Opinion Clout of the virtuous

The strange parallels between Germany and China

November 25, 2011 02:43 AM IST First published on: Nov 25, 2011 at 02:43 AM IST

When the Olympics were held in this countrys capital city,great care was taken to put on a show to impress foreign visitors. Dissidents were picked up and taken away from the city. Unwanted and protesting ethnic minorities were kept under surveillance. All citizens were instructed to keep smiling to convey the message that happiness prevailed in the host country. Magnificent stadiums were built. The might and power of the state apparatus was there for all to see and to get impressed with. The Olympics themselves were conducted with precision and an attention to spectacle that was nothing if not awe-inspiring. Truly the hour of the collective man seemed to have arrived.

The above paragraph was certainly true of Beijing in 2008. Ironically and eerily so,it was also true of Berlin in 1936. Totalitarian regimes proclaim their grandeur by building giant sporting arenas and by demonstrating their immense managerial skills. While there have been many similarities between Nazi Germany and Peoples China,what is astonishing is the set of parallels in economic matters that seem to be characteristic of contemporary China and the bespoke democratic Germany of today. The Chinese are thrifty and save a lot; the Chinese are hard-working; the Chinese export immense quantities of goods to other countries who seem to be willing consumers; the Chinese accumulate foreign exchange reserves at an astonishing rate; the Chinese keep their exchange rates at levels far lower than markets would organically set them at. The Germans are thrifty and save a lot; the Germans are hard-working; the Germans export immense quantities of goods to other countries who seem to be willing consumers (in this case,largely consumers living in lazier European countries); the Germans accumulate vast quantities of international reserves.

The parallel does not end there. By getting their European trading partners to join the euro,the Germans have in a roundabout way achieved the economic effects of an undervalued currency. After all,over the last 10 years,if the drachma and the lira had existed,would they not have pretty much automatically devalued against the Deutsche mark by several hundred per cent? Would the German currency have not strengthened? While everyone is talking about the fact that the strangulating effect of the euro is preventing the Greeks and the Italians from devaluing and at least addressing their problems in part,we miss the point that the same euro has the effect of providing the Germans with an artificially lowered currency value. When we talk of relative prices,after all one is the mirror image of the other!

I know it seems unfair to criticise countries where people save a lot (the moralists of antiquity have been positive about savings),where they work hard (something that the Bible and the Bhagavad Gita would both approve of) and where they set themselves up as frugal,sober and productive. It is difficult,if not impossible,to sympathise with lazy and profligate countries which accumulate debt all too easily! But the fact is that what China has done to the rest of the world and what Germany has done to the world at large,but more particularly to Europe,for the last decade and more has been pretty similar. They have leveraged undervalued currencies to persuade others (the US and southern Europe in particular) to consume more. Not that these countries or their citizens needed much persuasion to consume. But in all fairness,without their mirror image neither China nor Germany could have got the economic clout that they possess today. Contemporary Germany is a smaller version of China and if other Europeans feel that they have been shafted by the sleight of hand of a common currency,there is some measure of truth in that. The laid-back Italians and the even more laid-back Greeks would have devalued a long time ago and prevented the massive surplus in the German balance of trade. Being issuers of the worlds reserve currency,the US does not have the luxury of devaluing against the renminbi and the rest of the world stands saddled with the problem of Chinas surplus.

Is there a way out? Trade barriers would be disastrous as they would hurt all players and could precipitate an economic depression. In a world as uncertain as this,it is going to be pretty difficult to persuade sensible Chinese and Germans (and by God,are they sensible!) to save less and spend more. What can be done? The German and the Chinese answer would be that if the rest of the world saw the light and people started living frugally,sensibly and soberly,then over a period of time (did I hear someone say a decade or so?) the problems would get sorted out. In the meantime,if the citizens of lazy and profligate countries experience massive unemployment and severe cuts to their social safety net (mostly undeserved featherbedding in the opinion of the Chinese and the Germans),then so be it. Without this difficult medicine,people (like the Italians) will continue to desultorily and casually come to work,people (like the Greeks) will continue to retire at the absurd age of 50 and the Americans will continue to splurge on their credit cards and consume rather than save and invest. Postponing this medicine or trying to artificially achieve impossible soft landings for these economies,as per this argument,is neither possible nor desirable.

The rest of the world (and without an exception all of us are lazier and less productive than the Chinese or the Germans) would much prefer a fixing of relative prices through the simple magical act of re-setting the relative prices of currencies. But more than a decade of the consumer binge means that the ones with economic muscle (and therefore with respect from the financial markets) are the paragons of sobriety,not the hedonists who so readily bought (and are still buying) goods from the hard-working producers. The Chinese and the Germans may yet force the consuming world to swallow the bitter medicine.

The writer is chairman of the Nasscom Foundation,jerry.rao@expressindia.com

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