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Frequent fallacies of the imbalances argument

Second comments on Yang Yao "China’s growing pains, globalisation and adjustment", 7/04/2010, http://www.eastasiaforum.org/2010/04/07/chinas-growing-pains-globalisation-and-adjustment/

In addition to having more international financial assets for financing world development, I have some comments on a number of specific points in Yao's article.

While people often argue this or that and make statements on this or that, it is also fairly often that many arguments are incorrect even though they may be seemingly attractive to some particular audiences.

It is said that “the financial crisis demonstrates the unsustainability of the current pattern of global specialisation.”

But is that statement true or false? I would argue that it is not true but false. There are a number of reasons for my argument. Firstly, there is an issue on the real and fundamental cause of the financial crisis. While some people conveniently say it was the imbalances, most informed and rational people would think it was the malpractice lending by US banks associated with the sub-prime mortgages in the US prior to the crisis.

Then was the malpractice a necessary product of the imbalances, that is, low costs of finance prevailing in the US back then? The answer again is negative and no. It was irresponsibility and greed by some banks. It was their mistakes. It had very little to do with low costs finance available. Who on the earth wants to unnecessarily raise the costs of finance, given that the US also needed and still in need of investment in infrastructure projects? Alternatively they could have used low costs financing to investment overseas in other countries. There was nothing inevitable for that malpractice to happen.

Secondly, what is the problem with the current pattern of global specialisation? I can hardly see any and I think most people would not think it is a problem. Leaving the current practical and political issues aside, there are two points to argue for the positive of current global specialisation. One is that imbalances, whether it is domestic or international, households or regions or countries, are not necessarily a problem per se, as long as inter-temporal budget constraints are satisfied. It will be very counterproductive and welfare reducing one requires balance all the time for any unit. Why do people ignore this point when talking about imbalances just as if they are inherently a sin. They are not and are part of daily life and are good for everyone as long as they are responsible in their behaviour.

Leaving that aside, it should be abundantly clear that there are mechanisms that can resolve or reduce imbalances should that really be a problem without the need to significantly alter the global specialisation pattern.

I didn’t realise it is already so long in this comment, so I’d better take a rest on the case.

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