What will happen when the world’s poor become rich?

The chief economist of HSBC bank Stephen King recently raised the question in a book of what will happen when the world’s poor become rich.

The answer is obviously great news for the world’s poor, but a mixture of pros and cons for people currently living in the rich world.

He believes the West’s relative power and wealth will decline, as a share of the global pie. But depending on what Westerners’ decide to do about it, their absolute wealth – money in the hand – will either decrease or increase.

The book is called “Losing Control: The Emerging Threat to Western Prosperity.”

It basically accepts that the West is decreasing its proportion of global dominance to emerging nations like China and Brazil (the ‘West’ generally means rich countries).

Due to fundamental economics, the book sees this growth of emerging countries and their people’s wealth as inevitable.

They have cheaper workers so many manufacturing and outsourcing jobs are being moved there. They also have a lot of consumers, so multinational companies are investing heavily to get their piece of the action.

What King discusses is what this all means for people living in the rich world.

Positively speaking, it means there will be a lot more consumers for exporters to sell their products to. And that export wealth trickles through to the rest of society in spending, employment and growth.

Indeed, one only needs to look at the strong economies of Germany and Australia to see how they are defeating the doom and gloom of recession by exporting to places like China.

From a humanitarian point of view, there will be less need for aid assistance as countries get better at looking after themselves.

And ideally it will also mean less terrorist attacks on westerners at home or abroad, as poverty and injustice – the main drivers of extremism – gradually decrease with prosperity.

But there are also the downsides. And this is what King concentrates on most.

In a world of limited resources, the West, with its attractive markets, has for a long time had buying dominance over most of them.

Now companies from the BRIC countries – Brazil, Russia, India and China – and others will have considerably more buying power, meaning Westerners will have to learn to share.

This sharing will also mean higher prices for items like agricultural products and energy fuels – otherwise known as raw materials and commodities. The world got a feel for what higher food and oil prices can look like in 2008, just before the recession kicked in.

The only way to stop this price hike will be for people to grow more food and produce more energy. But whether the planet’s supply can keep up with demand is the trillion-dollar question.

The way King sees it, the West can choose to go two ways in response.

The first, and desirable way, is to accept that the changes are inevitable with globalisation, and try to modify their economies. Concentrate less on manufacturing and more on highly skilled industries or some other competitive advantage.

This will require a bit of short-term pain as people lose their jobs and perhaps have to begin new careers.

But in the long run it will whittle out the uncompetitive businesses, and replace them with more sustainable industries whose jobs can’t be lost to China or India.

But the second, and very undesirable way, is what King is worried about.

This is when Westerners continue to suffer from low unemployment, and their standard of living drops.

As a result, insecure voters take their anger out on politicians, who are then forced to look for short-term solutions to keep their positions.

One of those solutions will be protectionism – when politicians pass laws making goods produced overseas less competitive in an effort to boost production at home.

Such a move could be very destructive. For example, if America did this to protect its factory workers, China or Europe would retaliate with their own protectionist rules.

US exporters would then struggle with sales and have to lay off staff. Meanwhile, consumers would find that many of the cheaper products they used to buy are no longer available or more expensive.

The quest for a short-term solution over job losses would quickly result in a dangerous downward spiral in world trade.

This is what King is afraid of. He says the West should “age gracefully” (meaning accept the changes) and not fall into the protectionist trap that would harm everybody.

He says the issue is currently simmering below the surface, waiting for the debate to take place.

When it does, the hope is that short-term insecurity doesn’t get in the way of long-term prosperity.

By The Casual Truth