From Bloomie today comes an except from Michaal Pettis’ new book, Avoiding the Fall: China’s Economic Restructuring:
In the late 1980s, University of Chicago professor Robert Aliber proposed, partly in jest, what he called the Andy Warhol theory of economic growth: “In the future every country will grow rapidly for 15 years.” He had in mind the plethora of so-called miracle economies that seemed to take off one after the other in the postwar era. In every case, decades of high growth, almost always driven by very high levels of investment, eventually faltered.
With the exception of South Korea, Taiwan, and perhaps Chile, none of these entities were able to break into the rich-country club. (Japan had already been a member when its growth miracle began.) Even among the “successful” economies, the period of growth was sooner or later interrupted either by a debt crisis and many years of negative growth, or by a lost decade of very slow growth and burgeoning debt.
…I am not saying that a collapse in the Chinese economy is inevitable, or even likely. The good news is that because of the growing awareness of the costs of the imbalances and the risk of a debt crisis, the Chinese government will probably begin rebalancing before it reaches the debt capacity limit.
As they approach this task, however, Chinese leaders don’t have much room to maneuver. This is because of external constraints. Globally, savings and investment must balance. This means that for any set of countries whose savings exceed investment, as with China, there must be countries whose investment exceeds savings, like the U.S. To put it another way, the world can function with a group of underconsuming countries only if they are balanced by a group of overconsuming ones.
…So where does all this leave us? Of the two big trade deficit entities, neither the U.S. nor peripheral Europe can allow its deficit to rise. Of the three big surplus countries, Germany is reluctant to allow its surplus to decline by much, while Japanese reluctance to solve its debt problems by selling government assets to pay down the debt requires that it resolve them with an increase in the trade surplus. China’s surplus can decline only if we see a very improbable decline in its savings rate or a very unwelcome increase in its investment rate.
The refusal of the surplus countries to play a part in allowing the world to adjust has its counterpart in the refusal of the U.S. in the 1920s to do the same. Clearly, this isn’t going to work. And at least one of the above countries is going to be extremely disappointed.
And for those that recognise the similarity between these arguments and my own presented in a special report last week I assure you I have not yet read this book! Not yet anyways. You can buy it here.
