By: Matt Stoller
A few months ago, a friend in the entertainment industry told me of a new business model in Hollywood: hoarding videotapes. Apparently, the earthquake in Japan knocked offline a Sony factory that makes certain types of tape. That factory was also in the tsunami zone, so now there’s a serious tape shortage threatening the television industry. The NBA scrambled to get enough tape to broadcast the NBA finals; one executive told the Hollywood Reporter, “It’s like a bank run.”

In the last few years, economists have spent a lot of time and energy thinking about bank runs. A bank run happens when depositors think a bank is weak and scramble to get their money out before it collapses. “Tight coupling” of financial institutions, like when banks are overly dependent on each other, can create a cascading series of problems for the system itself. We saw this with Lehman Brothers when it went bankrupt. Its AAA-rated debt instruments lost value unexpectedly; that caused money market funds that held those presumably safe bonds to suddenly lose value. A shadow bank run was the result, as investors rushed to withdraw from the money market funds.

Worryingly, there’s been very little consideration of how systemic collapses can happen in another, perhaps more dangerous realm–the industrial supply system that keeps us in everything from medicine to food to cars to, yes, videotape. In 2004, for instance, England closed one single factory, which caused the United States to lose half of its flu vaccine supply.

Barry Lynn of the New America Foundation has been studying industrial supply shocks since 1999, when he noticed that global computer chip production was concentrated in Taiwan. After a severe earthquake in that country, the global computer industry nearly shut down, crashing the stocks of large computer makers. This level of concentration of the production of key components in a globalized economy is a new phenomenon. Lynn’s work points to the highly dangerous side of globalization, the flip side of a hyper-efficient global supply chain. When one link in that chain is broken, there is no fallback.

Lynn has continued to study industrial supply shocks and says, “What I have found most interesting recently is the apparent role supply chain shocks played in triggering a synchronized slowdown of industrial economies in April–production down (in USA, China, Europe, Southeast Asia), jobs down, demand down, GDP numbers down–due almost entirely to the loss of a single factory that makes microcontroller chips for cars.”

Today, the problem manifests as shortages of videotape or auto parts, but the global supply chain is so tangled and fragile that next time it could be electronics, weaponry, or even food or medicine. As Lynn noted in an interview with Dylan Ratigan, China controls 100 percent of the national supply of ascorbic acid, which is a basic food preservative. Leading oncologists are already warning that we are experiencing severe shortages of generic yet pivotal cancer drugs, because there’s no incentive for corporations to make them.

According to Lynn’s groundbreaking book End of the Line, the essential problem is a basic shift in the way that American multinationals operate. In the 1980s, the competitive manufacturing threat from Japan led most large companies to eliminate waste in their production facilities. As a result, they stopped keeping spare parts on hand. Eventually, companies began outsourcing production itself, as profits came increasingly from extractive monopolistic power over an economic system. Walmart is an important example; its profits come from the power it can exert on its suppliers, telling them what to make and how to make it, while the company itself functions as a giant autocratic marketplace and trading operation. Increasingly, this is the model of success in our global economy. Boeing, Cisco, Apple–all of them rely on their power over an ecosystem of production facilities halfway around the world. They have become rent extractive profit-machines, which is a relatively new phenomenon.

It was in the 1990s that American multinationals, spurred by government policy, began outsourcing operations to China. At the same time, the Clinton administration steadily relaxed antitrust enforcement, leading to massive corporate consolidation and the creation of the virtual firm. By the early parts of the last decade, the ideal American multinational made its profits by using its market power to gut labor and supply prices and by using its political power to eliminate taxation. All of this turned giant American institutions against making things. This is why we rely on a British factory to make our flu vaccine, why global videotape production was knocked offline by a tsunami and why that same event slowed the gigantic auto industry. US corporate leaders now see the idea of making things as a cost of doing business, one best left to others. What has happened as a result is that much of the production for critical products and services that make our economy run is constructed by a patchwork global network of suppliers all over the world in unstable regions, over which we have very little control. An accident or political problem in any number of countries may deny us not just iPhones but food, medicine or critical machinery.

Andy Grove, co-founder of Intel, has made the case that America needs to be building things here, investing here and manufacturing here. We need the know-how and the ecosystem of innovation. The more corporate America seeks to push production risk off the balance sheet onto an increasingly fragile global supply chain, the more it seeks to wound the state so there is no body that can constrain its worst impulses, the more likely we will see a truly devastating Lehman-style industrial supply shock.

There’s a good amount of grumbling about the state of American infrastructure–collapsing bridges, high-speed rail, etc. But American infrastructure is not just about public goods, it’s about how the corporations that enforce, inform and organize economic activity are themselves organized. Are they doing productive research? Are they spreading knowledge and know-how to people who will use it responsibly? Are they creating prosperity or extracting wealth using raw power? And most importantly, are they contributing to the robustness of our society, such that we can survive and thrive in the normal course of emergencies?

The answer to all of these questions right now is “no.” And while this may not be hitting the elite segments of the economy right now, there will be no escape from a flu pandemic or significant food shortage. The re-engineering of our global supply chain needs to happen–and it will happen, either through good leadership or through collapse. This means that our government and our society needs to reorient our economy toward manufacturing and rededicate our corporations to productive uses. This will require a new conception of antitrust laws to ensure that monopolistic or oligopolistic practices in pivotal industries aren’t placing our culture at risk. It means understanding the networks of suppliers and sub-suppliers. And it means ending the race to the bottom that pushes deflationary pressures on labor and the social safety net. All of this can insure a more robust culture and economy, one which can withstand national security or environmental challenges. The sooner our leaders, both in public and private institutions, recognize how highly vulnerable we are to a societal collapse, the better chance we have of avoiding collapse.

References:

The total collapse of the U.S. economy is inevitable – Here’s why

MediaMatters: The right-wing media have continuously attacked President Obama for proceeding with his long-planned trip to Latin America in the wake of the crises in Japan and Libya, often mocking his trip as a “vacation.” In fact, the President’s trip will be “focused on economic opportunities for the United States and the trade relationship” with Latin American nations. [ READ MORE ]

Bolling Still Falsely Labeling Obama Economic Growth Trip To Latin America A “Vacation“

Fox Attacks Obama’s Brazil Trip As A “Vacation” Then Refuses To Air His Speech: President Obama spoke in Brazil, highlighting that country’s rising economic power, growing middle class, and transition from military dictatorship to thriving democracy. The speech capped off a visit meant to promote the United States’ economic relationship with Brazil and the entire South American region, with the stated purpose of encouraging job growth. The speech drove home the very points Obama made in his March 18 USA Today op-ed in which he said: “That’s one of the reasons I will travel to Latin America this week — to strengthen our economic relationship with neighbors who are playing a growing role in our economic future.” [ READ MORE ]

Brit Hume: “To This President, The Presence And The Sight Of American Leadership…Is A Stigma”

Meet the Press Panelists Dismiss Criticism Over Obama’s Latin American Economic Growth Trip

Reference: Juggling With Skill; Obama’s Smart Crisis Management.

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Other Fox Thuggery on Obama
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Beck Upset Obama Didn’t Act On Libya — Then, 20 Seconds Later, Upset That He Did [ MORE ]

Ralph Peters: Obama’s Response To Libya Has Gadhafi Believing He Can “Wait The Gringos Out“

Was It Something Out Of “Red China” When Fox Celebrated Kids At A Tea Party? [ READ MORE ]

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The Big Picture: March 18, 2011 — Fox, Beck, Limbaugh Engaged in The Usual Garbage Spewing + A Dose of Childish Obama Bashing
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Pervert Dick Morris, the ‘Straight Out of My Butt‘ Fox and Newsmax guru, has just unveiled his latest prognostication. The big fat prophet of gloom and Democratic doom, has ripped out another fart, and it is stinking up the Internet like a mad skunk on the loose.

Says Dick:

“Will Obama get reelected? No way! In the teeth of the economic catastrophe that is shaping up, his chances are doomed.” “The tsunami in Japan, perhaps the greatest tragedy since 9/11, will further impede any prospect for economic growth. There will be a demand for spending to repair the devastation of the quake. But Japan is tied with China as the world’s second largest economy, generating 12 percent of the global GDP. With Japan neither producing nor buying for the foreseeable future, the drag on the global economy will be profound.”

Like a true smear artist, Dick drags in Rev. Jeremiah Wright, president Obama’s former pastor:

“As the Rev. Jeremiah Wright said — outrageously and wrongly — about 9/11, “the chickens are coming home to roost.” The policies of this administration — the disastrous overspending, the irresponsible borrowing, the social experimentation — all are magnifying and amplifying the impact of the recession. Relief is not going to come anytime soon.”

“Instead, the true legacy of the Obama years is likely to be stagflation and an entire decade wiped out by his policies, budget and programs. Long after he is gone in 2013, we will still be repairing the damage of his terrible decisions.” [ READ MORE HERE ]

Dick, has been wrong on almost everything he has predicted over the last two decades, but hey — he is preaching to the gullible!

Dick Morris at Work in 2010: Dick Keeps The Zombie Lies Alive — Americans ‘Correctly’ Fear Healthcare Reform Will Bring ‘Euthanasia‘

[ LISTING OF DICK MORRIS' LIES ] [ DICK MORRIS ON PA ]

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   Dr. Wolassa Kumo
Introduction

As many economists had expected, China overtook Japan as the world’s second largest economy during the second quarter of 2010. The Chinese nominal Q2 GDP was $1.335 trillion surpassing that of Japan, $1.286, by $0.049 trillion for the same quarter. Japan had retained this position since it overtook West Germany as the world’s second largest economy at the end of 1960s.

However, the Japanese economy began to stagnate since the early 1990s following the asset price bubbles of the late 1980s and had grown well below trend for the past 20 years. The Japanese economic growth was further dampened by the 2008-2009 global financial and economic crises. On the other hand, since a landmark economic reform in 1978, the Chinese economy recorded double digit annual average economic growth.

For instance, while Japanese economy grew only by 1.1 per cent during the fourth quarter of 2009, the Chinese economy grew 10.7 percent during the same quarter and 8.7 percent during the year. In 1980 the Chinese GDP of $188 billion was less than 20% of Japanese GDP of $1.05 trillion. However, due to rapid economic growth in China compared to sluggish, below trend growth during the same period in Japan, the GDP of both countries converged at the end of 2009 as the Chinese GDP of $4.91 trillion was only slightly below Japanese GDP of $5.1 trillion in 2009. China and Japan offer a typical proof of the economic convergence hypothesis.

As a result of accelerated and sustained economic growth, poverty in China fell by 80% during the past 30 years. China’s economic success is miraculous not only because of the pace at which it was able to catch up the advanced economies but also because it was based on a unique development model of Socialist Market Economy. The Chinese leadership ingenuously applied market principles in socialist state owned enterprises while it also allowed the private enterprise to gradually develop and contribute to the economic progress of the nation.

China is the only country in the world to achieve rapid and sustained economic progress based on a mixed socialist and market economic model of development that defied the basic principles of free market that was regarded as the foundation of economic prosperity since Adam Smith’s 1776 famous phrase of the “invisible hand”. Wen Jiabao, the current Chinese premier, was once quoted as saying: ” Both visible and invisible hands should regulate market forces.” And that is what worked for China. China is now undisputed world economic superpower surpassed only by the United States of America although it overtook USA as the largest auto market.

Key determinants of the accelerated growth of socialist market economy

Different authors emphasize different factors as key determinants of Chinese fast economic growth. Some argue that the three most important factors in Chinese fast economic growth are: private enterprise, investment on education and openness while others emphasize export, investment and domestic consumption as the three key components that propelled China’s economy.

Between the late 1940s and 1978, China followed a repressive and closed policy of communist economic development with tight state control of production, exchange and distribution. However, beginning in 1978 the Chinese leadership embarked in a landmark policy shift that not only opened up the economy to international trade and foreign direct investment, but also encouraged private sector development and gradual privatization of the state owned enterprises. These reforms and opening up the economy coupled with ingenious use of market forces led to unprecedented economic growth for the past three decades.

The adoption of market principles in state owned enterprises were made possible through series of reforms that separated the functions of government from those of state enterprises and those aimed at revitalizing the private sector. In addition to this, China carefully adjusted its economic structural imbalances by developing massive labour intensive industries with comparative advantage, focusing primarily on export markets.

The Chinese economic success therefore is primarily driven by state entrepreneurship. The Chinese leadership had a clear vision about their country and they delivered on their promises. The Chinese leadership was not only committed to the development of their nation but was also highly capable and no- nonsense leadership. They always prove their words with actions; a critical leadership quality that many leaders of the developing world and especially those in Africa lack. The critics of the Chinese leadership may disagree with me. But let us be realistic; transforming a country from poor agrarian society into the world economic superpower in 30 years cannot come without costs. I request the critics of the Chinese leadership to do a Cost-Benefit analysis of the Chinese economic miracle and show us the evidence.

The socialist market economy ensured high investment and saving

Immediately after opening up the economy, investment in China accelerated reaching 43.5% of GDP in 1993. The other critical components of GDP, domestic consumption and export were also increasing at the same time. China’s domestic market of 1.3 billion people is undoubtedly one of the major drivers of economic success. Although investment slowed down since mid 1990s due to surging inflation, it rose sharply again beginning in 2000 through a combination of massive government infrastructure spending and both foreign and domestic investment in manufacturing. As investment in factories and other construction as well as roads and other infrastructure reached unprecedented levels, gross capital formation rose from 36% in 2000 to 43% in 2003 ensuring GDP growth of over 9% per year from 1995[1]. During the 2008-2009 global economic and financial crises, China’s economic growth was spurred by a $586 billion stimulus package mostly directed towards massive infrastructure investment projects.

The extraordinary investment growth in China was supported by two central government policy instruments [1]. First, key input prices such as land, electricity, and other utilities, including water, were kept low through subsidies and controlled pricing. Land was mostly allocated for development for free and electricity for foreign direct investment was sold at half price. Second, cheap finance was channeled into industry, particularly to SOEs and other large companies, often effectively at zero cost which was made possible by the high savings rate, which averaged 40% of GDP for most of the 1990s and has recently grown to close to 50%[1]. In addition to the above China offered large tax incentives to foreign direct investors. What would African countries which charge more than 50% of the total investment cost for urban land lease learn from China?

Since China opened up its economy and implemented reform programmes to revitalize the private sector, the share of the state sector in GDP declined to only one-third. Foreign direct investment was important but only about 5% of the total investment.

China also maintained export competitiveness through currency depreciation. The yuan gradually depreciated from 3 yuan per US dollar in 1985 to 5.76 in 1994 and approximately 8.28 between the late 1990s to 2005. Currently, the yuan trades at about 7.8 per US dollar.

The socialist market economy improved efficiency of investment

In China an investment of 3.7% of GDP generates 1% of GDP growth and this efficiency of investment, from the point of view of GDP growth, is almost twice that of the US[2]. Another indicator of improved efficiency is growth in total factor productivity (TFP) which reflects a country’s ability to use a broad range of skills, including its public policies and infrastructural development. TFP grew by about 1.98 percent per year on average in China, and 0.87 percent in India for the period 1982- 2008 and by over 4 percent in Russia for the period 1995 ? 2008 as compared to 0.35 percent and 0.18 percent for United States and Japan for the period 1982-2008 respectively. The growth in TFP represents the effect of technological change, efficiency improvements, and our inability to measure the contribution of all other inputs and is a key determinant of long term economic growth.

Enormous investment on education

Improved productive efficiency in China is a result of enormous investment on education. High school and college enrollments are rising sharply in China. In 1998 just 3.4 million students were enrolled in China’s colleges and universities; but over the next four years enrollment in higher education increased 165 percent and the number of Chinese studying abroad rose 152 percent while between 2000 and 2004, university enrollment continued to rise steeply, by about 50 percent [3]. Studies indicate that skilled workers with college education are more than three times more productive than those with less than high school education.

China’s innovative Township ?Village enterprises

The communally owned township-village enterprises which were initially set up during the pre-1978 period to serve the rural areas and which were restricted to the production of non agricultural output such as iron, steel, cement, chemical fertilizer, hydroelectric power, and farm tools were later revitalized and became an engine of rural transformation and economic growth. The development of town and village enterprises transferred more than 120 million people (the total population of Ethiopian and Tanzania combined) out of agriculture by early 1990s.

The township and village enterprises are found to be much more efficient than comparable state-owned enterprises and are competitive in the international markets. Their management, which responds to market forces and their outward-orientation have contributed to their productive efficiency. It is argued that efficient management, which successfully exploits the endowments and resources of the country rather than the nature of ownership of production entities, is crucial to the success of manufacturing firms [4]. It is often argued that openness, not ownership, is the key in economic development. This offers critical lessons to most African countries where over 80 percent of the population survives on subsistence rural agriculture with massive redundant labour, and dismal labour productivity.

The rural sector will continue to play a significant role in China’s economic growth. It is estimated that in 2009,about 55 percent of China’s population, or 700 million people, still lived in the countryside. That large rural sector is responsible for about a third of Chinese economic growth today and will continue to anchor the future growth [3].

Concluding remarks

China’s economic success is a miracle. A country transformed itself from poor agrarian economy in as recently as 1970s to a world economic superpower within 30 years. China is not particularly endowed with vast natural resources as in Africa. But it is endowed with committed, capable and visionary political leaders that put the interest of their people and their country before anything else.

The unique socialist market model of economic development pursued by these leaders defied the main stream economic thinking of laissez faire capitalism as the only way for sustained prosperity. China provides a unique model of economic development to the developing world where it is not the nature of ownership of the means of production that really matters in economic development but it is the degree of openness, management and productive efficiencies that are the key to success. This is not to undermine the importance of a vibrant private sector, both domestic and foreign, in economic development; but rather to emphasize the fact that open, efficient and competitive state and communally owned enterprises complemented by equally vibrant private sector can do economic wonders as in China.

References

[1] Zheng, J, Bigsten, A. and Hu, A. Can China’s Growth be sustained? A Productivity Perspective. Special Issue on Law, Finance, and Economic Growth in China,World Development, 2007

[2] John Ross, Key Determinants Of The Different GDP Growth Rates In India And China, Sunday, May 02, 2010

[3] Robert Fogel, January /February 2010. $123,000,000,000,000. China’s estimated economy by 2010. Be warned.

[4] Fu X. , and Balasubramanyam, V.N. 2003. The Township and Village enterprise in China, Journal of Development Studies, Vol. 39, No.4, 2003.

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   Dr. Wolassa Kumo
1. Introduction

By early 1950s, based on the level of economic development and geopolitical alignment, the World was divided into three Worlds: The First World, the industrialised, capitalist, countries of North America, western Europe, Japan and Australia under the United States’ sphere of political influence; the Second World, the former Soviet Union, the socialist counties of Eastern Europe, and China; and the Third World, Africa, Latin America and the rest of Asia and Middle East. For about 4 decades until 1991 the first two worlds had engaged in Cold War with military tensions, arms race, proxy wars, and economic and technological competitions. The Third World was mostly a battle ground for proxy wars between the first two worlds.

This global politico ? economic order was fundamentally altered following the 1989 revolutions in Eastern Europe that overthrew socialist governments and forced the Soviet Union to withdraw its forces. The collapse of communism in Eastern Europe was followed by the collapse of the Soviet Union itself and the creation of 15 independent states in Eastern Europe and Central Asia. Following this, socialism also collapsed in less developed countries of Ethiopia, Cambodia and Mongolia.

With the end of the Second World, the concepts of the First and the Third Worlds became irrelevant. At present the world can be categorised into three economic zones: a) Advanced, industrialised countries (which includes all of the former First world countries); b) Emerging Market Economies,(rapidly expanding economies of China, Russia, Brazil, India, South Africa, Argentina ,Mexico, South Korea, and Indonesia); and c) Lesser-developed countries mostly in Africa and also in Asia and Latin America.

The next three decades will see major changes in world economic order with emerging markets poised to take over as global economic leaders. The following sections of this brief article investigate the trends in global labour and total factor productivity as engines driving rapid changes in global economic order.

2. Global output growth during the past 60 years

In 1950 the total GDP of India converted at Geary Khamis (GK) [1] PPPs in 1990 US dollar prices was US$ 222 billion, bigger than that of Japan (US $ 160.9 billion), France (US$220 billion), West Germany (US213.9 billion) and China (US$198.6 billion) all at constant 1990 prices. In terms of the size of total output, six decades ago, India was the third largest economy in the World after USA with total GDP at Geary Khamis PPP of US$ 1,455 billion, and United kingdom with total GDP of US $ 347.8 billion (of course excluding the former USSR with the total GDP of over US$ 510 billion) all at the 1990 prices.

During the next three decades the global economy expanded remarkably but at different paces in different major economies. By 1980 India’s total GDP nearly tripled to over US$ 637 billion while that of China grew more than four times to US$805.8 billion. During the same period, the total GDP of Japan grew almost ten times to over US$1,568 billion.

On the other hand, the total output of United States grew only three times to about US$4230 billion over the same period while the UK total output only doubled during the three decades between 1950 and 1980. Western Germany’s total output expanded by nearly four and one half times to US$946 billion while French total output expanded only three and one half times during the same period.

In fact, Japan’s total output exceeded that of each of India and China within a decade and one half after WWII while it exceeded that of each of UK and West Germany by mid 1960s. Therefore, by late 1960s Japan and West Germany emerged as the second and third world economic powers respectively after the United Sates.

However, growth trends for the next three decades ending in 2009 decelerated for most advanced economies. At the 1990 constant PPP prices, the US total output expanded only slightly more than 2 times at the end of 2009 from its 1980 level while that of Japan expanded only by 1.7 times for the same period. Similarly, total output in UK, Germany, and France expanded by less than 2 times during this period.

On the other hand, Chinese total output expanded nearly 11 times while that of India expanded five and one half times during the 1980-2009 period. Clearly, the growth moment started to decline in advanced economies since the early 1980s while it started to pick up in the current emerging market economies such as India, China, Brazil and later the Russian federation.

Based on the Geary Khamis PPPs at 1990 constant prices, in January 2010, China and India have become the second and third largest economies in the world respectively after the United States while Russia and Brazil are catching up with the UK and France. Japan and Germany are fourth and fifth largest economies in the world respectively.

Such rapid growth in some emerging market economies since the 1980s is attributed primarily to continuous improvements in labour and total factor productivity.

3. Labour and total factor productivity

The expansion of total output at any given point in time is strongly positively associated with the growth in labour and total factor productivity. For instance, the total output per person employed in the United States grew 1.7 times during the 1950-1980 period but only 1.5 times during the 1980-2009 period. Output per person employed expanded 3 times in France during 1950-1980 but only about 1.5 times during the 1980-2009 period while in UK there was no major difference in growth of output per employed person during the two periods.. In Japan output per employed person expanded six times during the 1950-80 period but only 1.6 times during the slow growth periods of 1980-2009. Thus, the rapid expansion in total output in advanced economies during the 1950-1980 period was directly linked with the rapid expansion in contribution of labour.

Then opposite is true for most emerging market economies. The, total output per employed person grew only by about 1.6 times in China during 1950-1980 but rapidly accelerated during the 1980-2009 period to about seven times. In India output per employed persons expanded only 1.3 times during the 1950-1980 period but it expanded 3 times during the 1980-2009 period. Thus the first three decades following the end of WWII, saw rapid growth in labour productivity in advanced economies while the past three decades since 1980 saw a sharp decline in labour productivity. This was accompanies by rapid growth in labour productivity in emerging market economies during the past three decades.

In spite of rapid growth in labour productivity in emerging market economies during the past three decades, in absolute terms, labour productivity in these economies is still lower than those of the advanced economies. The United States is still a world leader in total output/labour ratio. The GDP per persons employed in the United States in 2009 is the highest in the world, at about GK $ 66000 followed by Ireland GK$55000, Luxemburg GK$52000 and Norway GK$51000 all at the 1990 constant GK dollars.

Among the BRICs Russia leads in output per person employed in 2009 at about GK$18000 followed by Brazil, GK $ 13000 and China GK $ 11000 and India GK$ 7000, at 1990 constant GK dollars.

Labour productivity performance is critical for economic growth but its effect is usually short term. . The long term economic performance depends on total factor productivity (TFP) which reflects a country’s ability to use a broad range of skills, including its public policies and infrastructural development to improve living standards [2]. The TFP growth accounts for the changes in output not caused by changes in inputs. Its growth represents the effect of technological change, efficiency improvements, and our inability to measure the contribution of all other inputs. It is estimated as the residual by subtracting the sum of two-period average compensation share weighted input growth rates from the output growth rate as log differences of level which are known as Tornqvist indexes[1].

Rich countries are facing an increasing challenge from emerging economies not only in terms of labour productivity bus also in terms of total factor productivity .The growth in total factor productivity in most advanced economies between 1982 and 2008 measured as percent of Tornqvist index was mostly negative and marginal. For instance, between 1982 and 2008 total factor productivity in the United States grew only by 0.35 percent per year on average while in Japan it grew only by about 0.18 percent per year on average.

On the other hand, TFP grew much higher in emerging market economies. For instance, TFP grew by about 1.98 percent per year on average in China, and 0.87 percent in India for the period 1982- 2008 and by over 4 percent in Russia for the period 1995 – 2008.

It can be argued therefore that the 2008-2009 global financial crisis and the ensuing Great recession were not merely the result of short term bad bank behaviour, but the result of long term decline in total factor productivity in developed economies. Most of the developed economies have shown persistent trend of decline over the past thirty years while emerging economies have shown persistent sign of improvement in productivity and economic growth. The economic resilience of the emerging market economies during the 2008-2009 Great recession is the proof of their long term economic rigour.

4. The changing global economic order

Economist are predicting that during the next there decades the world economic order will change drastically and that China will take over United States as the world economic superpower. Robert Fogel [3], the winner of the 1993 Nobel Prize in Economic Sciences, argues that in 2040, the Chinese economy will reach $123 trillion, or nearly three times the economic output of the entire globe in 2000. He states further that China’s per capita income will hit $85,000, more than double the forecast for the European Union, and also much higher than that of India and Japan. Fogel forecasts further that although China will not overtake the United States in per capita wealth, its share of global GDP of 40 percent will be more than 3 times that of USA and more than 8 times that of the European Union after three decades.

The basic factors contributing to China’s faster economic expansion are: enormous investment in education leading to rapid increases in productivity; the continued role of the massive rural sector; currently underestimated economic progress; locally driven reforms and more open criticism than most think; and rapidly expanding consumerism tendencies [3].
The main factors for the relative decline of the European union will be declining fertility and consumer restraints.

However, not everyone shares such optimistic view about China’s economic future. Gordon Chang [4] argues that China will not achieve such massive expansion during the coming three decades. He argues that although China is making record investment in education, its education remains inappropriate for modern society. He further stresses that although China still has cheap labour, there is generally accepted projection that its labour force will level off in a half decade and then shrink.

Chang argues further that in spite of Fogel’s observations, Chinese communist party tolerates less criticism today than it did two decades ago and that economic reforms have stalled because China has progressed as far as it can within the existing political framework. He reiterates that a true market economy requires a rule of law, which in turn requires institutional curbs on government.

Chang rejects Fogel’s view on the role of consumer spending in China. He argues that historically, private consumption in China contributed about 60% of economic output; today it accounts for about 30% as the bulk of growth is driven by government’s massive investment on infrastructure. Change observes further that as much as Europe faces demographic challenges so does China; Chinese statistics show that the country’s birthrate fell 42 percent from 1990 to 2007, and government projections suggest that by 2025, nearly a quarter of China’s population will have celebrated its 60th birthday.

Finally, Chang states that China’s 1.4 trillion people will not earn a per capita income of US$85000 in 2040 for the main reason that the Earth cannot sustain such rapid growth, a clear reminder about China’s responsibility to curb carbon emissions to a sustainable level.

However, only time will tell whether Fogel or Chang will have accurately predicted the future state of the Chinese economy and hence the emergent global economic order.

References

[1] The Conference Board Total Economy Database, January 2010, http://www.conference-board.org/economics/database.cfm

[2] Finfacts Ireland, Business and Finance Portal, 2010: http://www.finfacts.ie/irishfinancenews

[3] Robert Fogel, January /February 2010. $123,000,000,000,000*
*China’s estimated economy by the year 2040. Be warned. http://www.foreignpolicy.com/articles/2010/01/04/123000000000000

[4] Gordon C Chang, January 8, 2010. China’s Economy To Reach $123 Trillion? A Nobel Prize winner seems to think so. Here’s why he’s wrong.
http://www.forbes.com/2010/01/07/china-economy-robert-fogel-opinions-columnists-gordon-g-chang.html

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