Enlightened Economics

Economics for an Enlightened Age

Posts Tagged ‘China’

• Has the Global Trade Engine Stalled? (Goods, perhaps. Services, maybe not)

Posted by Ron Robins on December 21, 2014

“For the first time in nearly half a century, trade between nations has grown slower than the global economy. Some economists believe trade may be at a peak, at least for a while. “Peak Trade” suggests the world could hit a long-term ceiling in terms of the effects of trade growth as an economic driver.”
— Has the Global Trade Engine Stalled? By Eric Justian, December 19, 2014, TriplePundit, U.S.A.

Commentary: Ron Robins
Buy local, make locally, is a major trend in all countries. The huge U.S. economic stimulus package of five years ago mandated domestic sourcing and production, wherever possible. In the U.S., as in many countries, there are large constituencies who see global trade as contributing to massive losses of high paying domestic jobs. Hence, like the U.S., countries around the world are emphasizing buy local, make locally.

Furthermore, renowned trends forecaster Gerald Celente of the Trends Research Institute predicts these trends growing globally together with an anti ‘made in China’ mindset among developed countries’ consumers.

Most of these trends likely apply mostly to the goods trade. But it remains to be seen if the services side of global trade is similarly constrained. My suspicion is that with the growth of the web and recently introduced simultaneous multi-lingual VOIP services such as Skype has inaugurated, services might yet see much further globalization. Services also constitute about 70% of global GDP.

For a more detailed understanding on the growth of the global services trade, read my post, Huge Migration of Service Jobs to Developing World Looming. That essay implies that over the long-term global trade in services — and due to lower cost structures particularly benefits the developing economies — could grow appreciably faster than world GDP.

From an Enlightened Economics perspective, the freer the trade, the better. There’s no better means to economic growth than for the ‘invisible hand’ of the market to function seamlessly and optimally.

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• India, Ancient Economic Behemoth, to Overtake China

Posted by Ron Robins on April 12, 2011

By Ron Robins. First published March 20, 2011, in his weekly economics and finance column at alrroya.com

When Europe was going through its murderous medieval period, India was an economic behemoth controlling from one-fourth to one-third of the world’s wealth. After the death of the Indian Mughal Emperor Aurangzeb in 1707, India descended into fractious internal wars. This gave the British with their East India Company the opportunity to seize and control vast Indian assets, eventually assuming supremacy over all India.

In 1700, India’s economic output—its gross domestic product (GDP)—was almost 9 times that of Britain’s. By 1947, just before Indian independence from Britain, the tables had turned dramatically with British GDP about 1.2 times that of India, according to data by Angus Maddison in his study, The World Economy.

Now, the International Monetary Fund (IMF) believes the Indian economy has grown to be the world’s fourth largest on a purchasing power parity (PPP) basis, that is, equalising exchange rates given the purchase of a set basket of goods. A Citi study reviewed in The Times of India on February 23 said that based on PPP, India will have the largest economy in the world by 2050. And the World Bank suggests that India’s economic growth rate could surpass that of China this year. The Indian government is projecting 2011 GDP growth of near 9 per cent.

Furthermore, the US Census Bureau projects India’s population becoming the world’s largest and surpassing China in 2025. And by 2050, the Bureau sees India’s population at 1.66 billion compared to China’s 1.3 billion.

Population demographics are crucial in another sense. In Ed Dolan’s, India’s Secret Weapon in its Economic Race With China: Demographics, November 11, 2010, he writes that, “rich countries with slow population growth have high dependency ratios because they have many retirees. Low-income countries with fast population growth have high dependency ratios because they have lots of children. In between these two states, countries go through a Goldilocks period when the working age population has neither too many children nor too many parents to support… India is just entering its Goldilocks period while China, like the United States, is already leaving.”

While considering demographics, Mckinsey & Co expects India’s middle class population to grow from 50 million in 2007 to 583 million by 2025, while over 291 million will move away from desperate poverty to a more sustainable livelihood. Mckinsey also sees India’s consumer market becoming the world’s fifth largest by 2025, up from twelfth place in 2007.

Such consumption growth implies enormous economic investment. And in fact, in the next three years, a massive $500 billion is being spent on Indian infrastructure says Chris Devonshire-Ellis in his post, China Demographics Dictate India as Global Manufacturing Hub, last September 27. Citing data from Asian Comparator, he says that Indian wage rates and associated costs are highly favourable when compared to China and other Asian nations.

However, for now it is India’s service sector that is its real star. Relative to China, and given its state of development, India’s service sector is much larger too and is thus offering a different growth path to that of China. In fact, Ejaz Ghani, Economic Advisor at the World Bank, says in The Service Revolution, March 23, 2010, that the growth in services has India and other South Asian countries exhibiting the growth patterns of middle to high income countries.

Mr Ghani also says, “productivity growth in India’s service sector matches productivity growth in China’s manufacturing sector… that the effect of services growth on aggregate economic growth appears to be as strong, if not stronger, than the effect of manufacturing growth on overall growth… India’s growth experience suggests that a global service revolution—rapid growth and poverty reduction led by services—is now possible.” Incidentally, services represent about 70 per cent of global GDP, whereas manufacturing is much lower at 17 per cent. Thus services represent potentially, a much higher order of growth for India than does manufacturing.

And services continue to grow rapidly. In a February 21 article in India’s Express Computer, it says that IT-BPO (information technology-business process outsourcing) is estimated to be up 19 per cent this year with revenues of $76 billion. Exports are expected to be $59 billion of that. For fiscal year 2012 the publication says that software and services growth is expected to increase 16 to 18 per cent.

India may have yet another advantage over China: it might be more attractive to foreign executives says Mr Devonshire-Ellis. He quizzed a number of western executives who had worked in China and India and asked them where they prefer to work. He said that, “the surprising conclusion was that India was preferable. Several executives expressed a desire never to return to China.”

Also, the world’s business language, English, is used by 350 million Indians, while about 100 million speak and write the language fluently. Moreover, unlike China, much of India’s legal, political, financial and commercial framework is more familiar to developed countries’ businesses that would like to do business with or invest in India.

India has traditionally been a land of great entrepreneurial activity and wealth. The past three centuries of poverty have been an anomaly. Now its economic growth could soon surpass that of China and its economy become the biggest in the world by 2050. Its population is projected to be the largest of any country by 2025. As it grows to have the world’s biggest pool of working age individuals, its forthcoming massive investments in infrastructure, its comparative wage cost advantages, widespread use of English and globally compatible financial and legal structures, India could soon become a major world centre for both manufacturing and services.

India is rising again to become a global economic behemoth.

Copyright alrroya.com

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• A Global Central Bank and Currency?

Posted by Ron Robins on February 16, 2011

By Ron Robins. First published January 27, 2011, in his weekly economics and finance column at alrroya.com

There are many paths forward for the global monetary system, but the hitherto unthinkable is becoming debatable: a global central bank and currency. However, despite the recent financial distress and potential for further financial calamity, the creation of such a new institution or currency is far off. But would a global central bank with possibly its own currency help bring monetary solace, universal prosperity and humankind together? Or would such a bank and currency result in yet another calamitous monetary failure?

The 2008-2009 financial debacle showed just how unprepared the global financial system was to deal with a loss of faith in, and imploding of, the global banking system. To stave off a global financial meltdown, the central banks of the US, the EU, Japan and many others around the world advanced vast sums in loans and guarantees to banks and financial entities. And the US Federal Reserve (the Fed) in particular loaned out hundreds of billions of dollars to foreign-owned banks, in effect acting as a bank of last resort to the global banking system.

As big as the Fed is, it and other central banks, for many reasons, may not be able to address the demands of a future global financial maelstrom with possibly even larger calls for loans of last resort. For the Fed, this is due to 1) the declining relative importance of the US economy and the dollar in relation to the global economy, and 2) potential political interference in its activities.

The mounting problems and lessening importance of the US economy and its dollar globally are obviously why a new international currency regime is being considered. International Monetary Fund (IMF) data (published in The Economist magazine) shows that while the US now makes up about 24 per cent of global gross domestic product (GDP), its dollar accounts for 84 per cent of foreign exchange transactions. Furthermore, over 60 per cent of international central bank reserves and about 60 per cent of global bank deposits are denominated in US dollars.

The continuing use of the US dollar internationally is largely dependent on the performance of the US economy and its domestic fiscal and monetary policies. Domestically, the US government is growing massive unsustainable debts while the Fed is hugely expanding the creation of new money and the buying of US government bonds (its quantitative easing programs). These actions are likely to further devalue the US dollar globally. Thus, holders of US dollars and assets will increasingly be less interested in retaining them.

Rising to compete with the US dollar has principally been the euro. However, with its member countries’ debt problems, the attention is turning primarily to China’s yuan. It is probably no accident that on January 12 China made a significant step forward in yuan foreign exchange convertibility by allowing it to trade in the US. China has also recently made deals with Russia, Brazil and other countries to settle trade accounts in yuan.

Such gains in the international acceptance of the yuan make it likely to be included in the revised and re-invigorated Special Drawing Rights (SDR) issued by the IMF. The SDR is presently a type of currency used in a limited way among central banks and the IMF. However, its role could eventually be expanded and in the decades ahead might even form the basis of a global currency.

The SDR comprises a basket of currencies that include the US dollar, yen, euro and pound sterling. Besides including the yuan, a revised form of SDR might include additional currencies and even gold or other commodities as well. As gold has an inherent market value, proponents for its inclusion suggest it could help bring further stability to the SDR. Changes to the SDR are favoured by many countries such as Russia and France.

Hence, the IMF may well begin to act in the coming years as a quasi global central bank. However, Barry Eichengreen of the University of California in the US cautions—quoting the Economist magazine of November 4, 2010—that, “no global government… means no global central bank, which means no global currency. Full stop.” Economists like Mr Eichengreen have the weight of evidence on their side regarding the need for a global government before a true global central bank and currency could come about. One only needs to look at the European Central Bank’s problems to see how the lack of an overarching, integrated and authoritative governance structure greatly impeded its ability to deal with the recent crises.

Advocating against the concept of a global central bank and currency are some free market proponents such as Ron Paul, a US Republican and now chairman of the powerful US Congress’s Monetary Policy Sub-committee. He and many others believe currencies should be freely chosen and have intrinsic value, backed by commodities, most likely that of gold. They say without gold backing, any currency and central bank issuing such currency, is deemed to eventual failure due to the historical fact that governments inevitably print excessive amounts of money. This ‘printing’ thereby debases the currency’s value and essentially commits fraud against the holders of the affected currency.

It is possible that the world may proceed towards a global central bank and currency over time. In the near future, the IMF will probably revise, re-invigorate and expand its SDR program to assist in the transition from reserve dependence on the US dollar. But the dangers with the SDR are that it is still largely linked to the viability and variability of national economies and their domestic policies and currencies. Advocates of a completely free market approach such as that proposed by US Congressman Ron Paul might also hold sway. The idea of a global central bank and currency is still just an idea. But it is an idea arising out of the calamity of our present day reality. It deserves hot debate.

Copyright alrroya.com

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