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The tide is turning in world economic activity

By Tensing Rodrigues

The tide is turning, and faster than we expected. The centre of economic gravity is shifting out of North America and West Europe to Asia. “The future is Asian,” asserts Parag Khanna, an international bestselling author of six books and the founder and managing partner of FutureMap in Singapore, a strategic advisory firm.

Global economists have been talking about it for long but nobody expected it to happen so fast. What has accelerated the change is the decline in the economic well being of the North America and West Europe which accompanied the rise of Asia. It has been like two trains moving in opposite directions both the trains appear to be moving at speeds faster than they actually are.

Their speeds may be an illusion but their directions are real. And neither can afford to ignore it. If you are comparing your opportunities in the old world (North America and West Europe) and the new (Asia), it matters what your horizon is. Opportunities will surely continue to be more in the old world for the next ten years or so. But if your horizon is beyond that the future is definitely brighter in the new world.

It is like a buffet table. There is definitely better spread in the old world but the dishes are not being refilled. As against that the table in the new world is yet to be laid fully. The global economic situation has definitely reversed over the last few centuries. The industrial revolution in Europe and the colonization that accompanied it was indeed a game changer; the centre of economic gravity soon shifted to Europe. And post the WW2, US snatched it. That left vast chunks of Asia, Africa and America dispossessed and in distress.

As Khanna puts it, “In the 19th century, the world was Europeanized. In the 20th century it was Americanized. Now, in the 21st century the world is being irreversibly Asianized.”

The statistics leave nothing to guess. Recently McKinsey Global Institute researched 71 developing economies and singled out 18 of them for consistently posting robust GDP growth. All seven long term outperformers, and five out of 11 recent outperformers, are located in Asia. Whether you look at the GDP the consumption or the trade, the performance of Asia far outpaces that of North America and West Europe. In fact, in both the latter all the three parameters are on the decline. It is important to note that this is not accidental or transitory; it is even wrong to write it off as cyclical for what we are witnessing is sheer structural.

Take the trade figures for instance. Over the past decade, global output has continued to rise but the share of goods traded across borders has fallen by about six per cent. It would be wrong to attribute this to trade disputes or global economic slowdown. The real reason is the healthy economic development in China, India, and the rest of emerging Asia. The rest of the world no longer needs to buy from the once prosperous economies as much as it did once and what it produces gets sold at home. And the flows could be reversing. Some day the balance of trade may be entirely in the favour of Asia and China has just shown a teaser.

The rise of Asia had its roots in labour cost advantage. But that is fast changing; the Western companies that built supply chains that stretched halfway around the world as they sought out the lowest possible labor costs, are now having to look elsewhere. China is no longer cheap so too many of the manufacturing hubs in South East Asia, while India is fast fading away as a low cost source. New hubs are emerging, nevertheless. But that is changing the complexion of trade. The earlier low-cost exporters are now importing, and the trade is getting Asia centric. The consumption boost caused by rising incomes is adding fuel to the change.

But perhaps the most alarming development is the savings and debt scenario. The savings rate in the developed world is plummeting; the developed economies are consuming more than they are earning and as a result groaning under a heavy burden of debt. For instance the external debt of US was 115 per cent of its GDP, the external debt of UK was 313 per cent of its GDP, Portugal was 205 per cent of GDP and Germany was 143 per cent of GDP. Compare that with the external debt of China (15 per cent of GDP), India (20 per cent) and Thailand (35 per cent).

What it means in simple words is that the countries of Asia are saving and lending it to countries of North America and West Europe to spend ! How long may that happen? As Asia catches up, its savings too may dry up. Then?

*The author is an investment consultant. Readers can send their comments and queries to investment.ideas.shop@gmail.com

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