Why PRC-Led Global Rebalancing is Unlikely

How can we transition into a more balanced world economy? Today, Jean-Michel Severino joined the man generally associated with the topic, Martin Wolf, in trying to suggest ways of doing so at the LSE. Martin Wolf's take is generally well-known as he regularly issues commentaries in the Financial Times where he is the chief economics commentator. However, Jean-Michel Severino, formerly of the World Bank and late of the French development agency Agence francaise de developpement (AFD), was something of a revelation to me.

Severino argues that, considering postwar history, the stand-out example of economic development remains that of export-led development. However, this poses an obvious quandary: while almost every sensibly run nation on earth professes increasing exports to be desirable, global markets represent finite demand. In other words, unless we can export to, say, Mars, we are bumping up against logical limits to what can be absorbed if developing countries continue to pursue export-led development as one would expect them to do given its track record.

The usual answer is to create demand in export-led economies as a transition that must be made in order to facilitate global rebalancing. However, the track record of the pioneers of such export-led growth is not encouraging. For many different reasons--inertia and demographics among them--Germany and Japan have singularly failed to make this transition. It is far easier to stick to "tried-and-tested" formulas for success that, truth be told, hamper processes of global rebalancing.

So we come to China. The PRC is famously prone to calling for changes in its economy. Remember Wen Jiabao calling his country's economy unstable, unbalanced, uncoordinated, and unsustainable in 2007? The Communist Party's 11th Five-Year Plan dating from 2006 already alluded to creating more domestic demand. Suffice to say that, in the five years since then, it hasn't really materialized. And yet the 12th Five-Year Plan makes similar allusions. Although one certainly hopes China can create domestic demand on an appreciable scale, you have precious few instances--if any--of major exporters making this shift. Alike Germany and Japan, China too faces demographic challenges of a largely programmed nature due to modern incarnations of its one-child policy.

However, given the sheer size of China and the magnitude of its contributions to global economic imbalances, pressures for it to help in processes of rebalancing are appreciably greater. I surely hope it manages this feat for the odds are certainly against it and there are definitely ingrained habits of relying on exports already whose lock-in effects need to be counteracted lest we lurch into another 2008-style disturbance. Martin Wolf made the fearful point that both 1929 and the advent of the WWII were in their own ways significant rebalancing acts [!] Hopefully matters don't come to such drastic conclusions, but you never know.