An interdependent world

The financial crisis that first struck the United States is unfolding into a worldwide economic recession. When the U.S. coughs, the world catches a cold, now a once-in-a-century cold. This is unexpected to most people, including most economists. It is often said that everything in the world is mutually dependent. But this is the first time that we all are really feeling the same pinch.
Real estate is a small sector of the U.S. economy, and sub-prime loans are only a part of real estate. Besides, default and bad debts constituted only a small proportion at the beginning, said to be around 20%. But as it happens, such malaise intensified and shook the massive body of U.S. finance to its very foundation. The virtual economy, as the crisis has revealed, is highly dependent on the real economy, and vice versa. With rampant spillovers into real economy, the economic recession is in full swing.
A few months ago, the Chinese economy was under pressures of “overheating” and “inflation,” and monetary authorities kept firm on their tightening policies. A series of steps were taken aimed at controlling GDP, exports and investment growth. Six months ago, the government and most economists were asserting that our economy was free from any problems, that the economic base was good, and that growth was as robust as usual. When the signs of the U.S. sub-prime crisis became apparent, most people still thought they were in a safe haven and could watch the show carefree. Unexpectedly, a financial tsunami at the other side of the shore spread swiftly to us, wreaking such profound havoc. We learned the hard way that we indeed live in an interdependent world.
Amid the mess, we are experiencing vivid lessons on the interdependence between the real economy and the virtual economy, between the U.S. economy and the Chinese economy. Moreover, various fields and aspects of our economic and social life are also highly dependent uponeach other:
· Employment and growth: GDP growth is the key to employment. We cannot figure out a better way to provide enough jobs for China’s huge population than maintaining a fast and steady growth.
· Growth and demand: falling demand will weaken growth momentum. When export demand plunges and consumer demand cannot be expanded quickly, increasing investment is the only way to maintain and expand demand on a massive scale.
· Staff interests and corporate competitiveness: Businesses have to stay competitive in order to maintain staff salaries and benefits. Mere labor laws and mandatory policies are at best insufficient for protecting job security;
· People’s welfare and industrialization: Without industrial growth, all major welfare programs will be on very weak foundations.
· Resources and industrial application: Without industrial demand and a certain technology basis, no materials in the world can be used as “resources”.
Economic confidence and stock and housing markets: Characteristic of a virtue economy, the price fluctuations and “market values” of stock and housing markets may seem to be no more than a blip phenomenon of profits and losses.
· Government revenue and corporate vibrancy: If businesses are blighted with operational difficulties, government revenues will not be backed by reliable sources.
No pain, no gain. The deepening financial crisis is lecturing us all on the lessons about this interdependent world.

Prof. Jin Bei (金碚)
Jan. 8th, 2009