Sunday, June 20, 2010

Obama Letter to G20 Makes Simple Economic Logic

President Obama of the USA recently sent a letter to those who call themselves the G20 who will be meeting in Toronto as of today, Toronto is a city in Canada, Canadians have spent a billion dollars for this 3 - 4 day meeting and get together.

In the letter, Obama rightly or wrongly called for China to let its currency float more, to reflect what Obama believes would be the currencies true value, his advisers obviously believe the Chinese currency is undervalued, given the economic circumstances today. But more so, he has called on countries to increase their internal demand and not over rely on exports. This logic definitely agrees with the logic of knowledge economics.

I touched on some of this logic back in December 2008. Though obviously attacking Germany and China, its political, but we must ask ourselves why do we trade. We trade for things that we dot have, Americans like Mercedes Benz and BMW, they are better than anything Ford makes, surely Americans have the right to purchase these makes of automobiles. That is trade.

But it is greed and short term foresight when a factory closes in the USA to open up a branch in say China, Vietnam, Zimbabwe or Kenya because wages are lower there. And then re - export the goods to the USA, that is not trade, it is a short term fix for profits, what happens to those people laid of in the USA, Canada or Europe, what then do they do, if every manufacturing company does it, in the long run, a permanent underclass will be created in the USA, Europe, and Canada. That is not what we want, we want the world to move ahead not at somebodies expense, but at every-bodies gain.

If a toothpaste manufacturer for example closes in the USA and relocates in Vietnam and reexports the toothpaste, it is just greed of the manufacturer who is looking at short term profits at the expense of his nation, the country will not have time to adapt to such a shock. However, if Vietnam makes better toothpaste than the toothpaste in America, then for sure, one should purchase the toothpaste from Vietnam. Vietnam though should not expect manufacturers to relocate to Vietnam, the way they did for China, that eventually led to the housing crises, unemployed people, or underemployed people can not afford more goods and services, it is just a fact. People are not happy doing 2 or 3 jobs, they want 1 job, that is enough. They are human beings. Yet economists have been awarded prizes for suggesting that relocating to a cheap manufacturing base makes sense. In the long run it will never.

This is why for trade to be effective, all societies must allow their citizens to use their knowledge and create goods and services, so that trade can be more natural and economies will not be shocked, The fall of Detroit was gradual, the Japanese and Germans made better cars, but the American economy had time to adapt and find jobs for these people. However what created the housing crises was a shock to the system, relocating in Mexico, China, Thailand ultimately cost, because people could not find jobs, there was no competition, it was the same product made by the same company in another part of the world, no better product came on the market. Ultimately the middle class of North America are those that suffered, and if this continues, a permanent underclass in North America, and Europe will be created, in the long run there will be political upheavals. Hungry people are easily irritated, especially when they see rich people around the corner having a good life. if everybody is poor than there would be no upheaval, but that is not the case.

Vietnam recently joined the WTO, for it to succeed, it must encourage its peoples to make better products, not desire relocation of industry to Vietnam from USA and Europe, that is what trade is, at its basic trade is just an exchange of knowledge, a good is just useful knowledge. For knowledge to be most effective, it must first satisfy its local market, having domestic support means that the knowledge can continue to grow in case there are problems in or with the trading partners. Vietnam must recognize Obama's message is political, but to the wise, it makes the best long run sense. Increase domestic demand, and let that demand be filled by domestic knowledge where domestic knowledge can satisfy it.

Human attention span is small, much more can be written, but hopefully one understands what I am saying.

Bhekuzulu Khumalo

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Bhekuzulu Khumalo

I write about knowledge economics, information, liberty, and freedom