Tuesday, September 2, 2008

How To Be Optimistic about the World Economy

Many, I believe, find solace in optimistism. Let me be helpful.

Assume the world to have been decoupled from the US economy so that nothing the US can do or say can hurt anyone (true?).

Assume the economic power in ascendent is China. The brilliance of the Chinese means they can always find a way out of any problem. If the world go in recession, China alone will survive - by building the fastest train from Beijing to Shanghai, by building the highest railway to Tibet, by building the biggest dam in the world.

I constantly remind myself that the Chinese have been brilliant for the last 4,000 years. What is it in the last two decades that makes the difference?

The most important factor has been the inflow of foreign direct investment, on the argument of the cheap Chinese labour and the largest market in the world. The first two decades have ridden on the first factor: cheap Chinese labour.

Whether China has a large market or not is yet to be seen - afterall, China has always had the largest population in the world. To turn the population into market, China must put cash in people's hands. So China have to pay higher wage rates, which means higher costs of production. Whether China growth can be sustained depends on whether China can innovate.

China therefore must be able to produce higher value-added goods for which its people desire. Only then China can raise wages and creates its own internal markets. If not, China will still have to rely on the global market to make dividends for their investments.

Critical to China today is whether it can stand tall without further FDIs and generates its own investments.

No comments: