WASHINGTON, Oct 27—Although its economy will remain strong during the global financial crisis, China’s leaders should not see the situation as a failure of capitalism, concluded Albert Keidel in a recent speech before the U.S.–China Business Council. Instead, both China and the United States should learn from the crisis and improve their political and economic systems.

The lessons to be learned apply more to the world’s advanced economies than they do to China, which is still in the early stages of economic and political modernization. For the United States and other mature industrial powers, this crisis is an opportunity to improve the competitive and democratic capitalist model.

Recommendations for the United States

  • Restore adequate liquidity through well-targeted infusions of cash, credit, and guarantees for financial institutions and their transactions.
  • Coordinate with leading global economies on large-scale fiscal expenditures to avoid a severe recession; adequate scale is vital.
  • Persuade Germany and Japan to adjust their economies to create long-term trade deficits rather than their traditionally large surpluses. In partnership with the United States, this would provide sustained demand, enabling developing countries to trade their way out of poverty.
  • Reform and limit professional lobbyists’ activities and their access to legislators and policy makers.
  • Lead a coordinated global and integrated reform of the world’s financial regulatory systems.

Recommendations for China

  • Move forward with domestic stimulus plans while simultaneously implementing previously outlined social and environmental reforms.
  • Frequently reiterate that it will manage its foreign exchange reserves in a balanced and responsible way.
  • Weaken non-tariff trade barriers to both help crisis-stricken economies and blunt protectionism.
  • Shift from criticism of American and European financial management to encouragement of what promises to be just the most recent of the world’s crisis-driven improvements in governance systems.

Keidel concludes:

“For well over a hundred years, financial market regulation has improved most when crises have shown its shortcomings. This current crisis will clearly be just another chapter in the gradual, and uneven, process of making an ever increasingly sophisticated financial system function more fairly and more efficiently. This is the most helpful—and most accurate—interpretation of the crisis’ long-term significance. As an outsider to the crisis, China could play the role of objective commentator and strengthen confidence worldwide in the eventual if not speedy recovery all over the world.”

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bulletNOTES

  • Albert Keidel is a senior associate at the Carnegie Endowment, where he specializes in Chinese economic issues and related U.S. policy. He formerly served as deputy director and acting director at the Office of East Asian Nations in the U.S. Treasury Department. Before that, he was senior economist at the World Bank office in Beijing.
  • The Carnegie China Program in Beijing and Washington provides policy makers in both countries with a better understanding of the dynamics within China and between the United States and China. In addition to books, policy briefs, papers, and other publications, the Program produces Carnegie China Insight Monthly, a Chinese-language e-newsletter, and hosts the Hong Kong Journal, an online quarterly covering political, economic, and social issues on Hong Kong and its relations with mainland China, the United States, and other governments and international organizations.