China, Argentina, and the mystery of the 'middle income trap' … Here is a fascinating chart from the joint report by the World Bank and Beijing's Development Research Centre. It shows the fate that China risks if it clings too long to the catch-up growth model that's been in place since Deng Xiaoping. It shows the vast difference in outcome between getting it right and getting it wrong. "If countries cannot increase productivity through innovation, they find themselves trapped. China does not have to endure this fate," said the report. Remarkably few countries have achieved break-out, and once they do the gains are spectacular as you can see. The World Bank said Hong Kong, Taiwan, Mauritius, Israel, and Equatorial Guinea have all done so, as well as Korea and Japan. Ireland, Spain, Greece, and Portugal have also done so in Europe, though Greece risks slipping back into the lower tier if it is not careful, as Argentina famously did under Peron. But more than 90 other countries deemed middle-income in 1960 never made it. Bad politics was usually to blame, or ideological idiocy, with some bad luck. – UK Telegraph/Ambrose Evans-Pritchard
Dominant Social Theme: Capitalist policies create richer countries. Central banking has nothing to do with it.
Free-Market Analysis: Ambrose Evans-Pritchard has much to recommend him – despite being a prominent mainstream journo. Almost alone among his peers he's been relentlessly hard-headed about the EU and even China. He's made good calls.
His analyses are often thought provoking and accurate. But sometimes his Keynesian/monetarist orientation betrays him fundamentally. This would seem to be one of those times. We can see how flawed this worldview is versus free-market/Austrian analysis when we look at this article that he has penned.
We don't mean to pick on Evans-Pritchard, by the way. Like many, we've benefited from his clear analysis of many world issues and the high-level sourcing to which he has access. He is far better than the majority of his peers and what he is enunciating here is mild compared to the flawed economic analysis that most offer.
But Keynesian-monetarism gets one in trouble sooner or later and this would seem to be one of those times. Of course, Evans-Pritchard would disagree with this because we've read arguments in which he denies he can be pigeonholed when it comes to economic argumentation. But we know what we see and read …
This latest article of his is a Keynesian oriented screed in the sense that it denies the overwhelming impact that monopoly fiat central banking money printing has on economies. He wants to make the case that certain countries have done well because they've gotten the "economics right." We don't see it.
He provides us with the example of Argentina and Australia, for instance. Argentina plunged into a socialist hole, he argues, from which it has never recovered. Australia, by aligning its government with the larger Invisible Hand, has prospered.
We tend to doubt this latter proclamation. Australia, more than Argentina, has been able to stave off immediate Armageddon (probably because its property bubble hasn't fully popped yet) but the reality remains: Central banking economies are inherently unstable and always end the same way – in recession, depression and economic chaos.
The socialist Keynes had no answer to this. "In the long run we're all dead," he pleaded, and then went his way, heedlessly implementing his nonsensical system with the connivance of Western politicians desperate for a system (which he provided) that justified government interference in the marketplace.
Evans-Pritchard has argued vehemently in the past for Keynesian-type stimulation, even as European and US democrats argue similarly, along with emergent "Greenbackers," in the US anyway.
The temptation to believe that to ensure prosperity government merely has to print paper-ticker nostrums satisfies some kind of profound psychological need. But psychological assuagement is not necessarily good economic theory. Here's some more from Evans-Pritchard:
When I was in Dalian in September I heard China's software king, Lee Kaifu, warn that the economic prize will elude the country unless it cleans up its intellectual property laws. Firms are already going off-shore to protect their inventions, and the best entrepreneurs are already moving to states with a commercial rule of law, he said.
"The role of the private sector is critical," said the World Bank. "Innovation at the technology frontier is quite different in nature from catching-up technologically. It is not something that can be achieved through government planning."
In my view, nothing is foreordained. China has a very good chance of making it into the rich club, and a roughly equal chance of blowing it. Wearing my hat as a historian/anthropologist, I suspect that this will be determined by forces that have nothing to do with economics. The sudden policy lurch of the 1890s comes to mind.
Doesn't this sound convincing, dear reader? It ALWAYS does. And yet, if one delves into copyright and patent law, one finds that government, far from "supporting" innovation, is choking it off.
Britain and Germany, for instance, in the 17th and 18th centuries had markedly different copyright laws. Germany's tended to be a good deal more lax and thus it would seem a good deal more information circulated at lower prices. In Britain, apparently, books and periodicals were a good deal more restricted by copyright law.
As a result, it can (and has) been argued that German society experienced a virtual efflorescence. This was the era in which great German musicians, philosophers, scientists and mathematicians surged to the fore of the world stage. Britain with its restrictive copyright laws was left in the proverbial dust.
Publishers grew rich in Britain. The average man grew richer in knowledge in Germany and the overall quality of life ascended. It would take two world wars for the British elites to fully control (and destroy) the German society that relaxed (or non-existent) copyright had created.
Always, black is white and up is down. The free market is not to be trusted. Government is the guardian of "free" markets. Restrict knowledge (via copyright, etc.) and there will be "more" of it. Make it harder for people to purchase and retain information and they will be better educated.
And most of all, "print money and we'll all grow rich." Any normal viewpoint would espouse the view that if there is MORE of something, those holding whatever it is will likely find a given possession devalued.
But money has "magic" qualities. Speak of "money" – as of "government" – and people's faculties tend to go on holiday. Even Ambrose-Pritchard's.
In this article, he argues, for instance, that Japan is one of the countries that "got it right" and joined the circle of "rich countries." What countries is he talking about?
Is he talking about America – with its 20-plus percent unemployment (we think it's closer to 30 percent)? Or is speaking perhaps about Europe with its bevy of bankrupt PIGS – Portugal, Greece, Ireland, Spain, etc.? Soon, we have no doubt, we'll see France join that procession. Just wait 'til after the election.
Central banking is a curse. You can't "get it right" with monopoly fiat. You can have a free market in every facet of the economy but if the money itself is controlled, forget about it. You're doomed to recession, depression, inflation and, ultimately, social chaos and resurgent ruin. Some understand it better than others.
"Give me control over a nation's currency, and I care not who makes its laws." – Baron M.A. Rothschild