December 05, 2015
The state of economics is pretty dismal these days, which is demonstrated constantly in the reporting on major issues. The NYT gave us a beautiful example this morning in a piece on a pledge by China’s government of $60 billion in aid to Africa.
The third paragraph told readers:
“Against longstanding accusations that China benefits from a lopsided relationship with Africa, contentions that have recently gained traction as China’s trade deficits with many African nations have widened, Mr. Xi said that ‘China has the strong political commitment to supporting Africa in achieving development and prosperity.'”
Okay folks, get those scorecards ready. In standard textbook theory, poor countries are supposed to run trade deficits with rich countries. The story goes that capital is plentiful in rich countries while it’s scare in poor countries. Rich countries should therefore lend capital to poor countries where it will get a better return.
The flip side of this flow of capital (it is an accounting identity) is that poor countries run trade deficits with rich countries. These trade deficits allow the poor countries to build up their infrastructure and capital stock while still have enough goods and services to meet the needs of their populations. If relatively better off countries like China are willing to give money, rather than lend it, the developing country trade deficits should be even larger.
This means that folks who believe the textbook trade theory should see the widening of the trade deficits that African nations are running with China as evidence that they are gaining from the relationship, not as evidence that the relationship is lopsided.
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