In recent weeks, there has been a chorus of opinion arguing for a sharp increase in global investment, particularly in infrastructure. Former US secretary of the Treasury Lawrence Summers asserted that public investment really is a free lunch, while IMF managing director Christine Lagarde has argued that an investment boost is needed if the world economy is to “overcome a new mediocre.”
These comments suggest that the world has been under-investing for many years.
In fact, according to IMF data, the current overall global investment rate, at 24.5 percent of world GDP, is near the top of its long-term range. The issue is not a lack of overall investment, but the fact that a disproportionate share of it comes from China.
China’s share of world investment has soared from 4.3 percent in 1995 to an estimated 25.8 percent this year. By contrast, the US’ share, which peaked at 36 percent in 1985, has fallen to less than 18 percent. The decline in Japan’s share has been more dramatic, from a peak of 22 percent in 1993 to just 5.7 percent last year.
China dominates global investment because it saves and invests nearly half of its US$10.5 trillion economy, but this investment rate is likely to decline sharply over the next five to 10 years, because the country already boasts new infrastructure, has excess manufacturing capacity in many sectors and is trying to shift economic activity to services — which require less investment. Moreover, China’s rapidly aging population and declining working-age population will reduce long-term investment demand.
Because the current-account balance is the difference between the investment and savings rates, the decline in investment will generate large surpluses unless savings also decline and the experience of other aging societies, such as Germany and Japan, suggests that domestic investment falls faster than savings rates.
China can therefore expect large external surpluses to transform the country from the world’s workshop into its main financier. Indeed, the scale of capital outflows could be so large that long-term capital will remain cheap even after the world’s major central banks tighten monetary policy. How the world absorbs those surpluses will define the next period of global economic expansion.
Emerging markets may be able to take some advantage of this low-cost financing. India would undoubtedly benefit, though it is unlikely to absorb a significant portion of China’s excess savings.
India’s share of world investment is only 3.4 percent and even a large expansion will not compensate for a small decline in Chinese investment. Furthermore, East Asia’s growth model has been sustained ultimately by mobilizing rising domestic savings and pumping out exports. So, although India might initially absorb some international capital, it might ultimately prefer to build foreign reserves by running small external deficits or even a surplus.
Other emerging countries are also unlikely to absorb much of China’s capital. Notwithstanding its advocacy of public investment spending, even the IMF accepts that a sudden increase in public investment is more likely to cause developing-country indebtedness than growth.
That is why calls by the IMF and others to scale up public infrastructure spending are really aimed at developed countries. Yet this, too, may prove insufficient. Germany’s investment-savings gap is so large that, even if it increases domestic investment, the most we can expect from Europe is that it does not add to the global savings glut.
Only a revival in US infrastructure investment can create a sustained global economic recovery. The US has the necessary scale to absorb China’s surplus and its inadequate infrastructure provides plenty of avenues for fruitful investment.
Ironically, the IMF’s new investment mantra ultimately leads back to large global imbalances, but, far from decrying this as a major failure of global policy coordination, economists should accept imbalances as the natural state of the world and try to manage the resulting distortions.
Indeed, almost every period of globalization and prosperity has been accompanied by symbiotic imbalances. They have always caused economic distortions and political complaints, but many have endured for surprisingly long periods.
Consider, for example, the Indo-Roman trade that drove the world economy in the first and second centuries. India ran a current-account surplus, while the Romans complained about the loss of gold, yet the system endured. Similarly, the first Bretton Woods system was sustained with European capital, while Bretton Woods 2 was fueled by Asian capital, with the US providing the deficits in both cases.
There is no reason why Bretton Woods 3 should not experience similar imbalances, but if, for whatever reason, the global economy fails to take off, we will have to reconcile ourselves to a long period of mediocre growth in which cheap capital depresses yields, drives up asset prices, inflates bubbles and seeks out trophy assets. These are not the sort of imbalances to which the world’s policymakers should aspire.
Sanjeev Sanyal is Deutsche Bank’s global strategist and a World Economic Forum Young Global Leader.
Copyright: Project Syndicate
Two major Chinese Communist Party (CCP)-People’s Liberation Army (PLA) power demonstrations in November 2024 highlight the urgency for Taiwan to pursue a military buildup and deterrence agenda that can take back control of its destiny. First, the CCP-PLA’s planned future for Taiwan of war, bloody suppression, and use as a base for regional aggression was foreshadowed by the 9th and largest PLA-Russia Joint Bomber Exercise of Nov. 29 and 30. It was double that of previous bomber exercises, with both days featuring combined combat strike groups of PLA Air Force and Russian bombers escorted by PLAAF and Russian fighters, airborne early warning
For three years and three months, Taiwan’s bid to join the Comprehensive and Progressive Agreement for Trans-Pacific Partnership (CPTPP) has remained stalled. On Nov. 29, members meeting in Vancouver agreed to establish a working group for Costa Rica’s entry — the fifth applicant in line — but not for Taiwan. As Taiwan’s prospects for CPTPP membership fade due to “politically sensitive issues,” what strategy should it adopt to overcome this politically motivated economic exclusion? The situation is not entirely dim; these challenges offer an opportunity to reimagine the export-driven country’s international trade strategy. Following the US’ withdrawal from the Trans-Pacific Partnership
Since the end of former president Ma Ying-jeou’s (馬英九) administration, the Ma Ying-jeou Foundation has taken Taiwanese students to visit China and invited Chinese students to Taiwan. Ma calls those activities “cross-strait exchanges,” yet the trips completely avoid topics prohibited by the Chinese Communist Party (CCP), such as democracy, freedom and human rights — all of which are universal values. During the foundation’s most recent Chinese student tour group, a Fudan University student used terms such as “China, Taipei” and “the motherland” when discussing Taiwan’s recent baseball victory. The group’s visit to Zhongshan Girls’ High School also received prominent coverage in
Late on Tuesday evening, South Korean President Yoon Suk-yeol declared martial law. A BBC analysis cited as reasons the opposition parties’ majority in the National Assembly, their continued boycott of the national budget and the impeachment of key officials and prosecutors, leading to frequent government gridlock. During the years that Taiwan and South Korea traveled the road to democratization, our countries hit many potholes. Taiwan cannot return to the Martial Law era. Despite the similarities in our authoritarian past, Yoon’s political travails are far removed from the issues Taiwan faces. Yoon’s actions are a wake-up call to the world about
RSS