Eastern confidence in the Swiss Alps
China and India were high on the agenda at the World Economic Forum Annual Meeting in Davos this year. Is this the beginning of a new era?
It is only 20 years since Japan was getting under the skin of many Americans. They feared that the 21st century would be Japan’s, as the 19th had been Britain’s and the 20th America’s. Now there is talk of China, followed closely by India, taking the main stage in the 21st century.
As the US financial system is being rescued by incoming investment from China and the Far East and emerging economies are recovering speedily from the crisis, there is much talk of a changing economic order. In a recent interview with the BBC, Pascal Lamy, Director-General of the World Trade Organization, stated that, “Emerging economies weathered the crisis better than their more developed counterparts. ”The tables have turned to such a degree that at this moment it seems as if the West is now dependant on the East to recover from this downturn.
This new perception of economic realities is having a considerable effect on the political level. The emergence of G20 as the primary international policy-making forum, replacing the Group of Seven, exemplifies this shift. The World Economic Forum’s Annual Meeting in Davos at the end of January was yet another indicator of these changes. Whilst a number of years ago, China and India were a bit of a curiosity at Davos, this year they were firmly part of the main event, with 25% of the participants hailing from emerging economies. This is the first time the numbers have been this high.
While European and American bankers have spent most of their time at this year’s Forum Meeting defending rates of pay and deflecting criticism, emerging market businesspeople have been boasting about how profitable their companies are. Their newly found confidence is also being spurred by praising words from prominent economists and investors, with very few casting doubt over the importance of emerging economies in today’s global economic system. Yet it is important not to throw the whole developing world into one basket. Not all emerging economies are emerging at the same rate.
The tortoise and the hare
In November 2008, China announced a US$ 586 billion stimulus package. The speed and relative success so far of this stimulus stands in stark contrast with that of the USA. According to a recent study by the World Bank, Beijing’s government spending will generate more than 80% of the country’s overall economic growth this year. The success of Beijing’s efforts is partially due to the fact that the country was already in the midst of a nationwide infrastructure programme when the recession commenced and could thus hit the ground running.
Whereas China is racing ahead at breakneck speed, India’s growth is less spectacular but, according to some experts, no less impressive. India’s lack of infrastructure is often raised as an argument why China is in a better position than India. However, although China is growing at a faster pace, some prefer betting their money on the slower horse.
Niall Ferguson, a renowned financial and economic historian at Harvard, is convinced that China’s advantage will be short-lived and that India holds the better cards. In a recent interview with the BBC Ferguson said, “India’s institutional fundamentals are stronger than China’s. India has property rights, representative government and the rule of law. Their institutions might not be perfect, but they are there and this is not the case with China.”
The faults in India’s system, however, are easily resolvable. “India lacks good education and infrastructure,” Professor Ferguson went on to state, ”yet these are things that can be upgraded at a reasonable price. India’s problems do not require the wheel to be reinvented; they are problems that can be solved. The institutional framework is in place and this is one of the most important elements when trying to develop a capitalistic system.”
India’s Road Transport Minister Kamal Nath agrees with critics who say that India has an infrastructure deficit. This deficit will have to be bridged in order for India to sustain its current growth trajectory. And India intends to close this gap. There are plans to invest US$ 1.7 trillion in roads over the next 10 years. This should lead to the construction of 20km of road per day and 7,000km a year. About 60% of the funds for these projects are expected to come from the private sector. Other infrastructure projects, involving power plants, ports and airports, will also rely on private developers for financing.
The last advantage
The West has the biggest advantage in design, technology and high-end research and development. Yet the question is whether the developed economies will be able to rely on this to keep ahead.
In the opinion of some experts, Europe and the United States are good at conducting research but they are not always able to translate this into innovation. According to Andrew Maynard, Chief Science Advisor at the Woodrow Wilson International Center for Scholars, emerging markets have been more successful at taking advantage of research and new technology.
There are many cases where US investment and technological innovation was subsequently used by China to develop innovative new products. Although emerging economies often rely on Western research, there has been a huge increase in the amount of basic and specific research conducted in developing countries.
Few deny that at some point China and India, as well as the other countries, will cease to be considered “emerging” and will be perceived as “developed”. Yet some are in doubt about the current hype that this new era with all its implications has arrived or will in the near future. One of the sceptics is Will Hutton, former editor-in-chief of The Observer and author of The Writing on the Wall: China and the West in the 21st Century. In his view, the crucial moment will be when emerging economies cross the US$ 12,000 per-capita threshold. That is when the strength of a country’s institutions will start to play a big role. Weaknesses that arise at that point will be difficult to remedy, as they would present systemic problems that cannot be merely resolved by throwing money at them, unlike infrastructure projects that rely mainly on financing. “You cannot buy the institutions that are important to generate capitalism”, Will Hutton states.
He also points to the fact that India’s – as well as China’s – strength is being over-estimated. India may have a population of 1.1 billion, but only 30 million are involved in the manufacturing sector. Despite its size, the country’s exports are only marginally higher than Spain’s. In addition, rural India, which according to the 2001 census amounts to more than 70% of the population, has low productivity levels and a high rate of illiteracy. Thus there is still a long way to go before India takes the main stage and it probably will not take place in the next decade or two.
In China, signs of looming difficulties are not hard to find. Standard economic analyses indicate that China is likely to face problems with its exchange-rate policy, its financial sector and the inefficiency of its state-owned enterprises. There might be much talk about “mighty China”, yet a look at the top 500 companies highlights some of the weaknesses of China’s version of capitalism. Not a single Chinese company made it onto the list of 500 companies ranked by profit and only 20 onto the list of companies ranked by turnover.
Far from the decline of the West, the interesting story in the decades to come, according to Will Hutton, will be: Why has the West maintained its lead?
Article by David Sidler