The US Originated Global Crisis,
the Washington Consensus
and
China Approach
Ping Chen
[email protected]http://pche.ccer.edu.cn/
China Centre for Economic Research, Peking University, Beijing, China
Centre for New Political Economy, Fudan University, Shanghai, China
6º. FORUM DE ECONOMIA
Causes
of the
US Originated Crisis
•
Market fundamentalism
> counter
Keynesian revolution (Lucas) + efficient
market hypothesis (Fama) + Coase theory
of transaction costs > the Washington
Consensus > minimize government +
deregulation > increase financial instability
•
Reagan revolution
> American disease >
Prof. Luis Carlos Bresser-Pereira
•
The world is not flat!
>
neo-classical economics is wrong for a
flat world
•
New developmentism is good
for developing countries!
> go
beyond Keynes (fiscal) and
Paul Krugman
:
How did economists get it so
wrong
(NYT /2/9/2009)
• Bernanke is wrong (saving glut) > Exchange rate resonance driven by US business cycles
• Fama is wrong (efficient market hypothesis) > random shocks
only count 35% of variance > endogenous persistent cycles > Hayek, Minsky were right > limits of arbitrage & diversification
• Friedman is wrong (exogenous monetary policy) > monetary
policy is endogenous > subject to structural + historical constraints
• Lucas is wrong (microfoundations) > against the Principle of
Large Numbers > meso foundation of business cycles
• Black-Scholes is wrong (Brownian motion) > Brownian motion is
explosive in nature > higher moment risk > ignore possibility of hers behavior & crisis > collapse of derivative market
• Coase is wrong (anti regulation + pro monopoly) > increasing
Exchange Rate
Resonance
:
DPI
(
Depreciation Pressure
Index
) of GBP, Euro, JPY and RMB (Jan 99 - Mar 09)
Theoretical and Political Implications of
Exchange Rates
Resonance
•
American
business cycles
is the
SOURCE
of
world
Imbalance
and international financial instability
•
Future expectations
in world financial market is driven by
American
POWER
&
IMAGE
, not by
fundamentals
(
TRADE
&
BUDGET DEFICITS
) in real economy >
Inconsistent with
equilibrium theory
in international finance
•
U.S.
is the
dominating power
in international financial
market >
No visible candidate
which could displace
U.S.
DOLLAR
as international
RESERVE CURRENCY
•
Realistic REFORM
>
Discipline
rather than
displace
American POWER
>
Possible of reforming
international
Nature
of
Persistent
Business Cycles
:
White
Noise
(
35%
) vs.
Chaotic Cycles
(
65%
)
Equilibrium illusion
is created by high frequency
Composition Fallacy
under the
Principle of
Large Numbers
for Positive Variables:
More
Micro
Elements ~ Effective Cluster Number
(
CN
)
N
>
Less
Macro
Market Variability (
MV
)
•
S
N=X
1+X
2+ . . . +X
NObserved
MV
》
Effective
CN
(Data Source: Fed. Reserve St. Louis)
Real Personal consumption
：
0.15%
(
800,000
)
•
Real GDP
:
0.2 %
(
500,000
)
•
Real Private Investment
:
1.2%
(
10,000
)
•
Dow Jones Industrial (1928-09)
：
1.4%
(9,000)
•
S&P 500 Index
(1947-2009)
：
1.6%
(
5,000
)
•
NASDAQ (1971-2009):
2.0 %
(3,000)
•
Japan-US
Exchange Rate
(1971-09)
6.1%
(
300
)
•
US-Euro
Exchange Rate
(1999-09)
4.9%
(
400
)
Meso Foundations
of
Business Cycles
and
Role
of
Competition Policy
•
Household fluctuations
contribute
less than 5%
of
real
GDP
fluctuations
》
Weak “Microfoundations”
in
business cycles
•
Small firm fluctuations
contribute only about
25%
of
GDP fluctuations
•
Only
public listed companies
and
Giant Corporations
may generate large fluctuations in
INVESTMENT
, which is
6-10 times LARGER
than
GDP
fluctuations
•
Stabilizing
international financial market >
International
ANTI-TRUST LAW
in asset market +
Higher moments of market risk ignored by
asset pricing theory
> need New strategy in
American Disease
&
China Development
• AMERICAN DISEASE > financial crisis !!
• Reagan Revolution = Star War + Tax Cut + deregulation > Deficit
Financing + Financial Concentration > FINANCIAL sector
CROWDING OUT INDUSTRIAL sector > global imbalance > rise of
East Asia & Pacific Economic Union
• German experience and Japan lesson for China strategy:
floating exchange rate and capital liberalization has tremendous
uncertainty for China > DIVERSIFY currency reserve +
SELECTIVE CONTROL in capital account
Linear Equilibrium
vs.
Complex Evolutionary
Perspective
•
A comparison between
•
the
Washington consensus
and
Arable Land
and
Population Pressure
• Cross Country Comparison in 1993 (Madison1998)
--- Region Arable Land (%) Population (millions) Arable land per capita (ha) --- China 10 1178 0.08
Europe 28 507 0.26
US 19 239 0.73
fUSSR 10 203 0.79 Japan 12 125 0.04
India 52 899 0.19 Brazil 6 159 0.31 Australia 6 18 2.62
Canada 5 28 1.58
Regional Relative Development (GDP per capita in US dollar$,1978=100) ---
Region 1978 1990 2007 AvGr(78-07)(%) ---
Brazil 100 185 397 4.8
China 100 160 1,163 8.5 India 100 184 471 5.3 Russia/SU 100 165 389 4.7 Japan 100 290 406 4.8 German 100 237 440 5.1 US 100 224 448 5.2
E.Asia 100 261 541 5.8 E.Europe 100 100 292 3.7
S.America 100 167 376 4.6
World 100 195 382 4.6
World Economy in Historical Perspective
•
(Annual average compound rate of GDP growth)
---
WEuro EEuro Asia US Japan fUSSR China
1913-50 1.19 0.86 0.82 2.84 2.21 2.15 -0.02 1950-73 4.79 4.86 5.17 3.93 9.29 4.84 5.02 1973-2001 2.21 1.01 5.41 2.94 2.71 -0.42 6.72
---
Russia’s Economic Declines in 20
thCentury
•
(Each period started with 100%)
--- ---
Period 1913-22 1940-45 1990-96
Russia/USSR WWI&CW WWWII Transition --- ---
National Income 55.6 83.1 54.7
Industrial Output 31.0 91.8 47.5
Agriculture Output 66.3 57.0 62.5
Capital Investment 40.3 89.0 24.3
--- ---
Economic Performance during Transition
•
(Each period started from 100%)
--- Date 1978 1989 1990 1998 2006
Region --- China 100 272 282 651 1327
100 104 239 488 100 230 471
East Europe 100 151 82.6 55.7 87.1 100 54.7 36.9 57.7
100 67.4 105
Russia (100) 50.7 31.5 53.1 100 57.4 96.6
---
Transition Recession in Former Soviet Union
Peak Though Recovery Length (yrs) Decline (%)
--- ---
Estonia 1990 1994 2002 12 -45
Latvia 1990 1995 >2003 >13 -50
Lithuania 1990 1995 >2003 >13 -44
Russia 1990 1998 >2003 >14 -43
Ukraine 1990 1999 >2003 >14 -61
Belarus 1990 1995 2003 13 -45
Georgia 1990 1994 >2003 >13 -82
Uzbekistan 1990 1995 2001 12 -19
Azerbaijan 1990 1995 >2003 >14 -58
Kazakhstan 1990 1995 >2003 >13 -49
China’s Living (1978-2007)
--- Item Average Growth(%) RealGrowth(%) ---
Inflation 5.5
GDP 14.6 9.1
Wage 12.8 7.3
BankDeposit 24.0
China’s Industrial Output
--- Year 1958 1968 1978 1988 1998 2007 2008 2009 ---
Steel (Mton) 6 16 31.8 59 116 489 500
Gr(%) 9.8 6.9 6.2 6.8 14.6
Car 57 279 3k 36 k 507k 4.8m 5.0m Gr(%) 15.9 23.8 24.9 26.4 22.9
Vehicles 16k 25k 149k 647k 1.6m 8.9m 9.3m 10m?
Gr(%) 4.4 17.9 14.7 9.1 17.6
CoTV 4k 10m 35m 85m 90m
Gr. 78.2 12.5 9.4
PC 116k 2.9m 121m ? Gr(%) 32.2 41.5
CellPhone (started 2001) 547m
. China’s Development Progress
--- Year 1958 1968 1978 1988 1998 2007 2008 2009 ---
ExWay 0.1k 8.7k 53.9
Gr(%) 44.7 20.3
UnvSts 856k 2.1m 3.4m 18m
Gr(%) 8.9 4.8---16.7
GrSts 3k 10.9k 113k 199k 1.2m
Gr(5) 23.4 5.7 20.0
StsAbr 500 860 3.8k 17.6k 144k
Gr(%) 14.9 15.3 23.4
---
China’s Trade, Foreign Reserve, and FDI
---
Year 1958 1968 1978 1988 1998 2007 2008
---
TrSpls($b) -2 200 360 2017
Gr.(%) 5.9 19.2
ForRes($b) 0.2 3.4 145 1528
Gr(%) 28.3 37.5 26.2
FDI($b) 5.3 52.1 200
Gr(%) 22.9 16.8
---
Here, data include trade surplus, foreign reserves, and FDI received.
Washington Consensus
(Williamson 1990)
•
Fiscal discipline
•
A redirection of
public expenditure priorities
toward
fields such as
primary health care
,
primary education
,
and
infrastructure
•
Tax reform
(to lower marginal rates and broaden the tax
base)
•
Interest rate liberalization
•
A
competitive exchange rate
•
Trade liberalization
•
Liberalization of inflows of foreign direct investment
•
Privatization
•
Deregulation
(to abolish barriers to entry and exit)
What’s Wrong
with
the
Washington Consensus
?
•
Market fundamentalism (pro market)
>
minimize Government role > ignore market
instability > counter Keynesian revolution
•
World is flat (pro Anglo-Saxon)
> development
depends on capital & tech flow from advanced
countries > deregulation > liberalization > pro
foreign investors
(speculator+multi-nat.componies)
•
Private market is optimal (pro rich)
> protect
property right > cut tax > weaken social
Beijing Consensus
(Ramo 1997)
•
First, the
value of innovation
. The development
strategy should not be
trailing-edge
technology
(copper wires), but
bleeding-edge
innovation
(fiber optic) to create change that
moves faster than the problems change creates.
•
Second, focus is
the quality-of-life
and
chaos
management
. It demands a development model
with sustainability and equality.
Why No Consensus on China
Experience?
•
The role of government > against Adam Smith
laissez fair policy?
•
The role of history & culture > China model is
replicable? > A challenge to Anglo-Saxon model of
market, democracy, and law?
•
Question: development is a convergence
(equilibrium) or divergence (evolution) process?
•
Many models of development: UK-US, Soviet
Lessons
from the
US Originated Crisis
Reagan revolution
= star war + take cut >
debt financing >
American disease
>
industry sourcing out > capture by financial
oligarchs > deregulation > financial
concentration > increase leverage >
destabilize financial market > global crisis
Aging in OECD
> population imbalance >
welfare crisis
in OECD > increasing
China Innovations
in
Development Strategy
•
New government role
> local/central governments have
more resource & choice than private sector in unequal
competition in the global market, especially compete with
multi-national companies
•
Mixed economies have better stability and lower cost in
providing social insurance in learning uncertainty
•
Market instruments
(price, interest rates, exchange rates,
rent) can be guided by development strategy in catch-up
competition
China Approach
(Chen 2009)
•
(1
)
Finding growth opportunity first
; and then
bold
structural reform follows
•
(2)
The dual-track system
for
stability
and innovation
•
(3)
A clear division of labor between
central
government (stability & coordination)
and
local
governments (innovation & development)
•
(4
)
Leadership
in
regional development
is the key
•
(5)
The mixed economies sustainable
for public
finance
, development and reform
.
>
industrial
China Approach
•
(6)
The
Chinese discipline
based on
competition at all
the level
,
not checks and balance by interest groups
in western style.
•
(7) A
new coordinative partnership
among
governments, entrepreneurs, workers, and farmers
•
(8)
Government
should
create
and
guide market
, but
not be driven by the market
> using
interest rate,
exchange rate
, and
market prices
as
strategic
instruments of development
, not slaves of market
•
(9) Social incentive mechanism> government should
not select winner
, but
award pioneers + innovators
•
(10)
Central government
should
focus on
China’s
A New World Order after this Crisis
•
From a
universal (Anglo-Saxon) value
system to a
more diversified world
•
China is developing
new partners
hip with
Africa
and
Latin America
countries
• China’s approach of
resource-saving
and
labor-intensive (digital) technology
Teachings by Confucius
(551-479 B.C.)
• “
What you do not want done to
yourself
, do not do to others.”
• “
To lead by setting an
example
, (not by carrot and
A clash of doctrines is not a disaster
–
it is an
opportunity
.
Alfred Whitehead
(1925)
•
Ping
Chen
’s forthcoming book by
Routledge (UK)
•
Economic Complexity and
Equilibrium
Illusion
:
•
Essays on
Market Instability
and
Macro
References downloadable at
http://pche.ccer.edu.cn/
• Ping Chen, “From an Efficient to a Viable International Financial Market,” in R. Garnaut, L. Song and W.T.Woo eds. China’s New Place in a World in Crisis:
Economic, Geopolitical and the Environmental Dimensions, Australian National University E-Press and The Brookings Institution Press, Canberra (2009)
• Ping Chen, “Three Dimensions of Current Economic Crisis,” in Looking for Solutions to the Crisis: The United States and the New International Financial System, Conference Proceedings, New York, Nov. 14, 2008, EPS (Economists for Peace and Security) and IRE(International Initiative for Rethinking the
Economy), Published in Clamecy, France (2009)
• Ping Chen, “Equilibrium Illusion, Economic Complexity, and Evolutionary
Foundation of Economic Analysis,” Evolutionary and Institutional Economics Review, 5(1), 81-127 (2008).
• Ping Chen, “Complexity of Transaction Costs and Evolution of Corporate
Governance,” Kyoto Economic Review, 76(2), 139－153 (2007).
• Ping Chen, “Evolutionary Economic Dynamics: Persistent Business Cycles,
Disruptive Technology, and the Trade-Off between Stability and
Complexity,” in
