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17 September 2008

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Lemmiwinks

I would point out a few issues:
1. It seems entirely correct that latecomers have to invest more in order to catch up with leading economies, but after they have caught up, their level of investments drops to lower levels. This can be seen from your graph as well.
Therefore it is hard to maintain that US and UK should invest and save more as you suggest.
2. I think the microeconomic enviroment in S. Korea, Japan, US and UK is not that much different. I think if one would like to see the effects of microeconomic efficiency one should look at the former Soviet Block.
The 20-30% fall in real GDP at the beginning of the 90's draws a sharp contrast in terms of microeconomic efficiency.
3. Overinvestment/oversaving: the east asian crisis of 97 and Japan's lost decade have shown clearly that there can be massive misallocations in capital with a high rate of fixed asset investment.
4. The market for investments and the sources of investment:
I think high investment rate was sustainable in latecomer economies, because either the financing or the market was provided by the rest of the world.
The 2008 collapse in demand in the rest of the world signals that China has to rely on itself for both financing and demand. Can this be sustained.

Jennifer

I was wondering if this investment rate is not due to the building of an infrastructure. For example in Germany after WWII, they had to rebuild all the infrastructure. Maybe it is what is happening in China and after they have build the main heavy industries etc... they will start investing less?

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John Ross

  • Is Senior Fellow at Chongyang Institute for Financial Studies, Renmin University of China

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