Amid all the jostling in London, Martin Wolf ordered the great powers to quit arguing over trifles and focus on the real imbalances in the global economy: the massive current account surpluses that China ($372 bn), Germany ($253 bn), and Japan ($211 bn) have accumulated in recent years (2007 figures), which supported cheap credit and over-borrowing on the part of the U.S. government and private lenders. Wolf thinks structural adjustment can and must happen, and that London’s G-20 meeting should have been dominated by that question.

Zhou Xiaochuan, the Chinese Central Bank governor who made headlines recently with his musings on the dollar’s status as the international reserve currency, has an answer: Ain’t gonna happen—not now, and maybe not ever.

More people should read Zhou. He is the rare technocrat who cares to communicate his ideas in simple and supple language, and the rare economist who enjoys grappling with the historical and cultural ambiguities of modern economies. That he is an important central banker doesn’t hurt either.

His argument is that East Asian savings rates shot up primarily because of these countries’ experiences during the Asian economic crisis. Since then, they’ve built up surpluses as “defensive reactions against predatory speculation [that] caused large capital inflows and subsequent reversal … which exacerbated their economic woes. People in these countries were shocked, and disgusted by these speculative attacks.”

The better solution, Zhou argues, would have been to restrict international capital flows at the time—perhaps something like Chile’s requirement that foreign investors leave 30 percent of their money in non-interest bearing accounts at the central bank for one year, a kind of tax on short-term investors. This would have discouraged foreign speculators from rushing into an emerging market like Thailand or Indonesia, then rushing out at the first sign of trouble, and leaving a financial crisis in their wake.

Zhou says these reforms never came about because “some countries were against such regulations, and failed to see the need to adjust the regulatory frameworks.” Instead, the preferred solutions were “excessive and stringent conditionalities,” which required “the crisis-stricken countries adopt tight fiscal and monetary policies, raise interest rates, cut fiscal deficits and increase foreign reserves.” This is clearly a jab at Treasury under Robert Rubin, who worked with the IMF to impose a series of belt-tightening responses to the East Asian turmoil.

Zhou argues that the approach was counterproductive: “In the decade thereafter, the East Asian countries learnt the lessons, and increased foreign reserves and domestic savings in order to beef up their defense against financial crisis.” China’s savings ratio increased from 37.5% in 1998 to 49.9% in 2007, helping to foster the cheap credit that underlay the recent bubble.

Of course, this is an argument for why savings rates in Asia are so high now, not an argument for why they can’t fall in the future. For that, Zhou invokes tradition, culture, and demographics. The big question, he says, is why Japan, an extremely developed country with high per capita income and a reasonable social security system, has not been able to transform itself into a consumer-driven economy. His answer—that cultural forces are at work—is a direct challenge to Wolf’s view that a day-long political summit can begin to untangle the issue.

--Sahil Mahtani