A NEW ERA OF OPENING UP

Joseph E. StiglitzChina Development Forum

March 20, 2011Beijing

China has had remarkable growth for more than 30 years

• Benefitting greatly from globalization– Trade– Investment– Technology– Human Capital

• But economic model that worked well in the past may not work in the future– Changing economic circumstances of China– Changing global picture

In the aftermath of the Great Recession global economic order is changing

• Recovery in West slow and fragile, especially with respect to employment– Monetary policy at its limits, fiscal policy

constrained– high unemployment will generate

protectionist pressures (already evident)

• New perspectives: global financial market integration has substantial downside risks– Importance of maintaining capital and

financial market regulations

Key Points

1. The broadening and strengthening of China’s engagement with the rest of the world—the new era of opening—should be welcome– Reflects China’s new role in global economy,

changing understandings about economics

Recycling Savings

2. There are great global needs for investment—in developing countries and response to climate change– The world’s problem is not a savings glut– The problem is the failure of global financial

markets to use savings well– Deploying savings will be facilitated by the

creation of a global climate change risk mitigation facility

Global Governance

3. This is an example of the need for new approaches to global economic governance– Also a need for reforming global reserve system– China needs to take an active role in G20– And in doing so, recognize that the global

economic architecture has major deficiencies• Stability• Inequities for developing countries

4. New Global Growth Pact

• Important to shift debate away from exchange rate

• Higher global growth will facilitate exchange rate adjustments

• Objective is to find common policies that will promote growth– Better income distributions (in both China and

US) will facilitate higher growth– So too would new reserve currency system

A New Economic Strategy for China

• China has to move away from export-led growth to domestic-led growth– Long recognized– But exports as % of GDP grew from 19%

(average in ‘90s) to 29% (2001-2010 average), current account balance grew from 2% (‘90s) to 4% (2001-2010 average).

• Part of this will be based on more consumption– Requiring an increase in share of HH income in GDP

• Though better safety net and better public education will reduce incentives for HH savings

• One child policies leading to gender imbalance may also be contributing to high savings rates

– And better financial markets, so small businesses (critical to service sector) don’t have to save as much

• Focusing on lending, not speculation or trading• Including expanding local and regional banks• Beware of the dangers of bubbles!

Restructuring economy• Necessary to remain competitive as real wages increase

and to maintain growth, to avoid middle income trap– Growth rate likely to decline– But rapid convergence is still possible

• Government policies crucial

– Focus should be on sustainable increases in well being of all (or most) citizens, not standard measure of GDP

• Key point of International Commission on the Measurement of Economic Performance and Social Performance

• Restructuring– Move away from manufacturing to services– Within manufacturing, towards more environmentally sensitive

production, higher value added sectors, higher value added within value added sectors

– And even more towards an innovation economy

• Will require more than rhetoric: carrots and sticks

• Negative real interest rates contribute to excessive capital utilization

• Exchange rate policies, while they may provide some short run benefits, may distort economic structure

• More fine turned industrial policies may be required

• Financial sector reforms—strengthening parts of financial sector focused on SME’s

• Tax policies designed to reshape economy

• Other institutional reforms

Rebalancing Economy• Increased public spending on health and education

– Especially if goals of achieving a harmonious society are to be achieved

• Increased public spending on infrastructure, including public transportation– Especially if goal of creating livable cities are to be achieved

• Increased public spending on research and higher education and encouragement of more private spending– Especially if goals of creating an innovation society are to be achieved

• % of firm revenues on R & D still low

• Patents per capita in Korea 6 time global average• China 0.6 times global average

– Creating a developmentally oriented IPR regime• One component of a national innovation system• Markedly different from TRIPS

Elements of New Engagement

1. Trade

2. FDI

3. Short term capital flows

4. Chinese investment overseas

5. Foreign assistance

6. Engagement in global governance

Elements of New Engagement

• Trade– More “value added”– Recognizing changing global landscape

• Necessary to address problem of trade surpluses– May already in process of being corrected

• Trade and FDI policy need to be designed to promote growth, restructuring

Foreign investment into China– Identifying elements that are critical to China’s

future growth and ensuring that FDI is playing appropriate role

• Not money

• But access to technology and foreign markets

• Skills training

• Careful attention to impacts on domestic entrepreneurship

» Should not be given favorable tax or regulatory benefits

• China’s “bargaining” position improved– Larger market– Continue working to improve institutional environment

Short term capital flows

– Short term financial flows can be destabilizing• Capital and financial market liberalization not

related to growth• Do contribute to instability• Not necessary for FDI• Represent on going concern, even with controls in

place– $435 bn hot money 2010– Divergent growth paths (robust growth in China, weak

growth in West) implies that this is going to be problem,– Especially if US monetary authorities continue with QE

Responding to Short Term Capital Flows

– Panoply of instruments—need to use whole portfolio

– Maintain controls– Impose capital gains taxes, property taxes– Financial sector regulations– Sensitivity to effects of interest rates

More Chinese investment overseas

– Part of overall economic strategy• Access to markets, technology, skills• Ensured supply of resources

– Markets highly volatile– Many market failures

• Higher returns on assets than buying T bills

More foreign assistance– China has much to contribute to development

strategy of poorest countries– China has ability to provide assistance– Especially important as Western countries may

be cutting back on assistance (or targeting assistance more strategically)

– Assistance has been part of strategy for most developed countries

• Must be attentive to how badly designed policies can impede development and have adverse political impacts

New engagement in global governance

• Reflecting changes in global balance of power

• And new global order– G-20 replaced G-8. Moving to multi-polar

system. Increasing influence of emerging markets in determining rules of game

• Rules often were unfair to developing countries• Emerging markets, including China, have an

opportunity to redress balance

• Many of key problems are global in nature:– Global warming; – global imbalances; – global reserve system; – global trading system; – global intellectual property system; – global food security; – global povertyHowever, problems will not be solvedwithout the active involvement of China,the world’s second largest economy

• In designing new agreements, China should be sensitive to developmental impacts– Doha Round agreement, as it now stands, is

not a development round– TRIPS is not a developmentally oriented IPR

system, e.g. of the kind advocated by WIPO– Investment agreements are typically not

balanced

Changes—new era of opening up combined with restructuring and rebalancing will

enhance standards of living in China

And promote employment and other social objectives

• But may only do a little to reduce China’s trade imbalances, even less for global imbalances, especially in SR– Innovation, education will increase competitiveness– Offsetting gradual adjustments in nominal exchange

rates, and even in domestic wages– Import content of increased consumption is limited– US trade deficit could even worsen

Global Consumption Patterns

• The planet will not survive if everyone tries to imitate US consumption patterns– America needs to correct its excessive carbon usage

• And to live up to commitments made in Rio Convention concerning financing incremental costs of emission reductions and technology transfer

– China has the opportunity today to try to avoid excessive carbon usage

• Carbon tax and regulations are critical

– And the world needs to impose cross border carbon taxes on any country that has not appropriately constrained carbon usage

• High standards of living can be consistent with low carbon footprint

The World’s Problem is Not A Savings Glut

• Accusation as attempt to shift blame away from U.S. financial markets for misallocation of capital

• World is in great need for investments for retrofitting the global economy for climate change and promoting development– Failure of financial markets to recycle savings to good

uses– World needs global risk mitigation facilities to facilitate

recycling China’s saving to where it is globally needed– China is already making major contribution to Africa’s

growth both indirectly (from increased demand for commodities) and directly (from increased investment)

• 12th Five-Year Plan represents a continuation in the restructuring of the Chinese economy– Another step in “crossing the river by feeling the

stones”– Central to its success will be a new era of opening up– A new engagement with the global economy– With new opportunities and new responsibilities– Including active engagement in reshaping the global

economy