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2009-11-24

Challenges of the rapid rise of big developing economies

Comments on Michael Stutchbury “Up against a great wall”, 24/11/2009, http://blogs.theaustralian.news.com.au/currentaccount/index.php/theaustralian/comments/up_against_a_great_wall/

The Americans (and also most other industrialised countries included unfortunately) will have to adjust to the new world economic reality with the rise of big developing economies to increase the supply of goods and services globally.

It is reflected in cheaper labour, but can also make capital cheaper if those fast industrialising countries have high savings rates.

But the real catch is a realignment of the prices of goods and services internationally, with most prices of manufacturing goods and services that had been the main outputs of the industrialised countries to fall.

That means a reduction in the real wages of labour in the industrialised countries. This is just the results of standard trade theories.

Unfortunately, the Americans had misjudged the challenges to them and took only the good side of the cheaper capital and finances of the rise of big developing economies.

That caused their bubbles and the global financial crisis and with it the great global economic recession.

In this regard, Bergsten has been one of the very few who have a clearer mind.

All people should now rethink about the challenges and opportunities associated with the rapid rise of big developing economies.

The Americans need to live within their means, or trade assets or accumulated wealth for current consumptions, which means they can still run current account deficits, but only with greater lower future consumptions.

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