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Panel of “Financial Crisis: Challenges and Responses” in Beijing Forum


Panel of “Financial Crisis: Challenges and Responses” in Beijing Forum

Morning of November 7th, 2009

        The two panel sessions in the morning of November 7th continue to shed light on many relevant issues regarding the global financial crisis and current situations in China. Discussions generally become more intense, and sparks of thoughts are frequent throughout the debates to and forth. The central topic of the first session is “Global Imbalances”.

        As the first speaker of the session in the morning, Satoshi Mizobata, professor of Kyoto University, shares his understanding of Russia's crisis with all the participants. He analyzes both external and internal reasons for the economic crisis in Russia. Undoubtedly, the financial crisis originating from the US triggered the global crisis. The decrease of global energy price and demand also contributed to Russian crisis. When it comes to internal reasons, Professor Satoshi Mizobata shows that although Russia tries to change the structure of its economy, its export still relies mainly on natural resources. In addition, due to the inflow of cheap capital, Russia's capital market expands rapidly and partial asset bubble is formed during this period. The professor also discusses anti-crisis policies.

        Professor Yang Yao from China Center for Economic Research at National School of Development of Peking University provides a rather new perspective on the causes of and potential remedies for global imbalances, in which the current financial crisis has its roots. According to him, global imbalances are caused by long-term factors determining international division of labor. Countries that have comparative advantages in manufacturing and those rich in natural resources end up with current account surpluses, and countries that have comparative advantages in finance end up exporting financial services and run current account deficits. However, a flux of large quantities of liquidities into the deficit countries caused asset bubbles and ultimately leads to the crisis. To cure global imbalances, structural changes have to take place on both sides of the imbalances, and international organizations should play a more active role. For example, Professor Yao has put particular emphasis on broadening the functions of special drawing rights (SDRs).

        Following Professor Yao's topic, Professor Linda Yueh from Oxford discusses the onset of global imbalances, its effects on China and implications for global re-balancing. Since surplus and deficit countries always exist, saving glut is usually considered as the chief reason for global imbalances. Nevertheless, Professor Yueh stresses the new situation in the evolvement of global imbalances and summarizes the factors that add up to the crisis. She suggests that China should implement “going out” policy and allow more capital outflows to re-allocate the East's savings to the West. The liquidity brought by this policy will greatly ease the global economy. Professor Yueh also emphasizes the importance of liberalization of China's capital account and the flexibility of China's exchange rate regime.

        Then Professor Leonard A. Schlesinger, president of Babson College, provides an alternative view at the cause of subprime global financial crisis as a psychologist, with particular emphasis on the importance of entrepreneurship. According to Professor Schlesinger, the incentive problem suggested by Professor Arrow yesterday was only one of the many possible hypotheses. We have to admit the natural limitation of our disciplines and also the natural limitation of current so-called scientific methods in understanding phenomena that could be easily classified as currently and essentially unknown. On the contrary, entrepreneurship on a broad scale is the most important driving force of generating job positions. And it already has the capacity, through careful observing and documenting human behavior, to be defined as a method. More entrepreneurs use a logic that works in a continuous cycle of action, reflection and learning, which turns out very helpful.

        After the coffee break, the second session in the morning started, focusing on “the Financial Crisis and the World Economy (II)” as a continuation to one of yesterday afternoon's sessions. Professor Takumi Horibayashi from Kanazawa University in Japan extends the discussion to crisis in Center and East Europe (CEE) countries. He argues that finance-led capitalism is the origin of the global financial crisis and discusses the current crisis in CEE countries. Professor Takumi Horibayashi argues that the CEE countries rely on export to old EU members and foreign currency denominated loans from affinities of the old EU members. After the burst of the financial crisis, export of CEE countries to old EU members decreased dramatically. Meanwhile, loans from abroad declined and foreign capital was withdrawn. All these facts amount to the crisis of CEE countries. Professor Takumi Horibayashi mentions that, to learn from the crisis and prevent future disasters, CEE countries should try to merge into global economy and strengthen their internal economic structures, especially the surge of SMEs.

        Professor Yide Qiao, General-Secretary of Shanghai Development Research Foundation, talks about external demand shock and structural adjustment of domestic industries. According to him, the current external shock from the United States for the rest of the world, particularly for exporting countries such as China, Germany, Japan, etc., is in nature a typical demand shock. Since the last quarter of 2008, China's economy has been slowed down, due to several factors. Some scholars and officials in China regard this fact of declining economic performance as a major reason for China to upgrade its industrial structure to a higher level. Professor Qiao criticizes this argument by pointing out the fact that China's export declined actually less than exporting advanced countries. However, he emphasizes that the previous analysis does not equal to total opposition against a necessity of industrial structural adjustment. Particularly the coast areas do need to upgrade its industrial structure for a different reason, namely obtaining more value added by occupying a higher end at industrial chain.

        To broaden the mind of the participants, Professor Steve Ellner introduces a new political model that is adopted in Venezuela. He argues that the world has witnessed the difficulties that the former Soviet Union had been faced with and the collapse of the former Soviet Union. According to him, this implies the need to correct accumulated mistakes that socialists made rather than denial of socialism. Since the radical actions taken by Soviet Union had proved to be ineffective, socialist countries should take unprecedented trials to find other paths to their final missions. Gradual reforms probably turn out to be more effective than radical ones.

        As the last speaker, Professor Ming Lu from Fudan University in Shanghai tells two stories in his presentation. The first is about that the rich United States borrows and the relatively poor China lends, while the second one is related to recent trends in China's labor market. Labor productivity in 2006 is more than three times of that in 2000, but unit labor costs continuously decrease over time. The professor claims that human capital accumulation in the form of training and education could only be partly responsible for this dramatic increase in labor productivity, but rather investment plays the main role. Migration, urban labor market reform to promote labor market competition, and poor labor protection could account for the decreasing labor costs. If these reasons are true, these trends in the domestic labor market will continue. Of course we can do something to balance to some extent the global economy and the internal economic structure. Special emphasis has been given to social security, public service, better labor protection, and improving financial markets to let people share the profits of investment in order to increase their income. We could also reform the land system to allow people from rural areas, especially migrants, to earn more income. The topic of land system reform actually stimulates intensive debates among participants.