Ono's Theory Groundless

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Last updated at: (Beijing Time) Wednesday, August 06, 2003

Ono's Theory Groundless

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It is ill-conceived for Japan to blame its economic slowdown on the value of yuan, the Chinese currency, said an article in the International Finance News written by Chi Hung Kwan, a senior researcher with the Japan-based Research Institute of Economy, Trade and Industry.

In recent years, there has been an extremely popular opinion in the Japanese media which attributes China's economic growth and Japan's recession to the depreciation of the yuan.

For example, Yoshiyasu Ono, a professor of the Japanese Osaka University, recently said as much in a fairly harsh tone in an article printed in the July 11 edition of the Nihon Keizai Shimbun.

It would be understandable if such opinions had been trumpeted by an amateur, but it really is unbelievable that a noted economist could put forth such a shallow argument.

In his article, Ono maintains that the strong competitiveness of Chinese firms is decided to a large extent by the changes in the exchange rate of the yuan rather than those firms' own efforts.

In fact, over the past 25 years since China's adoption of the reform and opening-up programmes, the Chinese currency has fallen sharply against the US dollar either in nominal terms or in real terms that reflect the inflation gap between China and the rest of the world.

However, there are a number of other developing countries in the world which have also seen their currencies depreciated. Why is it that only China that has realized so remarkable economic development?

If a country could realize a fast economic growth simply by devaluing its currency, then the more than 100 developing countries in the world would easily develop into industrialized nations and the North-South problem would be settled in a single stroke.

If Ono's reasoning is correct, then there is no reason for the existence of the World Bank or the Official Development Assistance plan (ODA) for developing countries.

However, every economist should clearly know that there has never existed such a mechanism in the world, Chi Hung Kwan said in his article.

It is a common economic theory that short-term prospects are determined by demand-related factors, while long-term economic growth is determined by supply-side factors. The fluctuation of a country's currency, like its monetary and fiscal policies, affects its economy mainly through demand.

The fundamental reason why the Chinese economy has achieved a high growth rate of 9 per cent on average over the past two decades should be attributed to its supply factors.

According to the economic growth theory, China's rapid economic growth over the past few years has been brought about by an increase in the input of production-related factors, such as labour and capital, and the increase of its productivity.

Furthermore, China's rapid economic development should also be attributed to its institutional reforms, which have advanced the country from being self-reliant to opening up and from a planned economy to a market-oriented economy.

Ono not only argues that China's economic miracle has been accomplished mainly through depreciation of its currency, but also owes Japan's economic slump to the unfair competition it faces from China.

In his article, Ono asserts that the "China threat" theory, which has been very popular in Japan and the United States, stems from "China's artificial devaluating of its currency."

The decrease of the exchange rate of a country's currency may possibly, over a short term, spur the development of its economy by expanding its external demands. But the real exchange rate, in the long term, will reach equilibrium with domestic prices gradually rising as time goes by, Chi Hung Kwan said.

Therefore, the real exchange rate of a country's currency over the long-term is not a policy variable that can be artificially decided by the government, but is rather one endogenous variable that reflects basic economic conditions.

As far as China is concerned, the long-term weakening of the Chinese currency reflects the decline in terms of trade, namely the relative price of export goods against import goods, due to the rapid increase in exports.

Besides, the argument that the devaluation of the yuan has a negative impact on the Japanese economy is based on the assumption that China and Japan have similar industrial structures and have a severe competitive relationship in international market.

However, the fact is that there is a clear division of labour in line with the individual comparative advantages of the two nations. China mainly focuses on labour-intensive goods and processing while Japan mainly produces technology-intensive goods.

Therefore, it is obvious that the two neighbours are economically complementary rather than competitive.

Under this situation, the decline of the price of imports from China, just like a decrease in oil prices, should benefit Japan's trade and boost the real incomes of the Japanese people.

There have been arguments that Japan's failure to extricate itself from its economic recession is attributable to its high production costs; such a situation, if left unresolved, will result in Japan's disadvantage in competition with China, which will further dampen the country's economy and lead to its eventual downfall. Such an argument is nothing but paranoia.

Ono drew the wrong conclusion by misapplying the Keynesian model, which is valid in analyzing short-term economic development trends, to explaining the issue of long-term economic growth.

In fact, there are many other economists, just like Ono, who wrongly believe that building abstract economic models, rather than conducting positive economic analysis on the basis of observing the real world, can find truth in economics.

Economists should get out of their ivory towers and strive to inquire into the nature and causes of the wealth of their own countries based on the spirit of "seeking truth from facts." (China Daily News)

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