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China-US co-op a must for world economy to recover

(Xinhua)
Updated: 2009-03-07 10:14

For the world's economy to recover, the United States and China must cooperate and become the engine for the Group of 20, the head and the chief economist of the World Bank said on Friday.

"Without a strong G2, the G20 will disappoint," Robert Zoellick, president of the World Bank, and Justin Yifu Lin, chief economist and senior vice president of the bank, said in an article published in The Washington Post.

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The root cause of broader global payment imbalances is structural: over-consumption in the United States and over-saving in China, they said.

For the United States, the consumption boom was fueled by bubbles in stocks and housing. This was accompanied by a collapse in the US savings rate. For China, the savings surplus is a result of structural distortions in the financial, corporate and resource sectors.

"A revaluation of China's currency -- a change in relative prices -- is not the primary tool for addressing these structural problems and the imbalances they have produced," they said.

They pointed out that the economic diplomacy between the United States and China should focus on two other areas.

First, the two countries should join forces to prevent a protracted global recession. Both countries have announced stimulus packages. The United States is again relying on boosting consumption, and China is again channeling funds to investment.

While this is a natural response to the immediate concerns, over time the United States must boost savings and investment while China increases consumption, not just capacity.

Second, the strategic economic dialogue between China and the United States should focus on how to reduce the structural consumption-savings imbalances in both economies.

To achieve its leaders' goal of building a "harmonious society, " China needs to improve its income distribution.

The next stage of Chinese reforms should boost social security protection, wages, service-sector efficiencies, and "green" resource-pricing and businesses -- all of which can increase consumption and imports.

The United States, in turn, must rebalance saving and consumption. It cannot afford a return to the days of maxing out credit cards to finance unfettered consumption. It must regain control over expanding budget deficits, which are driven largely by entitlement spending.

"The imbalances in the Chinese and US economies can only be tackled gradually," they said, "yet they must be addressed."

A recovery based on boosting US consumption and providing easy money financed by overseas savings would result in a repeat of mistakes, with dangerous consequences for global markets and politics, they said.

"Even as the United States and China lead the way toward today's solution, they need to be shaping tomorrow's world economy," they said.