Catching up is hard to do

Daniel Altman at Managing Globalization posits that China is learning the lessons of 20th century US economic history at the accelerated ratio of about 1 year per US decade.

...China seems to be rolling up the welcome mat a bit in several high-value ndustries, perhaps as an economically questionable preparation for a freer currency or a slackening of growth. The United States suffered the drawbacks of that approach many decades ago. If China is going through the same learning process now, you could argue that it’s traveling through economic time about 10 to 20 times more quickly. In the past year, the Chinese had the product safety scandals of the 1900s and 1910s. Next year, perhaps, they’ll experience the protectionism of the 1920s. Will a securities regulator and a social security program arrive in 2009, after a crash in an overvalued stock market?

If they can land a man on mars in 6 or 7 years, then I'll agree that we will all soon be speaking Mandarin. But there is an awful lot that will need to go right for the Chinese as they confront the scenarios outlined above. It was not foreordained that the US would emerge leaner, stronger and economically healthier either from the depression era or the 1970s. An awful lot had to go right.

Sovereign Wealth Funds Take Center Stage

Sovereign Wealth Funds (SWF) were the big topic at the recent meeting of the Group of Seven (G7) industrialized nations. These pools of cash, comprised of proceeds from government current account surpluses (often related to gas and oil wealth), have ballooned in size over the last fifteen years. They currently control an estimated US$2.5 trillion - more than the combined valued of every hedge fund in existence. They could control up to $17.5 trillion in assets by 2017.

States normally invest foreign exchange reserves in low or no-risk investment vehicles like US Treasuries. But there is concern that some of these funds are now moving toward riskier equity holdings. This development worries governments in the US and Europe. Finance Ministers from the G7 recently asked some of the biggest funds to develop an explicit code of conduct for SWFs. Transparency is an issue here. So is national security. "Money is naturally going to gravitate toward dollar-based assets because of the strength of our economy," Treasury secretary, Henry Paulson Jr., recently said."I'd like nothing more than to get more of that money. But I understand that there's a natural fear that they're going to buy up America."

At the Carnegie Council last week, Daniel Altman downplayed those fears by noting that a similar sentiment surrounded Japanese real-estate purchases in the US during the 1980s. "My gut feeling is, that if you are going to offer securities for sale, you can't dictate who buys them," he said.

Bloomberg's Matthew Lynn is somewhat more direct in his defense of SWFs.

"Nobody minded when emerging economies recycled all those dollars, pounds and euros by putting cash on deposit in our banks, or buying bonds issued by our governments. So why should we mind when they start buying companies? They are just diversifying their holdings, like any prudent investor would. If we don't like them purchasing our equities, shouldn't we tell them to stop buying our bonds and currencies as well?"

Should we be scared of Sovereign Wealth Funds? Or are they no riskier than other investment vehicles that we are more familiar with?

Gaps Abound

Last week, Daniel Altman, of the IHT and publisher of the blog Managing Globalization, came to the Carnegie Council to talk about his new book Connected: 24 Hours in the Global Economy. I asked him what people are interested in who read his blog: What stories is the world interested in but the mainstream press isn't covering?

His reply was that people around the world are engaged in a debate about the best way to organize economically. The Washington Consensus is not the world consensus. Other ways of managing economies--land reform, export-driven growth, or authoritarian capitalism--are also appealing to many.

I am in Tokyo this week at a program organized by the Ministry of Foreign Affairs and the Japan Foundation Center for Global Partnership. One of the themes that I am hearing is the many gaps in the world--perception gaps, income gaps, and values gaps.

Despite the common wisdom that Japan and the United States share common values (I would agree that the two countries do share a belief in universal values), one commentator said he felt that Americans are too concerned about terrorism. While Japan and the US are closer than ever through trade flows and security arrangements, he sees a divergence in what our respective publics care about. In Japan, the core concerns are gaps--between the rich and poor, countryside and cities--and demographics.

Global surveys depict these gaps worry many publics worldwide. Is the United States unique in that its culture accepts gaps between the rich and poor or the factory worker and the CEO or salaries commensurate with merit, as this Japanese commentator suggested?