Economic Reporting Review: Policies of the International MonetaryFund (fwd)

[Robert Weissman <rob@essential.org>]

Notes from Dean Baker's weekly analysis of economic reporting for FAIR.
Dean works with the Preamble Center.

Robert Weissman
Essential Information			|   Internet:	rob@essential.org

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Economic Reporting Review: Policies of the International Monetary Fund
August 2, 1999

By Dean Baker

South Korea

"Skepticism Over Korean Reform"
Stephanie Strom
New York Times, July 30, 1999, page C1 

"Korean Output Surges"
Bloomberg News
New York Times, July 30, 1999, page C6 

These articles report on the state of the South Korean economy. 
The first article discusses the efforts of the South Korean 
government to bail out the Daewoo corporation, one of the 
nation's largest corporate groupings. It asserts that this bailout 
will damage "the veneer of economic rejuvenation in South 
Korea." 

The second article reports that South Korea's industrial 
production is up 29.5 percent above its year-ago levels. This 
number suggests that, in reality, South Korea is experiencing a 
very rapid economic rejuvenation, regardless of what may be 
happening to its veneer. 

At one point, the first article comments that South Korea's 
policy of extensive government intervention is "blamed for 
contributing to South Korea's near disaster" in 1997. It is worth 
noting that South Korea's economic development model 
produced average per capita GDP growth of 7 percent annually 
from 1960 to 1994. While South Korea had been one of the 
poorest nations in the world four decades ago, this growth has 
raised living standards in South Korea to the point that they are 
now comparable to those of the poorer nations of western 
Europe. 

By contrast, the I.M.F. policies pursued in nations such as 
Brazil and Mexico have produced slow rates of growth. The 
negative impact of South Korea's financial crisis in 1997 is 
relatively trivial compared with its prior 35 years of sustained 
growth, and apparently its new burst of growth in the last few 
months. The evidence suggests that even with this downturn, 
the Asian "crony capitalist" model has been far more 
successful in raising living standards in developing nations 
than the U.S./IMF model. 

China

"Amid Unrest, Chinese Face Ugly Reality: Deflation"
Mark Langer
New York Times, July 25, 1999, Section 1 page 8 

This article presents an analysis of China's economic 
slowdown. Much of the discussion contradicts standard 
economic analysis. 

For example, the article asserts that consumers have cut back 
their spending due to economic insecurity, and that China now 
has a household saving rate of 42 percent. It then comments 
"by Western standards, consumer spending in China still looks 
fine. For a rapidly developing country, though, the trend is 
disturbing." In fact, economists generally argue that the main 
problem facing rapidly developing countries is a shortage of 
capital (i.e., savings). In this case, the savings rate reported in 
the article implies that China faces no shortage of capital at all. 
By standard economic theory, this means China should be in 
great shape. 

The article goes on to say that "the most intractable problem is 
that there are simply too many factories churning out 
everything from refrigerators to air conditioners to cars." The 
article then argues that the Chinese government has to give 
more support to its private sector: "Like most other economists, 
Mr. Xu said China could only stimulate consumer demand by 
supporting its private sector." 

If the article has diagnosed China's problem correctly as a 
shortage of demand, then there is a much simpler path. The 
country could easily boost demand by raising wages. This 
would likely happen, if instead of suppressing independent 
labor unions, the Chinese government decided to support 
workers' right to organize. If workers had higher wages and 
more job security, they would undoubtedly be willing to buy 
the large quantities of refrigerators, air conditioners and cars 
that currently going unsold. Since the country is still running a 
trade surplus, and has a huge savings rate, a wage-led increase 
in consumption should not pose any problem. 

The article also makes an argument that China must have a 
rapid rate of economic growth because its huge population 
requires considerable growth to absorb the increase in the size 
of the labor force. The absolute size of the population is 
completely irrelevant in this equation; the only factor that 
matters is its rate of population growth. China, with a 
population growing at a rate of about 1 percent annually, could 
actually absorb its labor force growth with a significantly 
slower rate of economic growth than a country like Mexico, 
where the population is growing at a rate close to 2 percent 
annually. 

It is worth noting that, even with the current slowdown, China's 
economy is still growing by more than 4 percent annually. 
Mexico and other developing countries that have followed the 
U.S./IMF model have never been able to sustain growth rates 
close to that level. 

Dean Baker is a senior research fellow at the Preamble Center 
and at the Century Foundation. 

Recent articles can be found on the websites of the New York 
Times and Washington Post. 

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