“Hey, Andy, have you heard the latest income projections on China?”  LJ stopped chewing his Moo Shoo pork for a moment to fill me in.  “By 2010, the number of Chinese who make at least $10,000 a year will double from 150 million to 300 million.  A decade later, China’s middle class will have more buying power than all of Japan.” 

I can’t tell you LJ’s real name, because he was a high-ranking government official who defected from China a few years ago.  The deal was if LJ kept his defection out of the U.S. media, the Chinese government would leave alone the family he left behind in China. 

There were obviously some things about China LJ didn’t like, but the market wasn’t one of them.  Since his defection, he’s gotten into the export business and ships huge amounts of products into China, even though he’s not allowed to go there himself.

Needless to say, LJ is bullish on China.  When I mentioned a bubble over our lunch meeting last week, he shrugged.  “Are you sure?  China is just beginning to scratch its potential.  It has a long way to go.”

As it happened, the same day I saw him, the Wall Street Journal ran this headline: “IMF Fuels Critics of Globalization.”

It seems that the latest data from around the world indicates that globalization spreads wealth around not only unevenly but unfairly.  The IMF found that skilled workers benefit more from globalization than unskilled workers.  The article explained that that’s not how globalization is supposed to work.  Our lowest-paid jobs requiring the least skills are the ones that are supposed to get exported overseas, not the jobs that are a couple of rungs higher in skill and pay.

Why is this so important to the “critics of globalization?”  Because when the lower-rung jobs get outsourced to other countries, the income gap between these job holders and higher-paid people is narrowed.  This is how globalization is supposed to promote equality.

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But when skilled workers get rewarded more than unskilled workers, the inequality gap widens.  Globalization in this case promotes inequality.

The skilled workers of these countries don’t bother with such quibbles, I’m sure.  They’re probably very thankful for the higher-paying jobs they’re getting from foreign firms manufacturing in their country or local firms producing products from foreign technology.

Foreign companies could very well be spending more on skilled labor than they would be spending on unskilled labor, so the local economy is also benefiting more.

So what’s wrong with this picture? Well, for one thing, inequality is a dirty word in developing countries and for good reason.  You see unimaginable wealth in these countries.  But you also see horrific poverty.

But that’s not the inequality gap the IMF is talking about.  It’s talking about the gap between those still stuck in poverty and those with marketable skills who have recently climbed out of poverty.

Skilled workers in such countries as Pakistan or Peru can’t necessarily buy a four-bedroom house and a Toyota Camry like they can in the U.S.  But things like TVs and appliances are now within their reach.  And with savings over time, so are modest houses and low-end cars.

And globalization reaches into other parts of the economy and raises the income bar.  For example, a manager working for a foreign-owned call center in the Philippines makes roughly as much as a lawyer working for a local law firm.  Globalization provides immediate benefits to the less-skilled person, but eventually the law firm will have to pay its lawyers more or risk them defecting to the foreign-owned call centers or other foreign companies.

Possible bubbles in China and small blips in inequality in countries like India … if that’s the worst globalization gives us, then what the heck is the big deal?

This is what I’ve observed first-hand about globalization from my 20 years of doing business around the globe.  I’ve seen it give countless people the opportunity to buy their first house.  And the very first thing they do when they move into their new houses is hire maids and servants from the countryside and give them a better living.  I wonder if these IMF studies capture this wealth distribution benefit of globalization?

Listen, LJ is a businessman and not an investor.  Sure, a healthy economy and growing stock market go hand-in-hand.  But he sees an additional 150 million people earning $10,000 or more buying more cars and needing more infrastructure – from schools to bridges.  From our point of view as investors, it’s also a huge source of money that will also be going into the stock market. 

Who’ll be earning that money?  Skilled workers.  Unskilled laborers make much less in China.  Opponents of globalization may not like this prospect, but investors and businessmen should be jumping for joy.  $10,000 goes a long way in China and other developing countries … whether it’s spent on stocks or on goods.

Good Global Investing,

AMG

P.S.  To let me know what you thought of today's article, send an e-mail to: feedback@investorsdailyedge.com.

[Ed. Note: Recently, Andrew led Wealth Advantage readers to gains of over 219% on Energy Metals. To learn more about how you can take advantage of gains like these, Click Here.]

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