The Chinese economy
John Azzopardi Vella
In the eighties and Nineties tens of millions of Maltese liri were poured into Argentina. The details of this financial debacle are so well known that it would be tiresome to repeat them.
In the next few years tens of millions of Maltese liri will flow into the Chinese economy. They will accompany tens of billions from wealthy countries.
Massive economic development beckons in China. Is there anything in common between China and Argentina? Not necessarily.
The world's financial press is full of articles about the Chinese economy, and if these articles are compared and monitored they will help us to make the right decisions.
Success does not come easy in the investment world. There must be an educative process, for which this article is a humble contribution.
If there is erroneous education it can lead to catastrophic consequences not only of money but also of human life. During the Thirties Wall Street crash, stockbroker suicides, involving jumps from investment bank skyscrapers, were a daily occurrence in New York.
The Chinese economy must be monitored in Malta on a daily basis, not least because HSBC, the bank which largely controls the Maltese economy, is heavily involved in China. To know China is to know HSBC.
Research on China must be done, and be seen to be done. The position in three years' time will not necessarily be that of today. How many articles can be expected to appear in the Maltese press on the Chinese economy in the next three years?
The international quality financial press has a negligible circulation in these islands, but it cannot be said that the amount of Maltese money held in international currencies is negligible. Malta must have one of the highest per capita figures for foreign currency investments in the world, whether private or governmental.
Lord Balogh used to tell me "Malta's reserves are enormous". That was 30 years ago and as everybody knows Malta is today a far richer country.
We see ordinary workers in our supermarkets owning mobiles and driving cars. If we want to defend this prosperity we must be eternally vigilant.
Malta needs to invest in equities because only equities can beat inflation significantly. Let us prepare the Maltese people culturally so that it might enter the international investment game on a larger scale and provide money for a dramatically aging population.
A full cultural preparation involves far more than a knowledge of economics; it requires also familiarity with recent economic history and psychology.
One can hardly legislate on these matters. The educative process must be a collective one through the stimulation of public debate. This is how success in investment is achieved in other countries. The country, which lacks a financial education, invites disaster on its people.
Investment opportunity
Over the past ten years China has come to occupy an increasingly large space in international financial journalism. The Chinese economic miracle has been so great that an attempt is being made in some quarters to rewrite fundamental economic principles such as the law of comparative advantage first formulated by Ricardo.
This law states that there can be only gains when countries exchange goods. One country will enjoy a comparative advantage in the production of a certain good, which the other will not have.
Economic upheaval on a massive scale has always brought forward a flowering of economic theory - the industrial revolution of more than 200 years ago begat Say, Adam Smith, Ricardo and Karl Marx, while the economic blizzard of the Thirties produced the incomparable magnificence of Keynesian theory regarding the stimulation of demand.
There is no greater evidence of the irresistible advance of the Chinese economy and of its portents, than its impact on the law of comparative advantage.
There is a school of thought in America, headed by no less than the world famous Paul Samuelson of the Massachusetts Institute of Technology, which would like to say that "comparative advantage cannot be counted on to create net gains greater than the net losses from trade".
This Samuelson rethinking, was seized on, in an issue of Business Week last month. This most prestigious American economic publication quoted Samuelson, although he is now 87. The great Chinese economic game depends on the extent to which the world persists in embracing the theory of comparative advantage, and of the bounty that comes from trade.
It would be a misrepresentation to tell the Maltese investor that nobody in America will ever challenge the globalisation which is fattening both China and the investors of the West.
The indications are that this challenge will not succeed and that the nations will continue to seek trade's largesse. The challenge to world trade globalisation advantages was faced by The Economist in more than one issue, while Business Week has only presented a markedly tepid anti-globalisation stand, so tepid that it can easily by recognised for a pro-globalisation attitude.
It has not failed to carry out a patriotic duty in pointing out that rethinking among prominent economists could soon spill over into the policy arena, but there is no mistaking the meaning of the following words which have appeared last month:
"No one is advocating new trade barriers, which could be a cure that's worse than the disease."
These words mean that seeking comparative advantage in trade between the US and China is at least safe for the next five years. Beyond that date the position will have to be reviewed; no economist can predict what the next American President will do.
There have been presidents and prime ministers who have made mistakes. The most famous of all was that of Sir Winston Churchill when he revalued sterling upwards instead of downwards in 1925, making British coal exports uncompetitive.
Avoiding Thirties deflation
The Economist, the world's most prestigious economic publication, has come out with overwhelmingly strong arguments on why the West should continue to welcome trade in China.
It has published an evaluation of a study in its column 'Economics Focus', which estimated America's gains from past and future global integration. This study is entitled: "The payoff to America from Global Integration".
Forthcoming is "The United States and the world economy: foreign economic policy for the next decade", edited by Fred Bergsten, to be published this month by the Institute for International Studies.
The stand of The Economist on the prospects of America's trade with China and the consequent probable dramatic expansion of the China economy can be nailed down to hard statistics and self-interest.
America wants to trade with China because if it goes protectionist it will bring back the disaster on its economy, which existed during the deflation of the Thirties.
The Economist article asks: "What if the wave of global trade liberalisation that began after the Second World War had never taken place? One study estimates that a return to 1930s-style protectionism today would reduce America's GDP (gross domestic product) by 2.4%.
"If other countries retaliated with higher barriers of their own, GDP would fall by 2.1% more. Once again consumers' lost product variety would have to be considered too. On this method the total value of trade to America is put at 7.3% of GDP."
To be concluded
John Azzopardi Vella has advised S&P and promoted the Malta Development Fund. E-mail: johnazzopardivella@hotmail.com
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