Michael Pettis is a former Wall Street banker, Latin America specialist and hedge-fund manager. Currently a finance professor at Peking University, he has become over the last few years one of the most sought after commentators on the Chinese economy in the Western media. Pettis's most recent book commendably avoids turgid academic language and should be readily understood by non-specialists. It is a highly readable summation of the many complex ideas on the global economy that he has been disseminating in interviews and through his blog since arriving in China some ten years ago.
The Great Rebalancing is divided into nine chapters, beginning with an exploration of the root causes of the 2008 financial meltdown. The next two chapters are a theoretical exposition on the long-term impact of international trade imbalances, and the many forms of trade intervention that exist. Chapter four recapitulates how the Chinese economy has come thus far; to what extent its development model can be considered historically unique, and why both internal and external imbalances mean it will not be able to sustain high growth rates any longer. Chapters five and six broaden the scope of discussion with an ambitious prognosis of the Eurozone crisis, how it is linked to China, and where the blame for it lies. Chapter seven reinforces Pettis's advice throughout previous chapters to look at the “real” economy rather than at the financial one in pursuit of solutions: international trade imbalances created by domestic investment incentives result in Chinese, Japanese and German overproduction; by the same token, they drive up commodity prices and create bubbles in “quarry” economies like Australia's and Latin America's.
The last two chapters are much bolder than one might expect to find in more academic books, since Pettis explicitly ventures a prediction about the directions the RMB, Euro, Yen and US dollar will take over the next few years, and precisely how the EU, Chinese and Japanese economies will fare against the US economy in relative terms.
Popular literature has to some extent come to associate the global financial crisis with greedy Wall Street bankers and neo-liberal under-regulation. It has similarly cast Greek profligacy as the bane of the Eurozone. For Pettis, however, the real culprits destabilizing the global economy are – it would appear – China and Germany. Both, according to him, are pursuing pro-employment policies that lower the cost of borrowing capital domestically, at the expense of other countries. The result in the short-term may not be another dramatic breakdown of global financial markets but a slow and painful “rebalancing,” whereby Chinese and German trade surpluses will have to be shrunk if only because the US and the EU can no longer afford to continue absorbing their overproduction. Along the way, Pettis also predicts that this “rebalancing” will trigger an abandonment of the Euro, and a Japanese-like “lost decade” for China.
Pettis's Latin American background means he is well aware that neo-liberalism did not always work there, and that it is questionable whether “small government” has invariably led to higher growth rates in the developing world. For that reason, it is regrettable that his narrative about China often sounds like an unquestioning affirmation of the “Washington consensus.” In other words, Pettis is not in the least preoccupied with Wall Street excesses but is almost apocalyptic when discussing what he and many others call “financial repression” in China. Otherwise, his association of Chinese economic policy with the same industrial policies pursued in the 1970s–80s by Germany, Japan and Korea is very reminiscent of Niall Ferguson's views, but still glosses over many important differences among these countries (such as the degree to which import-substitution was pursued, or foreign ownership of local enterprise was allowed).
Where Pettis's narrative sounds more persuasive is in his depiction of the white elephants that China's last fiscal stimulus has produced; in his scepticism about the productivity and capacity for innovation of state-owned enterprises (SOEs); and in his lamenting about how the Chinese government has eradicated social security nets and cheapened the price of rural land over the last three decades so as to speed up industrialization and urbanization. Less social security means everyone needs to save more for a rainy day, thereby making more funds available for investment in manufacturing capacity; inability to sell rural land for a reasonable price means peasants are more easily tempted to seek low-paid jobs in factories that flood the world with cheap products. However, Pettis's claim that Chinese SOEs egregiously undercut foreign competition seems a little exaggerated when one thinks of the Japanese or Korean setting by way of comparison.
Ultimately, Pettis will be judged on the strength of his predictions in this book rather than on the book's academic merit. For The Great Rebalancing is surprisingly devoid of tables and figures, and is very sparsely annotated – for example chapter three features only four footnotes, two of which cite newspaper articles. This is perhaps why the publisher decided not to attach a bibliography. But what matters, in the end, is not the number of annotations but whether we are about to witness the breakdown of the Eurozone and a free fall in Chinese economic-growth rates to near-zero. If this does transpire over the next four or five years; if the US economy recovers at least in relative terms, and if its trade deficit with East Asia subsides – this book may well become a must-read primer in economic theory. In the meantime, Pettis's own discussion of Japan's economic malaise (pp. 66–68) suggests that “rebalancing” may not be such a straightforward outcome. After all, the yen has steadily appreciated since the signing of the Plaza Accords in 1985; Tokyo's equity and realty bubble burst six years later, and economic growth has all but stood still. Yet, Japan's massive trade surplus with the US has not evaporated. Can this similarly mean that China's international trade will not “rebalance” as early as we in the West might hope?
