Transparency, Trust and Certainty
Proper functioning of an economy over the long haul requires certainty; that is to say, it requires trust in a system, whatever that system may be. A desire for certainty does not justify the proposition that a government ought to seek stability as the highest goal or means to protect its economy; rather the governmental role is to ensure that the rules of the game are both well established and consistently enforced, thereby generating trust in its system. Despite years of substantial growth, we are now seeing the results of an economy being micro-managed by a government with an eye to pre-determined growth rates on a short term basis, protecting, selectively divulging and obscuring data, and working only toward what amounts to an appearance of strength. Such actions may generate trust in the manager, but do not generate trust in the system.
To be fair, the same could be said about the 2008 financial crisis which began here in the United States. Our government became overly involved in a particular sector of the economy and encouraged specific, risky behavior; private parties, failed to look for long term growth and instead focused on the immediate gain. Management failed, and the system was not trustworthy, nor was it trusted, and the economy was brought to its knees. The results reverberated around the world.
However, the problems resulting from the current difficulties in China are reverberating in a far different way, because the seemingly endless growth of Chinese economy provided an immediate opportunity for the developing and emerging worlds to market their raw materials and goods. Enhanced by China’s desire for increased influence in world politics, many developing nations welcomed Chinese investment, and the ability to sell their natural resources en masse to the seemingly insatiable Chinese.
An economy is never a zero sum game, though growth can always reach its limits in particular areas. Eventually, even a seemingly insatiable appetite can be sated, or it may go broke trying to get there. The result is devastating to those who can least afford to be devastated. Whereas the 2008 financial crisis certainly had a far reaching impact, the impact was not unbearable by those (as a group) upon whom it was thrust, the current problem initiated by the Chinese currency devaluation and stoked by a closer look at the fundamentals of the Chinese economy, could set back development in the developing world a great deal. The present situation with the Chinese may obliterate the gains that have been seen in many emerging nations that have tied themselves to China, as many in Latin America, Africa and South East Asia have. Moreover, the impact also reaches more developed nations like Russia, Brazil and South Africa. The impact on the advanced economies in Europe, North America and northern Asia exists, but can be absorbed.
One of the most disturbing ties between the 2008 financial crisis in the United States and the current issues with the Chinese is the recognition that the systems lack transparency. The problems with the home mortgage industry in the United States during the early 2000s were masked by layers of red tape and insurance products, coupled with bundling that obscured the real value of each individual loan. Generally, the system was so complex and opaque that only a select few understood it, and most people involved in that field were not among that select few.
The recognition that the official numbers put out by the Chinese regarding China’s economy are unreliable is nothing new. Private firms verify the official numbers and / or put out their own estimates based on specific sectors of the Chinese economy. However, a history of government intervention, creating a false market through significantly and artificially boosting demand even obscures the revised estimates provided by private firms. Again, only a very select few understand how decisions are made or what the intended effect is. Clearly transparency is not a short term goal for the Chinese, at least not any transparency beyond what is absolutely required by the IMF or World Bank. And even that level of transparency may not be reached if China has another option, such as starting its own development bank.
Transparency permits trust, and trust generates the certainty that a stable marketplace needs in order to operate.
The one thing that the U.S. driven financial crisis in 2008 and the most recent (hopefully) hiccup originating in China can teach us is that transparency, trust and certainty are necessary. But, these conditions do not develop quickly or without substantial effort. We must all take the time to get to know and understand our customers and the risks involved in doing business with them. Doing so is absolutely necessary, and exceedingly difficult when choosing international trading partners. In the international realm, cultural differences, differences in privacy expectations, and different transparency norms and requirements exist. This is why rushing to sell products overseas, or to develop a business in another country, especially a country that does not have an extensive background of beneficial and fair international trade is not a good idea.
Relationships must develop over time. Only through investing one’s time and energy in building relationships with key players from overseas trading partners, and business associates, can one truly make appropriate risk calculations about a business venture in another country. Only with time can one understand the market forces in the other country in which one hopes to engage in business. And, most importantly, the individuals in the other country are unlikely to trust you or your business, unless you are willing to put the necessary time, effort and resources into truly engaging them before you set up shop.