Too bad Zhou isn’t fully one of the Minsky crowd.If he were he would be more concerned about minimizing the consequence of crisis on the Chinese economy rather than protecting the economy from crisis, which I think is an impossible task.This would drive a number of policy recommendations – including on flexibility in the financial system, strategies for developing an investor base, the CIC investment strategy, and the treatment of NPLs in the banking system.
In his speech he does make some interesting points, especially on the history of recent Chinese financial crises, in a section called “Parsing China’s experience”.Let me quote (extensively):
In 1985, China experienced a high inflation rate of 8.8 percent. In the anti-inflation process, the decision-makers learned how to build a two-tier banking system. The blind optimism about the balance of payments existed at that time was also corrected in this process...
The next round of inflation, starting in 1993, caused the third plenary session of the 14th CPC Central Committee to lay out a formal macroeconomic policy framework as well as various guiding perceptions and principles, including what kind of macroeconomic policy framework should be established…
Through the 1990s, the Chinese banking sector faced a predicament characterized by the underdevelopment of a sound "credit culture." During this period, shortcomings of the credit culture were exemplified by two main types of bank lending. The first was policy lending, including those determined by the government plan or under variety of administrative interventions. The second was so-called "relationship-based lending"…
At the end of 1997, the Asian financial crisis spread to its full scale. Although China averted a head-on hit by the crisis, its aftermath had produced long-term effects on the Chinese economy, including, most obviously, the problem of non-performing loans (NPLs)…
In February 2002, at the second National Financial Work Conference, plans were made to strengthen financial supervision (later on in 2003 the China Banking Regulatory Commission (CBRC) was established). It was also decided to kick off a new round of reforms on the commercial banking sector, clean up bank balance sheets, and proceed with financial restructuring…
Just before the Enron and WorldCom cases were exposed in the United States, the Chinese media had unveiled a fund scandal in its securities trading. In this case, some institutions were found of manipulating stock prices. The year 2001 also saw the Yin Guang Xia case, which was similar to the Enron scandal in that the listed company disclosed false information and engaged in unlawful trading in its stock. In 2003, a larger scandal of listed company broke out with the collapse of the De Long Conglomerate. Following these incidents, China's financial regulations and corporate governance standards were improved and toughened to counteract the misconducts by using complex corporate structures, which occurred in the De Long Case.
By the way, and I guess as a complete aside, as long as I am on the subject of favorite little-known economists, let me add the name of Alexander Hamilton to the list.Of course the first US Secretary of the Treasury is famous as an historical figure (and has made a big comeback in the past decade, before which he had been almost ignored for about seventy years), but he is also the theorist who more-or-less invented US economic policy in the 19th century and perhaps even the phrase “infant industry”.His 1791 Report on the Manufacturers, a brilliant overturning of Smith and Ricardo which should be the blueprint for China’s economic development, set out probably one of the best (and highly practical) expositions ever of economic development policy.
I am reminded of this because I was reading earlier today Justin Lin’s 2007 Marshall Lecture in which he made extensive favorable references to Freidrich List (and his “infant industry” argument), but the German List, who was originally an ardent free trader, developed most of the framework of his economic theories during his exile in the US in the 1820s, when he lived with and met a number of prominent Hamiltonians and was able to examine up close what was then called the “American system”.I think we need to revive Hamilton as one of the great economists, and the only excuse I have for inserting this little lecture into my blog is that, as a developing country, China could do an awful lot worse than to have its leaders study the works of Alexander Hamilton (political and financial, as well as economic).
I don't think that the Chinese government is trying to eliminate financial instability, merely manage it to the point that it doesn't destroy the regime, which is a major task.
Alexander Hamilton is on my list of major economists. The other one is Henry C Carey and there are a half dozen economists in the American Institutional school. One thing that one gets when reading economic history is a sense of how many choices and alternative paths there really were for people in the 19th century, and the lack of historical input in current economics is why I think the field is dangerously sterile.
One problem with economics is that toward the end of the 20th century there was a lot of "physics envy" and there was a turn toward making mathematical models which would encapsulate universal rules. The broken assumption here was that what is mathematical is universal and what is non-mathematical is non-universal and that assumption is just wrong. So what you end up with are mathematical models that assume an institutional and historical context and fall apart completely when you don't have that context.
One other problem is that people forget past lessons. The Washington Consensus was a reaction against import substitution, but looking back it seems that import substitution was a reaction against some of the policies of the late 19th and early 20th centuries.
I am an admirer from RGE. Anyway, I would be interesed to see your list of great economists developed into a list if I might impose.
Plus, any useful learning sites for those of inclined to acquire a deeper understanding of the "issues" you discuss so that we (I) could more beneficially engage in the dialogue.
Issues = micro and macro economic, especially where they relate to relations between the developing and developed world. I do hope you respond when time is available.
I appreciate the balance in both of your perspectives.
By Developing - 12/7/2007 6:34 PM
I suspect that getting us to put together a list of economic greats would best be done over beers. One guy often missing from the list is the "mercantilist" Richard Cantillion (1680-1734) -- well worth reading.
Twofish, interesting that you say that about the Washington Consensus. i wrote about that in Foreign Affairs in 1996. I'd be curious about your comments: http://www.foreignaffairs.org/1996/6.html
Michael Pettis is a professor at Peking University's Guanghua School of Management, where he specializes in Chinese financial markets. He has also taught, from 2002 to 2004, at Tsinghua University’s School of Economics and Management and, from 1992 to 2001, at Columbia University’s Graduate School of Business. He is a member of the board of directors of ABC-CA Fund Management Co., a Sino-French joint venture based in Shanghai.
Pettis has worked on Wall Street in trading, capital markets, and corporate finance since 1987, when he joined the Sovereign Debt trading team at Manufacturers Hanover (now JP Morgan). Most recently, from 1996 to 2001, Pettis worked at Bear Stearns, where he was Managing Director-Principal heading the Latin American Capital Markets and the Liability Management groups. He has also worked as a partner in a merchant banking boutique that specialized in securitizing Latin American assets and at Credit Suisse First Boston, where he headed the emerging markets trading team. Besides trading and capital markets, Pettis has been involved in sovereign advisory work, including for the Mexican government on the privatization of its banking system, the Republic of Macedonia on the restructuring of its international bank debt, and the South Korean Ministry of Finance on the restructuring of the country’s commercial bank debt.
Pettis is a member of the Institute of Latin American Studies Advisory Board at Columbia University as well as the Dean’s Advisory Board at the School of Public and International Affairs. He is the author of several books, including The Volatility Machine: Emerging Economies and the Threat of Financial Collapse (Oxford University Press, 2001). He received an MBA in Finance in 1984 and an MIA in Development Economics in 1981, both from Columbia University.
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Comments (3) for "Is Zhou Xiaochuan a Minskyit...
- 12/6/2007 1:19 AM
January, 2008