Cross Posted from Asia Times Online

By Spengler

I wish I had a nickel for every prediction of social unrest in China that I’ve read in the past year. Apart from the risk of stampedes at shopping malls before the Lunar New Year, China is tranquil. Meanwhile there are several dozen dead in Cairo overnight, central Bangkok remains under lockdown, street protests are out of control in Ukraine, Argentines are looting stores during power outages, and the stink of tear gas still overhangs the public squares of Istanbul from last year’s demonstrations.

There is social unrest in a lot of places other than China, and it goes together with the collapse of local currencies. The Chinese aren’t rioting because they are gainfully occupied and their wages are rising 15% to 20% a year. Other so-called emerging markets are in trouble because they are teeming with people who have nothing remunerative to do.

Most of the world’s people farm for a living, but we need perhaps 1% of the world’s population to grow crops at American standards of productivity. The rest are marking time. We will need less unskilled factory labor as automation takes hold, which implies dire consequences for most of the farmers who managed to get to a city and get an entry-level factory job.

Turkey was supposed to be the poster-boy for prosperity through Muslim democracy. Instead, it has become an object lesson in emerging market mediocrity, and its currency is collapsing because it pretended to be something better than that.

The Turks can spin polyester into sweaters for the Russian market, build washing machines for Southern Europe, and assemble cars for the Koreans. They can’t build a smart phone, let alone a modern aircraft, although their military has put some down-market drones in the air. There are a handful of fine universities that produce good engineers and financial types, but not enough to make a dent in the country’s overall economic backwardness.

Turkish Stock Market ETF, Past 12 Months

Turkish Lira to US Dollar

Argentine Peso to US Dollar

Turkey is in trouble because the Turks aren’t very good at anything in particular, but acted as if they were the next China. They borrowed vast sums from the international market against a glorious future that was never to be. Among all of the world’s big economies Turkey has the worst current account deficit, at nearly 8% of economic output, roughly where Greece was before its national bankruptcy. Investors reckoned that with high economic growth, Turkey would have no problem carrying its debt; what they did not take into account is that the growth itself was largely an illusion, a carnival of consumption and construction that depended on increasing debt in the first place.

Of all the so-called emerging markets only China addressed the problem of a sidelined population, by methods that appear cruel, even repugnant in Western eyes. The one-child policy, surely the worst intrusion by any state into personal life in modern history, stopped the growth of the peasant population.

By main force, China will move 700 million people – the equivalent of all Europe from the Urals to the Atlantic – to cities from the countryside within little more than a single generation. This great migration has great costs – separation of families, arbitrary removal of farmers from their land, and the occasional construction of a city in the wrong place. But Chinese household income has risen 16-fold since 1987 as a result. And the Chinese by and large do not riot because they are too busy working. There is no reserve of idle farmers to bus into the center of the capital for a few dollars a day apiece, as in Thailand.

Unrest, to be sure, has different proximate causes in different places. The Ukrainians want to join the European Community so that they can leave Ukraine and go to places where they can earn money. The Turks object to the ruling party’s stealth construction of an Islamic dictatorship with its attendant cronyism and corruption. But the common thread in all the financial and social crises which broke out during the past several months is this: the world economy has left behind large parts of the world’s people.

The Egyptians, with 40% illiteracy and a more than 90% rate of female genital mutilation, dependent on imports for half their food while 70% of the population languishes in rural poverty, are the worst off. The Turks have a future, but it is a humbler and poorer one than their leaders have promised them. The adjustment of expectations will be wrenching, perhaps violent.

Argentina, whose currency collapsed last week, is another case in point. Blessed with great natural wealth, the Argentines have resented the oligopolies who control their resources, and try to vote themselves rich with depressing regularity. One government after another offers handouts to the querulous voters, who have learned that this practice breeds inflation and currency devaluation. The Argentine game is to be first in line at the public trough, and first in line at the foreign exchange counter to get out of local currency before it collapses yet again.

The industrial countries have the same kind of problem just below the surface. In America, fewer than half of adults available to work with a high school education or less actually are working.

US Labor Force – High-School Graduates

That is, only 58% of the noninstitutional adult civilian population with only a high school degree is counted in the labor force. For adults with less than a high school diploma, the labor participation rate falls to just 44%. Deduct the unemployed, and the result is that less than half of Americans without college are at work. That’s why 60 million Americans are on food stamps, and why a third of all American households have at least one member receiving means-tested government subsidies.

Meanwhile employers report shortages of skilled labor in numerous fields. It is hard to find skilled machine operators, who require the equivalent of a couple of years of college math to master the computer controls on industrial equipment, for example.

Spain’s unemployment rate remains at 26%. Spanish workers are now willing to take jobs at 700 euros (US$957) a month making clothing to compete with Chinese imports. That’s roughly what better-qualified Chinese workers earn with overtime. The low end of the European labor market, that is, already has converged with the high end of the Chinese labor market.

US Labor Force – High-School Dropouts

The risk is that the unproductive, unskilled and unemployable portions of the industrial world’s people will decide to vote themselves rich. Their leaders encourage this by focusing on income inequality. That is President Obama’s message as well as the consensus at the World Economic Forum last week at Davos, and it is nonsense.

The problem isn’t inequality of income, but inequality of knowledge. One pilot flying a modern military aircraft could destroy the whole of an ancient civilization. One farmer from Nebraska can replace a hundred in Egypt. A thousand years ago, everyone knew how a watermill worked; 200 years ago, most people knew how a steam engine works; how many people today know how a computer works?

East Asia is faring better than the rest of the world in this great transformation because its culture imposes a merciless meritocracy. The West should be able to do better than this. If we can’t, we can see our future in Argentina.