Africa Guardian

MIKI TASSENI:
THERE used to be no doubt in the past as to who was the global leader, namely the United States, but recent cataclysms which in actual fact were touched off by the failure of Lehman Brothers, a major US investment bank, put that into question. When the crisis broke out, competition started as to who would get out of it earlier, and largely it appears that US banks, the sector most condemned in relation to the crisis, are the best performers. Its industry, whom the critics spared all blame, is in crisis as companies fold up and leave for South Asia or the Far East, eastern Europe, etc. Hardly is the US bustling with industrial drive.
Of the countries which are in a position to smile at the US, only China and India seem to dare, but only because they are trying to hide perhaps far greater problems down the line, or around the corner, compared to the US. The Chinese are said to be ready to overtake the US in gross national product terms perhaps as soon as 2016, but it will take a while yet for their income per capita levels to even start being compared – and the same applies to India. The latter has an even greater problem when it comes to actually eroding structural poverty in its more archaic class systems, but its enterprise culture is cultivated, experienced.
One reason why the Japanese economy has been overtaken by China in GDP terms is that its population is stagnant and ageing, while China is by comparison still regenerating its population, but the hallmarks of the Japanese experience are there for all to see. China’s one child policy means that stiff imbalances of a demographic sort will be felt sooner than later, and how it adapts too such pressures is not clear, but it is showing signs that it is capable of often unexpected innovations. Exporting populations from industrializing countries was fashionable in Europe late 19th century, and the Chinese seem to be reliving that experience.
India has some settled populations abroad especially in the eastern African region, Europe and North America, who as in the case of the Chinese Diaspora become important conduits for foreign direct investment, finding local partnerships, etc. Yet this aspect has never been as important for India as it always had an open economy, even during the socialist days of ex-premier Indira Gandhi, and is an exporter if not of capital then of enterprise, on its own. Its weakness lies in a demographic context, of the cultural norm of favoring male offspring, limiting population renewal when its poorer classes are less ‘fertile’ than at the moment.
India doesn’t appear to follow in China’s footsteps to send ‘surplus youths’ abroad to start living more or less like local people, one reason being that India doesn’t have the sort of mass industrial production of cheap goods in virtually all products which need offloading agents abroad. India has in a way begun at the end, coming up as a hub of computer hardware and software manufacturing relocation, where foreign capital targets its internal market, in like manner as its entrepreneurs. The model looks more assured than the Chinese one, where the latter has inherently a greater level of dependency on export markets than India.
The unfolding of global crisis has affected more the Chinese model than the Indian model, as it is exports that are sensitive to changes in the world market, absorption capacity of goods, viability of purchasing US government debt (Treasury bills) as a safe investment, etc. Only lately nerves were jarred in global financial markets when Standard and Poor’s along with other credit rating agencies came close to downgrading US debt, that it potentially faces severe restructuring needs like southern Europe – which was sacrilege even a few months ago. Listening to US commentary on that scenario, it is hard to say they explained it.
Earlier on it used to be believed that the US Federal Reserve Bank had all the answers, in that it was just a matter of what ‘base points’ it would add or deduct from existing Fed rates, for financial operators all over the US and in world stock markets to start adjusting. This situation worked perfectly well so long as the US was the favored export market for capital, and it would receive virtually all of it and put it to profitable use, so that nearly everyone owned a portion of the US economy. In 2007 it was already clear US investment banks (Lehman Bros and others) were forcing the lending to ‘sub-prime’ borrowers, unfit to lend.
So the logic of global financial markets snapped when the US failed to play its traditional role, and it is hard to say where that imbalance came from – one reason being that it is at this point that grey territory starts in global economic analysis. Habits from a generation (or two) of welfare economics have focused on ‘greedy banks’ as the problem, whereas no one needs to have a degree in Economics to perceive that the US financial sector is more or less robust already, and it is the industrial sector that is in cahoots. Was the lending imbalance a result of weakening employment growth and declining productivity against borrowing?
From the time that former Fed chairman Alan Greenspan appeared in a congressional committee and had a dressing down, more or less forced to apologize for mistakes committed in nearly 30 years of Reaganomics, which persisted through Clinton and Bush, hardly any straightforward economic wisdom comes from the US. When entering the White House, early 2009 in his State of the Union address, President Obama made a point of rejecting accusations that the bail out (started by outgoing President Bush and pursued by himself) was meant to help greedy bankers. He said banks are the centre of all enterprise, education, treatment, overdraft, everything that the average citizen (American) needs on any day, so saving banks is to come to the aid of the people.
One year later there was little of that idealism, as his administration was pushing through a pack of regulations and controls to cut the ‘greed’ out of banks, as most commentators and naturally, politicians, noticed were huge bonuses out of the cash from public bail outs. Yet this sentiment was surprising, represented stridently by ex-UK premier Gordon Brown but steadily catching up with Obama as well, until most of his economic advisory staff left in a hurry starting mid last year, leaving Treasury Secretary Thomas Geithner largely in complete charge. Obama himself doesn’t seem to have recovered from the leftist virus, his inner self.
The bonuses were part of the loans perhaps but all that was to be repaid, so there was no point whatsoever staking out how far banks could treat the money as if it was a usual part of income or borrowing that people are used to. It appeared that the cash, as it comes from public funds, had to be used with care to take note of sentimentality outside about bonuses, despite that the cash would be repaid entirely, and with interest. Obama then struggled to get his Medicare Bill passed, and it has also had its ungainly effect or removing chances that industry would again be reconstituted in America, as the costs of labor are too high.
One little examined datum is that House Speaker Nancy Pelosi and the Democrats after taking control of Congress in mid 2006 elections, put up a bill to hike the minimum wage from 5.5 dollars per hour to 7.25 dollars per hour, staggered over two years. President Bush did not sign it into law until he left office, and by mid 2009 the incoming president had already signed it, in which case by mid 2011 the minimum wage all over America shall be 7.25 dollars per hour. In Hong Kong by early 2009 they approved a minimum wage bill setting it at 2.5dollars per hour and major industrialists complained, that it disfigures the market.
If Hong Kong be treated as ‘pedigree’ in global wage level terms, and it complains about 2.5 dollars per hour as disincentive to investment, and even with a large China market next to it, how far does the US expect to compete to retain capital when the minimum wage is thrice that figure? This is the question that one fails to hear being asked even by experienced people like Prof. Kenneth Rogoff, Harvard don and formerly chief economist at the IMF. His discussion in a BBC interview was cold on that point.
Left as it is as an economic hypothesis it becomes difficult to demonstrate that it is the core issue, but when it is transposed as economic history, it becomes easier to figure out, that civilizations rise and outgrow others when they are in a phase of innovation and saving, and even if a consumption culture comes up, it is within bounds. They lose their edge when the upper classes sink into consumption and government begins overtaxing, or forcing capital to uplift the poor, not by market forces. That seems to be the case in the US, in that they are forcing a general mass consumption culture and medical privileges to everyone.
The key aspect of liberal economy is competition to control costs, but a 7.25 dollars minimum wage is a sort of ‘socialist’ revolution, to remove decades-long cries of ‘exploitation’ and to enable everyone live the American dream. When for instance President Obama insists on Medicare for each US citizen, was it not possible to liberalize Healthcare to remove syndicalism, a trade union of doctors that all are specialists? Isn’t the US pricing itself out of foreign and local investment, in which case Tea Party revivalism needs to restore economic freedom, not trade union led demands for tripling the minimum wage signed into law?
(ends)