Monday, March 03, 2008

Dear Readers, I know I have not contributed much of substance lately, but here is a piece of my mind. Exactly 20 years ago, China's inflation rate was going through the roofs, surpassing the 20% mark in many cities. Yet, a group of young scholars who worked for a think tank set up by then Premier and Party Secretary Zhao Ziyang wrote article after article about "acceptable" inflation--the idea that 20% inflation was normal for a developing country like China (for full story, READ MY BOOK). It turns out that there was some support for what they said, but they mainly made the argument because their political patron, Zhao Ziyang, wanted them to say so.

Now, the leader of that young group of scholars, Li Yining, is at it again. As one can see from the passage below, Li now blames inflation in China on current account surpluses and world price shocks. He is clever to admit that high investment was also a cause. The underlying tone of his remarks though is that the central government should loosen monetary policies because the cause really was "structural" (ie having to do with exchange rates). To be sure, Li is quite consistent in his argument; he also blamed inflation in the 80s on the structural problem of having too many SOEs and price controls. Be that as it may, China fortunately never implemented his preferred policy of not imposing retrenchment policies--or it would have faced hyper-inflation. Li's thinking is once again gaining currency, and this time, he has the backing of some subset of the political elite and the real estate tycoons. I don't want to sound melodramatic, but one feels a certain level of relief that Wang Qishan is taking the Vice Premier position at such a moment.











So Prof. Li's reputation within general population of being a "mouthpiece" for the rich and powerful is true indeed!
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