Thursday, August 03, 2006

Its the Global Economy, Stupid

What with prices at the pump exceeding $3 a gallon this week in Minnesota it is hard to be entirely positive about the state of economic affairs in this world. In fact if there is one thing that threatens to derail the excellent global economic news it is the effect of the global Islamic terror campaign. So far the terrorists have not been so successful in disrupting in a major way the oil from the Middle East and the Gulf region from getting to the market. Not to say they haven't tried. The Saudi's have thwarted more than one attack on their major facilities. In Iraq it seems nearly a weekly occurance that their pipe lines are bombed. The oil market is tight and the market is jittery. It is speculation and high demand that is driving barrel prices beyond reality. All the more reason the Western world needs to replace oil as the fuel to power our daily transportation needs - but again reality creeps in - the technology and infrastructure to accomplish that could be years if not decades away.

Despite the oil market dysfunction the global economy is booming. I read with great interest this piece on "Don't Look Now, But the World Economy Is Booming". Nathan Smith points to the world's developing countries as evidence that things are actually looking up outside the core nations that anchor the global economy.

...check out the back page of The Economist. There is a column showing the GDP growth rates of 27 developing countries. In a typical copy from the late 1990s as many as one-third to one-half of these could have minus signs in front of them.

Today, every single one of these developing countries' growth rates is positive. Substantially positive. The slowest growth rate, in Brazil, is still a respectable 3.4 percent.

The old saw "A rising tide lifts all boats" absolutely applies to economic systems in a market based paradigm. Is there any doubt now that centrally controlled communist economic systems are a complete disaster? Smith declares the winner...

...Never in history has the market-capitalist system been so widespread. A golden age of capitalism started in the 1990s, when the Soviet Union fell, India hit a financial crisis and embarked on market reforms, Deng urged the Chinese to "plunge into the sea" of market competition, and Latin American countries beat inflation and tried out the Washington Consensus. Market capitalism was the only game in town...

Sixteen years after the fall of the Soviet Empire and a decade or more since China and then India began to reform their economic models away from communism and socialism we see that capitalism in one form or another is working its magic like any other "natural" system. Only governments, including America's can convolute the free flow of goods and services with bad legislatiton. Governments, foreign and domestic sad to say do a good job at bad legislation.

There is pain associated with all this good news and it will be felt mostly by North America and Western Europe. Demographics do not favor large stable economies. We have an aging population for one and secondly a ever more under-educated youth. The costs associated with these facts coupled with an aging infrastructure that is no longer world class spell hardships for many people who do not position themselves for personal success. Basically, for all intents and purposes high paying low-skill jobs are going away and there's nothing to be done about that.

Unfortunately our public school systems are not preparing the next generation to meet the challenge of reality, but rather teaching them to be sub par and above all to feel good about that. This is what I fear most. We should not fear the success of other nations in the free market because their good economies will lift ours if we are smart and prepared. Are we?