprise, China has been far more successful. China in a decade created more than 10 million private enterprises which dominate services, retailing, and light industrial production. The Russian government has produced a deep crisis in the private sector.

- In China no collapse in output occurred prior to commencement of rapid growth - as is claimed is necessary in Russia. Economic growth accelerated rapidly with the start of the economic reform and living standards doubled since its commencement. China demonstrably made the type of economic change Russia requires. Consumer production became the leading sector of the economy, the supply of high quality foodstuffs enormously increased, the service sector expanded rapidly, small scale enterprise flourished, output and productivity of labour and investment both soared, and living standards rose rapidly. However whereas the Russian government proclaimed these goals in theory, it completely failed to achieve them in practice. The Chinese economic reform created them in the real world.

This article demonstrates that this contrast is not accidental. Once the specific character of the Russian, East European and Chinese economies is understood then the same laws of economics which determined success in China dictate failure in Russia and Eastern Europe. The mistake of the Russian government is that it fails to understand the specific character of the Russian economy and applies policies designed for a quite different structure - the competitive economies of the West. The economies of Russia, Eastern Europe and China must, instead, be defined as specific "dual economies" constituted by: (i) an almost pure monopoly sector which operates according to the laws of monopoly economy, (ii) a non-monopoly sector which, for theoretical purposes, may be considered as operating according to laws of perfect competition. The specific dynamic of the economy results from the interaction of the two sectors. Once the character of these dual economies is understood then their laws, and the policies necessary within them to achieve success, are clearly defined.

The relative weight of the national and international markets

Before turning to the structure of the Russian economy, however, a preliminary question must be considered - the relative weight of the international and domestic markets for Russia. This is necessary not simply because of the difference between exports and imports and domestic sales, but because the structure of the international and Russian economies are different. The international economy may be considered as competitive - only a small percentage of production can merely be supplied by one country. The Russian domestic market is within a dual economy. If the dominant sector for the Russian economy were its international connections then the laws of competitive economy would dominate. If the domestic market is dominant those of dual economy will operate.

The first error of the Russian government is, therefore, that it fails to draw the necessary conclusions from the fact that the domestic and former Soviet markets are dominant for Russia. This error is rooted in the concept of the IMF that countries should seek "export oriented growth" - as exemplified by South Korea. The specific application is that the IMF suggests that Russia should be inserted into the world economy as a supplier of raw materials.

This orientation is defined in the figures of the IMF's A Study of the Soviet Economy. The concluding section of this, 'Assessment of Medium Term Economic Prospects', projects former Soviet/Russian industrial production declining by a minimum 20 per cent in the first year of IMF policies. Measures to increase exports of energy and agriculture are proposed - notably liberalisation of energy prices which would release oil for export, by reducing Russian demand, while making large parts of Russian industry unviable. Such a combination entails that the Russian economy would be fundamentally shifted in the direction of deindustrialisation and raw material export production.

Such a perspective for Russia is an historic dead end. The most clearly established long term trend in economics is that the price of raw materials fallsrelative to finished products. All countries which have undergone economic development, including in the last two decades, have done so through moving out of primarily raw material production into manufacturing. If Russia were to accept the distortion of its economy in line with the estimates of the IMF it would become an historical backwater doomed to national decline.

More fundamentally the entire model of export oriented growth, of the South Korean type, cannot be applied to Russia for quantitative reasons. A country such as South Korea must necessarily rely on export oriented growth - as the small size of its internal market prevents it achieving the necessary economies of scale or specialisation on a domestic basis. But the size of the Russian economy means different comparisons apply. The best estimates put the size of the former Soviet economy at approximately the size of Japan's - or approximately half that of the US or European Community (EC). Comparing Russia with these economic units, exports of goods are 7.1 per cent of US GDP, 9.4 per cent of EC GDP (excluding trade among members), and 9.8 per cent of Japanese GDP.

The situation of Russia is equivalent to Western economic units of comparable size. On IMF calculations, Russian trade is 22.3 per cent of GDP. However 12.9 per cent is with the former USSR and only 9.4 per cent "external" trade. Such a figure, slightly under 10 per cent of GDP, is in line with comparable economies and therefore would not be expected to increase greatly. This is reinforced by the fact that the economy of the former USSR was integrated not simply in terms of a market but in terms of production. In short 90 per cent of the market for Russia is either domestic or within the economy of the former USSR. It is the national, not international, market which is decisive.

The Russian dual economy

Turning now to the Russian economy first the dynamic within the monopoly sector of the dual economy will be considered and then the relation between the monopoly and non-monopoly sectors.

The difference between the Russian monopoly structure and the structure of a Western economy is worth repeating. In the former USSR, for example, 87 per cent of the 5,885 products delivered to the State Supply Commission in the machine building industry came from single sites. Some 30-40 per cent of industrial products came from single producers. Enterprises with more than 1,250 employees accounted for 85 per cent of industrial employment. Not only final assembly but components supply is monopolised.
Similar structures exist in Eastern Europe and, historically, in China - in the West enterprises with more than 1,000 workers account for only 20-33 per cent of employment. Even in an extremely concentrated and capital intensive sector, such as Japanese semi-conductors, the top five firms only account for 60 per cent of production. A Japanese automobile plant has 13,000 firms, many small and competing, directly and indirectly supplying it.

The Russian economy in the industrial sphere is closer to a perfect monopoly structure than anything in the West. Furthermore the hopes of the Russian government that either privatisation or international competition can offset the effects of this monopoly structure are illusory as (i) monopolisation is of physical production, not simply ownership, and therefore privatisation will not change the situation (ii) given Russia's problems with exports, no amount of imports sufficient to create large scale competition on the domestic market can be financed.

The laws of operation of monopoly economy are well known -and have been applied by many Russian economists in pointing out the errors of the government's policies. In the former economic system monopolies either produced to planning targets and, because of price controls, could in any case only maximise profits by increasing output. With a transition to full price liberalisation a monopoly's rational profit maximising market strategy is to reduce output and increase price. This occurred in Russia and Eastern Europe and by itself explains a large part of the economic decline.

The dynamic within the credit system

These direct effects of monopolisation on production are reinforced by the dynamic within the monetary system. As this underlies the dispute over credit policy, and shows the incoherence of the government's strategy even within its own monetarist framework, it will be considered from a fundamental point of view.
The analytical starting point of monetarism is the Quantity Theory of Money. This states that MV=PT (Mass of money x Velocity of its circulation = Price level x Transactions in the economy (equivalent for present purposes to output)). This formula is true by definition and therefore in any economic system. Monetarism, following Friedman, asserts that V is essentially constant - which will be accepted for present purposes.

The dynamic under monopoly economy is then clear. By algebraic rearrangement the quantity theory states that T=MV/P - ie, given that velocity is taken as constant, the change in output depends on the ratio between the change in the money supply and the change in the price level.

The consequence of the vast upward movement in prices under a price liberalised monopoly economy is then evident. Unless the money supply rises by at least at an equivalent rate to the price level (a 350 per cent increase in January alone) output must decline. The attempt to constrain the money supply under monopoly pricing necessarily produces a fall in output. In Eastern Europe this mechanism operated violently. The quarterly rate of expansion of the Polish broad money supply fell from 190 per cent in the third quarter of 1989 to under 10 per cent in the second quarter of 1990 in the context of a 400 per cent increase in domestic prices. Real money supply, the ratio of money to the total price of output, fell by 44 per cent. As the money supply did not accommodate the increase in prices output collapsed.

The joint demand by Russian industrialists and trade unions this summer to expand credit, to avert a catastrophe, was therefore justified not merely from a contingent but from a fundamental theoretical point of view - as are measures such as indexation of capital assets.

The problem, however, is that while expansion of the money supply is necessary under monopoly to prevent the collapse in output - and its social and output effects can be ameliorated by measures such as indexation of wages, pensions, and amortisation - it cannot halt the price increases. This problem will be returned to below.

The relations between the monopoly and non monopoly sector

If the dynamic created within the monopoly sector is for output to decline and prices to increase then the relation of the monopoly to the non-monopoly sector is equally clear. Under full price liberalisation monopoly output declines but simultaneously its prices rise relative to the non-monopoly sector. These two basic laws: (i) Within the monopoly sector decline in output and increase in prices; (ii) the rise of monopoly prices relative to non-monopoly prices, together define the basic dynamic of the dual economy.

The 'scissors crisis' between agricultural and industrial prices, the fact that throughout Eastern Europe the agricultural crisis is even deeper than the industrial crisis, is one manifestation of this. Although food prices rise rapidly the price of industrial inputs into agriculture, from the monopoly sector, increase even more quickly - a process described by agriculture minister Khlystun. Crushed between a decline of demand on one side, due to impoverishment of the population, and a rise in input prices on the other, the agricultural sector is thrown into profound crisis.

However the same process, with specific modifications, operates in relation to other non-monopoly sectors. It is for these reasons that full price liberalisation in Russia has produced a deep crisis within the small private business sector - Professor Yasin has pointed out that 50 per cent of cooperatives in Russia have gone bankrupt. This dynamic is strategically decisive not only in itself but, in particular, because the relation between the monopoly and non-monopoly sectors is inseparably connected to the single most important historical distortion of the domestic Russian economy - its underdevelopment of individual consumption. As this issue is at the core of the contrast between economic success in China, and disaster in Eastern Europe, it will be considered in detail.

The underdevelopment of consumption in Russia

The historical underdevelopment of individual consumption in Russia is clear. Only 55 per cent of former Soviet GDP was devoted to personal consumption - compared to 60-65 per cent of GDP in most Western economies and 67 per cent in the United States. This underdevelopment of consumption was disastrous from the point of view of production - destroying the incentive to work. However it also profoundly distorted the structure of the supply side of the economy.

- The most rapidly growing sectors of the post-war world economy, in addition to computers and related industries, were increasingly concentrated among consumer durables and services. However, due to the low share of individual consumption in the former Soviet economy, these sectors had a very restricted market and were inhibited in their development. The sectors in which the former USSR concentrated - metal production and machine building - were, in contrast, among the most slowly growing sectors of world production.[3]

- The low percentage of consumption concentrated production in sectors requiring very high investment per unit of output (heavy industry, energy) and underdeveloped sectors with much higher ratios of output to investment (light industry, services). This by itself dictated a low productivity of capital.[4]

- Investment to meet the needs of the population was extremely low. In the main Western economies one sector, housing, accounts for approximately 23-33 per cent of total investment. In Russia, in 1971-89, the average share of housing in investment was only 15.4 per cent. [5]

- Services, the most rapidly growing sector of a modern economy, were underdeveloped. Employment in services in 1990 was 57 per cent of civilian employment in Germany, 59 per cent of civilian employment in Japan, and 71 per cent in the US but only 45 per cent in the USSR.[6] While these are not the only factors explaining the low productivity of capital in the USSR expansion of Russian production into consumer durables and services would, by itself, raise the productivity of investment. [7]

The structure of employment and industry

The relation between heavy and consumer industries and services is, however, inseparably connected to that between the monopoly and non-monopoly sectors of the economy. Light industry and services are characterised by much smaller units of production than heavy industry and by a quite different structure of employment. For example in Germany, a country with a very large industrial sector, 11 per cent of the workforce are self-employed/ employers. However in retailing and wholesaling 18 per cent are self-employed/ employers, in the private service sector 20 per cent, and in restaurants and hotels 36 per cent - in agriculture the figure is 79 per cent. Within German manufacturing only 3.9 per cent are self-employed or employers. But in textiles and clothing 8.5 per cent are self-employed/employers, in food processing 9.4 per cent, and in miscellaneous (chiefly light) manufacturing 12.3 per cent. In construction 10 per cent are self-employed/ employers.[8]

In contrast, in 1989, it was estimated that only 0.2 per cent of the workforce were legally self-employed in the former Soviet Union. A further 3.5 per cent were employed in the cooperative sector, giving a total of 3.7 per cent - equivalent to less than 3 million persons in Russia. However production for the consumer sector cannot be developed without creating a very large number of small enterprises - ie a huge development of the non-monopoly sector. Taking international comparisons, between 8 and 19 million self-employed/ small employers must be created in Russia - the higher figure being necessary if the decision were taken to de-collectivise agriculture. However in Russia, under the economic policies of the government, the shift in relative prices in favour of the monopoly sector crushes the non-monopoly sector - making it, among other things, impossible to meet consumer demand.

The basic dynamic of the dual economy under price liberalisation

The basic mechanism of the dual economy under conditions of full price and economic liberalisation, that is the East European and Russian economic reform, may now be seen: (i) output in the monopoly sector declines while its prices rise (ii) the rise in monopoly prices relative to non-monopoly prices crushes the non-monopoly sector - creating a mechanism sucking resources out of the non-monopoly sector. What is instead required is the exact opposite mechanism. One which (i) maintains output in the monopoly sector (ii) pours resources into development of the non-monopoly/consumer sector. The Chinese economic reform precisely created such a mechanism. In examining this first the monopoly sector will be considered and then, most important, its relations with the non-monopoly sector.

The Chinese economic reform

No significant part of the Chinese monopoly industrial structure was privatised . There were several waves of 'small privatisation', in particular in retailing, but these did not affect large scale industry. Output in the monopoly sector was expanded by three complementary mechanisms.

- the entire economy was expanded extremely fast under the impact of policies discussed below. Demand for goods from state industry was therefore high.

- slightly under half investment in the state sector was subject to a central plan - such investment declined only from 8.7 per cent of GNP in 1978 to 7.5 per cent in 1988. Large supplies of credit were given to enterprises under a "credit plan" - such credits increased from 9.3 per cent of GNP in 1978 to 29.9 per cent of GNP in 1988. However, because price controls in the monopoly sector existed, enterprises could only maximise profits by increasing output.

This combination of high demand and cheap investment credits led to extremely rapid increases in state output. Gross output by state industry in 1981-86 rose by 56 per cent - an annual growth rate of 8.9 per cent. The change in industrial structure in China, therefore, came not because the state sector was curtailed or privatised, as in Russia, but because the non-state sector grew even more rapidly - gross industrial output in the non-state collective sector, a concept discussed below, increased at 19.3 per cent a year in 1981-86.

Similarly Chinese investment rose not because the share of state investment fell - despite a reduction in 1979-81 it was 19.5 per cent of GNP in 1988 compared to 19.2 per cent of GNP in 1978 - but because non-state investment rose from 7.6 per cent of GNP in 1978 to 10.2 per cent of GNP in 1989.

China therefore grew not by destroying its state sector but by altering the relations between the monopoly and non-monopoly sectors - rapidly expanding the latter. This mechanism is the key to the Chinese economic reform. First the demand and then the supply sides of the process will be considered.

The demand side of the Chinese economic reform

On the demand side the foundation of the Chinese economic reform was a radical increase in the share of personal consumption in the economy . In only three years, 1978- 81, the share of private consumption in GNP was raised from 52.6 per cent to 58.5 per cent - an increase of almost 6 per cent. In real terms individual consumption rose by 20 per cent. All other priorities were subordinated to achieving this initial leap in consumption [9] - government final consumption was reduced from 14.2 to 11.5 per cent of GNP and fixed investment was temporarily reduced from 26.8 to 20.1 per cent of GNP (although fixed investment recovered rapidly once the initial transition to a new pattern of demand had been achieved).

This huge, six per cent of GNP, upward shift in the share of personal consumption was the precondition for the transformation of the supply side. New industries - high quality foods, consumer durables, and services - could only develop if a market was created for them. The rapid upward shift in consumption was the mechanism to achieve this. The time sequence of the shift is clear. There was no voluntaristic attempt, as in Russia, , to lower military spending with reckless speed.

Over the 10 years 1978-88 reduction of the share of military expenditure in GNP was the chief means by which the increase in the share of personal consumption in GNP was financed. Military expenditure as a percentage of GNP was reduced by slightly over half in constant price terms over a decade - the 3.1 per cent of GNP fall in the share of military spending, in current price terms, almost exactly matched the 3.8 per cent of GNP rise of the share of personal consumption. But the reduction of the share of military expenditure was gradual, 0.3 per cent of GNP a year in current prices terms. In 1979, with transitional expenditures, the percentage actually increased marginally.[10]

The increase in the share of personal consumption was initially financed by a reduction in the proportion of fixed investment in GNP - a 6.7 per cent fall in the percentage of fixed investment in GNP in 1978-81 financed a 5.9 per cent of GNP increase in the share of personal consumption. After 1981, however, the benefits of reduced military spending began to be felt, and the enormous increase in the share of personal consumption necessary to bring about the initial change in economic structure could be reduced. By 1984 the percentage of fixed investment in GNP had regained its 1978 level. The dynamic of the change on the demand side over the decade is therefore clear. Initially the proportion of consumption was raised by reducing fixed investment. Then, as military spending fell, the resources released were shifted into investment. [12]

The supply side

This huge shift in the structure of demand was connected to the supply side of the economy by being used to produce a large shift in relative prices in favour of the non-monopoly sector. This mechanism was the key to the economic reform.

The sequence of the price shifts is clear. In 1978-81, with the start of the rural reform, the procurement price of agricultural goods was raised by 38 per cent more than industrial goods and the price of consumer goods rose 11 per cent faster than those in the economy as a whole. In 1984-86, with the start of the urban reform, consumer prices rose by a further 11 per cent compared to average prices. The population was protected against the rise in prices because the resources saved through reducing investment were transferred into consumer subsidies and increasing wages. [13] Therefore, unlike Russia, as the population did not suffer from the change in relative prices, and benefitted greatly from the increase in supply, there was popular support for the changes, not opposition.

Over the decade as a whole consumer prices rose by 24.8 per cent relative to average prices and agricultural prices 77 per cent relative to industrial prices. [14]

The shift in favour of non-monopoly sectors

As the boundary between consumer and investment goods also largely corresponds to that between the monopoly and non-monopoly sectors of the economy, what fundamentally took place in China was clear. A gigantic shift was produced in favour of prices in the non-monopoly sector – i.e. the exact opposite to that in Eastern Europe.

The contrast, in the crucial sector of agriculture, is shown in Figures 3 and 4 [The original draft article graphed the figures given below- JR]. Figure 3 illustrates the upward shift in consumer prices and agricultural prices in China. Figure 4 shows the movement of relative agricultural prices in Czechoslovakia following price liberalisation - similar figures exist for all East European countries.[15] In three months following Czech price liberalisation agricultural prices rose more rapidly than the general price level - due to pent up demand for food . However, in the following nine months, relative agricultural prices then fell rapidly, until by a year after price liberalisation they were 8 per cent lower than before it.

The contrast to China is evident. In China relative prices were moved sharply in favour of the non-monopoly/ agricultural economy. As all barriers were removed to production for consumer and agricultural markets, and as small scale production can develop rapidly in response to demand, consumer and agricultural production boomed. By the price shift the Chinese government produced not merely a legal but real economic possibilities to develop consumer/small scale production - whereas in Eastern Europe a legal right to establish enterprises is created but they are crippled in practice by the decline in consumer demand and the effect of monopoly pricing.

If, in a dual economy full liberalisation of prices becomes a mechanism whereby the monopoly sector sucks resources out of the nonmonopoly sector, China created a mechanism whereby huge resources were pumped into the non-monopoly sector to meet consumer demand. Once the shift in prices, and relative demand, was coupled with liberalisation in supply the other processes flowed logically.

In China three sectors were developed:

- state, 'collective' (frequently groups leasing premises from municipalities, but also cooperatives with their own facilities etc), and private.[16] The industrial private sector remained small - in 1989 56 per cent of industrial production was by the state sector, 36 per cent by the collective sector, and 5 per cent by the private sector . However the collective sector grew more rapidly than the state sector - increasing its share of industrial output from 20.7 per cent in 1980 to 35.8 per cent in 1989. [17]

In the service sector, by 1988, only 39 per cent of retailing turnover was in the state sector, compared to 33 per cent in the collective sector, and 19 per cent in the private sector. In catering 22 per cent of turnover was state sector, 25 per cent collective, and 50 per cent private.

Service employment exploded. In 1978-88 China's total workforce increased by 35 per cent [18] but catering employment increased by 327 per cent, retailing by 380 per cent, and other services by 750 per cent.[19] Total employment in these three sectors increased from 6 million to 30 million.

In agriculture decollectivisation was undertaken - land remaining nationalised but responsibility for production passing to family farms. From the production point of view a system of essentially perfect competition was created.

Onto this a system of incentives was grafted by the state paying a fixed price for a quota, and above that guaranteeing to buy all agricultural production at a higher price. [20] To produce incentives agricultural procurement prices were progressively raised. [21]

The increase in agricultural output followed the predictions of economic theory. Between 1980 and 1984 food output in China increased by 6.9 per cent a year - cereals by 7.4 per cent a year. By 1984 the fundamental problem of food supply was solved, the relative increase in procurement prices was halted, and attention was switched to increasing output of high quality food (beef, pork, oranges, bananas, sugar) and industrial crops.

The interaction between rural and urban sectors created a huge demand for consumer goods. Total industrial output in 1979-84 rose by 8.6 per cent a year but production of televisions by 47 per cent a year and refrigerators by 98 per cent a year. After 1984, with a halt to the rise of procurement prices, agricultural growth slowed to 5.0 per cent a year but the annual increase in industrial output rose to 14.5 per cent a year. [22] Production of consumer durables was now large in absolute terms - in 1988 China produced 7.6 million refrigerators and 25 million television sets. A housing boom took place.[23]

By this mechanism China made the type of structural transformation required by Russia. With monopoly output increasing due to state control, and resources pouring into the non-monopoly sector due to the shift in relative prices, consumer production of all sorts soared.

This mechanism in China was, literally, the exact reverse of that in Eastern Europe and Russia. In Eastern Europe, state domination of the monopoly sector was abandoned, monopoly output collapsed while the monopoly sector simultaneously sucked resources out of the non-monopoly sector through the rise in relative prices. In China state domination of the monopoly sector meant: (i) its output was raised, (ii) the price boundary between the monopoly and non-monopoly sector could be manipulated to pump resources into the non-monopoly sector. Success in China flowed just as inevitably from application of the economic laws of the dual economy as did disaster in Eastern Europe.

The Chinese economic reform, therefore, was not simply about the relations between industry and agriculture. It concerned the general relations between the monopoly and non-monopoly economy - of which the agricultural-industrial relation is only one, extremely important, aspect. While in a predominantly rural country, such as China, agricultural prices were raised even more rapidly than those for all consumer goods such shifts in relative pricing can, in principle, be used equally in favour of other non-monopoly sectors.

From a fundamental economic point of view, indeed, there is a rather interesting parallel between the Stalin system and the system of East European reform. Stalin produced a huge shift in relative prices against agriculture and reduced consumption. So, by a different mechanism, does the East European reform. In its most fundamental feature the Chinese economic reform is the exact opposite to both. Furthermore it is clear from the laws of the dual economy that only the fundamental principles of an economic reform of the Chinese type can succeed in Russia. No matter how long an 'East European' reform is applied it can, for reasons the outlined, only lead to disaster.

Equally a reform simply of the Ryzhkov [former Soviet prime minister – JR] type cannot create the necessary huge network of non-monopoly enterprises necessary to meet consumer demand and achieve flexibility in production - no administrative mechanism, centred for example on conversion of defence industries, can create this. Instead, in China, a system was created whereby state investment led the economy through market mechanisms not administrative decisions - the only possible way with decentralised consumer production.

What are the implications for the Russian economy? Russian suffers from the great disadvantage that, unlike China it does not start from a stable, if stagnant, base but from a catastrophic decline in output created by an East European economic reform. Therefore, an intermediate term programme for structural transformation must be integrated with an immediate anti-crisis package. However the broad principles are clear.

(i) The precondition for success is to end the destruction of the state industrial sector. Without this (a) output in the monopoly sector cannot be stabilised (b) price relations with the non-monopoly sector cannot be controlled.

(ii) It is imperative to restore the national market. Everything possible must be done to re-strengthen links between the republics - it is this market, not the external one, which is decisive. As a supplement any recreation of trade links with Eastern Europe will be mutually beneficial.

(iii) Domestically, in the short term, everything must be subordinated to halting the decline in living standards and consumption. This is not merely necessary for human reasons but to provide the basis of structural transformation of the economy. Given that consumer output has fallen less rapidly than total output the share of consumption in GDP has already increased (unfortunately in a declining, not expanding, economy). Both an immediate stabilisation programme, and structural transformation, require the introduction of wage indexation. Immediately wages must be indexed to prices, to halt the decline in consumption and the domestic market.

Later they should be indexed to ensure a share of individual consumption in GDP of approximately 60 per cent (5 per cent higher than the historic level ).

(iv) To halt inflation, and create conditions for the necessary rise in relative prices of consumer goods and agricultural items, price controls must be reintroduced in the monopoly sector. In some non-monopoly sectors in which competition has been developed this may not be necessary. In competitive consumer sectors prices may be allowed to rise, within limits, relative to monopoly prices (the population will be protected against the effects of this through wage indexation).

(v) To create supply to respond to demand shifts an extremely rapid programme of elimination of state control and/or ownership in areas where competition can be created quickly should be undertaken - "small privatisation" must be as rapid as possible.

(vi) Output in the state sector must be maintained through a system of state orders, state contracts etc. Large credits for enterprises must be given and their assets must be indexed.

(vii) In China, where the economy was stable, investment was initially reduced to create resources for extra consumption. However in Russia a precipitate investment collapse is underway - the share of investment in the economy has almost certainly already declined too much. The problem is therefore to stabilise and increase investment. This must be done through: (i) state decisions on investment in priority sectors, (ii) strong incentives for investment such as indexation of amortisation and tax incentives. Given the current depth of the crisis strong administrative decisions are almost certainly necessary on investment - transition to credit as the primary instrument for maintaining investment can only function when inflation has been curtailed.

(viii) While in the intermediate term the resources to increase the share of individual consumption in the economy must come from reduction in the share of military expenditure this cannot be cut precipitately - closure of armaments factories would, in any case, reduce overall demand in the economy. Use of the resources of the military complex in exports would, however, be economically rational.

Three groups clearly have an interest in such an economic reform: (i) Industrialists and managers who wish to stop the destruction of industry and prepare conditions for economic modernisation; (ii) Representatives of the mass of the working population who are interested in halting the decline in consumption and production, maintaining employment and preparing for a rapid expansion of consumer production, (iii) Small business, which would gain an economic climate in which it would thrive - rather than one in which it is given a legal right to exist but is crushed by economic processes.

The three interests coincide in the restoration of the domestic Russian economy - that is such a solution is truly "national" in character. The forms in which these three groups would work out their interests is, of course, a question of politics and domestic Russian affairs which it is not within the competence of this article to discuss.

Naturally Russian economists will be able to develop much more detailed and adequate programmes than these - which relate only to the most fundamental issues. However the economic laws of dual economy, which dictated success in China and failure in Eastern Europe, are not specific but universal in character. They therefore apply to Russia. The specific application of these laws in defining an adequate programme for Russia can, of course, only be achieved in Russia, by Russians.

Notes

[1] Set out in the Memorandum to the IMF and 'The Programme of Deepening of the Economic Reform'.

[2] Both in terms of domestic production and international competitiveness.

[3] This trend was already clear in 1960 to 1973. In this period world output of, for example, iron and steel rose only by 5.8 per cent a year, non-ferrous metallurgy by 5.6 per cent a year, and metal piping by 4.4 per cent a year - compared to annual rates of increase of 13.4 per cent for computers, 11.6 per cent for photographic equipment, 9.6 per cent for watches and clocks, 9.0 per cent for pharmaceuticals, 8.4 per cent for consumer electronics, and 8.2 per cent for household goods (refrigerators, washing machines etc).

But after 1973 the development became even more extreme. After 1973 18 of the 25 most rapidly growing branches of industrial output were in only 3 groups: electronic and computer equipment (computers, electrical components, telecommunications, and electrical equipment), high quality consumer products (pharmaceuticals, toiletries, consumer electronics, photographic and optical equipment, watches and clocks, household goods, books and printing, and paper), and food products (animal fodder, edible fats, meat and fish, meat preserves, cereal based products, and beverages). The world market in sectors in which the USSR specialised - such as iron and steel, piping, machine tools, and non-ferrous metallurgy - actually shrank ie the USSR was producing into declining sectors. By 1987 the USSR produced more than twice as much steel as the United States, twice as much cement and almost three times as much iron ore but was totally underrepresented not only in computers and electronics but in the most dynamic sectors of consumer durable and high quality food production.

[4] To take international comparisons, in Germany, from 1980 to 1988, the ratio of annual value added in manufacturing to gross fixed capital formation in manufacturing was 850 per cent. However it was only 650 per cent in basic metals, 690 per cent in non-metallic minerals, 840 per cent in fabricated metal and machine production. In light, primarily consumer, manufacturing the output to investment ratios are far higher - in Germany 980 per cent in food processing, 1210 per cent in furniture production, and 1230 per cent in clothing. In the service sector ratios are similar to light industry - 930 per cent for restaurants and hotels, 1030 per cent for wholesaling and retailing, and 1390 per cent in financial services. In energy, in which the USSR specialised, the ratio of output to investment is even lower. A comparison cannot be made with Germany, where production is insignificant, but for the US and UK, Western economies with large energy sectors, the ratios in the 1980s were 350 per cent for the United States and 540 per cent (including coal production) for Britain.

[5] The share of housing in the reproducible assets of the USSR is less than 18 per cent compared to 30 per cent in the US, 33 per cent in west Germany, and 45 per cent in France.

[6] In "personal" (consumer) services in particular services employment in the USSR was only 19 per cent of the working population compared to 28 per cent in Germany, 33 per cent in France, 37 per cent in Japan and 39 per cent in the US. The disastrous situation of the Soviet retail system is easily explained by the fact that only 6 per cent of the working population was employed in wholesaling and retailing compared to 15 per cent in Germany, 17 per cent in France, 22 per cent in the US, and 23 per cent in Japan. West Germany, for example, itself a Western country with an unusually large heavy industrial sector, devoted 25.2 per cent of its investment to industry and 24.4 per cent to services, while the USSR devoted 36.4 per cent to industry and only 14.9 per cent to services.

[7] In addition to domestic effects the inappropriate structure of industrial production struck at the international competitiveness of the Soviet economy. This is graphically illustrated by comparison with the most rapidly growing economies in the last two decades apart from China - the Newly Industrialising Economies (NICs) of South Korea, Taiwan, Hong Kong, and Singapore. Starting from far lower levels of development than the USSR these were able to achieve spectacular export success by concentrating on sectors such as consumer electronics. They were aided by technological mastery in consumer goods being much easier to achieve than in the investment sector - UN studies indicate that in washing machines, refrigerators, radios, and televisions South Korea and Taiwan are already at the same technological level as Japan, that is the most advanced in the world. These economies dominate the export of cheap personal computers. However the USSR, which had the advantage of a much more advanced starting point and a much larger domestic market, failed to develop any such industries - in part because its domestic production of consumer items was extremely low compared to the size of its economy.

[8] The proportion of the working population who are self-employed/employers in countries with larger agricultural sectors than Germany is much higher - 15 per cent in France, 21 per cent in Japan, 27 per cent in Spain, and 32 per cent in Italy. Even in the United States, which has the most developed economic structure, the figure is 9 per cent.

[9] Far from allowing consumption to collapse, as in Russia and Eastern Europe, China started its reforms by determined measures to raise the short term living standards of its population.

[10] As the economy more than doubled in size in the decade real military expenditure probably rose slightly at the same time as its share in GNP was halved.

[11] After 1984 the percentage of fixed investment rose above its pre-1979 level, financed by further reductions in military spending and reductions in other government economic expenditure, until by 1989 economic overheating was occurring The percentage of fixed investment in the economy was then reduced to its 1984 level.

[12] Such figures also show clearly that far from the state sector abandoning the process of change to the market it in fact led the transformation through state control of the investment mechanism. First there was marked reduction of the share of state fixed investment in GNP in 1978-81, from 19.2 per cent of GNP to 14.4 per cent, to create the space for increased consumption. Then through the reexpansion of state investment as a percentage of GNP in 1981-86, from 14.4 per cent of GNP to 20.9 per cent of GNP, general investment was expanded. Finally in 1988- 89 state investment was reduced to curb economic overheating (Figure 3). The difference to the previous situation was that state investment increasingly led the economy through the market, not through administrative decisions - which in any case could not have been implemented given the enormous increase in the number of small enterprises discussed below.

[13] In the first phase, from 1978 to 1981, subsides on daily necessities rose from 2.2 per cent of GNP in 1978 to 6.4 per cent of GNP in 1981 - an increase in subsidies of 4.2 per cent of GNP. Later consumer subsides were reduced and instead compensation was given through de facto indexation of increased wages and pensions - a more efficient system but which has exactly the same result.

[14] If relative prices had remained as in 1978 the share of private consumption in GNP in from 1978 to 1988 would actually have contracted from 52,6 per cent to 45.2 per cent - instead of expanding from 52.6 per cent to 56.4 per cent.

[15] In Hungary food prices rose by 10 per cent more rapidly than the general price level in the three months following price liberalisation at the end of 1989. Food prices then fell by 16 per cent relative to the general price level - leaving them six per cent lower, in relation to prices, than before price liberalisation. In Poland the process is not yet finished but the trend is clear. Food prices rose by 30 per cent relative to other prices in 1989-90. They then fell by 20 per cent relative to other prices and are continuing to fall rapidly.

[16] The second category undoubtedly contains a proportion of both quasi-state and quasi-private enterprises as well as genuine collective ones.

[17] This rapid development of the "collective" industrial sector in China explains the extremely rapid development of small industrial enterprises in China - by 1986 there were 500,000 industrial enterprises in China of which 420,000 were small scale (Jiang Yiwei, "Enterprise reform" in The Chinese Economy and its Future ed Peter Nolan and Dong Fureng, Polity Press Cambridge 1990 p159.). This sector primarily developed in light industry, which also helped its extremely efficient use of capital - by 1987 one third of industrial output was produced by small enterprises with only one eighth of investment. This sector also developed significant exports - $5 billion in 1987.

Overall the share of light industry in total industrial output increased from 42.7 per cent in 1978 to 49.3 per cent in 1988. Three directly consumer industries - food processing, textiles and clothing, and publishing and paper making - alone increased their percentage of industrial production from 29.7 per cent in 1978 to 34.3 per cent in 1987 on the basis of only 17.8 per cent of industrial investment - implying an efficiency in investment almost double that of industry as a whole.

[18] Industrial employment increased by 59 per cent. Employment in construction, reflecting
the building boom, increased by 178 per cent.

[19] By 1989 only 17 per cent of employment in retailing was in the state sector, 34 per cent in the collective sector, and 49 per cent in the private sector. In catering 13 per cent worked in the state sector, 25 per cent in the collective sector, and 61 per cent in the private sector. In the other service sectors 19 per cent worked for the state, 31 per cent in the collective sector, and 48 per cent in the private sector. In the retailing, catering, and service sectors alone more than 10 million new firms were created in 1978-88.

[20] This is technically known as a system of "price perversity". Normally prices remain static, or fall, with increases in output. In this case average price rose as output rose.

[21] Given the conditions of perfect competition monopoly profits could not be made. But the new incentives gave extremely strong possibilities to increase profit by increasing output.

[22] This being too rapid and creating overheating in the economy by 1989 after which the pace of growth was slowed down.

[23]As indicated by the figures for the ratio between light and heavy industry output in heavy industry grew more slowly - although after 1984 coal production still increased at 5.4 per cent a year, steel at 6.4 per cent a year, sulphuric acid production at 7.0 per cent a year, and nitrogenous fertilizers at 12.5 per cent a year.

The share of developing countries in world trade

2008-12-13T06:14:00.000-08:00

The rise of Asia, in particular China, in world export markets is well known. The aim of this post is, however, to provide a more systematic overall examination of trends in world visible exports - i.e. exports of goods and not including trade in services (to avoid excessive repetition all references to exports below are to be taken to be referring to visible exports unless otherwise specified).

The most fundamental, twenty year, tendency is shown in Figure 1. This is the well known consistent trend, since the late-1980s, for a major rise in the share of developing countries in world exports - and the decline of the share of already industrialised countries.

The share of industrialised countries in world exports fell from 70.3 per cent in 1988 to 53.3 per cent in 2007. In the same period the share of developing countries rose from 27.9 per cent to 45.2 per cent.

Figure 1

Considering these trends in greater detail, Figure 2 divides exports from developing countries between those in Asia and those outside Asia. Again the trend is clear.

The rising share of developing countries in Asia in world exports is continuous throughout the last quarter century - the share of developing Asian countries in world exports nearly tripling from 8.3 per cent in 1980 to 23.7 per cent in 2007.

For the initial part of the period after 1980 the share of non-Asian developing countries in world exports fell - this was particularly accounted for by a decline in the value of the share of world exports from the Middle East associated with the decline in the real price of oil in that period. However since the early 1990s the share of non-Asian developing countries in world exports has been rising steadily. The share of non-Asian developing countries in world exports rose from 13.5 per cent in 1992 to 21.5 per cent in 2007, while in the same period the share of Asian developing countries in world exports rose from 15.2 per cent to 23.7 per cent.

Since 1992, therefore, the increase in the proportion of world exports accounted for by Asian and non-Asian developing countries has been almost equal - the increase in the share of world exports accounted for by Asian developing countries being 8.5 per cent and the increase in the share of non-Asian developing countries being 8.0 per cent.

It is the combination of this rising share of world exports from both Asian and non-Asian developing countries that accounts from the strong overall rising trend in the share of developing countries in world exports. The phenomenon since the beginning of the 1990s is therefore one of developing countries in general and not one only of Asia.

Figure 2

Considering these trends in more detail, the huge role played by the development of China is evident. Figure 3 shows the share of world exports for China, developing Asia excluding China, and, to provide a comparison for the developed Asian economy, Japan.

The rise of China is evident - China's share of world exports rose from 1.0 per cent in 1980 to 9.8 per cent in 2006 - the last year for which full figures are available. In the same period the share of other developing Asian countries in world exports rose from 7.3 per cent to 13.7 per cent. Therefore, in this period, China alone accounted for 58 per cent of the increase in the share of developing Asian countries share of world exports - China's increase in the share of world exports being 8.8 per cent compared to 6.4 per cent for all other developing countries in Asia. Particularly since 1990 China's increase in the share of world exports has considerable exceeded that for the rest of the other developing Asian countries put together.

In contrast, to take the main developed country in Asia, the declining importance of Japan in world trade is evident.

In 1980 Japan accounted for almost as high a share of world trade as all the other developing countries in Asia combined. Since 1986 the share of Japan in world exports has declined sharply - falling from 10.3 per cent in that year to 5.3 per cent in 2007. In 1980 the developing Asian countries, including China, accounted for 8.3 per cent of world exports and Japan for 6.5 per cent. By 2006 the developing Asian economies, including China, accounted for 23.7 per cent of world exports and Japan for only 5.3 per cent. In 1980 Japan's exports were equivalent to 78 per cent of those from the developing Asian countries, while by 2006 Japan's exports were equivalent to only 22 per cent of those of the combined exports of the developing Asian countries.

The relative decline in importance in world of exports of Japan, and the rise of the developing Asian countries, above all China, is evident.

Figure 3

The more detailed trends for Asian developing countries, other than China, are shown in Figure 4. This confirms continuing strong export growth by South Korea. However Singapore, and more recently Malaysia, having been losing some world visible export share. Vietnam has been gaining export share steadily but from a very low base.

India stands out clearly as a large economy but with a very low share of world exports. India's share of world exports is only just over one per cent and has not been rising very strongly.

Figure 4

Such figures illustrate strikingly the different path of development being undertaken by China and India - the contrasting development in shares of world exports for India and China is shown in Figure 5.

India's economy is growing rapidly, but essentially within its domestic economy. India's share in world exports remains both very low and only slowly growing.

India's economy, in short, shows no signs of being strongly competitive on an international scale despite known strength in individual sectors such as software. China's economy is growing even more rapidly than India and enjoying rapid export growth - China's economy, in short, shows far more signs of being competitive internationally than India's. This is line with the the data on the much greater size and development of Chinese firms compared to India that has been analysed elsewhere.

Both India and China are extremely important markets but China's economc fundamentals and competivity continue to be significantly stronger than India's.

Figure 5

Turning to non-Asian developing countries, the overall picture is shown in Figure 6. The main trend in the early part of the period considered is the sharp fall in the share of exports coming from the Middle East - reflecting the fall in the relative real price of oil after the beginning of the 1980s. It may also be noted that, despite the increase in the price of oil in the most recent period, the Middle East has only moderately increased its share of world exports, from relatively depressed levels, and its has not retained the position held at the beginning of the 1980s - in terms of trade surpluses, as opposed to share in world exports, a number of Middle East countries continue to be extremely important..

In contrast, the share of world exports from developing countries in Eastern Europe has risen significantly - from 4.4 per cent of world exports in 1999 to 8.0 per cent in 2007. Within this total the share of Eastern Europe excluding Russia rose from 3.1 per cent of world exports to 5.8 per cent, while Russia's share rose from 1.4 per cent to 2.6 per cent.

Over the period as a whole Africa's share of world exports fell from 4.5 per cent in 1980 to 2.6 per cent in 2007- although there has been a small recent revival from the extremely depressed levels in the mid-1990s.

The share of developing countries in Latin America and the Caribbean (Western Hemisphere) in world exports fell significantly in the mid 1980s but has since risen again. The rate of increase, however, is still modest compared to countries in Eastern Europe and even more so when compared to Asia. Latin America and the Caribbean's share of world exports rose from 4.3 per cent in 1992 to 5.9 per cent in 2007.

Figure 6

Considering the situation within Latin America there was an increase in Mexico's share of world exports in the 1990s but this has since fallen back significantly. No Latin American country has gained world export share in the way that has been experienced in Asia. This is shown in Figure 7.

Figure 7

Summarising these developments overall the following the following key trends emerge.

The increase in the share of world exports from developing countries started in Asia, however since the early 1990s this trend has become substantially more generalised. The increase in the share of world exports coming from Asian and non-Asian developing countries was essentially equal in the 15 years 1992-2007.

The success of China is even greater when placed in a comparative framework than when considered by itself. China is now the world's largest visible exporter - overtaking the US and Germany.

Asia outside China in the recent period has ceased to gain world market share in visible exports, after an exceptional performance for several decades. South Korea continues to show outstanding visible export performance but several other Asian developing economies have lost world market share. India's share of world exports continues to be extremely low for such a large economy and shows no strong trend to rise.

East European developing countries, both Russia and non-Russian, have an export performance which is second only to Asia - although lagging substantially behind Asian success.

Latin America and Africa's role in world exports has not yet increased - despite the commodity boom.

India and China's challenge in the current financial crisis

2008-11-30T06:07:00.000-08:00

In an earlier post on this blog, 'China and the "third Asian financial crisis"', it was noted that while the present is a global financial crisis nevertheless in Asia it has a further aspect.

Asia has passed through two extremely severe financial crises in the last thirty five years which had long term consequences for the region and therefore for the world economy. The first, starting in 1973, was the financial and economic crisis in Japan which culminated in the creation of the bubble economy of the late 1980s and the collapse in asset prices, deflation and economic stagnation which followed after the bursting of this bubble in 1990. The second was the 1997 currency and devaluation crash in South East Asia - which drastically slowed the former South East Asian 'Tiger' economies of South Korea, Hong Kong, Taiwan etc.

Through this period of the previous Asian financial crises, however, India and China escaped any major long term consequences. Far from slowing, their economies accelerated over the historical period during which these crises took place.

These trends are shown in Figure 1 in comparing the four largest Asian economies - China, Japan, India, and South Korea. The divergence in performance between China and India on one side and Japan and South Korea on the other is evident.

As may be seen, at the beginning of this period, in 1970, Japan and South Korea had annual rates of growth, taking the average for the preceding five years, of over 10 per cent - comparable to China and India's today. However Japan and South Korea's economies then drastically decelerated - Japan's growth rate falling to an average of one per cent a year in the mid-1990s and two per cent a year in the most recent period. South Korea's growth rate fell to around four per cent a year up to the most recent figures available.

In contrast, over the same period, India's growth rate accelerated from four and a half per cent a year to approaching nine per cent a year. China's growth rate accelerated from four and a half per cent a year to over 10 per cent a year.

Figure 1

In order to illustrate this more clearly Figure 2 shows the change in the annual average rate of growth for these four economies in comparison to their 1970 growth rates - again the figures are shown as annual averages for the preceding five years in order to eliminate any purely short term fluctuations. Over the period concerned India's growth rate accelerated by four per cent a year and China's by six per cent a year while South Korea's economy decelerated by six per cent a year and Japan's by eight per cent a year.

Figure 2

This, therefore, is the challenge which confronts both India and China as they enter the third great Asian financial crisis. The economies of both South Korea and Japan were lastingly decelerated by the previous two financial crises. The reasons, in both cases, was due to a sharp decline in savings and investment rates.

The challenge facing both India and China is to avoid the fate of Japan and South Korea - to maintain their very high savings and investment rates and therefore simultaneously maintain their capacity for very high sustained economic growth. Given the very large size of their economies, in realistic Parity Purchasing Power (PPP) exchange rates India is the fourth largest economy in the world and China the second, the recovery of the world economy out of the current financial crisis will in very large part depend on how well they succeed in maintaining these economic growth rates.

China and the 'third Asian financial crisis'

2008-11-08T23:14:00.000-08:00

Having spent the last week attending the Mayor of Shanghai's International Business Leaders Advisory Council, giving a talk to and discussing with Shanghai financial and government officials, and then going on to Beijing to discuss with more business and government figures, it is possible to form a fairly clear view of how the international financial crisis appears in China. It presents a rather different aspect to that as seen in Europe or the US.

Direct financial turmoil is not a key feature in China. China's banks had almost no exposure to now heavily discounted, or worthless, sub-prime mortgage or similar financial products. While in Hong Kong there is some concern over the direct financial fallout, no mainland Chinese bank has suffered significant losses in this field. The immediate issue for China is the effect on its productive economy and on the renminbi’s exchange rate. But underlying these is a still more fundamental issue – maintenance of China’s savings and investment rates.

Indeed. seen from China, the international financial crisis might be posed from a different angle. It may be viewed as the 'third great Asian financial crisis' – the first being that of Japan and the yen in 1973-90, and the second that of the South East Asian debt and currency crisis of 1997. To emerge successfully will require from China an enormous response and a new stage of its economic development.

Key Trends in Globalisation has noted that the fundamental determinant of the much higher rates of growth of a number of Asian economies, compared to the US or Europe, is their far higher investment rates. Therefore for the US and Europe to regain competitiveness with Asia one of two things has to happen. The US and Europe have to raise their investment rates up to Asian levels, or the Asian economies have to lower their investment rates down to US and European ones.

These two courses have very different implications for world economic growth. If the US and Europe raise their investment levels towards Asian ones then Asia will essentially maintain its present economic growth rate and that of the US and Europe will increase – i.e. world economic growth will accelerate. If, however, Asian investment levels are reduced towards US and European levels then the growth rate of the Asian economies will also fall, while economic growth in the US and Europe will not increase – i.e. world economic growth will decline. It is, therefore, far preferable that the US and Europe increase their investment rates rather than that those in Asia fall.

Nevertheless, in successive economic crises of the last thirty years, the outcome was the opposite of the preferable one – the US and Europe did not increase their investment rates, indeed those in Europe fell, but the investment rates of a number of Asian economies declined.

To illustrate this process in more detail, Figure 1 shows the level of fixed investment as a percentage of GDP for the US, Germany and France. As may be seen, the US fixed investment level has been essentially constant for the last half century at around 20 per cent of GDP – itself a continuation of a very long term trend in US investment rates. The German and French levels were somewhat higher than that for the US for the period up to the early 1970s, at around 25 per cent of GDP, and then fell to levels comparable to the US. Such investment levels generate rates of growth of 1.5-3.5 per cent a year.

Figure 1

If these US and European trends are compared to the situation in Asia there is a clear contrast. Asian economies have achieved far higher levels of investment, reaching over 40 per cent of GDP, and far higher rates of growth – in some case approaching or achieving double digit rates. However, the effect of both the post-1973 crisis in Japan, and the 1997 crisis in South East Asia, was to reduce these investment rates and with them also rates of growth of growth of GDP.

Considering this trend in a number of Asian countries in greater detail, Figure 2 shows the proportion of GDP accounted for by gross fixed capital formation in Japan. Japan’s fixed investment level peaked at 36.4 per cent of GDP in 1973. At this time, averaging the preceding five years, the annual average rate of growth of Japan’s GDP growth was 9.3 per cent.

Figure 2

The economic events which commenced in 1973, and which were accompanied by the first ‘oil shock', greatly affected Japan. The proportion of GDP devoted to gross domestic fixed capital formation declined to 27.5 per cent by 1986, and Japan’s average annual rate of growth of GDP, over the preceding five years, fell by two thirds to 3.1 per cent. By 1986 the Japanese economy, which had been expanding almost three times as fast as the US in the early 1970s, was growing more slowly than the US – in comparison in 1986 the average annual growth rate of US GDP over the preceding five years was 3.5 per cent.

Japan’s investment rate then temporarily rose under the impact of the hyper lax monetary regime during the ‘bubble’ economy in the late 1980s – a consequence of Japanese financial policies introduced to aid US economic stability following the 1987 Wall Street stock market crash. Following the bursting of Japan's financial bubble in 1990, the investment rate fell again and by 2002 gross domestic fixed capital formation had declined to 25.8 per cent of GDP while Japan’s five yearly annual growth rate of GDP had declined to 0.2 per cent.

Summarising these processes, under the successive impacts of the oil price increase and the monetary effects in Japan of the measures it chose to take to respond to the 1987 Wall Street crash, the proportion of the Japanese economy devoted to fixed investment fell by 10.6 per cent of GDP, and Japan’s annual growth rate decelerated from 9.3 per cent to 0.2 per cent - a 98 per cent decline.

If Japan post-1973 was the first great Asian economic/financial crisis, the second was the debt and currency crisis of the South East Asian economies in 1997. The similarity of the outcome to the earlier crisis in Japan’s is striking.

Figure 3 therefore shows South Korea’s rate of gross domestic fixed capital formation. This rose progressively to 39.0 per cent of GDP in 1991. By that year the average annual rate of growth of South Korea’s GDP over the preceding five years was 9.4 per cent.

By 1996, the last year before the currency crisis, South Korea was still investing 37.5 per cent of GDP and its five yearly annual average rate of growth of GDP was 7.3 per cent.

Following the 1997 debt and currency crisis, however, the proportion of South Korea’s GDP devoted to fixed investment fell sharply, to only 28.8 per cent of GDP in 2007, and its five yearly annual average growth rate of GDP declined by almost half to 4.4 per cent.

Figure 3

Figure 4 shows the similar process in Thailand. By 1996 the proportion of Thailand’s GDP devoted to fixed investment was 41.1 per cent of GDP – although this level was clearly unsustainable as it far exceeded the domestic savings available to finance it, resulting in a balance of payments deficit of 8.2 per cent of GDP. Thailand’s five yearly average annual rate of GDP growth was 8.1 per cent.

Following the currency crisis, by 2007 the proportion of Thailand’s GDP devoted to gross domestic fixed capital formation had declined to 26.8 per cent and the five yearly average annual rate of GDP growth had fallen to 5.6 per cent.

Figure 4

Figure 5 shows the similar process in Malaysia. By 1996, the last year before the debt/currency crisis, Malaysia’s gross domestic fixed capital formation was 42.5 per cent of GDP - although again this was being unsustainably financed by a balance of payments deficit. Malaysia’s five yearly annual average rate of growth of GDP was 9.6 per cent.

By 2007, ten years after the currency crisis, the proportion of Malaysia’s economy devoted to fixed investment had fallen to 21.7 per cent and the five yearly average annual rate of growth had dropped to 6.0 per cent.

Figure 5

Therefore, although the mechanisms of the crises were different, the outcomes in Japan in 1973-90, and South East Asia in 1997, were essentially the same - the proportion of the economy devoted to investment fell drastically and therefore so did the growth rate.

The impact of these two previous Asian economic crises, therefore, clearly illustrates the challenge facing China. China’s level of investment is significantly higher than Japan’s in 1973 – China's fixed investment rate is over 40 per cent of GDP compared to Japan's 30-35 per cent at that time. China's annual average annual rate of growth for the last five years is over ten per cent compared to Japan's nine per cent in 1973. In a number of South East Asian states, on the eve of the 1997 crisis, their very high investment rates were unsustainable, as they far exceeded domestic savings levels and were financed through extremely high balance of payments deficits. In contrast China’s savings level, running at over 50 per cent of GDP at nominal exchange rates, is even higher than its level of investment – see Figure 6. China, therefore, does not fact the international financial constraints facing South East Asia in 1997. There is, therefore, nothing inherently financially unsustainable in China’s very high investment rates. It has more than adequate domestic savings to finance its current investment levels and, therefore, approximately its present growth rate.

Figure 6

But it is the international context that has changed significantly and poses the economic challenge. With many economies moving into recession, and virtually all slowing, China's export growth will become significantly harder - even more so as simultaneously the renminbi is becoming a ‘hard’ currency.

As illustrated in Figure 7, the renminbi's exchange rate moved up against the dollar prior to the outbreak of the international financial crisis and it has remained constant against the dollar since its onset. As, however, the dollar has moved up against almost all currencies, except the yen, this means that the renminbi has undergone an upward revaluation against almost all other currencies.

Figure 7

China’s exporters, therefore, face a double squeeze. First, the markets in the economies into which they are exporting are either contracting or growing far more slowly. Second, the renminbi’s exchange rate is rising. This combination squeezes China’s exporters while simultaneously cheapening imports. China's balance of payments surplus may, therefore, decrease from its current level – the last available data being for 2007 showing a surplus of $372 billion.

However, statistically, the balance of payments is necessarily equal to the difference between domestic savings and investment - China’s balance of payments surplus reflecting that its savings level is even higher than its investment level. If China’s balance of payments surplus declines this can therefore only be achieved by its investment level moving up towards its savings level or its savings level declining towards its investment level, or a combination of the two.

Which of these two occurs will have a huge influence on both the Chinese and the world economies. As already noted, in the case of both Japan and the South East Asian economies, faced with crisis, investment levels fell. Their economies consequently drastically decelerated – negatively influencing the rate of growth of the world economy. A major deceleration of China’s economy, particularly under conditions of recession in other major economies, would have very negative consequences for international growth.

The health of the world economy, therefore, requires that if China’s balance of payments surplus is to shrink this should be by moving its domestic investment rate up towards its savings rate, not by its savings level falling towards its investment rate.

Domestic economic requirements China push in the same direction. The exchange rate of the renminbi has not merely moved upwards but will remain higher due to the underlying strength of China’s economy. A clear lesson of the current crisis is that any primary use of China’s financial resources not for domestic investment but fundamentally to attempt to maintain a low exchange rate of the renminbi will not work as a strategy – even in cases where the renminbi is stabilised against the dollar it moves up against other currencies.

China will, therefore, have to learn to compete at a higher exchange rate. This requires that its whole economic mechanism become more efficient, which can only be achieved through investment. China will cease to compete as a pure low wage economy – Vietnam and other economies now occupy the place China did twenty years ago. High levels of investment are therefore vital if China's economy is to compete in this new context.

Put in other terms, China's traditional strategy has been to keep its currency's exchange rate down to the level of productivity of its economy. In the future China will have to raise the level of productivity of its economy up to its appreciating exchange rate - requiring gigantic further investment in its productive base.

Consequently the cyclical requirements of economic management, that is ‘Keynesian’ anti-recessionary measures, coincide with the structural requirements of a high investment level. So far the Chinese government is heading in the right direction in announcing successive waves of infrastructure and other investment – railways, roads, housing. The fact that China has a large state owned economic sector allows it to take far more direct ‘Keynesian’ measure to sustain investment than are available in the US or Europe.

Nevertheless the scales of the programme’s which are required are gigantic. If, to take a hypothetical example, China’s balance of payments surplus were to fall by half under the impact of pressure on exporters and cheaper imports due to the higher exchange rate, while its savings level remained the same, this would required $175-$200 billion extra a year investment in China’s domestic economy. While there is no financial constraint on this, due to the high savings rate, the task of physically gearing up the economy for such a scale of extra-investment programmes is gigantic.

Naturally this particular example is arbitrary, and China’s balance of payments surplus may not fall to this degree, but it shows the scale of economic forces and shifts which are involved.

At the same time China faces new economic challenges it has not experienced previously. The fact that China is acquiring a 'harder' currency will undoubtedly lead to central banks of other countries wishing to hold the renminbi as part of their foreign exchange reserves – an issue China has not faced on a significant scale before.

Simultaneously China will come under pressure to use its financial resources for measures other than investment in its domestic economy. The US has announced that it is arranging dollar swaps for four economies that it considers systemically crucial – Brazil, Mexico, Singapore, and South Korea. But there will be a whole series of much weaker economies in deep trouble and it will undoubtedly be proposed that China should finance these, probably via intermediaries such as the IMF, rather than investing its resources in its domestic economy. When China attends the international economic summit in Washington on 15 November the US will also almost certainly propose that China accelerate a programme of buying US Treasury bonds.

So far China is rightly adopting the approach that 'the most important task for us now is to manage our own affairs well', as vice-premier Wang Qishan put it. But pressure put on China to change that stance, and divert resources away from its key goals, will increase. In other words many other people also have their eye on the funds which China could invest in its domestic economy.

With all these pressures, together with domestic programmes of improving social welfare and attempts to improve conditions in rural areas taking place simultaneously, not to mention other issues to manage, Chinese economic policy makers are going to be kept extremely busy in the coming months.

However, as noted, while there are many specific issues to tackle they are all within the framework of one decisive strategic choice. If China responds in the same way that Japan did in 1973-90, and South East Asia did in 1997, that is by reducing its savings and its investment levels, this will be bad not only for the Chinese economy but for the world economy. If, however, China is able to maintain its savings and investment levels through the present ‘third’ Asian currency crisis, which is a crucial aspect of how the international financial crisis appears from its perspective, not only will that be good for the world economy but it will be one of the greatest pieces of macro-economic management, not to speak of practical management of huge investment programmes, ever seen.

China since 1979 has achieved one of the greatest economic miracles in history. Confronted with the third great Asian financial crisis China again faces a gigantic challenge to its macro-economic management. How successfully it confronts that will have profound consequences not only for its own but for the entire world economy.