Greenspan & China and the Growth Story

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China is one the hottest economic destinations now, if you see the latest reports it is having a 9% GDP growth and an FDI inflow of $108.3 billion. The mammoth nation is growing too fast. Greenspan had a story to tell here about how china has slowed imparted capitalism into its political system by modifying it a bit !

The growth of nations like China and India which have huge populations have been on the slower side. They seem to have picked up only in the last decade. Investment Freedom, Financial Freedom and Property Rights are way below the average. If you see the turn of things which have had such an impact you need to go all the way back to the origin of the country. China started as a central planning state. Not to mention in such a situation, the market prices and what the market should be supplied with ( not considering the demand into picture ) is all decided by the state. Orders just flow in the hierarchical manner. In the process, the producers have to be in favor with the officials who are in direct contact with the market. And then comes corruption into picture. As the market forces grow stronger, they had to stop influencing the market which they did.

China took the first hit in the 1978 drought which has proven central planning to be less effective and immediate measures were to give the property rights of the farms to the producers. They have realized that property rights are a crucial part of the economy. It generates a monetary inflow by giving the owner a chance to sell the property at a higher prices which in turn generates cash flow and people are also free to borrow money on the property to invest it somewhere else. Imagine a drought has hit and the farmer needs capital for the next season, he is going to lend money on the property. This gives the producer the opportunity to move on. But Marxism says otherwise, state ownership on the property is always a good sign. State virtually holds all property rights which gives control over the producers and production and eventually a central control on the society’s ability to produce wealth. Eventually ownership has been replaced by regulation by economists for a better functionality of socialism.

Deng Xiaoping is the Chinese economic reformer who had a great impact on the Chinese economy for decades. He developed a theory which was known famously as Deng Xiaoping Theory and suggested that Mao Theory ( Marxian thought ) must be modified a bit to uphold the socio-economic conditions in china. He is also clearly against the Liberal state of the markets or free markets in general.

Later china went for major reforms on the currency exchange norms and trade regulations and what we see today is a sensitive balance between the political system and the economic system which they are ready to change if necessary. The Chinese export industry is the probably one of the best in the world. Next to it comes the rest of the similar Asian countries, Taiwan, Hong Kong, Korea etc. And one more serious problem they have been dealing with is the urbanization leading to decrease in the rural population. When industrial areas are paying better wages, there is no point in depending on the agricultural production which is heavily dependant on the most uncertain thing, weather. This is a problem with other developing nations as well. In such a situation if property rates, government spending and subsidies are not increased over time, there will be bigger problems to deal with in these nations. Chinese rural to urban population is at 1.4 % annually and it has also proven to increase the productivity of china. One more advantage with market economies is the disturbances in the markets are easily adjusted with the variable interest rates, but in china  the central banking system holds the interest rates and only modifies them in case if any disturbance has shown up. Adjusting anything at that point might also be counter productive. Chinese leaders are, i guess are busy thinking about these things as well.

But the problem with china remains as long as the party sticks to its philosophical roots when they are in such a strategic advantage compared to the rest of the world. Almost every one is out matched to its labor power ! Can the party compromise over time to Market Capitalism ? That would a serious change something only time can answer as of today !!!

Price of Commodities in Money

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Any good that is in demand and can be sold is called a commodity. There are two types of commodities. Soft and Hard. Soft Commodities are goods that are grown. Hard commodities are those which are extracted. Earlier these commodities were used for trading. Either Soft or Hard commodities explored has got an effort that is used for creating it. For example growing of corn has got certain labor associated with it. That effort is later converted into pricing using various regulatory rules. Before Money was born, commodity exchange was prominent.

Barter systems in the raw sense means exchange of labour. Exchanging commodities is as good as exchanging labour that is invested to produce/make those commodities. Different degrees of Hardships are endured to acquire the same. However these prices of commodities are fluctuating. So, it is hard to continue with the barter system. Money was invented and everything from then on was exchanged for money.

Commodities also serve as raw materials for other products, for example Iron ore. It is used to produce a lot other by products. Prices of various commodities vary according to the demand and supply of the same. If commodity produce is more than demand, the prices will be cheaper. If commodity Produce is less than demand, the prices will be dearer. Changes in the commodity prices effects other industries adversely. Supply of these commodities depends upon lot of conditions. One example is Agricultural commodities, the supply portion is directly proportional to the climate changes. A rough climate effects the crop adversely and commodity supply will be less, demand ( As always people need agri products for survival ) will continue to be constant there will be an increase in the price. Similarly a change in the Iron Ore deposit in the mines will affect the businesses which use iron ore as raw product.

Inorder to judge the price of any good, first you need to calculate its manufacturing value, As so far proven to work, the equation is as below.

 

C = SIGMA(A x (1+m+n) x (1+o+p+r+s)) + B

 

C – Commodity Manufacturing Value

A – Net Work price of each worker for the assignment ( Total time consumed , Previously Quoted Price vs time , Current labour Prices )

m – The coefficient of workers employed in non-economy; it is expressed by the proportion of the work price of all workers employed in non-economy and in economy on the territory of the commune.

n – The coefficient of workers employed in non-economy; it is expressed by the proportion of the work price of all workers employed in non-economy and in economy on the territory of the commune.

o, p, r, s are constant values which can be computed

B – The cash assets that are involved 

For more information, click here,

 

The Commodity Manufacturing value is obviously less than the market price and there would be no point otherwise 🙂

Commodity Price Index is one of the important measures of inflation is the CPI. Each nation calculates the CPI and keeps a close watch on inflation.

Indian Statistics for 2006-2009 are available here. Commodity Channel Index measures the deviation the commodity prices from average historical pricing. Calculation of CCI is available here.  Commodity Research Bureau gives good information about trends and analysis of the Commodity Prices http://www.crbtrader.com/

From Wiki, Indices across the world.

Supply and Demand Effects the prices of commodities in the following manner

  • if Market is at the equilibrium price and Quantity (Intersection of supply and demand), majority of the sellers and buyers are satisfied ( cant say 100%)
  • Supply Constant, Demand is more then Demand curve takes a shift. Prices will be higher
  • Supply Constant, Demand has gone down, then Prices will come down
  • Demand is constant, Supply is more, Prices will come down
  • Demand is constant, Supply is less, Prices will be higher

 

References and Further Study :

Bad Samaritans .. Globalization

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I have never read a book of a critique but i am glad at least now i did that. Bad Samaritans, written by Ha-Joon Chang a Korean economist, hits at the epi center of the world trade policies and their problems. The world as i know, started after 1991 crash and exposure to the chronological order of events before and that and their impact, for me at least is from Thomas L Friedman and his active contribution to the Globalization. Its the Berlin wall isn’t it !!

Globalization from an Economists angle looks much different. The most important thing here is the regulations on the industries based on tariff regulations. Initially when colonies existed, the colonies or currently developing nations were forced to follow free trade policies. This free trade policy has in many ways made those nations under privileged.

When Developed countries had industries like textiles in the primitive states they levied heavy tariff’s on imports. Overtime the domestic industries became competitive enough and then the tariff’s were reduced. Now they are forcing the developing nations into free trade and exporting their technology and products at a fair price. However the developing nations don’t also have a choice. What the developed countries did long time back was termed as protectionism. It is against free trade and thus also against globalization.

Without these policies many of the Briton’s industries would be wiped out. By the time these policies were abolished in 1860 from its colonies, it was too late, Briton was already having the competitive advantage on technologies.

Same was the case with the US. Alexander Hamilton went across the argument of Adam Smith and framed a report to go for import bans, higher export tariff’s; ban on the export of key raw materials. Initially lot of the politicians did not agree, but later when Anglo-American war broke out in 1812, they had to ban all exports and imports and increase tariffs. The blueprint given by Alexander Hamilton was followed after the second world war. He was the person who coined the term ‘infant industry’.

The key historic events for which the tariff’s stayed at an all time high is the 1812 Anglo-American War ( 1812-1816 ), 1921 ( First world War ), Second world war and Great Depression ( 1912 ). In such a situation the governments don’t have any choice.

The two contrary examples for protectionism are US and Mexico. Mexico tried freeing the trade policies and succeeded in showing growth. US on the other side was protectionist all the way, however still succeeded.

But when Brettonwood institutions was formed, they started intervening with the economic policies of the Developing and under developed nations. The borrowed money from the IMF and World Bank is so high for some nations that they have to let the Brettonwood institutions to closely monitor their fiscal economic policies. What a series of events ! Till date the countries like india have a lot of debt and still cannot sustain the markets when they are still struck with olive tree issues, less innovation. They are still dependant of technology from other nations like Russia for Defence technologies and US for outsourcing.

With all of them turning to free trade there came WTO into picture ! 

World Trade and the Recession 2009

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While 2010 starts with a lot of hopes that the world will come out of recession this year, the economists were always cautious enough to warn the governments not to remove the clutches from the economies. Removing the clutches will only make things worse. Thats what happened in 1930’s. While one way to put it is to understand the underlying factors that went down with the fall of the GDP and bring them back to strength as well. One of them is world trade. The world trade numbers in early 2009 were much worse.

The World Trade took a free fall. Picture : WTO website. It also states that the world trade took a big hit since the great depression of 1929. The export and imports %’s also fell down significantly. The reasons put forward by the WTO as they know it are as below.

1. Severe drop in domestic demand
2. Lack of trade credit
3. Much longer production chains / globalisation
4. Rise in protectionism

While the alarm triggered in early did have its impact 2009 , the short term analysis of the numbers say that the trade ( Export and Imports ) are bouncing back.

WTO WEBSITE : Export volume statistics

The chart above states that the there is 16% increase in the export volumes. I could not get a hold of the combined statistics like the one above. It does suggest an upward trend. Exports increase will mean an increase in imports as well. 🙂 Putting it back to Q2 2008 might be very tough. Governments across the world have a lot to do before they actually start considering that the recession is over.

OECD website has a different numbers for various countries, they call it leading composite factor.

Adam Smith : Wealth of the Nations

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The online version of the book is here.

http://www.online-literature.com/adam_smith/wealth_nations/

PDF’s are also available on the WEB.

This classic is must read for anyone with trade and commerce as their profession. Speaking of the Labour distribution trends Adam has split it into three different groups.

The Division of the Labour

Division of the labour is a must. In any economy with diversified talent pools streamlining the system will give optimal results and also helps survive the respective industries. For someone to achieve a task X there will be sub-tasks A, B and C which require a talent pool of P, Q and R respectively. Hence, the Division of the labour.

Occasion for the Division of the labour

Occasion is from the personal interests of the professional himself that we get his services rather than our own interests. “It is not from the benevolence of the butcher, the brewer or the baker that we get our dinner but from their regard to their own interest” Occasion also refers to the skill set the person holds and the kind of dexterity he has in that profession.

Queit true !

Extent of the division of the labour

This is the biggest deciding factor to the division. Extent of the market decides how the regular labour is carrying on their activities. If the Extent is small, one person cannot stick to one kind of work and hence comes the distribution of the skill set and reduced masters.

The book was written too long ago, hence the division if the labour clearly has a bigger variable called the Extent of the Market. If a potter is present in a town, he can easily produce and sell at the market which is available in the town and there shall be no potter around for some range and then there will be one more. This division cannot be otherwise. Today’s world of competition arises with the Market being huge and so are a lot of players and hence the competition. There shall also be a situations where the produce is greater then the market requirment and then the export has to happen or the produce will be wasted.

If the Product deteriorates over time the methodology shall not work. Changes to the extent of the labour are obvious to the impovements in the methods. An example from the book, the land carraiges business is effected with the water-carriage proving to be more effective in the labour cost, wear and tear and the maintanance. Water-Carraiges also prove to be effective in the trade between countries or continents seperated by sea.

To be continued ..

Brettonwood institutions

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As an initiative to work out the postwar international economic governance, during 1944,  the Allied forces came together ( US, Britan etc ) and formed what we call today as IMF and World Bank. This union took place in the  New Hampshire resort of Bretton Wood. Hence these organizations are sometimes called Brettonwood institutions.

The purpose of IMF formation is to help nations with the Balance of Payment ( BOP ) crises. BOP comprises of, in financial terms, Capital Acount and Current Accounts. In simple terms, it is the balance sheet of any nation’s in and out, flow of money in any form. Export and import of goods and services, capital assets, Foreign Direct Investments, Shares, Bonds, Forex Transfers, Liabilites, Assets etc.

The purpose behind World Bank is to help the war torn nations with moeny to restructure themselves. Usually World Bank ( WB )  is supposed to help such a nation with infrastructure like, roads, dams and bridges.

According to the korean Economist, Ha-Joon Chang, in his book, “Bad Samaritans” the Brettonwood institutions are taking advantage of the third world and the developing contries. Unlike the WTO ( World Trade Organization ), the WB and IMF are having a one-dollar-one-vote system. This makes more than half of the votes to the Developed nations and they can control the way in which these policies can be set. Post Third world debt crisis of 1982, the bretten wood institutions have spread them selves into various sectors of economy of the developing countries than what is mandated to them.

However, they ( IMF/ WB )  hold a valid argument, that they ( Developing Countries ) have borrowed money from WB / IMF and since they dont have a concrete plan of how to return these investments, they are involving to help them. They have already reached to the unthinkable areas like democracy, corporate governance etc.

Lets hope they are helping …

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