The second section of my book, Redefining Capitalism in Global Economic Development, is ambitious in that it first uses different macroeconomic world data to see how the world economy has been performing in the last few decades. The data do produce some interesting pictures in how different world economies performed in their international rankings and positions. Indeed, many global trends are reflected in the performance of the world economic data. In examining the top ten world economies using different data, the world economy can be separated into five categories of economies: fragile states, emerging states, oil exporting countries, the two socialist countries of Russia and China, and the advanced countries. The global data show the various economic trends, for example, which economies performed best in trade, reserve, while others performed worst in debts and deficits. Which world economies have been rising in economic power, and which world economies remained stagnant over the last decades.

Following on from discussion in Section One, Capitalism: Theories, Concepts and Behavior, the data performance also suggested a difference between economic issues and the involvement of politics. Typically, the fragile states in the world have been weak economically for decades, despite the availability of economic resources in these economies. This led one to argue if there were excessive politics and government intervention in economic activities, resulting to delays, distortions, uncertainties and risk in all fragile states. The solution would be for the fragile states to put their domestic economy in good order before any growth and progress could proceed. A related argument among the fragile states is the ethics exhibited at the leadership strata.

Chapter Download: The Five Groups of World Economies

When compared to the fragile states, the emerging states are better in that at least there was the presence of stability, which served as a pre-requisite to economic development. The next step for the emerging states would be to encourage newly capitalist activities so that individuals are given the opportunity to work their utmost. This requires the government to deliver effective supply-side policies, and to maintain competitiveness to attract trade and investment. Other than a few geographically large countries, many emerging states are medium-sized countries or economies newly emerged from the collapse of the Soviet Union in Eastern and Southern Europe. Improving domestic economic conditions is still the best strategy for these emerging states.

The OPEC countries hold a global monopoly on the export of oil, and they have amassed a large among of world resources over the last decades. Such a trade imbalance, however, was not addressed in terms of rechanneling resources to the oil importing countries. In addition, there was clearly the growth of extremist activities and terrorism. There are also extremes among the oil exporting and Middle East countries, and conflicts developed at multiple dimensions: religious, historical, racial, political, territorial and decades-long deployment of militarism offered no permanent solution. Despite of absorption of world resources, many Middle East countries are still imposing burdens to the rest of the peaceful world. Indeed, the level of complication in this group of countries requires multiple level of solutions, while the among of extremist activities led one to argue the presence of another world war.

Despite of collapse of Soviet Union, the Russian leaders have since taken up socialist ideologies in world affairs, and has been reluctant to cooperate with the rest of the world in promoting peace and development. While Russia is the ideological leader in socialism, China’s socialism is much stronger economically. Indeed, China has taken up several political and economic initiatives that would have incorporated some of the former Soviet states in western Asia. With its “cheque-book” diplomacy, China is behaving like a “Santa Claus” in its foreign policy in dishing out funds and assistance to many foreign countries. In the meantime, China is fortifying its socialist ideology both at home and abroad, flexing its economic might as it is the country with the largest world reserve. How could the ideological-strong Russia face up to the growing strength of the China economy? Would China’s “cheque-book” diplomacy impose threat to Russia, for example, in enclosing the entire southern border of Russia? Or, Russia still has time to change its policy in cooperating more with Europe and the West.

The advanced countries are still the leader in the global economy, though some countries are faced with severe domestic problems. While the advanced countries are still equipped with world leadership infrastructure, such as capitalist market development, key global investors, leadership in technology and so on, the adoption of socialist policies by socialist governments and leaders have weaken the economic strength of some advanced countries considerably. Typically, the distortions resulting from the pursuit of income equality at the expense of opportunity creation has led to accumulation of large debts.

Indeed, the accumulation of large national debt and the adoption of a prolonged period of ultra-low interest rate are the two cases of economic vulnerabilities. The rise of national debt basically meant that this generation has overspent at the expense of the future generation. Excessive welfare policies, the pursuit of income equality through redistribution in the form of high taxation and the gradual enlargement in government intervention have been common in many pro-welfare economies. Here, economic is incorporated into politics, but ex-ante political decisions are seen in ex-post economic distortions. The adoption of demand-side policies would mean the increase in current spending, and as more resources were devoted to demand-side policies, less would be available to cater for supply-side policies. Hence, the rise in government spending is directly correlated to the rise in national debt. The case of Greece was used as illustration, as the future generation stood no chance in securing a more progressive Greek economy, as the piling up of debt would mean a weak economy in the long future.

The prolonged adoption of an ultra-low interest rate regime would create another area of distortion. With a low interest rate, money does not function as a store of value. The low cost of money would mean investment cost is low, and a low return investment could be maintained. As resources are geared to low return investment, there would be less resources that could be devoted to high return investment. Hence, low interest rate regimes directly promoted low return investment. With money losing its value, speculative activities could be used to hedge against the fall cost of money.  The world economy has been “trapped” in low interest rate regimes, as the revision of interest rate would mean the failure of investment, and real estate speculators would face loss, to be followed by economic recession. While the redistributive policies through high taxation would result in growing national debt, the low interest rate served as a welfare policy that worked through the financial and monetary sector. “Investors” were aided with the low interest rate so that their investment cost could be “subsidized”, but economic growth could not have taken place exactly because low return investments, including speculative varieties, became dominant.

The world economy is faced with excessive socialist policies, which could not be maintained and sustained. The worst was that as capital funds departed from the home country, the same resources helped to strengthen the host economy. Hence, the home country suffered a loss in resources, which could be used for domestic investment, and a loss in competitiveness, as the funds in the host country helped to enlarge its economy, industries and exports. The home country would further be weakened when imports from the host country would weaken the exchange rate of the home country. The loss of the home country included: departing funds, domestic jobs and employment, competitiveness, rising import and trade deficit and falling exchange rate. How long a country can suffer such losses without revising its economic policies?

There are solutions to the problems in each group of world economies. The common core problem is the adoption of supply-side economics that aimed to strengthen infrastructure, greater marketization and a reversal of welfare policies. In the first instance, advanced countries need to strengthen their domestic economy before it could aid other countries. Secondly, there could be economic complement between advanced countries and medium-sized emerging countries.

If you found this interesting, you may want to read the first blog, Redefining Capitalism in Global Economic Development,  that focused on Section One of the book. The next blog, Capitalist Development: Asian Style, will focus on Section Three of the book.

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