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Home Publications Blogs Beat the Press Germany Is a Slow Growing Rich Country, China Is a Fast Growing Developing Country

Germany Is a Slow Growing Rich Country, China Is a Fast Growing Developing Country

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Thursday, 29 September 2011 02:38

In a useful anti-austerity editorial the NYT makes the mistake of equating the trade surpluses of China and Germany. There is a fundamental difference between these countries. China is a fast growing developing country. In standard economic theory we would expect that it would be a capital importer (meaning it has a trade deficit) since capital gets a much higher return in China than elsewhere. The fact that China and other developing countries are growing by running large trade surpluses and exporting capital reflects the enormous failure of the IMF in setting up a workable international financial system.

On the other hand, it would be expected that a relatively slow growing wealthy country like Germany would have a trade surplus, although not necessarily with other wealthy countries, as is now the case in the euro zone. The Germans apparently have not yet come to grips with the accounting identity that implies that if they run persistent trade surpluses with the other euro zone countries, then Germany will have to continually lend them more money. The only way to avoid this situation would be if the deficit countries within the euro zone had massive surpluses with non-euro zone countries.

Comments (3)Add Comment
So a workable international financial system ...
written by John Puma, September 29, 2011 6:51
is one that resolves the inevitable, accumulated worldwide trade surplus/deficit imbalance?
Peter Paul Pareto Principle of Trade
written by izzatzo, September 29, 2011 9:20
The only way to avoid this situation would be if the deficit countries within the euro zone had massive surpluses with non-euro zone countries.


Exactly. If Paul is within the euro currency zone and depends on exports to Peter outside of it in order for Paul to run up a huge deficit then Paul need not borrow from anyone within the zone to finance the deficit that is effectively paid for by Peter.

However if Paul's trade surplus is consumed by other Peters inside the zone who must borrow from Paul to afford it then those Peters need not export to other Peters outside the zone in order to pay the Pauls inside it.

The moral of the story is robbing Peter to pay Paul only works when their respective currencies differ. Otherwise both Peter and Paul are better off in nominal terms despite what appears to be a robbery in real terms.

Stupid liberals.
It's not rocket science
written by Patrick Tchou, September 29, 2011 2:01
Trade deficit occurs when one country fixes it's currency exchange rates by proclamation. It's about time that the U.S. start addressing this issue seriously. We can't force others to revalue their currency. But we can control the trading! Free trade in this scenario is like playing a game against an opponent who proclaims the rules of the game as it progresses! It's the stupid trade agreements and their fraudulent promoters, not the stupid liberals.

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About Beat the Press

Dean Baker is co-director of the Center for Economic and Policy Research in Washington, D.C. He is the author of several books, his latest being The End of Loser Liberalism: Making Markets Progressive. Read more about Dean.

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