Keith Cowling, Stephen P. Dunn, and
Philip R. Tomlinson
Global imbalances and modern
capitalism: a structural approach to
understanding the present economic
crisis
Abstract: The world economy is riven by very large imbalances, with the U.S.
economy exhibiting high levels of consumption but low savings ratios and a
high current account deficit while China provides the mirror opposite. In this
paper, we explore the structural causes of these imbalances that underpin the
current global economic crisis. A key focus here is on the corporate sector in
the United States, which has been instrumental in creating unsustainable consumptionist tendencies through the use of excessive advertising strategies. In
China, changing demographics and market reforms have led to a significant rise
in precautionary saving. Correcting the current imbalances requires recognizing the underlying characteristics of both modern and nonmodern capitalist
economies, with appropriate responses being structural in nature in addition
to any macroeconomic adjustments.
Key words: advertising, consumption and saving, corporate strategy, global
imbalance, modern capitalism.
The American citizen’s first importance to his country is no longer that of
a citizen but that of a consumer. Consumption is the new necessity. (Lynd
and Lynd, 1929, p. 88)
Keith Cowling is Emeritus Professor of Economics at the University of Warwick.
Stephen P. Dunn is Director of Strategy at NHS East of England. Philip R. Tomlinson
is a lecturer in economics in the School of Management at the University of Bath. The
authors are grateful for comments and suggestions from David Bailey, Rob Branston,
Dan Coffey, Marc Cowling, Nick Crafts, Ben Ferrett, Ian Jackson, Mark Harrison,
Dennis Mueller, Andrew Oswald, and Carole Thornley. They are also grateful for
comments from participants at the Finance in Crisis/Finance in Question conference
held at the University of Manchester, UK, April 12–14, 2010, and at the 12th European Union Network for Industrial Policy (EUNIP) conference, held at the University
of Reus, Spain, June 9–11, 2010. The usual disclaimer applies.
Journal of Post Keynesian Economics / Summer 2011, Vol. 33, No. 4 575
© 2011 M.E. Sharpe, Inc.
0160–3477 / 2011 $9.50 + 0.00.
DOI 10.2753/PKE0160-3477330403
576 JOURNAL OF POST KEYNESIAN ECONOMICS
The world economy is riven by very large imbalances: the current account deficits on one side, with the U.S. economy the most prominent
case, and current account surpluses on the other side, with China being
a similarly prominent case. The engine of world consumption is being
driven by the United States, and this is being financed by the savings of
China. While some see this as a perfectly natural state of affairs, with the
U.S. economy providing an efficient home for the savings of the surplus
countries, most economists see this as quite fragile and not sustainable
in the longer term; indeed, some see this imbalance as at the root of the
present global financial crisis (see, e.g., Hung, 2008; Wade, 2009; see also
Eichengreen, 2004, 2006a, 2006b, who forewarned about the dangers of
global imbalances and the need for gradual readjustment).
However, the solutions that dominate the current debate concentrate
mainly upon macro-policy instruments and usually see large exchange
rate adjustments as being necessary to eliminate the imbalance. Recent
adjustments in the U.S. dollar have been observed, probably encouraged
by the governments involved, but much more is seen to be called for,
achieved preferably, as seen by the U.S. authorities, by a planned appreciation of the Chinese renminbi. Coming at the present time, when
financial markets are so febrile, such large changes may magnify the
impact of the shocks already being experienced. Moreover, in this regard,
both Keynes and other economists in the heterodox tradition have long
gone beyond the conventional wisdom, arguing that a more fundamental
reform of the world’s international monetary institutions is required.
Keynes, for instance, argued for a new international system that shifted
the burden of adjustment toward surplus countries: “The object of the new
system must be to require the chief initiative from the creditor countries,
whilst maintaining enough discipline in the debtor countries to prevent
them from exploiting the new ease allowed them in living profligately
beyond their means” (1980, p. 30). A new financial architecture has yet
to emerge to accommodate such necessary changes, and while it may be
time once again to reconsider the management of international trade and
currency realignment so as to enable nations to pursue full employment
policies without fear of external shocks (see Davidson, 1994), it is also
necessary to understand the underlying characteristics and economic
processes that are driving these structural imbalances.
It is this issue that the current paper specifically explores, and in doing so, provides an alternative perspective on the underlying roots of the
current crisis. In particular, we seek answers to critical questions as to
why the United States on one hand generates huge deficits and what has
given rise to huge surpluses in China? What is it about these economies
Global imbalances and modern capitalism 577
that leads to the present situation where the U.S. economy is so dedicated
to consumption that Americans work relatively long weekly hours, take
fewer vacations, are late to retire, and yet are also so reliant on the surpluses of other countries to continue to finance their own consumption?
Conversely, why are the Chinese so prepared to save a large proportion
of what they earn? In linking the present imbalances in the U.S. economy
to the present financial crisis, Wolf states that “[a]ny country that receives
a huge and sustained inflow of foreign lending runs the risk of a subsequent financial crisis because external and domestic financial fragility
will grow” (2008, p. 13). Precisely such a crisis is now happening in the
United States. Wolf’s explanation: “Cheap money encouraged an orgy
of financial innovation, borrowing and spending” (ibid.). But this is not
the whole story. At the same time hours of work per week in the United
States rose, vacations fell, and retirement was delayed. While the easy
availability of cheap money certainly enables people to consume more, it
would seem that other forces were at work impelling people (Americans
particularly) toward a different work–leisure choice in order to sustain a
higher level of consumption: this increased pressure to consume felt by
Americans would seem to offer the key to understanding the spending
“orgy” leading to the “huge and substantial inflow of foreign lending”
experienced by the U.S. economy.
What is the distinguishing feature of the U.S. economy that can account for this behavior? The United States is the example of modern
capitalism, par excellence: modern capitalism is characterized by large
dominant corporations in active rivalry with each other where a key feature of such rivalry is investment in creating, sustaining, and developing
the market by devices such as advertising, the retailing network, and
product innovation (Galbraith, 1958, 1967). As a consequence, the level
of advertising is much greater in the United States compared with other
high-income countries; for instance, in 2007, total advertising expenditure
was approximately $43 billion greater in the United States than in the
economies of France, Germany, Italy, the United Kingdom, and Japan
combined (World Advertising Research Centre [WARC], 2009). This
undoubtedly induces greater pressure on Americans to consume and to
work in order to sustain such consumption. Indeed, the higher degree of
advertising intensity in the United States can largely explain the sharp
differences in observed work–leisure patterns between Americans and
their counterparts in Continental Europe (namely, France and Germany),
with Americans electing to work longer hours and enjoy fewer vacations so as to engage in higher levels of consumption (see Cowling et
al., 2011). The key to understanding the imbalance from the U.S. side
578 JOURNAL OF POST KEYNESIAN ECONOMICS
therefore lies in the nature of modern capitalism and the solution lies in
addressing such structures.
In exploring these issues, this paper considers the nature of modern
capitalism and its consequences for the macroeconomy, with the focus
first on the United States, as a principal player and the prime example of
modern capitalism. Like Galbraith (1958, 1967) and others, our analysis
here draws specific links among the industrial structure, advertising,
and conspicuous consumption in the U.S. economy. We then turn to the
major player on the other side of the crisis, China, and try to address
some structural issues that may have to be faced there. Finally, we point
toward some possible structural approaches that may provide long-term
solutions to the global imbalances problem.
Modern capitalism, advertising, and economic behavior
Modern capitalism is characterized by large dominant corporations in
active rivalry with each other using a variety of weapons. While other
(smaller) production units exist in industrial economies, these “firms” exist within the strategic ambit of the dominant corporation; their autonomy
is more apparent than real. The long-term aim of the dominant firms is the
effective monopolization of specific industries through organic growth,
merger, or effective coordination with rivals. Somewhat paradoxically,
rivalry and collusion coexist in such concentrated markets, with tit-fortat strategies providing a useful interpretation of such behavior, on one
hand eliciting and rewarding cooperation, and on the other providing
rapid retaliation for noncooperation (for a review of the argument, see
Cowling and Tomlinson, 2005). Rivalry, or competitive behavior, is
then diverted from price competition toward product and advertising
competition, with corporations induced to invest in the market as well
as production. A key feature of such rivalry is investment in advertising,
the retailing network, and product innovation. This form of competition
is advantageous to corporations operating in oligopolistic markets given
that, compared with competing directly on price, it takes longer for rivals
to respond with their own competitive strategies and thereby allows monopoly profits to be made in the meantime. While market share can be
gained, this strategy enables an extension of the market, thereby reducing
competition: advertising should be seen as a characteristic of corporate
power, which in turn sustains and enhances such power.
If the capitalist system is seen to be prone to recession or depression,
then corporations may be induced to choose such strategies in an attempt
to ward off the implications for themselves. Such behavior has led to a
Global imbalances and modern capitalism 579
surge in investment aimed at shaping and extending the market in the
twentieth century. Over the period 1919–76, advertising expenditure per
person in the United States rose 150 percent (Brack and Cowling, 1983),
while more recently there has been a sevenfold increase in advertising
expenditure per capita over the period 1945–2005 (Cowling et al., 2011).
While we would expect that globalization will tend to lead to economies
converging over time, for now huge gaps remain with the U.S. investment
in advertising being 11 times that of France and twice the intensity. But
the extremes are seen when we compare the United States with China,
with advertising per capita in the United States being 50 times that of
China (WARC, 2009). With this difference in the character of capitalism between the modern economies, such as the United States, and the
other emerging capitalist economies, such as China, we expect distinct
differences in behavior, differences that underpin the imbalance that
has appeared and intensified in recent years. If advertising and product
innovation, the marketing effort in total, is seen as part of a system for
creating wants, then it can also be seen as creating a continuing dissatisfaction with current levels of consumption.
But is there any supporting evidence for this thesis? Kenny (1999)
presents evidence of declining levels of happiness in the United States,
but Europe generally shows rising happiness, with the United Kingdom
being the major exception. Blanchflower and Oswald (2004) report
what they claim are the first microeconomic happiness equations to be
estimated for the United States and reveal life satisfaction falling over
time with rising income, providing (further) support for Easterlin’s
(1974, 1995) earlier views that economic growth does not necessarily
ensure greater well-being. More recently, Alesina et al. (2005) provide
some very suggestive results on happiness: lifetime satisfaction appears
to increase with the length of vacations, whereas it appears to fall with
increases in hours of work, with the United States having the shortest
vacations and the longest hours. While not providing evidence directly
on advertising and happiness, by promoting continuing dissatisfaction
with present consumption, specifically market consumption,1 advertising could explain these various observations, and the United States, by
1 Freeman and Schettkat in their “marketisation hypothesis” argue that “[b]y working longer hours and taking short vacations, Americans earn money to buy goods on
the market. By working fewer hours and taking longer vacations, Germans have more
time to produce goods at home” (2002, p. 6). Alesina et al. also show Americans “giving up sleep and food preparation time as a result of working longer” (2005, p. 62).
Americans are being propelled toward market consumption, consistent with the pressure of advertising.
580 JOURNAL OF POST KEYNESIAN ECONOMICS
experiencing the most intensive advertising, could reveal these effects
to the greatest degree.
This fits in quite nicely with James Duesenberry’s (1967) theory of consumption, which may be coming back into fashion (Hopkins and Kanbur,
2009). The theory is based on interdependent preferences, the individual
is the product of society: there is a “demonstration effect” such that the
individual emulates the consumption of others. Duesenberry was asking
the question, why are savings of households in the United States so low
and why do Americans work such long hours: overall why the drive to
higher levels of consumption? His “demonstration effect” presupposes
the drive’s existence: emulation can go either way—conspicuous consumption or nonconsumption. Duesenberry relies on the “character of our
culture”—American culture. The question we raise is whether American
culture is, to some extent, endogenous to the economic system—does the
character of modern capitalism feed into the development of American
culture?
Advertising in the broadest sense could provide the key to answering
the questions posed by Duesenberry (1967). This argument is captured
eloquently in Galbraith’s (1967) management of the consumer in what
he terms the “revised sequence” (see also Anderson and Dunn, 2006). In
the conventional wisdom, the firm is subservient to the given preferences
of consumers. Galbraith argued, however, that consumer demand was not
exogenous, but is shaped by institutional processes and by particular influences such as advertising (Dunn, 2011). By managing consumers, large
firms are able to recoup any substantive investment monies undertaken
and establish and maintain monopoly positions. The revised sequence
is broader than just the management of specific consumer demand by
the firm, encompassing the wider forces that reinforce consumerism:
consumers must be able to buy goods as well as desire them, so the large
firms have a vested interest in ensuring this occurs such as through the
provision of credit (Galbraith, 1967). The bias toward consumerism fuels
the emulatory processes that drive the rat race—what Stanfield (1983,
1996) calls the “treadmill syndrome”—resulting in people working harder
and harder in order to consume more and more (Folbre and Bittman,
2004; Schor, 1991). This pressure to work and earn even higher levels
of income also explains the increased demand for childcare, which has
exploded in recent times.2
2 As Eric Schlosser points out in Fast Food Nation: “Adjusted for inflation, the
hourly wage of the average U.S. worker peaked in 1973 and then steadily declined for
the next twenty-five years. During that period, women entered the workforce in record
numbers, often motivated less by a feminist perspective than by a need to pay the bills.
Global imbalances and modern capitalism 581
Many economists had anticipated that the twenty-first century may
be dominated by issues of market saturation. Some saw this propelling
the development of new industries, including those that promote consumption (Ono, 1994). Krugman has stressed the present return of such
problems: “For the first time in two generations, failures on the demand
side of the economy—insufficient private spending to make use of the
available productive capacity—have become the clear and present limitation on prosperity for a large part of the world” (1999, p. 155). And yet
this may seem strange coming from an American economist speaking
with the American experience all around him. The United States has
been the most significant exception to this current generality. The global
lack of adequate demand has only been ameliorated by the great engine
of consumption as has distinguished the U.S. economy in recent years.
We see this exceptional behavior of the U.S. economy as being rooted
in the enormous and growing investment in advertising, in the broader
sense—all forms of the selling effort in the U.S. economy. Again, as
Galbraith described it: “Advertising and its related arts thus develop the
kind of man the industrial system requires—one that reliably spends his
income and works reliably because he is always in need of more” (1967,
pp. 209–210). Thus, Krugman’s concerns about the demand side of the
economy relate to the world capitalist market economy in general, but
in the case of the United States, they appear to have met a massive, if
inherently fragile, response. From this perspective, we can see the world’s
present economic crisis as emanating from imbalances initially created
in the United States and implicit in its modernity.
The structural roots of the present imbalance
The influence of advertising in the United States
In a sense, the present imbalance and the present crisis has its origin in
the characteristics of the modern capitalist economies, the U.S. economy
being the prime and most important example. Within them the nature
of oligopolistic rivalry provides the basis for very high and increasing
In 1975, about one-third of American mothers with young children worked outside
the home; today almost two-thirds of such mothers are employed. As the sociologists
Cameron Lynne Macdonald and Carmen Sirianni have noted, the entry of so many
women into the workforce has greatly increased demand for the types of services that
housewives traditionally perform: cooking, cleaning, and child care. A generation
ago, three-quarters of the money used to buy food in the United States was spent to
prepare meals at home. Today about half of the money used to buy food is spent at
restaurants—mainly at fast food restaurants” (2002, p. 4).
582 JOURNAL OF POST KEYNESIAN ECONOMICS
levels of advertising expenditure. While it is the case that advertising
plays a role in interfirm rivalry to induce brand switching between consumers, it is also true that the pressure of advertising and the continual,
if minimal, new product innovation associated with it can be expected to
induce a higher level of consumption out of current income, via creating
continual dissatisfaction with present consumption. In this latter respect,
there has been limited exploration of the direct effect of advertising on
consumption, but when research has been done, it has tended to reveal a
positive effect on the propensity to consume (Keir, 1993; Metwally and
Tamaschke, 1981; Peel, 1975; Taylor and Weiserbs, 1972).
However, related work on the impact of advertising on labor supply
(hours of work and participation rates in market work) can be interpreted
in the same way (Brack and Cowling, 1983; Cowling et al. 2011; Fraser
and Paton, 2003; Giulietti and Meschi, 1991). It is probably true that the
impact of advertising on consumption is more difficult to identify than
that of advertising on labor supply because consumption and advertising are very much trend dominated. It is also probably true that, partly
because of advertising, consumption has been very much constrained
by income and the pressure to consume is reflected in this work–leisure
choice; the choice of a lifestyle that demands high hours of work, high
family participation in market work, restricted vacations, and delayed retirement, all characteristics of modern consumers, with the United States
as the prime example.3 More widely, Galbraith (1967) demonstrated the
impact of sophisticated marketing techniques on consumption and work
patterns, particularly in the food, tobacco, pharmaceutical, automobile,
and alcohol industries, arguing that the resulting augmented consumption
patterns have similar social and economic pressures to increase working
hours and augment incomes to consume more and more, which has been
linked to the increase in psychological disorders.
It might appear surprising that advertising can have such an impact
on household behavior, particularly in an era that has been defined by
some economists as the “great moderation,” a term used to describe the
reduction in the volatility of (aggregate) economic variables in the mod3 In putting forward this view, we acknowledge that other factors may also be
important in shaping work–leisure choices in the U.S. economy. For instance, there
has been a privatization of welfare services and a noticeable retrenchment in the provision of social goods over the past 30 years (see Hacker, 2004). Such moves have
raised income and wealth inequalities within the United States, and workers may be
working longer to pay for their own private provision of public goods. Combined with
the corporate sector’s drive to higher levels of material consumption, this has led to
greater levels of indebtedness (see below), particularly among the lower social classes.
For many, this is often the complex reality of chasing the “American dream.”
Global imbalances and modern capitalism 583
ern economies since the early 1980s (Bernanke, 2004). Yet this “great
moderation” does not appear to transcend to the micro level, where
there has actually been a moderate increase in individual and household
economic uncertainty and volatility, particularly with regard to income
uncertainty and consumption decisions (see Davis and Kahn, 2008).
While the tentative explanations here are that greater flexibility and
insecurities in largely the U.S. (and the UK) labor markets may explain
household behavior, recent work in behavioral economics has intriguingly
unearthed some of the psychological mechanisms that may also be at play.
In this respect, following a comprehensive review of recent studies in this
field, DellaVigna concludes “the preference for immediate gratification
(captured in these studies) appears to have identifiable neural underpinnings . . . (and) inter-temporal preferences with these features capture
self-control problems” (2009, p. 318). In essence, although individuals
make plans to, say, save (more) for the future, as the future gets near,
they seek immediate gratification in present consumption, thus, making
allowances for future needs is postponed.
We would suggest that the desire for such immediate gratification is
largely induced through increased advertising expenditures that make
present needs more pressing. Indeed, as people procrastinate we observe
low levels of saving, high levels of debt, and pension crises. Again, this
is most acutely observed in the United States. Here saving rates have
fallen to very low levels, with saving only taking place to help finance
consumption of household durables (Ruggles, 1993). Personal savings as
a proportion of disposable income in the United States have, for instance,
fallen from an average of 10 percent between 1974 and 1984 to around
5 percent in 1994, and 0.6 percent in 2007 (Organisation for Economic
Co‑operation and Development [OECD], 2008). At the same time, the
debt of U.S. households has grown considerably over recent years, with
the real level of debt rising by approximately 35 percent over the period
2001–5, leaving the total level of debt as a percentage of after-tax income at the highest level since U.S. Federal Research records began (see
Mishel and Eisenberry, 2005). In this regard, it is also noticeable that
the largest U.S. advertising expenditures are incurred in the automotive
and finance industries with, in 2006, U.S. advertising expenditures being
approximately $16.5 billion in the automotive sector, and $8.5 billion in
finance (TNS Media Intelligence, 2009). Both of these sectors promote
expensive purchases such as new cars and house purchase and rely heavily on debt finance to sustain consumption. Such observations, of course,
neatly coincide with the Duesenberry story and Galbraith’s hypothesis:
the creation and exacerbation of new desires and demands through
584 JOURNAL OF POST KEYNESIAN ECONOMICS
excessive advertising expenditures drives conspicuous consumption and
in the United States (and also the United Kingdom) this has contributed
to rising and unprecedented levels of public indebtedness.4
The rise in consumption in the United States has contributed to the
creation of a very large current account deficit with the United States
absorbing no less than 70 percent of the current account surpluses of the
rest of the world, largely those of China and Japan. The global economy
is seen by many as being increasingly vulnerable to these imbalances,
with the U.S. current account deficit at almost 6 percent of gross domestic
product (GDP) in 2006 and the associated potential risks of a collapse in
the dollar (see, e.g., International Monetary Fund [IMF], 2006; Obstfeld
and Rogoff, 2004). For a long period, the United States has been in a
largely unique position in being able to manage this ongoing deficit by
selling U.S. assets to foreign buyers and increasingly through international borrowing, particularly from China; Kitson (2005), for instance,
points out that the Chinese central bank holds approximately $1 trillion
in U.S. government bonds.5 Such a situation is not sustainable in the long
term, with Obstfeld and Rogoff (2004) regarding the current trajectory
as “particularly precarious,” seeing close parallels with the 1970s, when
the Bretton Woods system collapsed. Moreover, they stress that an easy
rebalancing is more difficult with the deficit equal to 20 percent of U.S.
traded goods production. Some economists now believe that a sustained
adjustment in the U.S. current account deficit cannot be achieved through
a temporary nominal deflation of the dollar alone, but also requires action
to redress the internal imbalances (government and household) within
the United States and an increase in the savings rate (El‑Ayd et al., 2005;
McKinnon, 2007).
Achieving this broader rebalancing requires us to recognize that the
strategies of Corporate America, interacting with a compliant govern4 Galbraith anticipated such concerns back in the 1950s when he recognized that
in order to sustain its production and planning processes, a large corporation requires
consumers to be able to buy the goods that are produced: “The process of persuading people to incur debt, and the arrangement for them to do so, are as much a part
of modern production as the making of the goods and the nurturing of wants” (1958,
p. 167). This results in lower savings rates and higher levels of indebtedness for the
household. It is no surprise, as Stanfield notes, that “[e]asier credit checks, lower down
payments, longer repayment terms, and other inducements for people to go further
and further into debt are permanent and necessary fixtures of the consumer society
described in The Affluent Society” (1983, p. 591).
5 The influx of foreign capital has occurred within more liberalized U.S. financial
markets and has been concomitant with the large rise in U.S. consumer borrowing. In
essence, it has exacerbated the boom, particularly in real estate.
Global imbalances and modern capitalism 585
ment, have been critical in creating this situation. The structural, longterm solution calls for a rebalancing of the industrial base of the U.S.
economy, likely involving an increase in the importance of the export
sector. This will no doubt happen as the dollar depreciates in value, as
is now happening, but this is perhaps easier to achieve with appropriate industrial policies aimed at bringing about the necessary changes in
infrastructure in the widest sense to include educational and scientific
investment, to enable a change in industrial structure which is sustainable.
In commenting on the appropriate international macro-policy package,
Brittan has argued that “[i]t would need a world political authority to
enforce the whole package necessary for success, ignoring the informational requirements of an appropriate macro-policy mix” (2005, p. 15):
a suitable industrial policy for the United States could be a critical
complementary policy.
We have begun with the characteristics and consequences of modern
capitalist economies like the United States. It is their modernity, their
reliance on marketing investment, such as advertising, which gives rise to
the inordinate pressure to consume and delay saving in these economies
which in turn gives rise to the external and internal imbalances observed.
The appropriate, long-term, policy response is a structural one to be
adopted by these economies, but we must also look at the nonmodern
economies, such as China. Within this world, the nonmodern economies
take on certain characteristics, but they are led to it partly as a result of
the behavior of the modern world. Whereas the United States currently
has a high trade deficit, China’s current account surplus is approximately
10 percent of its GDP (IMF, 2008). Behind this pressure of external
imbalance lies a huge contrast in saving rates and the intensity of advertising in the two countries: the household saving rate (as a proportion
of income) in China is approximately ten times the rate in the United
States (OECD, 2008), while the intensity of advertising (per capita) in
China is less than one-tenth that of the United States (WARC, 2009). It
is to China that we now turn.
China’s high savings and market transition
China’s high savings rates have not surprisingly attracted significant attention in recent years. Notwithstanding reported difficulties in relation
to the adequacy and quality of available data and the coverage rates of
household surveys (see Kraay, 2000), most conservative estimates of
Chinese household saving indicate that it has averaged around 25 percent of income since the millennium, having reached 34 percent during
the mid-1990s (Kuijs, 2005). This, of course, not only contrasts sharply
586 JOURNAL OF POST KEYNESIAN ECONOMICS
with the extremely low household savings rates discussed above for the
United States (and similarly, the United Kingdom, 1.1 percent), but is
also approximately twice that of France (13.3 percent), Germany (12.9
percent), Spain (13.9 percent), and three times that of Italy (8.4 percent)
(see OECD, 2008).
In comparing savings rates between economies, there is a temptation
to view the Chinese case as reflecting long-standing differences in culture between societies. Indeed, Asian economies have tended to have
higher savings rates with Japan once being the notable example6: China
might therefore be exemplifying the Asian tradition. Modigliani and Cao
(2004), however, suggest this is not the case. They note that historically,
household saving in China has been much lower: between the 1950s and
late 1970s, it averaged around 5 percent. So why the substantial increase
in saving, given that China’s income per capita remains well below the
major industrialized nations, and indeed its Asian neighbors (see, e.g.,
IMF, 2006, 2008)? Employing an error correction model, Modigliani
and Cao find support for the life cycle hypothesis, with higher national
income growth (as opposed to per capita income) since the late 1970s
and (politically induced) demographic factors being especially important
in determining China’s higher savings rate. With regard to changing demographics, the main focus is on the so-called dependency ratio, which
measures the nonworking population, primarily consisting of minors and
the elderly and which tend to consume rather than produce income (and
so reduce national household saving), to the working population. Over
the past 30 years, China’s dependency ratio has fallen significantly, and
Modigliani and Cao attribute this largely to China’s birth control measures and the controversial one child per family policy introduced in the
mid-1970s. They argue that this measure not only reduced over time the
number of minor dependents but “it also undermined the traditional role
of the [Chinese] family in providing old age support to the parents by the
children, thus encouraging provisions through individual accumulation”
(Modigliani and Cao, 2004, p. 166).
Further evidence for the life cycle model is provided by Meng (2003),
who finds that greater income uncertainty in Chinese urban areas has
led to a significant rise in precautionary saving and general consumption smoothing.7 Meng traces the rise in income uncertainty to China’s
6 From the late 1960s to the mid 1980s, Japan’s household savings rate averaged 24
percent. It has subsequently fallen and is now around 3.5 percent of income (OECD,
2008).
7 Disturbingly, Meng (2003) finds that Chinese urban households are unable to
smooth their education expenditure; where income falls, education consumption tends
Global imbalances and modern capitalism 587
market reforms, initiated by Deng Xiaoping in the late 1970s and subsequently expanded upon, and which have led to a significant reduction
in social welfare provision with, in particular, the free state provision
of health and education services being replaced by market-oriented
pay-per-use principles. Underdeveloped credit markets and poor credit
access has resulted in a greater tendency for Chinese consumers to now
save for such large purchases, which were previously freely provided.
Moreover, changes to Chinese pension arrangements with moves from
state-sponsored defined benefit schemes have also placed a greater onus
upon individual saving (see also Feldstein, 1999). In addition, deregulation of state enterprises—now exposed to market competition—and
the labor market have effectively ended China’s lifetime employment
guarantee, and rising unemployment in some urban districts has become
a new social and economic problem: in the late 1990s, approximately
15 million state employees were made redundant (Meng, 2003; see also
Hung, 2008). Greater income and economic uncertainty in China have
contributed to a higher (precautionary) savings rate, and while Meng’s
study focused on urban households, Qin (2003) also reports a higher
effect among rural communities, where the declining state provision of
services is even more pronounced. Interestingly, in further work, Meng
et al. (2005) find that the rise in precautionary saving among poorer
households, combined with wider inequality, has led to such a reduction
in their current consumption patterns that it has effectively increased the
level of (expenditure-defined) poverty within these groups.8
These observations are both interesting and undoubtedly useful in
exploring the impact of economic reform and the transition to a market
economy in China upon both macro variables such as national savings
rates and also the micro behavior and living standards of Chinese households. Yet what is also interesting is that the (global) corporate sector has
to be reduced. This is obviously a policy concern since it affects intergenerational
mobility.
8 Meng et al. provide a vivid description of the impact of the economic reforms
upon Chinese society, noting between 1988 and 2002 that “housing rental subsidies
were reduced, free universal health coverage fell from 66% to 22% of the population,
school fees (at all levels of education) were introduced and significantly increased,
while changes in the state pension system meant a decreased pension coverage for a
larger segment of the population” (2005, p. 719).
Meng et al. (ibid.) compare and contrast the various definitions of poverty but suggest that the expenditure-based measure is most appropriate in the Chinese case given
data availability and that it accounts for the “cost of basic needs” such as food, clothing, and shelter, whereas income-based measures tend to ignore price differentials and
local and regional living costs (see also Ravillion, 1994).
588 JOURNAL OF POST KEYNESIAN ECONOMICS
largely regarded China as a production base through which to exploit lowcost labor conditions primarily to export manufactures across the globe.
Indeed, in this latter respect, Naughton (2007, pp. 377–423) provides a
lucid and highly documented account of China’s extraordinary growth in
inward foreign direct investment (FDI) and involvement in international
trade over the past 20 years. In particular, Naughton notes that China
has become one of the prime locations for international investment and
“now accounts for a third of total so-called developing country FDI . . .
with an unusually large proportion in FDI inflows in manufacturing,
as opposed to services or resources” (ibid., p. 401). This growth has
followed liberalization and generally more favorable Chinese policies
toward transnational corporations, with the government providing investment protection agreements, a moderate tax regime and facilitation of
the repatriation of profits as well as significantly less stringent approval
procedures for inward FDI than observed in other East Asian economies.
The predominance of manufacturing FDI clearly reflects China’s abundant supply of low-cost labor and since the early 1990s, transnationals
have increasingly shifted production from other previously low-cost bases
(such as in Taiwan) in East Asia to China (ibid., p. 416).9 With China’s
FDI inflows averaging around 4 percent of GDP (and being twice that
of neighboring South Korea, Japan, and Taiwan; see Naughton, 2007),
China’s economic trajectory has become especially entwined with those
of the large transnationals.
In summary, while globalization might have brought some benefits
for China, most notably in terms of access to new technology and the
creation of new manufacturing jobs, these gains are qualified somewhat
with a growing suspicion that liberalization and the market reforms
have largely benefitted the (global) corporate sector and the West, which
has, in particular, enjoyed low-cost Chinese imports (and low inflation)
predominantly based on cheap Chinese labor. Moreover, while a rising
middle class in relatively affluent cities such as Shanghai and Beijing
offers corporate firms a potentially profitable consumer market, China
has yet to become a major consumer society. Indeed, the data suggests
the reverse is occurring, with Chinese consumption as a proportion of
GDP gradually falling from 46 percent in 1995 to 37 percent in 2007 and
now half that recorded in the United States (IMF, 2008). Furthermore,
the rise in income and economic uncertainties and inequality for Chinese
9 An indication of the attractiveness of China as a low labor cost location is provided by Kobayashi (2004), who notes that Chinese wage costs are one-thirtieth of those
in Japan. China has become the prime location for Japanese FDI in Asia.
Global imbalances and modern capitalism 589
households over the past 20 years have contributed to the unprecedented
rise in (precautionary) saving rates and the global imbalances that we
now observe.
Addressing the global imbalances
In light of the problems surrounding global imbalances, the emphasis
of much economic analysis has tended to focus on coordinating international macro-level economic policies, such as engineering exchange
rate adjustments. There have, for instance, been calls for a real appreciation in the renminbi, amid accusations that China has been pursuing a
deliberate policy of suppressing the real value of its currency vis-à-vis
the dollar (see, e.g., Bergsten, 2007; Goldstein, 2007).10 However, even
if such large exchange rate adjustments are achievable, they are likely
to cause considerable disruption to the world economy and will only
provide short-term respite unless they are accompanied by longer-term
structural measures.11
While greater international coordination and reform of the world’s
monetary system is clearly needed, it is important to acknowledge
some of the underlying processes of the new industrial state that drive
10 It has been suggested that since the dollar is widely held as the reserve international currency, the United States is saddled with a new “Triffin” paradox, whereby
the world’s central banks are induced to support the dollar since their own dollar
holdings and exposure to U.S. markets are relatively large; thus, in facilitating international liquidity, the United States has to incur a trade deficit (see Morgan, 2009).
Notwithstanding that such problems were largely a feature (and led to the breakdown)
of the Bretton Woods era, any positive demand for dollars (as a reserve currency)
would tend to be offset by a counterveiling falling demand for dollars as established
by a trade deficit, at which point the exchange rate becomes relatively stable (ceteris
paribus). This situation does, however, illustrate the difficulties the United States has
in devaluing its currency, a point considered by Howes (2000, p. 192), who notes that
during a period of constant real effective exchange rates in the 1990s, the U.S. trade
deficit (in manufactures) worsened due to an uncompetitive (particularly on nonprice
factors) U.S. manufacturing sector and unfavorable income elasticities of demand
for imports and exports, with the United States having a relative higher propensity to
import foreign goods. While the high demand for imports may be due to excessive
advertising and the drive to higher levels of material consumption in the United States,
the combination of these factors exacerbate industrial decline in the United States.
Like us, Howes (ibid.) advocates a rebalancing away from consumption toward manufacturing investment in the U.S. economy.
11 One might also recall the Plaza Accord in 1985, which sought a “managed” devaluation of the dollar vis-à-vis the yen and the deutschemark. The accord was subsequently regarded as being a major contributing factor in the global asset price inflation
that followed, particularly in Japan. Moreover, the Plaza Accord largely failed to fulfill
its primary objective of alleviating the U.S. trade deficit with Japan because this deficit
was structural (rather than being a product of monetary policy).
590 JOURNAL OF POST KEYNESIAN ECONOMICS
the global imbalance. Addressing the global imbalance, therefore, will
require more than the fine-tuning of macroeconomic policy. It will require
fundamental reform of international monetary arrangements (Davidson,
1972, 1994, 2007). But it also requires a more fundamental consideration
of wider social and industrial policy. In the United States, it may be an
opportune time to reconsider the Galbraithian debate on the wider effects of excessive advertising expenditures and material consumerism
within the economy. At a fundamental level, we would suggest that in
the United States (and also the United Kingdom), there is a central role
for industrial policy in rebalancing the economy toward investment and
production activities as well as investing in the cultural and educational
base to counter the relentless advance of consumerism.12 Since the early
1980s, both the United States and the United Kingdom have largely neglected their industrial bases and have relied far too heavily on imports
to satisfy their high domestic consumption. Addressing deficiencies in
these economies’ domestic industrial bases will therefore be especially
important in reducing their large trade deficits. It is beyond the scope
of this paper to explore the precise form that industrial policies might
take, although it is perhaps preferable that policy is geared away from
the present oligopolistic structures that have had such a destabilizing
effect. The form of competition chosen by oligopolistic firms, implying high and growing levels of advertising expenditure, in turn shapes
consumer preferences and thus work–leisure choices. While providing a
stimulus to the service sector, this generates unwanted side effects such
as the unsustainable consumptionist tendencies at the root of the current
imbalances. Less-concentrated structures, however, may negate such
tendencies because advertising expenditures will tend to fall; see, for
instance, Sutton (1991), who finds an inverted “U” relationship between
levels of advertising and concentration.
In sharp contrast to the United States, where unbridled consumerism
has fueled the economy, China has depended (to an unprecedented degree) on export-led growth combined with a high savings ratio and low
domestic consumption (see also Hung, 2008). Indeed, there is a certain
irony in that bloated U.S. consumerism has been largely financed by the
(largely precautionary) savings of Chinese households: these savings
being channeled through the global financial system to U.S. borrowers.
12 We are not alone in calling for a renewed emphasis upon industrial policy. Wade
(2009) also makes the point that there is a positive role for (Western) industrial policy
to play in re-addressing the current global imbalances.
Global imbalances and modern capitalism 591
Such a situation has now been shown to be untenable, and the current
crisis thus offers opportunities for a careful readjustment.
While a managed appreciation of the Chinese renminbi is probably
now desirable, it is clear that this will lead to a painful readjustment for
the Chinese economy given its heavy reliance on exports. It is therefore
important that the negative effect of any such currency appreciation is
mitigated through a domestic and publicly funded economic stimulus.
Moreover, and aside from economic reasons, there is a strong social case
for restructuring the composition of growth in China through active state
intervention, if only to alleviate the rising income inequalities that have
been particularly evident between urban and rural districts and are a
(unintended) consequence of the market reforms (see Hung, 2008; Meng
et al. 2005).13 In this vein, rural inequality might be reduced through a
program of rural industrialization linked to public educational policies
(Benjamin et al., 2002), which are largely nonexistent in rural areas (see
Lin et al., 2002). As Galbraith (1964, 1979) argued, an active public
educational program is not only social welfare enhancing, but it will also
improve human capital.14 For the rural Chinese economy it may increase
the transfer of rural labor into the township and village enterprise (TVE)
sector for manufacturing. Such movement may in turn raise agricultural
prices and incomes, thus further reducing rural inequalities. A further
(global) benefit of such a scenario is that China’s level of agricultural
imports subsequently rise from countries with a comparative advantage
in agriculture, such as the United States: in fact, the United States has
been suffering from an oversupply of agricultural produce for some
time (Burfisher et al., 2001). By utilizing each country’s comparative
advantage, greater (global) allocative efficiency may be achieved, while
easing the bilateral trade deficit between the United States and China
(Guo, 2007). At the same time, rural households in China benefit from
better education and higher incomes.
Such an interventionist policy approach is not as controversial as it
might seem, with widespread acceptance among leading economists.
13 In this vein, it is worth noting that Galbraith first raised the issue of “insular
poverty” in American Capitalism (Galbraith, 1952, ch. 8), where he pointed out that
the affluence created by technological advance can cause problems for those who do
not benefit from the new technology, and who are relegated to receiving low wages for
work that is no longer in widespread demand.
14 Galbraith (1964, p. 66) noted that the first stage of development requires education, communication, and transportation to be provided by the state. In The Nature
of Mass Poverty, Galbraith (1979, pp. 115–116) argued for a third way between unfettered capitalism and state socialism, setting out the essence of what later became
identified with the notion of a “developmental state” (see Johnson, 1982).
592 JOURNAL OF POST KEYNESIAN ECONOMICS
Eichengreen (2004, 2006b), for instance, has suggested that China
increase public spending on health and education, while Woo (2009)
has recently suggested that such expenditures might be directed toward
import-intensive investments such as overseas scholarships and the technological upgrading of China’s capital stock to that of G7 levels. Such
an approach, with relevant safeguards, would fit in well with a structured
approach to China’s readjustment. At a macro level, such moves should
reduce China’s domestic savings rate and increase domestic consumption (thus alleviating any downward pressures on domestic demand from
any currency adjustments) while at the global level, such moves would
militate against the current global imbalances.
Conclusion
Modern and nonmodern capitalist market economies give rise to very
different macroeconomic positions in the present century. Such imbalances can, of course, be sustained in the short and possibly medium term,
but in the longer term many economists have questioned whether they
can. The present economic crisis would suggest that such a view is probably the right one. In this paper, we suggest that the response to such a
situation has to recognize the underlying characteristics of the economy
and has to be structural in character, seeking a change in the structure of
the underlying system in each case. The central thrust of this paper is to
suggest that the global imbalances created by modern capitalism and the
ensuing economic crisis requires something much deeper than simply
adjustments in macroeconomic policy.
In the United States and the United Kingdom, in particular, there needs
to be a refocusing of policy away from an overreliance on the consumer
toward raising levels of investment and production. This may imply a
positive role for industrial policy to reestablish productive capacity in
these economies, possibly one that steers away from promoting oligopolistic structures. In China, while market reforms have helped to generate
impressive levels of economic growth, it has also led to greater economic
uncertainty and rising inequality and a reduction in public service provision. Along with changing demographics, these factors have contributed
to extraordinary levels of precautionary saving among households and
since the mid-1990s, lower levels of consumption (as a proportion of
GDP). While exchange rate adjustments are likely to be painful, Chinese
domestic policy might be directed to reducing inequalities and poverty,
particularly through the provision of health and education services to the
poor so as to aid intergenerational mobility (see Meng, 2003; Meng et
Global imbalances and modern capitalism 593
al., 2005). Such measures may go some way to reducing China’s high
savings rate and allow more of the populace the opportunity to participate
in the benefits of economic growth. At the global level, these structural
changes in both modern and nonmodern capitalist economies may go
some way toward correcting the global imbalances problem.
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