Meade's Conflict: International Experience And Difficulties Confronted In China

Under the Open Economy, the regulation of Macro-economy must achieve internal equilibrium and external equilibrium, that is, sufficient job positions, stable prices, suitable development of economy and external equilibrium, all these are fulfilled at the same time. And under such circumstance, the relationship between the internal economic department and the external economic department is not only close but relative independent. In some conditions it even can cause contradictions and lead to conflicts of regulation of Macro-economy. James Meade is the first economist who proposed the contradictions of inward equilibrium and outward equilibrium under the Open Economy. In his book"The Balance of Payments", Meade said, the only way for the government to regulate the contradictions was using the policy which affected the whole demands of the society. And during the specific period of the Open Economy, there would produce difficulties of regulating the contradictions, which called Meade's conflict.After thirty years'Reform and Opening-up, the degree of Chinese opening of the domestic economy increases gradually. The opening to the Outside world of the economic department is also enlarged so as to the international factors affect the Macro-economy more and more which cause the contradictions of internal equilibrium and external equilibrium important to regulate the macroeconomy in the new period of the opening to the outside world. From 1994 to 2006, there were so many contradictions between internal equilibrium and external equilibrium which means difficulties confronted in China .The basic method of solving this problem is policy combination, such as choosing different policies according to diverse environments to realize the optimized matching of the economic policy. The optimized matching is to achieve the corresponding relation between the efficiency of the policy targets and the policy tools. From the practices of the macro-economy policy during 1994 and 2006, the targets of the internal economy such as increasing economy, stable prices and promoting employment, were realized by the combination of financial and monetary policies. Meanwhile, the fluctuation of RMB exchange rate caused by the unbalance of international payment was stabilized via bargain of foreign exchange reserve. When the change of the scale of the foreign exchange began to influence the realization of the target of internal economy, sterilized intervention was adopted to solve this problem. But from the results, it showed that it couldn't regulate the contradictions. It was due to the trade policy characterized by earning foreign exchange through export , the actively attracting foreign capital policy and the stable exchange rate policy. Under such combination, the macro-regulation of government confronted with the conflict between economy increasing with unemployment decreasing and the balance of international payment, stable prices, and steady exchange rate of RMB. To solve Meade's conflict and realize internal equilibrium and external equilibrium, it needs to regulate the traditional economic policies according to the actual conditions of Chinese economy, and finally reaches the optimized matching of the policies of monetary, exchange rate, regulation of the flow of international and external trade policies.On the basis of the principle theory of western macroeconomics, this paper analyzed the contradictions between internal and external equilibrium of Chinese macro-economic regulation, and studied the policies of monetary, exchange rate, regulation of the flow of international investment and external trade under the Open Economy.This paper consists of seven chapters except preface.(1) At first, the theory of internal equilibrium and external equilibrium under the open economy was presented. We analyzed the producing reasons and the manifestation of the contradictions between inward equilibrium and outward equilibrium and discussed the solving method, combination of financial policy and monetary policy which using Mundell-Fleming Model.(2) From the Meade's conflict which caused by the fixed exchange rate policy and free capital movements, we analyzed the inevitability of the Argentine crisis and the Asia financial crisis. Then, we summarized the successful experiences of Japan and Korea to control Meade's conflict when they were in the same difficulties as those China now encounters. At last, we described the coordination of the financial and monetary policies holding on European Union.(3) The developing status of Chinese economy was stated from two aspects, width and depth. By divided the period, from 1994 to 2006, into three different parts, we studied the contradictions between internal and external equilibrium of Chinese macro-economic regulation. Then, we made a summarization of the policy combination and proposed an efficient method.(4) During the realization of the policy combination, monetary policy is mainly used to adjust the price level and to achieve stable prices. So we analyzed the independence of the Chinese monetary policy and the sterilization of foreign exchange by central bank under the open economy. In current policy combination, conflicts of political target lead to the independence of monetary policy waken with the capability of the endogenous character of base monetary increasing, so as to produce inflation or deflation. The sterilization of foreign exchange by central bank didn't smooth the conflicts between monetary policy and exchange rate policy.(5) With the degree of the open economy and the ability of market increasing, exchange rate policy has been an inevitable tool to realize the balance of international payment. But under the target of stabling RMB exchange rate, it produces conflicts between exchange policy and monetary policy. Here we analyzed the effects of the exchange rate regulation to the operation of internal and external economy. By reviewing the two reforms of RMB exchange rate policy in 1994 and 2005 separately, we emphasized on the fluctuant exchange rate policy with regulation using a basket of currencies. As for the effect of the regulation of RMB exchange rate on the the balance of international payment, we analyzed it in three aspects including trade balance, short-term capital flow, and foreign direct investment.(6) Since Reform and Opening-up, China implements "Easy in And Strict out" capital flow regulation policy and attracts foreign capital. Though the large amount of the input foreign capital devoted to the increase of economy and employment, it aggravated the unbalance of external economy, and lead macro regulation to face the contradiction between economy increase, unemployment lessen and the balance of international payment, stable prices and steady exchange rate. In this chapter we focused on five parts to analyze the effect of international capital flow regulation policy on the internal and external equilibrium of Chinese macro-economy, such as the capital and financial difference to the balance of international payment, foreign direct investment to trade balance, the short-term capital flow to the net errors and omissions, foreign capital inflation to incongruity which leads to saving gap and trade gap, and international capital flow to money supply. Besides, we discussed on the new development on the international capital flow regulation policy.(7) Since Reform and Opening-up, an extraordinary feature of Chinese economic development is the continuous and fast increases of foreign trade under the promotion of the reform on the trade policy. Since 1994, our trade sustained surplus and the difference was enlarged. Undoubtedly, surplus had done significantly to solve the foreign exchange deficit during the developing process of economy, to promote the increases of Chinese economy and employment. But it affected the balance of international payment, aggravated the press of RMB Appreciation. As the unbalance of external economy increased, the development of internal economy was affected by the liquidity surplus which caused by excessive increase of foreign exchange reserve, and all these produced the contradictions of macro-economic regulation between internal equilibrium and external equilibrium. We analyzed the effect of the long-term implemented strategy of export leading type foreign trade to the current balance of macro-economy. By discussing on the dependence of foreign trade, we described the relationship between domestic demand and external demand, and pointed out the emphasis of depending on the domestic demand to decrease the trade surplus.The contributions of this paper were stated as followed.(1) This paper pointed out that the inward and outward equilibrium of macro-economy should be optimized. Internal equilibrium means sufficient utilization of national resources, fulfilled employment, suitable and fast increases of economy, stable prices and so on. External equilibrium refers to that there is no deficit crisis in international payment which will cause no ability to pay off the debt in the future, and there is no excessive surplus to lead other country into this dilemma. Besides, there are some other factors should be considered such as trade payment balance, internal and external capital flow stability, structural balance of economy department. So the optimized outward equilibrium is not equivalent to the balance of international payment, but an international payment structure suitable to the development of macro-economy.(2) This paper synthesized the principle of the producing of the contradictions between internal and external equilibrium. The first reason is the impact of the external economy including the actual economic factors and financial impacts. The second is the spontaneous disturbance of the internal economy, such as the spontaneous increase or recession of domestic payment, the growth of production and increase of supply caused by developed technology, the change of consumption structure, structural effects of marketization and internationalization. The last is the incongruity of economic policy, including international and domestic economic policies.(3) This paper analyzed the main three reasons of the principle of the producing of the contradictions between internal and external equilibrium in China in detailed. The external impact mainly refers to the aggravating of the international factors'fluctuation and producing factors under the fast internationalization. The spontaneous disturbance of the internal economy means the unbalance of the structure of the domestic Chinese economy. The incongruity of economic policy includes the conflicts between Chinese exchange rate policy and monetary policy, and the asynchrony of the exchange rate regulation between China and America.(4) Finally, this paper emphasized on the importance of the coordination of international economic policy to solve the contradictions confronted in China. Due to the significant effect of the external factors to the economic unbalance, the fundamental method is the coordination of the international economic policies. It is a new viewpoint to discuss the coordination of the international economic policies from the perspectives of solving thecontradictions between internal equilibrium and external equilibrium.Certainly, the word, China threat, is still exists around the world which causes bad effects to the international coordination of Chinese economic policy. It needs further investigation on how to solving the confronted contradictions by the international economic policy combination.