November 29, 2010

When the Competition Catches Up, Despite Itself

Justin Katz

Megan McArdle makes some interesting points about China's potential for economic growth that may quickly find it more susceptible to competition:

The endless acquisition of US currency is unsustainable. The sterilization transactions required to keep their foreign exchange operations from turning into inflation have left the banking system positively gorged with low-interest government bonds; and now that the sterilization has eased, the inflation is showing up anyway. The current official figures are 4.25%, and a bank economist we spoke to yesterday expects something over 5% in the near future.

The wages, too, are starting to rise. Anecdotally, we're hearing reports of labor costs jumping 15-30% in major urban areas like Beijing and Shanghai. Importing low-wage workers from distant farms and using the labor cost advantage to dramatically undercut competitors is a strategy that has limits.

Both those who essentially believe in central planning and those who do not have a tendency to see its initial appearance of success (the lure) as perpetual. The laws of economics still apply, and it still spells disaster to subvert them for too long.