Exactly. The paradox is that if instead you repress domestic wages and use your earnings to subsidize, say, manufacturing, you will grow more quickly. The problem is that your production will grow faster than your demand. And because in a closed system you can’t sustainably produce more than you demand, you end up running a trade surplus. At some point you will have to cut back on production and allow unemployment to go up. But in an open system like the globalized economy, you can run a trade surplus.
Robinson argued that it was a bad thing — but that’s not necessarily true. You can export your excess savings to developing countries who can use it to increase domestic investment. Because they have high investment needs and typically insufficient domestic savings, the reduction in your domestic consumption will be matched by an increase in investment elsewhere. And the world is still fine. Demand continues to grow, and businesses have to respond to that growing demand by expanding production and expanding productivity.
The problem arises from exporting the savings imbalance to advanced economies that aren’t suffering from saving constraints. In other words, if you export your excess savings to England or Canada or the United States — which together account for two-thirds to three-quarters of all of the export of excess savings — your domestic imbalance is being absorbed by countries that don’t have saving constraints. In that case, investment doesn’t go up.
If savings go up in, say, Germany, then that is relative to German investment. If, say, Spain was a developing country whose investment was constrained by lack of Spanish savings, then, driven by German capital flows, Spanish investment could go up, and the world would be in a better place, right? More investment in a country that needed it and growth as a result. But if Spain isn’t savings-constrained, investment won’t go up. And because everything has to balance, something…
Auteur: Michael Pettis
