China can avoid West's economic mistakes

By Chen Ping
0 Comment(s)Print E-mail China.org.cn, December 30, 2012
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Snow plus frost [By Jiao Haiyang/China.org.cn]


 Snow plus frost [By Jiao Haiyang/China.org.cn]



China must not be led by the nose

The thinking of Keynes and Friedman is to substitute a short-term stimulus of aggregate demand in the place of harder solutions to long-term systemic problems, thus sidestepping the core element needed to regain macroeconomic control - dealing with entrenched interests.

The root of the 2008 financial crisis is the "American illness", huge profits in banking and finance that have squeezed out its manufacturing industry and the real economy. Even after dropping the gold standard, the U.S. dollar still rules the global market with its innovative financial tools.

The financial deregulation implemented in the past twenty years has amplified freewheeling financial speculation. The virtual economy created by financial derivatives is 10 times of the global GDP and almost 50 times of the U.S. GDP.

To cure the financial crisis, the U.S. government must break the monopoly of financial oligarchies and work with other countries to tighten the control of capital flows, enhance financial regulation and limit speculative profits.

However, the U.S. government thus far has avoided pressing for such reforms, instead protecting the oligarchies and exporting the crisis. As a result, its economy is still sluggish. The global economy has been shadowed by inflation and social instability as well.

China should not follow this unreasonable international financial order led by the U.S. It needs to understand its own position, as well as the positions of its rivals, and change its strategy from passive defense to active. China must be brave and visionary and set up its own international financial strategies.

'Global imbalance theory' is unworkable

U.S. Federal Reserve Chairman Ben Bernanke once admitted in his "global imbalance theory" that the root of imbalance is a welfare crisis caused by the aging U.S. population. But he shielded attention away from another heavy fiscal burden — the military expense necessary to maintain U.S. hegemony and the EU's enlargement.

U.S. military expenditures account for half the world's defense spending, and are larger than the sum of the next-highest 15 countries on the list. If it does not make fundamental changes of its military budget, it will not be able to improve its stagnating economy and high unemployment levels.

Bernanke's "global imbalance theory" argues that developing countries must expand domestic consumption and developed countries must increase savings. In doing so, international capital can be redirected from developing countries to developed countries to keep a high-level return and consumption in western countries.

However, this theory is not workable either in theory or in practice. China's coastal mega-cities have fallen into the trap of aging population like their peers in the West. The welfare of residents of those cities is supported by large number of migrant workers, not the bubbled real estate market.

Bernanke's theory is not a remedy to the financial crisis, but a means to shift the crisis onto to the shoulders of developing countries, a plan to maintain the imbalance of resources currently favorable to the developed world.

China has made a good move by promoting settlement of transactions in local currencies among the BRICS. But it has not touched the heart of political ecology in the U.S. and Europe. The Southern European countries are stuck in mire of sovereign debt. If the Euro Zone collapses, the dollar's financial hegemony will be further enhanced.

Only China can help the EU out of the crisis and lessen its dependence on the U.S. The financial crisis has clearly proven that although Western countries still lead the world in technological development, they are now following China in economic development.

The author is a senior research fellow of Academic Committee Center for New Political Economy of Fudan University.

This article was first published in Chinese and translated by Li Shen.

Opinion articles reflect the views of their authors, not necessarily those of China.org.cn.

 

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