Friday, August 13, 2010

2050, An Economic Odyssey

Napolean once said, "Let China sleep, for when China wakes up, she will shake the world."

China has woken up. It is investing nearly half its GDP — that's simply unprecedented. No other economy, at no other time in history, has invested capital on that scale. To call this "hyper"-investment is like comparing the Sun's luminosity to a street-lamp. At the peak of its economic miracle, Japan was investing only 30 percent plus of its GDP — but China is doing 50 percent!

Over 200 years of economic experience tells us that hyper-debt-fuelled-investment creates a bubble and ends in a dreadful collapse. But China has consistently defied all such prophesies of doom. Frankly, it may not be too bizarre to believe that China could be scripting a new economic logic. Traditional theory says that investment should be "sustainable", that is, it should be "matched" by rising consumption. But what if you pump so much capital into your economy — similar to putting extra fuel into a rocket — that you "escape" the gravitational pull of low thresholds? Especially if the bulk of your capital is spent on infrastructure (roads, railways, schools, irrigation canals, dams, hospitals, ports), as against factories which produce toys and televisions? This could be the Chinese masterstroke, the single discontinuity which could defeat 200 years of economic wisdom. Ultra-big manufacturing factories may create waste and over-capacity, but mammoth infrastructure could trigger higher productivity and the ability to create wealth. So it may be a fatal mistake to look at China's investment spree in a single lump of factories-plus-infrastructure. Huge capital spending on life-enhancing social assets, like schools, research labs and hospitals, may actually empower people. By rapidly educating its workforce, by brilliantly executing immensely large projects, by importing expertise and dollars in a shrinking world, China could be creating a "shower of wealth and productivity" such that consumption eventually "trickles through" into the bubble.

But 200 years of political economy have also taught us that genuine enterprise and innovation takes place only when people are free, when individual genius soars unfettered. But China is challenging that axiom too — once again, it is using ambition and infallible execution to trump democracy. It believes that people will trade wealth for freedom — for nearly three decades, this belief has held good and gathered in strength. So will China drive the final nail into the coffin of history? The jury is out on this one.

Now look at India — that's a classic textbook case. India's structure is an uncanny prototype of a "promising" economy. Well above half its GDP — nearly 55 percent — is consumed by over a billion people, giving it the kind of organic strength that transformed the economies of the US, UK, Germany and Japan. Just its rural economy is made up of 800 million people spending over $425 billion. This, when agriculture's share is declining, manufacturing is rising, and services are already more than half the GDP — again, a classically attractive mix. Like China, India saves nearly 40 percent of its GDP, but the bulk comes from households (as against China, where state-owned corporations with somewhat contrived accounting contribute more than households). India's resource consumption has decreased for every incremental dollar of GDP since 1991 (as against China, which was using three times more resources per dollar of GDP than India). India's economy is healthily private, with state-owned corporations accounting for less than a tenth of the output. At slightly over a trillion dollars, its stock market capitalisation is about equal to its GDP — another beautifully balanced economic attribute. Its foreign reserves are over a quarter of a trillion dollars — neither uncomfortably high, nor low. Its bank credit is roughly equal to half its GDP (as opposed to over 150 percent for China), while bad loans are at an astonishingly low 2-3 percent in a world devastated by toxic financial assets (recall that China's bad debts are precariously estimated at between 30-50 percent, the large range itself betraying a huge risk of fuzzy estimates).

The Indian Rupee largely floats against world currencies — it danced in a 25 percent band after Lehman's collapse in 2008, without disrupting anything. A red rag is India's weak government budget and rather high public debt at 80 percent of GDP — but here again, the highly vulnerable dollar loans are paltry by Asian standards. India is in a very sweet demographic spot, being the youngest country in the world — half a billion people are less than 25 years old, giving it a unique "demographic dividend" among peers. Ten of the world's 30 fastest growing cities are in India — its urbanisation rate, at 30 percent, is accelerating. With 350 million people displaying a reasonable proficiency in English, it's the largest English-using country in the world. Its judicial system is robustly based on English Common Law. It's a genuine, albeit imperfect, democracy.

Continuing to infuse physics into economics, India's growth is like "wave theory" — closer to the epicentre, the waves are tiny, densely packed, and look really small. They start as an undetectable wobble, but soon become a ring of thrusting circles, growing in size and strength with each outward lunge. That could be India's model — dotted with micro changes, the atoms picking up energy from each other, pushing and jostling those around them to move faster, until all the particles begin whizzing around kinetically, pumping up a balloon of spreading prosperity. But just as lack of democracy is the Achilles Heel for China, half-hearted governance by a dysfunctional state — especially in education, health, agriculture and infrastructure — is the Big If for India. Once again, the jury is out here.

Finally, there is another, enormously enigmatic factor at work. It's not about China versus India, but China and India versus the Rest of the World. It's for the first time in human history that trillions of dollars are being added to billions of people. For instance, America and China have roughly the same land mass, but China has 13 times more people than what America had a century ago when it began its economic miracle. Earlier, in countries with 50-150 million people, many people would get very rich quite rapidly.

Now billions more are getting somewhat rich (but not "very rich") at a reasonable clip (but not "rapidly") — as soon as one sub-economy becomes rich (the west coast of China or south India), the growth wave moves to the next-in-line poorer one (central regions in China or north India). Earlier, the smaller rich economies made a "one time transition" over a few decades — but China and India, because of their large numbers, could see "serial transitions" as one sub-economy after another hits higher living standards. This could make their growth stories far more elastic — with repeated "rebounds" from "slowdowns", as one sub-economy plateaus but another begins firing on all cylinders. What's more, this uncharted dynamic is happening simultaneously across both countries in a contiguous part of planet earth. The centre of economic gravity is shifting from some point in the Pacific Ocean to a dot near Mount Everest.

This power shift of civilisations could be the most dynamic idea of the 21st Century. Both China and India were giants in the 17th and 18th Centuries — according to economic historian Angus Maddison, together they accounted for over 50 percent of world GDP in 1600 (China had 28 percent and India, 23 percent). But 200 years of colonial domination shrunk their economies and political space on the globe. Over the last few decades, both countries are beginning to rear again — the initial swell of a giant tidal wave that made its last crest in 1770.

This article appeared in Forbes India Magazine of 04 June, 2010

1 comment:

  1. splendid! this is a very good insight. would like to see the growth waves reaching north-eastern region of india. it wouldn't be a miracle for the resource (both human and natural) rich region, provided the central government and the indian population genuinely supports its growth.