Twofish's Blog

June 4, 2007

Challenging three statements

Filed under: china, economics — twofish @ 6:29 pm

Let me throw out three challenges for statements that need justification:

1) Capital flows *should* flow from capital rich areas to capital poor areas. It’s not obvious that this should be the case. Capital rich areas also have more efficient mechanisms for allocating capital, so it isn’t obvious to me that moving capital from poor areas to rich areas is the optimal allocation of capital.

2) China’s savings rate is unprecedented, and therefore unwise. Just because something has never happened before doesn’t mean that it shouldn’t. Among the differences that China has with other economies is the size of the project and also the age-distribution structure which is very different from previous developments.

3) China’s actions would result in losses and are therefore unwise. The problem with that statement is that an activity that results in losses may be wise if alternate activities result in even greater losses.

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