THE WAR OF ECONOMIC SYSTEMS
Aug 8 - 14, 2011
Alan Greenspan reveled in his success at cracking the 'conundrum' of declining long-term yields in the face of Fed tightening in June 2004.
He rightly thought that something strange was happening in the economic world. He got a clue from the German corporation Siemens' 12 percent cut in wages and the union IG Metall accepting it without a whimper.
The year 2004 was the time when world wages, costs, and prices were dampened by the influx into free markets of low-cost highly-educated workers that were on the move from the freed centrally planned economies in the wake of economic reset that followed after the end of the cold war and the fall of the Berlin wall.
He writes, with his typical penchant for free-market capitalism: "The fall of the Berlin Wall exposed a state of economic ruin so devastating that central planning, earlier applauded as a "scientific" substitute for the "chaos" of the marketplace, fell into terminal disrepute....Communist China which had discovered the practical virtues of markets a decade earlier, accelerated its march toward free-market capitalism without, of course, ever acknowledging that that was what it was doing. India began to awaken from the bureaucratic socialism of former prime minister Jawaharlal Nehru. And any notions emerging economies might have had of implementing or expanding economy-wide forms of central planning were quietly shelved. Soon well over a billion workers, well educated, all low paid, began to gravitate to the world competitive marketplace from economies that had been almost wholly or in part centrally planned and insulated from global competition....This movement of workers into the marketplace reduced world wages, inflation, inflation expectations, and interest rates, and accordingly significantly contributed to rising world economic growth.'
It is not very distant when we knew this world as a bipolar entity. USSR at one pole relied on draconian, centrally planned economic policies. US at the other pole (after acting prudently for quite some time) put its blind reliance on rapacious free-market forces. Pole one was destroyed for being on one economic extreme while pole two is in the process of getting punished for being on the other economic extreme. China took the wise decision of cruising along the equatorial line that guarantees life more than the poles do. Alan Greenspan's gloating over the perceived supremacy of free market capitalism is utterly misguided. He attributes China's economic advance during the recent decades to Chinese shift to free market capitalism which, according to him, China avoids to admit. The flaw in Greenspan's thinking is exposed by the current economic standing of the two nations. If one system has proved so beneficent for one economy, why it failed to deliver the same benefits to the other one?
Rational oversight in the shape of timely state intervention and well-designed regulatory mechanism is what separates the two leading world economies - one relying on brutal forces of free market and the other on prudently laid-down economic policies and programs. The size of American public debt betrays how precariously the economy is positioned. Heavy US reliance on services sector is in sharp contrast to Chinese model which strives to maintain a balance between services and industrial sectors. China's high reserves position combined with a low debt-to-GDP ratio enables it to act as "banker to the United States of America", as stated by Niall Ferguson. The dominance of a prudently managed, state-controlled economy over the much-feared, but in fact hollow, economy of US belies all claims about the infallibility of free market capitalism. It is the sound economy of China that lends a helping hand to the US economy. This fact is beautifully described by Niall Ferguson in one of his bestsellers The Ascent Of Money: "Welcome to the wonderful dual country of "Chimerica" - China plus America - which accounts for just over a tenth of the world's land surface, a quarter of its population, a third of its economic output and more than half of global economic growth in the past eight years. For a time it seemed like a marriage made in heaven. The East Chimericans did the saving. The West Chimericans did the spending.'
ECONOMIC INDICTORS OF US & CHINA
ECONOMIC INDICATORS UNITED STATES REPUBLIC OF CHINA Rank in World Economies First Second Nominal GDP $14.660 trillion $5.880 trillion GDP growth 2.9% 10.46% Labor force 154.5 million (2009 est.) 780 million (2010 est.) GDP by Sector Industry: 21.9% Industry: 46.8% Services: 76.9% Services: 43.6% Agriculture: 1.2% Agriculture: 9.6% Inflation rate 1.6% 4.9% Population below poverty line 14.3% 2.8% Labor force 154.5 million (2009 est.) 780 million (2010 est.) Unemployment rate 9% 4.2% Ease of doing business (Rank) 5th 79th Exports goods $1.280 trillion $1.506 trillion Imports goods $1.948 trillion $1.307 trillion Main export partners /import partners Canada 13.2% / 11.6% US: 20% / 7.7% Mexico: 8.3% / 9.1% Hong Kong: 12% / 10.1% China: 4.3% / 15.4% Japan: 8.3% / 12.3% Japan: 3.3% / 4.9% S. Korea: 4.6% / 9% Germany: - / 3.7% Germany: 4.2% / 5.6% Foreign Direct Investment (FDI) stock $2.938 trillion (Dec 2009) $100 billion (2010) Gross external debt $14.390 trillion (Sep 2010) $406.600 billion (2010) Public debt 93% of GDP (Jan 2011) 17.5% of GDP (2010) Revenue $2.162 trillion $1.149 trillion (2010) Expenditure $3.456 trillion $1.270 trillion (2010) Foreign exchange reserves $142.931 billion (July 2011) $3.050 trillion (2011)
"Ease of doing business" is one area the free-market economists tend to focus on. Protectionism and red-tape business administration are openly frowned upon. In all fairness, there could be no sets of uniform custom practices and tariffs or rules for conducting business that can fit into various economic structures. Each economy has to develop them according to its resource base and state of the economy. To expect different 200 nations to conduct business according to the standards developed at alien quarters is simply naivety. This is perhaps one of only few indicators the US can take pride in. But one should remember that unbridled ease of doing business does only promise subprime mortgage fiascos and creation of spurious debt securities with AAA rating by S & P and Moody's. A quote from Brian Cloughley's latest article Confronting China would be of great interest to economic students and analysts: 'Washington insulted the most powerful nation on earth (for it could destroy America economically tomorrow if it wanted to.'