January 14, 2005

Economic Country Deformation

What is the proper response when an economic partner does something truly dumb and decides to subsidize you by selling you things for less than they are worth or overproducing them globally? The first impulse is to smile quietly and say "thank you and may I have another?" but things are not so simple in the real world when you throw politics in the mix.

Those displaced by cheap goods and services howl bloody murder as they are chased from job to job by a sea of cheap foreign imports of goods and services. If you're a born engineer, it's quite uncomfortable to be chased into real estate sales and you're very likely to express some displeasure at the state of affairs when you visit the voting booth.

The result of all those cheap imports deforms our own labor pool. We graduate fewer engineers in the US, at least in part, because the communist countries graduated so many of them that engineering's recompense is lowered as barriers to labor or even service provision mobility fall due to globalization and the fall of the iron curtain.

The biggest example of economic deformation on the planet today is the People's Republic of China. The PRC's elite is in a desperate struggle to stay ahead of rising population expectations and keep their collective necks out of the noose and their bodies off street-lamps as some sort of revolutionary "strange fruit". They are the fourth generation of leadership in a movement that has killed tens of millions and impoverished hundreds of millions. They want to unwind this legacy but leave themselves on top. This leads them to make all sorts of economic deformations in order to have a decent shot at achieving their goals. Their deformation triggers corresponding deformations in the rest of the world.

They overproduce engineers, we must underproduce them or watch as the price for engineering talent spirals through the floor and a first world engineer is just another euphemism for unemployed and poor. They enter into a market and inevitably they will either conquer it or we will innovate our own efficiency to the point where they cannot match it by throwing more bodies at the problem.

But these economic deformities themselves cause further stress in the PRC so they have to be unwound as well. Each round of deformation unwinding, hopefully, will be less disruptive than the last and the end result will be a PRC that is sane and reasonably well off, firmly integrated into the Core countries in the global economic system. Simple justice suffers (many of those in the PRC elite deserve to be hung in the street) but our chance of intra-Chinese civil war and nuclear Armageddon appreciably drops if this project succeeds so simple justice will have to be delayed until after the crisis is past. Unfortunately, at that point the bloodiest hands will likely already have died.

Since we're now not talking about economics here but politics, it's quite unpredictable whether those societies (1st, 2nd, and 3rd world all) who have economic deformation imposed on them by the PRC are going to sit still and take it indefinitely. Fortunately, it is starting to looks like they won't have to as PRC wages rise and their competitive cost advantage drops.

So, what is the proper response if one of your trading partners does this to you? I guess it has to do with how flexible your society is. Can you afford to absorb some social change that would otherwise have to be expressed internally at your partner? Is your partner doing so as a desperation move to avoid revolution? Do you want revolution in that partner? What would be the consequences of that revolution in creating further stress in the system (could you get a Great Depression style chain reaction going)? In the end, it's going to be a case by case study but at least now we've got somewhat better questions.

Posted by TMLutas at January 14, 2005 10:18 AM