Reflecting this morning (with my pot of tea as usual) I cannot help
thinking that the world is on the verge of major economic events.
America is in recession (the gravity of which is not admitted yet); Europe
is in recession (the gravity of which is not admitted yet); Japan is in
recession (the gravity of which is widely admitted); South America, Africa
and Russia are basket cases (and will remain so until property law is
properly established in all of these); and China is . . . what?
No-one can assess China yet in any reasonably balanced way. The sheer
diversity of the country is baffling and information is scant. However, the
overall figures show that it is still growing vigorously on almost all
fronts -- agriculturally and industrially (and in all sectors of industry
from cheap toys to high-tech -- e.g. it makes a quarter of all DVD players
in the world). But corruption is also widespread in China.
But as to whether the corruption is going to be a hindrance to China's
further development depends on what sort of corruption is predominant.
There are basically two sorts.
There's the form of corruption by which powerful interest groups persuade
politicians to grant them special privileges (protective tariffs, for
example) and thus crowd out competition. There's the other main form of
corruption by which politicians (or mafia gangs) run protection rackets on
profitable enterprises, taking a modest 'rent' (or insert their people onto
their boards) and thereby benefit from continued success.
America, Europe and Japan are much less corrupt overall than China but the
type of corruption there is mainly of the former variety. Interest groups
are tolerated in those countries because they are 'democratic' but yet
their highly centralised governments are able to impose legislation
uniformly over the whole of their domains, assisting monopolies. This form
of corruption is, of course, greatly harmful to consumers because the
prices of the goods involved are higher than they need to be and potential
savings and investment are curtailed.
China seems to suffer mainly from the latter form of corruption -- of the
sort that is usually written about as heinous, but isn't. This sort, while
far from economically desirable, doesn't snuff out competition right across
its territory, raising prices generally as does the other. It is
non-monopolistic in character. While China is de jure still under the
central control of the Communist Party it consists, de facto, of any number
of almost independent city and regional economies with highly variable
types of business ownership -- private, governmental, party, army generals,
etc.
The situation in China today strikes me as being similar in many respects
to the early chaotic decades of the Industrial Revolution in 19th century
England, and the 'robber baron' period in American history. In other words,
its economy is likely to continue growing strongly despite the drag of its
many 'hangers-on' and malefactors.
If, in the coming years, the dollar, yen, euro and pound go through bouts
of extreme volatility, how might this affect China? Well, it's probably
going to be very upset because at present it has a growing export trade,
mainly with America and Europe. It has already had strong words to say
about what appears to be Japan's policy (though not yet officially
unadmitted) of devaluing the yen. If the yen continues to decline and
sparks off crazy bouts between all the currencies -- as it's likely to --
then China's exports are going to be exposed because its exchange currency,
the Hong Kong dollar, is tied to the American dollar.
My speculation is that China would then decide to scrap its Hong Kong
dollar and revert to its internal currency, the renminbi, for external
transactions, too. In order to give it stable value and attract the
confidence of investors, the best thing China could do is tie it to gold.
(It would also have to reform its state banks -- a process it has already
started.) The renmimbi would then act immediately as a pivot for the
currencies of other Asian countries (in which, incidentally, a great deal
of the world's gold is privately hoarded without opportunity for
investment), particularly since a great deal of South-East Asian industry
and trade is already dominated by ex-pat Chinese family corporations. This
may not cut much ice with America. But America's attitude is likely to be
academic by then, because if its recession is continuing it will more than
likely have started to raise protective barriers against Chinese goods.
Thus China might take the risk that its medium term future lies in
South-East Asia and to forget America as a major trading partner. China
plus Japan (with a reformed banking system) plus the other Asian countries
would then have an internal market several times greater than America and
just as diversified. The region as a whole wouldn't have a great need to
export for the same reasons that America doesn't today.
To summarise, I foresee: (a) continuing devaluation of the yen; (b) extreme
volatility of exchange rates; (c) growth of protectionism in America; (d)
consolidation of South-East Asia around a gold-standard renminbi.
Meanwhile, America and Europe will have to start thinking seriously about
reforming their school systems because their governments, industries and
universities will no longer be able to attract the thousands of
highly-qualified scientists, engineers and medical people every year from
Asia as they do now. The financial and career opportunities in Asia will be
just as great, if not greater.
That's what my crystal ball is telling me this Sunday morning. It's dogwalk
time now -- during which I'll be reading the Sunday papers and, in
particular, aspersions of falsehoods being thrown about between the highest
levels of the UK government and its most senior officials, the like and
nastiness of which have never been remotely approached before in the whole
of the 130 years of our present sort of civil service.
Keith Hudson
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“Writers used to write because they had something to say; now they write in
order to discover if they have something to say.” John D. Barrow
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Keith Hudson, Bath, England; e-mail: [EMAIL PROTECTED]
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