Asian Developement Model

This post draws significantly from M. Pettis

Beginning in 2009 - the massive expansion of credit and investment is an extension of the same policies observed in China since 2004 - driven by the Ministry of Commerce, export constituencies, and provincial and municipal leaders focused on short term growth targets and unemployment.

In late 2009 - it appeared that the US consumption binge could not continue - though it has. We have seen a dress rehearsal of this in the 1987 crash - when the trade deficit reached 3.5% before reversing over the 1990s. That period also marked the end of the Japanese miracle, though party didn't end for several years.

Quick note on Japan - following the Plaza Accord, as the Yen appreciated versus the dollar, Japan's surplus with the U.S. expanded, driven by a surge in credit (and informally guaranteeing borrowers, so profitability did not affect lending decisions) which allowed producers to expand production while consumers subsidized this production - trade surplus.

The Asian Development model then involves policies that directly/indirectly boost savings and channel huge subsidies (usually provided by the savers, thus depressing consumption) into investment and manufacturing. Consumer restraint and surging production inevitably lead to large and consistent trade surpluses and equal capital exports.

When large countries, or groups of large countries have policies aimed at creating trade surpluses, they face a binding constraint - a country or group of countries willing to run the concurrent deficit. Without deficit countries, the Asian growth model would run into 19th century cycle of rapid production and overinvestment. There must be an importer of last resort.

In the lasts decade, the U.S. trade deficit grew from 1% of GDP to 7%. When consumption growth is faster than GDP growth - necessary when a country builds a trade deficit -there is a necessary build up in debt. When households repair their balance sheets - we would expect a decline in consumption relative to GDP and a decline in the deficit.

Declines in deficit countries will force concurrent declines in trade surpluses from growing. The Asian growth model is dependent on growing deficits, particularly the US with the largest market for consumers and deep financial markets. The end of U.S. trade deficits will likely be the end of the Asian Growth model.

This is why the surge of lending and investment in 2009, 2010, and 2011 is so disturbing. This investment will lead to even more overcapacity, NPLs, misallocation of capital, and suppression of consumption (through an implicit tax on household by lowering interest rates to reduce debt burdens and recapitalize insolvent banks). Instance after instance of wealth transfer from households to producers.