A comment in the Financial Times, “Prudent Asia is unlikely to bail out the west,” by David Piling, provides a badly needed reminder: societies watch out for themselves first. And the way they define their best interest may not correspond with what we think is good for them.
Forgive us for repeating ourselves, but we have mentioned more than once that we have some reservations about the analogies being drawn to the Great Depression. The vast majority of economists are basing their prescriptions on what the US should do now with what they believe would have worked for the US then, namely, more aggressive monetary easing and fiscal stimulus.
But the US then was the world’s biggest manufacturer and creditor. Its position then is more analogous to that of China now. And recall that Keynes not only wanted the US to run even bigger budget deficits back then, but he also said it was unreasonable for the US to expect is overconsuming, indebted trade partners such as the UK and Germany to go deeper into debt to support the US (and the UK, France, and Germany all defaulted on their government debt).
That suggests that China, and not the US, should be fast to adopt stimulus programs (note that the impressive-sounding Chinese package is estimated to be only 1/3 to as littel as 1/6 of new programs, and most of those take place in teh second year of this two-year effort). It is not clear that trying to restore the status quo ante of a ever-more-deeply-in-debt US funding overconsumption from China and other exporters will work for any length of time.
Pling adds two more unpleasant considerations to this equation. Even if the Chinses accepted the notion that they needed to take up most of the demand slack, their ecnoomy is way too small to make up for the shrinkage of US and European demand in any reasonable time frame. And the Chinses (not surprisingly) have little sympathy for a decadent West suffering the consequences of its lack of discipline.
From the Financial Times:
Profligacy is the new prudence….. After decades of predicating growth on piled-up savings, weak currencies and hyper-demand from shopaholic Americans – hitherto the world’s buyer of last resort – Asians must now start spending some of their hard-earned cash on themselves…
Now Americans are rebuilding their savings. Companies too are forcing some employees to spend less by the simple mechanism of sacking them. That means – short of a collapse in global trade – the surplus-savings countries have to spend more.
On the surface, Asia appears to have heeded the call. The region is awash with stimulus packages…
Yet, if you were to conclude that Asian consumers, flush with government handouts, are about to spend the world out of trouble, you are in for a disappointment. For a start, outside Japan, Asian economies simply lack the scale to act as global locomotive. Stephen Roach of Morgan Stanley shows a bar chart in which Chinese and Indian consumption are barely visible alongside the towering demand of the US and Europe.
But even if Asia had the oomph, it is far from clear it has the will. Hardly surprisingly, it views as foolish the excesses that led the west into so much trouble. While macro-economists dispassionately weigh borrowing and lending and call for a global rebalancing, Asians still tend to view the story as a morality tale of thrift and profligacy.
A few tales from around the region underline the point. In Japan, Kaoru Yosano, economy minister, says he would need a week to consider what to buy. Like many Japanese, he says he has all the modern conveniences he requires. The same is true on a national level, where Japan’s government is worried about public debt – given that it is 180 per cent of gross domestic product, that is hardly surprising – and convinced there is nothing left to spend money on anyway. A few years ago, one rebel economist, who wanted Japan to print its way out of deflation, could think of nothing better on which to lavish a proposed $150bn than on a fleet of 250m-long garbage incineration and fish-farming ships. (The Japanese government did not take up his suggestion.) More than half of Japanese voters, polls suggest, are against the $600 government handout.
Such prudent attitudes are not confined to Japan. Gloria Macapagal Arroyo, Philippines president, proudly insists that she will not increase the budget deficit beyond 1 per cent of output even though the International Monetary Fund, which wrote Fiscal Rectitude 101, told her she could safely double that. And just look at Chinese consumers, 90 per cent of whom, according to surveys, pay for their new cars cash on the nail. No zero per cent financing in Nanjing.
There are good reasons – beyond any questionable notion of natural Asian prudence – to explain such reticence. Asia’s post-war growth was built, by and large, on policies that suppressed consumption and favoured big industry, especially exporters, through government-sanctioned price cartels and undervalued currencies. (Japan has allowed the yen to strengthen, but China’s reflex reaction to the downturn has been to halt, even reverse, currency appreciation.)
The lack of a social safety net in much of Asia has also added to the propensity to save, forcing people to defer consumption and plan for the future. In China, where private demand is an astonishingly low one-third of GDP, people hoard cash to pay for education, healthcare and retirement benefits that their nominally Communist government entirely fails to provide.
Asia’s propensity to save is engrained more by policy than by culture. But that doesn’t mean it can be quickly or easily reversed.
By contrast, I was in the eye doctor’s office Monday and overheard some of the terms for financing Lasik surgery: no interest for the first 18 months, 9% if you go longer.