Wednesday, September 10, 2008

Prescriptions for a Globalized Economy

Now that I have passed the 50 posts mark, let me go back and reiterate some recurring themes that flow through much of the posts that have lined this site so far. These themes, you might say, form much of the philosophy of the Rogue Economist, as brought about by the current global economic condition.

Foremost in my economic thoughts is always the idea of sustainability. You might say that this is the core idea that runs in practically all of the posts. In fact, I’ve mentioned it ever since the first post. Nothing will go on unless it is sustainable. So the next time you think about the current level of use of resources, of public funds, or personal funds, ask yourself if it is sustainable. If it isn’t, then it’s likely to level off, or stop altogether, at some point in time.

Then there is the idea of uneven effects of globalization in various locations and industries in one single market or country. A falling currency can favour one industry and punish another. Similarly, a rising currency will benefit the other while disadvantaging the former. You can no longer say that a rising or falling currency is favourable to a country. Favourable for which of the country’s citizens?

All countries and economies are now inter-linked, that anything that happens is one country will likely have an effect on many others. This includes one country’s domestic economic decisions and policies. So if you’re a policy maker, particularly if you’re from a small country, how much can you really decide your own country’s economic future, unless you coordinate your policies with those of your neighbours?

A country whose people are experiencing severe credit problems likely do not have to worry much about inflation. During financial crises, consumers consume less, investors stop investing, and many businesses cease doing business.

This has been said by others before - fear and greed are more powerful forces than long-term considerations. This is true for most capitalists and investors. So what government always needs to do is to always help people overcome fear and manage greed. In times of crisis, it needs to do whatever it takes to conquer crises of confidence, while at the same time making clear that it will not bail out every mistake made by private initiatives.

Very tricky distinction, especially now that all financial markets are inter-linked, and any adverse event in one area can easily spread to others. When is a bail out not a bailout? How do we know that an intervention is to overcome fear and not to reward greed? It helps if the intervention is made before a crisis spreads, and cuts those most liable for the mess. But again easier said than done. It's also a fine line since, with every incremental increase in government intervention in the economy, we could be undermining the market in unforeseen ways.

Investor speculation can increase the demand for commodities artificially. But since investors are essentially following the end user’s momentum, at some point, they have to follow his lead. In an inflationary environment, the leaders in falling demand will be the poorer consumers and the smaller businesses.

There will be a new world equilibrium after this crisis, and it will be less centric on US consumption. Developing countries will have to develop their own local consumers if they want to continue growing their economies. But this won’t likely happen until after raw supplies increase and commodity inflation has been tamed. Otherwise, a new growth surge in global demand will just increase prices again.

Economic growth in the developed world will now have to come from real value creation. There is only so much growth that can come from shifting resources around. The latter is not sustainable as a stand alone source of growth. Real growth can only be experienced by mature markets if they integrate with growing markets, but that growth will be uneven across various locations and industries.

Because capital flows are now global, and financial institutions worldwide are deeply inter-linked, individual monetary policies by themselves will likely have little effectiveness. Capitalists and investors can, and will, move their capital around to take advantage of arbitrage opportunities created worldwide by digressing policies.

Because of globalized capital flows, many of our current economic indices, matrices, and indicators are no longer useful and appropriate. They need to be tweaked, to reflect the fact money flows into an economy, by itself, is no longer an accurate indication of growth. Value creation is.

Unless capital mobility is, in the future, accompanied by labour mobility, globalization will not result in the development of comparative advantage in any location. Capital speculators will only end up criss-crossing money around, chasing after a shadow. Ordinary people everywhere will not reach enough affluence unless they can follow capital the way capital can follow them.

The real businessmen, those who create real value, will be discouraged in starting businesses where increased capital mobility can change his cost of funding at a snap, but where he cannot attract the people he needs from anywhere at the same snap, and where his local consumers never reach enough affluence to become sustainable consumers.

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