What the West Can Learn From China About Growth

Recently we discussed the prospects for the Chinese renminbi becoming a freely convertible currency and indeed an alternative reserve currency in world markets. Such a development would be positive for the global economy, and while some years away, it's worth thinking about now.

Figurines of manual workers pushing Chinese coins on push carts.
Redchopsticks | Getty Images
Figurines of manual workers pushing Chinese coins on push carts.

The Asia-Pacific region’s economic miracle (in 1958, when the Gold Coast became the newly independent Ghana, it had the same GDPas South Korea) has been based on a number of factors. Off the top of one’s head, we would list these as (i) an open economy (ii) an export-based manufacturing sector (iii) a high domestic savings rate. Add to that a strong work ethic, and one observes the results today in Taiwan, Singapore, Hong Kong, Malaysia and the aforementioned South Korea.

The case of China is based more on (ii) and (iii) above. As The Economist notes this week, “cheap capital has been crucial to China’s rise.” However, China doesn’t exhibit our first criterion, that of the open economy. Capital flows are restricted, and while the country doesn’t need capital inflows—its vast domestic savings see to that—it has resulted in market distortions most evident in the large number of non-performing loans held on public sector balance sheets.

Is this important? For the world’s economy, a China that eased controls to allow freer movement of capital would be beneficial. The domestic savings could be channeled into investments abroad, which would be extremely welcome in the troubled southern euro zone , and the sovereign authority would not have to hold its large foreign currency pool exclusively in Western sovereign bonds .

But is there a further lesson here for Western economies? By definition, not every country can be an exporter, just like not every person can be a lender of money. So factor (ii) above is not an option for everyone. But concentrating on sectors wherein one exhibits comparative advantage is still the best thing an economy can do, and if this means structural change, of the kind seen in the 1970s and 1980s in the UK when it moved out of shipbuilding and coal extraction and into financial and other services, then this requires investment. Capital inflows, we have already noted, are key to this, but so also is the domestic savings rate. The EU savings rate has languished for years in single figures, and is an issue that isn’t much talked about when Greece, unemploymentand the banks are hogging the headlines. But it’s still important.

In a post-recessionary environment of de-leveraging and debt repayment, the savings ratio is not high on most peoples’ and firms’ agendas. But it certainly is something that we need to consider, as an ingredient for future investment and growth. It's one more item for governments to consider, after they have tackled the labor market.

The author is Professor Moorad Choudhry, Treasurer, Corporate Banking Division, Royal Bank of Scotland.

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