Thursday, March 25, 2010

Learn From, not Criticize, China

The U.S. government and many American economists are ratcheting up their criticism of China’s economic policies as the April 15 deadline approaches for the U.S. Treasury to stipulate if China is manipulating its currency. Currency manipulation involves China fixing its exchange rate at an undervalued rate to gain competitive advantage by making its goods cheaper for U.S. consumers, while raising prices of U.S. goods and services for Chinese consumers. Jobs are thereby created in China but lost in America. Other complaints include mistreatment of American companies in China (e.g., Google), violations of intellectual property rights, and so forth.

China, for its part, complains about large U.S. budget deficits, the potential loss on its holdings of U.S. securities, and trade protectionism.

Lecturing China on its economic policies is arrogant and misplaced. Beginning in 1982, when Deng Xiaoping “opened up” the economy, China has recorded 9-10 percent annual average real growth, lifting several hundred million people out of poverty. Prospects for continued high growth appear promising. In purchasing power parity terms, China has surpassed Germany and Japan to become the world’s second largest economy. China could catch or surpass the U.S. by 2020, although it will take several more decades to reach per capita levels of U.S. output and consumption. Given its success, Chinese policy makers must be doing something right.

Meanwhile, the U.S. and Western countries are in the midst of trying to recover from their worst financial and economic crisis since the Great Depression. They are mired in debt, deficits, and high unemployment, which China has managed to avoid.



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