Wealth of nations: The modern illusions of economic development

18 Jul 2012, 4:30 pm   -   Source: World Crunch
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The meanings of the words

The meanings of the words "developed" and "developing" have changed over time. (AAP)

What does it mean for a country to be rich, but act like a poor country, or for a developing country to act like a developed country? Betty Ng CAIXIN/Worldcrunch reports on a fast changing landscape. 

By Betty Ng
CAIXIN/Worldcrunch

From one point of view, Europe is rich, but also down and out. Similarly, China can be seen as prosperous, but poor at the same time.

The word “developed” has always been synonymous with “rich,” while the words “developing” or “emerging” are often a polite way of saying “poor.” In the past decade, and in particular after the outbreak of the financial crisis, the meaning of these terms has changed a great deal. Now “developed” is actually reminiscent of “financial hardship” or “declining,” whereas “developing” or “emerging” means “awash with cash.”

Even if the division between the developed and the developing or emerging countries remains broadly unchanged, the definition of “rich country” and “poor country” is rapidly evolving -- and ever more difficult to define.

This decoupling is partly due to the fact that the definition of “developed country” implies a much wider scope, not just economic -- where other factors must be taken into account such as the cultural level, the general level of health… etc. Wealth is but one of these elements. A country can be developed, but not necessarily rich. In other words, economically-speaking it might qualify as “decent” but not wealthy, just like having a better education might increase one’s income, but is never a guarantee.

Yet some developed countries insist on regarding themselves as rich, and they act as such consistently. Meanwhile, certain developing or emerging countries insist on considering themselves as poor, and make decisions and act accordingly. This might sound odd, but in fact such modes of thinking help to explain how countries rise and fall.

Rather than arguing who is developed or not, one might as well change the perspective and talk about rich and poor.

So what happens when a rich country considers itself as poor and a poor country regards itself as rich?

The Chinese model

Take China as an example. After a long period of being ravaged by foreign occupation as well as civil wars, it opened up its economy as late as the 1980s, so it still maintains the mentality of a poor country. China lacks a sense of security and is particularly cautious in focusing on saving for a rainy day and preparing for emergencies.

It is very wary in the management of its treasury, and favors saving over spending. Such a tendency has become a sort of subconscious instinct. China maintains and defends its currency at a low and pegged exchange rate so as to assist export growth and bring in more and more foreign currency.

In the past three decades, its poor country state of mind has helped China build a long-lasting positive international balance of payments and accumulating vast foreign exchange reserves. This has proved quite useful in the global financial crisis. Even though the average living standard in China is not yet high, in terms of treasury China is already one of the world’s richest nations.

Western European countries have had a very different experience from China's during the same period. Even the two World Wars that brought colossal economic losses did not change their deep-rooted mentality of being rich countries. They went on developing the same consumption habits and lifestyle that they were accustomed to. While these countries’ output and exports are in fact insufficient to maintain their high living standards, they raise their internal and external borrowing to make up for the deficit.

In living standards, most European countries remain at a “developed” level. Basic necessities such as water, electricity, telecommunications, education and health care are readily available to the general public.

But in terms of state finances, many of the European countries are finding themselves trapped in a crisis, and even moving toward poverty. The surge of unemployment in Greece and Spain shows that in the next few years their average national living standard will have to be painfully lowered. Their rich country mentality is unfortunately not keeping up with the reality of their economic recession.

However, this doesn’t mean China’s poor country mentality is definitely superior. It has its own issues. China is no longer a poor country, but it isn’t yet developed either. Excessive saving has deprived its people of a higher living standard and prevented them from developing their potential.

Reality sets in

Besides, when a country is uneasy with its finances it is often either too conservative or too enterprising. When too conservative, it can result in idle savings, very low risk and low-performing investments. This in turn causes the surplus to be eroded by inflation. On the other hand, speculative enterprise and investment in high-risk projects with the hope of catching up with the rich countries may also be counterproductive and cause losses.

Therefore, when a country’s mentality doesn’t evolve gradually with the economic reality, when its actions are based on subjective historical standards rather than on objective conditions, it will create serious problems.

But for most countries, changing the general state of mind itself requires efforts. This may arouse anxiety and fear, particularly because change sometimes also means losses.

This explains why it took so long for the debt-ridden European countries to face up to their problems. They are compelled to pay extremely high interest rates that they can’t afford. Meanwhile, this is also why the Chinese currency has risen to the current level, so China can alleviate inflation. In both cases, it’s reality that obliges a change of mentality and behavior. Naturally, if one is to choose between the two for investment, the choice is obvious.

Read the original article in Chinese.

Photo - aroid

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