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2009-09-16

Rethink international imbalances and the East Asian model

Comments on Mohamed Ariff “US-East Asia trade: Is East Asia ready for a rebalance?” 16/09/2009, http://www.eastasiaforum.org/2009/09/16/us-east-asia-trade-is-east-asia-ready-for-a-rebalance/

I had also thought the existing model would not be able to continue until a short while ago after I had read this article and had another thought about this.

It does not appear to me that the existing model needs to change.

When thinking and talking about the existing model in the wake of the financial and economic crises, most thought and argued that the international imbalance is unsustainable. While that is obviously true for the long run. But what is the "long run"? Until that is well defined, then one can get easily confused by "short term" inequilibrium and the needs for long run balancing.

Further, the existing model can continue when assets and trade in them are taken into account, e.g. the US households trade some of their assets for consumption. In that way, current account imbalance can last for a very very long time. That should and need not be a problem.

It is all too easy for one to blame international trade imbalance for any problems, whether it is the cause or not, or the real cause or not.

Comprehensive and solid analyses are needed to understand the implications of the "international imbalances". Partial analysis does not help to address the perceived problems and are very likely to be highly misleading to wrong policies with huge economic costs.

Economists should not just simply follow what a layman or some politicians say. They need to apply serious and rigorous economic thinking.

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