“When they say that Spain should be like Germany, they mean that Spain should cut its salaries”
For the economist Michael Pettis, there is no doubt that the world missed a great opportunity when it canceled John Maynard Keynes’ Bretton Woods proposal on what the global economy should look like. The result of this mistake was a “global polarization” that over the past three or four decades has been “very destructive. We need to create a new kind of globalization,” he adds. Bettis, a professor of finance at Peking University’s Guanghua School of Management, co-authored Trade Wars Are Class Wars (Captain Swing Publishing) with historian Matthew C. Klein, in which they explain how trade wars between wealthy asset owners and their “competitiveness” International has been achieved by reducing wages.”
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After reading his book, it becomes clear that the way globalization has been implemented has been the driver of increased inequality, an argument that runs counter to the prevailing thought that trade liberalization brings nothing but benefits to all.
Many people argue about whether or not we are at the end of globalization. The current global polarization that has existed for the past three or four decades has been very destructive. We need to create a new kind of globalization. Now, unfortunately, we may not. We may do what we did in previous periods and become less globalized countries, turning inward. It would be a good thing if we redefine the following trade and capital flow system Lines proposed by John Maynard Keynes at Bretton Woods in 1944. If we had followed them, we would have had a better world organization.
Globalization has been one of the many causes of increasing inequality. We know that since the 1980s there has been an exponential increase in inequality in the United States and, to a lesser extent, in Europe and Japan. The Keynesian version is that in a world where countries compete internationally for exports, there are two ways to compete: a good way is through continuous improvement in worker productivity, while a bad way is by constantly lowering wages. In the book, we argue that we live in a world system in which international competitiveness has been achieved through lower wages, not only in surplus countries, but also in deficit countries.
Janet Yellen, US Treasury Secretary, says we are going to “globalize among friends” (friendship). There will be a split in which the United States and Europe will be on one side and China, Russia, Iran, North Korea, etc. on the other side.
This opinion is based on a misunderstanding of trading. We do not need friendshipWhat we really need is a reorganization of trade agreements. We live in a world where capital can move around freely and unfortunately a lot of that capital is speculative, so it creates huge problems. Between 2000 and 2003 we started to see money flowing into Spain from Germany, which led to an exponential growth in household debt. This was a real problem for Spain, because it could not absorb much incoming capital.
So a better globalization is one in which there are more restrictions on capital flows and more restrictions on countries’ ability to pursue policies that lead to permanent trade surpluses.
In their book they point out that persistent surpluses are almost always the result of a highly lopsided distribution of income in favor of corporations and the wealthy. But in Spain, a country almost always in deficit, the surplus has been postulated as a political goal to which we must aspire, to be like Germany.
That’s the problem, because obviously we can’t all be like Germany. When they say that Spain should be like Germany, what they are basically saying is that Spain should lower their wages. What matters are wages in relation to productivity. Germany has higher wages than Spain, but labor in Germany is cheaper than in Spain because German workers keep less of what they produce than Spanish workers [exportan más]. So from a production point of view, German workers are very cheap. The problem is that a country like Spain has to lower wages to compete with the Germans or it will lose industrialization. Spain can also increase worker productivity, but it is very difficult to do and involves huge investment. So the easiest path in the end is to cut wages.
The way Spain aims to become as competitive as Germany is basically to lower wages so that the relationship between productivity and wages in Spain is the same as in Germany. This is what we call the beggar-neighbor policy. The problem is that if you lower wages, you reduce consumption. If consumption decreases, the reasons for firms to invest decrease. This only leads to slower growth and greater inequality.
The prevailing discourse is that one of the main goals of economics is to create a surplus.
Many people do not realize that a permanent trade surplus is not normal. If you ask the people in Spain, why does Germany have a trade surplus? They will say that because Germans are hardworking, efficient and very frugal. It’s all nonsense. If you are an efficient and thrifty worker, your reward is not a trade surplus, but the ability to import more stuff from abroad. The reward for good exports is imports. If you want a trade surplus, that means you don’t receive imports for your exports. The reason is that families do not receive enough salaries to import what they should import. So a trade surplus is not a sign of hard work or saving, but a sign of low wages relative to productivity. We need a world that does not reward countries for cutting wages, but that rewards countries for increasing productivity.
“As we write this,” I read in your book, “Europe remains committed to using external spending to salvage its misguided fascination for competitiveness and balanced budgets.” Are we making the same mistakes?
It is very difficult for European countries to raise wages without losing competitiveness in the manufacturing sector. Ten years ago, during the financial crisis, I wrote that as long as the European Union is bound by a single currency, it is very difficult for countries to solve their problems individually, and they can only solve them collectively. Debt is not a problem when you invest faster than the value of the debt. The problem is that there is a group of countries, Germany and the Netherlands, that want one set of solutions and the rest of Europe needs very different solutions.
What Europe generally needs is more demand, which is driven by more investment or more consumption. The private sector will not invest if consumption is too weak. How do you get people to consume more? There are two ways: increase your debt, which is not sustainable, or increase your income. The problem is that the system is globalized, and if Spain raises wages, those who can benefit will be German manufacturers who will see how their products are more competitive. It makes no sense for countries to try to solve the problem on their own, it must be solved globally or at least at the European level.
Another interesting issue is that they are wondering if it would be a good idea to issue a reserve currency, such as the dollar, as there will always be a conflict between domestic needs and global demand for reserve assets. Now the US is having more difficulty absorbing the savings imbalances in the rest of the world.
Countries use the dollar not because they want to be generous with the United States, but because they have to invest their surpluses somewhere. The US and the UK are still the safest place to invest them, which is why these two countries have very large permanent deficits. For the dollar to stop being the dominant reserve currency will require Washington to act to limit the ability of foreigners to buy US assets. I think it will happen, but it will probably take at least ten years. Until then, the dollar will remain the dominant currency and the US will continue to run a very high deficit.
Some analysts say that China is trying to bring about the “birth of the petroyuan” (the attempt to convert the Chinese currency into a currency for trading crude oil). If the petroyuan takes off, it will fan the flames of de-dollarization. Do you think it is possible?
Some analysts say that for political reasons, China, Russia, Iran, etc. They will create an alternative to the dollar. This is ridiculous. The point is that China has a surplus and the OPEC countries have a surplus. They cannot invest their surplus in each other, but when you have a surplus you become a net investor abroad. Therefore, both China and the OPEC countries have to invest their surpluses in a deficit country. They should invest in developing countries willing to run deficits that entail many risks, or in advanced economies. Japan and the European Union refuse to enter into a deficit. The only rich countries in which they can invest their surpluses are the so-called English-speaking economies: the United States, the United Kingdom, Canada and Australia. If we look at 80% of the global deficit, it corresponds to those four countries.
Is the emergence of India as a potential alternative to China credible? I do not think that giving a country with such inequalities a new role with greater responsibility will improve the global situation.
India has a very different growth model. Until the 1970s or 1980s, its growth model was that of a traditional developing country. Developing countries run a deficit because they import foreign capital. Now, some people in India want to replicate the Chinese model, which requires a massive contraction of the household share of GDP and that money be poured into investment. Right now, India is in dire need of investment, but it is very difficult for India politically to create the institutions needed for this kind of model. India will grow very quickly, but I think it will be a more balanced growth, while China’s growth has been very unbalanced.
Can China change this unbalanced growth model?
They’ve been talking about rebalancing since 2007 or 15 or 16 years ago, and they haven’t been able to do it. More and more economists are realizing that they have a very serious problem with their economy: it generates too much bad investment and too much debt, and they must also redistribute income to increase the share of consumption. But the matter is very complicated, it is not a simple economic adjustment, the political and economic structures and institutions must be changed. It is easy for an economist to say that change must take place, but it is much more difficult to do so.
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