I have recently been reading a series of articles in the July 30th-August 5th 2005 The Economist supporting this thesis. The underlying theme of their thesis is that “China, along with the other emerging giants, India, Brazil, and the former Soviet Union, has effectively doubled the global labor force, hugely boosting the world’s output and hence its future prosperity.” In addition to the “huge, cheap workforce”, the thesis adds that “… its economy is unusually open to trade.” The underlying thesis is that not only does China export a lot, but it buys a lot also.
What are the implications of this thesis?
If we envision a global labor market, the implications of adding such a large labor pool to the global economy appears to be that increases in labor costs in developing nations should be moderate.
We read every day about how China and India have become major buyers on the international petroleum market. Feeding a growing demand at home, they have aggressively sought to secure supplies of this and other commodities. In light of their growing requirements, it would seem reasonable to assume that commodity prices will remain strong.
We know that China has been a major reason that the United States has been able to fund a huge budget deficit with minimal impact to the nation’s financial markets through the purchase of U.S. Treasury bonds. As long as China continues this policy, interest rates in the U.S.A. should remain relatively stable. Hopefully, not reaching a level that would be detrimental to economic growth.
Moderate labor costs + rising material costs + stable capital costs
Just as advanced telecommunications technology has made the world a smaller, more tightly coupled world, globalization has tightly bound the economies of the individual nations together. One of the articles closed with the Chinese proverb: “What you cannot avoid, welcome.”