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Keynes Prize - Winning Essay - Global Imbalance from the Rise of the East

Monday, October 22, 2012
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In this prize-winning essay, James Richardson answers this question set by Professor Danny Quah from the London School of Economics

‘Global imbalance from the Rise of the East shows only that the East is big enough to be culpable but not mature enough to be responsible.’ Discuss

The unprecedented growth of the East has, in economic terms, defined the decades either side of the millennium. Led by China, which has enjoyed average real annual GDP growth of between 8% and 10% over this period [1] and which, according to Jim O’Neill, is now economically significant enough to be included in the G7 [2], Asia has propelled itself to the forefront of the economic scene. Indeed, the continent now accounts for 5 of the 20 largest economies by GDP [3], and projections by Jim O’Neill’s team at Goldman Sachs suggest that China could overtake the USA as the largest economy in the world ‘as early as 2027, perhaps even sooner.’ [2] The Rise of the East, then, is as undeniable as it is impressive, but is it sustainable?

Criticism of the growth models of emerging Eastern economic powerhouses is common, and as they have grown, so too have fears that their structural weaknesses might seriously threaten both their own economy and that of the world. FT columnist John Gapper has stated his fear that China’s current growth model provides only an ‘illusion’ of economic prosperity [4], while some economists have gone further, blaming China for various increasing imbalances in the global economy.

Gerard Worms, Chairman of the International Chamber of Commerce, believes that China must increase domestic demand, and reduce dependence on the US and the EU in order to achieve more balanced economic growth. [5] John Gapper has cited Chinese growth driven by over-investment as ‘a measure of waste, not of economic welfare,’ [4] while Jim Chanos at the LSE referred to the situation as ‘Dubai times 1,000.’ [6] Indeed, at the end of 2008, China’s steel capacity was 660m tons against demand of 470m tons, yet there are currently 58m tons of new capacity under construction. [4] Meanwhile, the country’s reliance on foreign demand is reflected by its rising trade surplus (from $20bn in 2000 to more than $450bn in 2012, in nominal terms), [7] while domestic consumption accounts for just 35% of GDP. [8]

However, in the wake of the recent global financial crisis and consequent recession, international demand for Eastern exports has declined, leading to further criticism of current growth strategies. Indeed, S Rao, the Indian commerce secretary, blamed weakening global demand, especially in the EU and US for the 14.8% decline in exports in July 2012 [9], while China’s export growth this year has been well below target. [10] Although this contraction may prove temporary, it seems clear to Chinese academic Yu Yongding that over-reliance on exports and investment threatens the country’s economic future. In his eyes, ‘China’s rapid growth has been achieved at an extremely high cost’ and the country’s growth pattern has now ‘almost exhausted its potential,’ [11] while Jim O’Neill has also emphasised the importance of the quality and sustainability of growth rather than the sheer rate of it. [2] Given the increasing economic influence of the East, these criticisms of irresponsible growth models are particularly concerning for the global economy, in addition to the countries’ citizens. But do the leaders of these developing Eastern economic powerhouses increasingly have a more far reaching responsibility and a need for a greater sense of global conscience?

China among other fast growing Eastern countries often falls short in this area, according to Shaun Rein. He describes China as being ‘in many ways like a teenage boy…[which] has just gotten its seat at the adults’ table…[but which] doesn’t always know how to handle its new responsibilities and status.’ [12]

A criticism which has been levelled at China in recent years, and which was brought against Japan 25 years ago, is on the subject of exchange rates. Although it is hard to calculate accurately, economists believe the Yuan to be undervalued by up to 40% [13] and consensus suggests that China’s policy of stockpiling foreign exchange reserves is responsible. In recent years, China has been able to use its huge trade surplus to fund the purchase of US currency and Treasuries, thus maintaining high demand for US Dollars and making the Yuan appear relatively cheap, which in turn raises China’s price competitiveness. The People’s Bank of China currently holds $3.2 trillion of foreign currency reserves. [14]

Indeed, speaking after a G20 summit in 2010, President Obama stated that the Chinese spend ‘enormous amounts of money intervening in the market to keep it undervalued’ [15] – a policy many see as protectionist and as contributing to increasing global imbalances. Mitt Romney, during his recent presidential campaign, went further, vowing to label China a currency manipulator and apply tariffs to combat what he considers ‘unfair trade practices’ which are ‘stealing American jobs unfairly.’ [16] He blames China’s ability to maintain an artificially low exchange rate with its major trading partners for rising global imbalances including the USA’s persistent trade deficits (no surplus has been run in any quarter since 1991 [17]), as well as manufacturing job losses in the country. Of course, this neglects the impact of the undervalued Yuan on Chinese citizens: as long as the Yuan’s value is kept low, Chinese people’s purchasing power abroad is also suppressed, making them less able to afford foreign products and increase their standard of living.

The final branch to the currency manipulation debate concerns China’s ability to fuel US over-consumption by buying up government Treasuries. As well as artificially suppressing the Yuan’s value, this practice allows the Treasury Department to keep long-term interest rates low. This, in turn, effectively fuels American and indeed Western debt-fuelled, over-consumption, ensuring demand for Chinese exports is maintained. [18] While this practice is in no way illegal, some have argued that China will have to replace this self-centred approach with greater global conscience in the future. As it develops as a superpower, it may have to take on a more mature, long-term approach, addressing global trade imbalances by allowing the Yuan to appreciate and breaking the cycle of Western debt-fuelled consumption of its exports.

However, environmental imbalances are perhaps the best publicised of those blamed on the Rise of the East. Reports suggest that Asia’s coal-fired energy output will rise from 900GW in 2010 to 1500GW by 2020, an increase in CO2 emissions of 2.6 billion tons. To put this in context, this increase would more than offset reductions achieved by the US and Europe even if they were to surpass their 20% target. [19] Jonathon Watt’s research statistics on China speak for themselves: by 2020, the volume of urban rubbish in China is expected to exceed 400m tons, equivalent to the figure for the world in 1997. In 2006, 8.3 billion tons of untreated sewage was released into the ocean, a 60% rise from 2001. [20] In Indonesia, the UN Food and Agriculture Organisation estimates that 1.87 million hectares of forest are being lost every year, meaning an area of forest the size of Portugal disappearing over a 5 year period [21], while, according to Human Rights Watch, immense destruction has been caused to India’s environment by the out of control mining industry. [22]

Many people, including forestry expert Christopher Barr, blame expectations for rapid growth for much of the environmental damage. At a meeting of the Association for Tropical Biology and Conservation, he blamed Indonesia’s ambitious targets for the environmental damage, claiming they were ‘at odds with [the country’s] push for green economic growth.’ [23] The majority of these countries seem to have prioritised rapid economic growth and increases in export production capacity over environmental sustainability. As the world’s “centre of gravity,” described by Danny Quah, shifts Eastwards, Asian countries must take on the responsibility that their global status dictates, addressing not only issues of domestic concern, but also those requiring international cooperation.

However, Eastern defence of their own growth policies has been equally vehement as Western criticisms, leading one to question whether such criticisms simply represent Western fear that their own influence is declining in an increasingly mutli-polar world.

Jim O’Neill believes that, as the Eastern economies continue to expand, imbalances in their growth models will self-correct due to booming domestic consumption resulting from rising per capita incomes. This effect is already partly apparent, with even conservative estimates suggesting that personal consumption in China rose by $1.5 trillion between 2001 and 2011. [2] Furthermore, it is revealing that the average spend by a Chinese customer in a single London shop is now £1,058 (roughly ten times the average for a British customer) and that it was Asian Boxing Day sales-shoppers who led the charge at Oxford Street this year. [24] O’Neill describes the opportunities as ‘spectacular’ in what ‘could soon be the biggest market for luxury goods.’ He revealingly comments: ‘If you spend any time at BMW’s headquarters in Munich, you end up thinking that what’s going on in China is more important than what’s going on in Germany. Talk to executives at Louis Vuitton or Tesco, and you will soon understand the structural theme driving these companies.’ [2] Of course, these observations indicate thriving demand for luxury Western brands among Asia’s wealthy elite and while this has not yet translated into increased domestic consumption by the masses (domestic consumption stands at a lowly 35% of GDP), the potential is clearly there.

Furthermore, leaders of fast-growing Asian economies are aware of the need to adjust their growth models as their countries develop, understanding the need for more consumption by the masses. Zhao Ping of the Chinese Academy of International Trade and Economic Cooperation conceded that it is ‘almost impossible for exports to show rapid growth,’ concluding that it is vital to stimulate domestic consumption in order to maintain economic growth. [25] Indeed, in 2012, the Chinese government announced a $5.8 billion subsidy fund for home appliances, automobiles and other electrical items which it said was to stimulate domestic consumption and push forward ‘economic restructuring.’ [26] Interestingly, Arjuna Mahendran of HSBC, said that India and Indonesia ‘have large domestic consumption drivers and…are not too dependent on exports.’ [27]

The data suggests that Asian growth models are beginning to self-correct, and that attempts are being made by governments to catalyze these changes in the interests of continued growth in domestic demand. But what about the East’s increasing global responsibilities, which come with its rising economic power? True, Asia has taken the fast track through adolescence, focussed on emerging as a muscular presence on the world stage, and the wider global community has been affected. But does it deserve more recognition than it gets for the attempts it has made to change?

Addressing the issue of currency manipulation first, the Chinese politician Premier Wen Jiabao stated in 2010 that he did not believe the Yuan was undervalued. [28] Regardless, some have argued that an appreciation of the Yuan would have little effect on China’s trade position, citing the example of the Yen in the 1980s as evidence. Having come under political pressure from the USA, Japan allowed a two year 51% revaluation in the Yen. However, not only did Japan’s current account surplus persist, so too did the US current account deficit – some see this is evidence that focusing on Yuan appreciation is a misguided solution to global imbalances. [29]

With the Yuan being allowed to appreciate by almost 30% since 2005, and China’s trade surplus declining over the same period from 10% to less than 3% of GDP, officials are perplexed by continued cries of foul play. [30] Indeed, Premier Wen took the example of Germany, which succeeded in increasing its exports to China to a new high of €76 billion in 2009, while, by contrast, US exports to the country fell by 0.22%. [28] Yukon Huang, writing for Bloomberg, noted that the US trade deficit began increasing around 1998 and peaked around 2005, while China’s surpluses only began in around 2005, peaking in 2008. These differences in timing, Huang concluded, show that US deficits and Chinese surpluses are ‘not directly related but actually reflect country specific circumstances.’ [30] Is it, in fact, a culture of expenditure beyond one’s means and underlying, structural weaknesses in the USA which are to blame for their persistent trade deficits and global imbalances, rather than protectionist behaviour on the part of the Chinese?

And in defence of the East’s environmental approach, which some argue has been compromised in the pursuit of uncontrolled investment and export growth, per capita carbon emissions in the region continue to pale in comparison to those of the USA and UK. In 2008, per capita carbon emissions in the US stood at 17.5 tons and the figure for the UK was 8.5 tons. The corresponding figures for India, China and Indonesia were 1.4, 5.3 and 1.8 respectively. [31]

Green investment in Asia is also taking off. Johanna Klein of the Asian Development Bank said that, although China is building a coal plant a week, it is ‘dedicated to having the clean energy sector take off.’ The country’s energy requirements are astronomical, and for now 70% of that demand is satisfied by coal as an energy source, but the desire to change is clear. Indeed, Ms Klein feels that Asia has taken a ‘quantum leap’ ahead of countries such as the USA, which are, in her opinion, ‘dithering around’ regarding clean energy. [32] Five years ago, China had invested just $2.5 billion in green technologies, but by 2009 that figure had soared to $34.6 billion (almost twice the USA’s investment of $18.6 billion). [33]

Although criticisms of Eastern growth models are numerous and, in many cases, compelling, it seems unjust to blame increasing global imbalances on the irresponsible behaviour of these emerging economic powerhouses. Perhaps it is justifiable to say that, to date, Eastern countries have made economic progression their sole priority often at domestic expense. In the short-term, their environment, their people’s living standards and their growth structures have been sacrificed and, by extension, the wider world has not been left unscathed. However, as these countries have matured, they have started to restructure, taking greater notice of the quality and not simply the quantity of their growth – progress which the West sometimes seems reluctant to recognise.

However, the responsibility for global imbalances is a separate issue which cannot, in my opinion, be placed squarely on the shoulders of the East. While the East has played its part by providing attractively priced goods for export and financing Western debt, ultimately the inability of the West to control its over-consumption is equally to blame for persistent global imbalances.

Returning to Shaun Rein’s analogy, it seems that the teenage East is growing up and accepting the need to approach its responsibilities with greater maturity. Meanwhile, the middle-aged West, sensing the potential loss of its previously unchallenged position at the helm of world economic affairs, is reluctant to acknowledge this progress and seems ever keen to accuse the East of  foul-play regarding issues of global imbalance. Could it be that these accusations are little more than a desperate cry from an economic Titan which senses its days of un-rivaled dominance are numbered?


1.)  Trading Economics, China Data: GDP Annual % Growth Rate., [Accessed 8th August 2012]

2.)  Jim O’Neill, ‘The Growth Map.’ Penguin Group, London, UK (2011).

3.)  Trading Economics, International Data Comparison, GDP Billion USD., [Accessed 7th August 2012]

4.)  John Gapper, ‘The cost of China’s excess capacity,’, 29th November 2009. [Accessed 10th August 2012]

5.)  China Daily, ‘Growth needs new horizons,’, 22nd May 2012. [Accessed 10th August 2012]

6.)  John Carney, ‘Jim Chanos: We’re Shorting Autos, China, And Commodities But Not Financials,’, 15th December 2009. [Accessed 9th August 2012]

7.)  Trading Economics, China Data: Current Account Balances USD. [Accessed 9th August 2012]

8.)  World Bank Data: Household Consumption as a Percentage of GDP,, July 7 2011. [Accessed 12th August 2012]

9.)  Indiatimes, ‘Exports decline sharply by 14.8% in July 2012,’ 28th July 2012. [Accessed 11th August 2012]

10.)  Joe McDonald, ‘China’s export growth plunges to 1 per cent in July, imports also fall,’ The Canadian Press,, 10th August 2012. [Accessed 7th August 2012]

11.)  Jamil Anderlini, ‘China’s growth model “unsustainable”,’ 23rd December 2010, [Accessed 9th August 2012]

12.)  Shaun Rein, ‘China is just like a teenage boy,’ 19th January 2010, [Accessed 7th August 2012]

13.)  Bryan Rich, ‘Chinese Yuan the most undervalued currency in the world,’ 31st October 2009, [Accessed 9th August 2012]

14.)  Channelnewsasia, ‘China forex reserves top US$3.2 trillion,’ 14th October 2011, [Accessed 11th August 2012]

15.)  Michael Forsythe and Julianna Goldman, ‘Obama sharpens Yuan criticism after G-20 nations let China off the hook,’ 12th November 2010, [Accessed 7th August 2012]

16.)  Eric Martin and Ian Katz, ‘Romney refuses to see China progress on Yuan,’ 2nd May 2012, [Accessed 7th August 2012]

17.)  Trading Economics, US Data: Current Account. [Accessed 5th August 2012]

18.)  Global Finance School, ‘How China keeps the Yuan undervalued,’ 26th July 2011, [Accessed 6th August 2012]

19.)  Engineer Live, ‘Coal-fired power plants to grow by 35 per cent in next 10 years,’ 21st August 2010, [Accessed 7th August 2012]

20.)  Jonathon Watts, ‘When  A Billion Chinese Jump,’ Faber and Faber, London, UK (2010)

21.)  WWF Global, ‘Environmental problems in Indonesia,’ [Accessed 13th August 2012]

22.)  BBC, ‘India mining industry “out of control”,’ 14th June 2012, [Accessed 13th August 2012]

23.)  Rhett A. Butler, ‘Indonesia’s pulp and paper targets incompatible with green growth goals’, 10th August 2012, [Accessed 13th August 2012]

24.)  Alistair Osborne, ‘Chinese are the new Big Spenders in town,’ 31st December 2011, [Accessed 17th August 2012]

25.)  Ding Qingfen, ‘China’s growth needs new horizons: trade chief,’ 22nd May 2012, [Accessed 18th August 2012]

26.)  Tony Zhu, ‘China issues new subsidy scheme to boost consumption,’ 17th May 2012, [Accessed 17th August 2012]

27.)  Money Control, ‘Domestic consumption to drive India: HSBC Pvt Bank,’ 23rd September 2010, [Accessed 13th August 2012]

28.)  Han Jingjing, ‘Premier Wen says Chinese yuan “not undervalued”,’ 14th March 2010, [Accessed 19th August 2012]

29.)  Hsiao Chink Tang, ‘Can renminbi appreciation resolve global imbalances?’ 25th June 2012, [Accessed 30th July 2012]

30.)  Yukon Huang, ‘Don’t blame China’s currency for US trade deficit,’ 20th April 2012, [Accessed 31st July 2012]

31.)  Carbon Footprint of Nations, ‘Country Carbon Emissions,’ [Accessed 1st August 2012]

32.)  James Melik, ‘China leads world in green energy investment,’ 16th September 2011, [Accessed 21st July 2012]

33.)  Leon Kaye, ‘China blistering past US in green investment,’ 29th March 2010, [Accessed 23rd July 2012] 



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