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Economic Leadership Starts at Home

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Unread 05.23.12, 01:17 PM
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Economic Leadership Starts at Home

On 05.23.12 11:00 AM posted by Derek Scissors, Ph.D.




China is taking over the world!

A lot of people believe this. And a few very smart people point to China as being a huge external creditor as a main reason. These people have a point about China’s growing influence, but it is a much exaggerated one.

The world’s top creditor country last year wasn’t China. It certainly wasn’t the U.S. It was Japan, which you might remember from such news stories as “Japan Hasn’t Grown for the Past 20 Years.” No one thinks Japan is taking over the world—quite the opposite: Japan is falling down the ranks of global economic powers. How can the world’s top creditor be doing so poorly?

In all of international economics—finance or trade, small economies or big economies, the past or the future—what countries do at home matters much more than what they do around the world. Japan has been pursuing a self-destructive course of large fiscal deficits for a generation. Their external creditor status arises in part out of bad choices at home and is much less important. So Japan is the biggest creditor, but it is stagnant, a shadow of its former self economically.

The lesson regarding China is to look past its creditor status to what is happening within the country. In the reform era as a whole, Chinese productivity has soared, creating the conditions for China to become a large creditor. Within the last decade, however, China has moved away from the reform path. Greater efficiency from competition has been supplanted by greater liquidity and leveraging—more money sloshing around.

As a result, China, like Japan, is still accumulating foreign credit while it accumulates domestic debt. This imbalance is not a sign of strength or health but of a fundamentally unsound economic structure. China is a building growing ever larger, but it’s starting to sway.

There is also a lesson for the U.S. The U.S. has been the world’s most productive economy for over a century. For much of that, we were the world’s top creditor. That was sensible because it was based on productivity. We then became the world’s top debtor.

If American productivity growth is strong, debt is merely a sign that others want to lend us money to share in our strength. If our productivity growth weakens, though, rising debt becomes frightening. And it can be that a rising debt burden hurts productivity. Now, of course, our problem is public debt.

The bottom line for everyone is: Take care of business at home. If you’re doing that, you can lay claim to global economic leadership. If you’re not, how much credit you’ve run up doesn’t matter.



http://blog.heritage.org/2012/05/23/...tarts-at-home/
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