The Straits Times in July 2010 published an article by Linda Lim, a professor of strategy at the University of Michigan's Ross School of Business, arguing that Asian economies should save less and spend more. The article spawned an e-mail exchange between Professor Tommy Koh, chairman of the Centre for International Law at NUS. Straits Times edited excerpts of their exchange and I read it with interest and found it with interest and educational below :
It is with some trepidation, as I am not an economist, that I write to register my disagreement with several points in your essay.
First, you state 'Cheap money fuelled 'financial innovations' such as sub-prime mortgages and risky assets, which led to a crisis'. I beg to disagree. It is greed that led Wall Street to deceive investors with those unsound instruments.
Second, you quote United States Federal Reserve chairman Ben Bernanke as saying that a 'global savings glut' was the cause of these global macroeconomic imbalances.
Mr Bernanke's argument is self-serving and disingenuous. He is trying to blame America's creditors when the fundamental problem is America's unsustainable deficits.
Third, you argue that the reason why East Asians save so much is demographic. I do not agree. East Asians save because of our culture of thrift and out of prudence.
During the 1997-98 Asian financial crisis, if Hong Kong had not had very substantial reserves, speculators would have succeeded in bringing down the Hong Kong dollar and stock exchange.
Fourth, I agree that East Asia should spend more - but not in the way that US consumers spend.
East Asia should spend more of its savings on education and training, housing and health care, on alleviating poverty and ensuring that every Asian has access to safe drinking water, basic sanitation and a decent standard of living, on improving our environment and upgrading our infrastructure and cities.
Thanks as always for your careful reading of my article.
On cheap money: Its contribution to the financial crisis is not at all controversial, though both former Fed chairman Alan Greenspan and Mr Bernanke have indeed said self-servingly 'It wasn't us' - the title of an Economist magazine commentary on the tendency of central banks to deny that monetary policy had any role in the financial crisis, a patently absurd suggestion.
Greed, we have always had with us. But when interest rates are low, first, it is hard to make money via conventional means so the greedy look for extraordinary innovations; and second, the cost of capital is cheap, encouraging people to risk it playing for higher stakes.
Cheap money always leads to asset bubbles, everywhere. There was also the lack of regulation which permitted excessive risk-taking. Greed may be necessary but it is not sufficient to explain a financial crisis of such magnitude.
On the 'global savings glut': Mr Bernanke came out with this notion well before the crisis. It was an attempt to explain why the US current account and fiscal deficits - which should have been unsustainable long ago - did not prove to be so. Even today, savers around the world plough their money into US assets, which perpetuates the deficits. Why do they do this?
Because the money has to go somewhere. There is so much of it and in times of uncertainty, there is still a 'safe haven' preference for the US dollar.
On the demographic explanation for savings rates: It is uncontroversial, with a great deal of empirical research behind it.
Culture may have a marginal effect but so far this has not shown up in the research. It turns out that East Asian cultures (diverse among themselves) have savings rates that vary over time and are strongly correlated with demographic profiles and real interest rates. The same is true of other countries.
Culture is neither necessary nor sufficient as an explanation for high savings. When the Japanese and Germans age further, they will not be able to avoid drawing down on their savings to survive. The same will be true for Singaporeans.
On what Asians should spend more on: The bedrock of a market economy is consumer sovereignty, so Asians should spend on what they want. For some, it will be more food, clothing, a home of their own. For others it will be better services - health, education, etc.
Chinese economists have been arguing for some years that China should be investing its surpluses in health and education services, and not in manufacturing for export to rich foreigners or buying pieces of paper like US Treasuries or BlackRock shares. Unfortunately, since so much of China's savings is in the hands of state entities, this does not happen.
I hope you will not be offended if I were to give a rejoinder to your reply.
First, it is wrong to blame so-called cheap money for the excesses and sheer dishonesty of Wall Street. What happened was a combination of greed and a lack of regulation.
Under the regime of former president George W. Bush and Mr Greenspan, 'regulation' became a dirty word and 'de-regulation' a good word. But as Mr Greenspan has recently confessed, he had been wrong to assume the market could always be relied upon to regulate itself.
Second, it is very convenient for Americans to blame others for their problems. It is intellectually dishonest of Mr Bernanke - and, I regret to say, many of my intellectual friends in Washington - to blame Asia for our high savings rate and for lending our savings to America.
If American intellectuals were more willing to confront the truth, they would acknowledge that the fundamental problem is their low saving and high spending habits and their indebtedness.
This is not a new point. Many years ago, economist Henry Kaufman wrote a book warning that American families, companies, cities, states, and the federal government itself, were in danger of drowning in a sea of debt.
It is morally absurd for the world's No. 1 debtor nation to blame its self-inflicted problems on its creditors.
Third, we Asians save because it is in our culture to do so. Thrift and saving are among the Asian values which my grandmother taught me. Saving is a virtue. Spending and living beyond one's means is not a virtue but a vice.
I think it is time for Asians like me to stand up and speak the truth (with love) to Americans. They should save more and spend less. They should live within their means. And, if they do not, please do not try to make saving into a vice and spending a virtue.
Fourth, let me raise the issue of the exchange rate of the Chinese currency. The US campaign against China on this issue reminds me of another recent period in American history.
During the mid-1980s, when America was gripped by economic nationalism and protectionism, to appease the protectionists, Washington targeted Japan and the four newly industrialised economies (NIEs) of East Asia - South Korea, Taiwan, Hong Kong and Singapore. Japan was pressured into signing the Plaza Accord which substantially revalued the yen by more than 50 per cent against the US dollar.
Washington also accused the four NIEs of currency manipulation as the justification to graduate us from trade preferences. The representatives of the other three NIEs in Washington kept silent, but I asked to debate the accusers at Peterson Institute.
What are the lessons learnt? The first lesson is that US trade policy is always driven by domestic politics. The second lesson is that though the yen was substantially revalued, Japan continued to enjoy (and still does) a trade surplus with the US.
It is not the exchange rate but the saving rate that is the root cause of America's current account deficit.
I don't disagree with you at all. But I think you are misunderstanding the thrust and context of my argument.
It was not about the causes of the financial crisis. These have been amply addressed by many, including myself and yourself. But the world has moved on, as it needs to, from the causes of the crisis to its policy solutions.
No one - including the Chinese government - disagrees that global macroeconomic rebalancing is required. Rebalancing is not the only solution to the crisis, but it is one solution - together with financial re-regulation, and international monetary policy and banking rules coordination.
The US must indeed save more and spend less; and China and other Asian countries must save less and spend more.
What I was doing in my article was actually challenging Washington pundits, who believe it's up to China and the rest of East Asia to change their macroeconomic behaviour. I tried to show them how difficult (and perhaps impossible) that change is: Asians will not grow old faster (and thus spend more) just because Washington wants them to; state-owned enterprises and export-oriented multinational corporations have no incentive to retain earnings and distribute them in the host country; and so on. In other words, there are structural and not just monetary-and-fiscal-policy reasons for these persistent global imbalances.
It is very Washington-centric to attribute the global macroeconomic re-balancing argument to Americans only. Many Chinese economists have said the same thing - and more.
I think we need to move beyond the notion that Americans have a monopoly of ideas. They do not - hence the increasing representation of Asian voices in debating such issues. Hope we can agree on that, even if you and I (both Asians) do not agree.
Finally, I think your comments are actually an expression of your frustration with your Washington friends rather than a disagreement with the theoretical and empirical reasoning underlying my article. Or at least I hope so, since I can't do anything to change the facts.