Asia’s dance of the twin elephants

Financial Times
28-Feb-2006
By Todd Thomson

Also found at FT.com

All roads lead to China and India. Whether one is talking to policymakers gathered in Davos or to business leaders scattered around the globe, the conversation inevitably turns to the spectacular growth of China and India – the elephants in the room, or at least the boardroom. Perhaps not surprisingly, most observers divide into two camps: skeptics who expect the two nations to stumble after so many years of rapid growth; and doomsayers who think China and India will suffocate the developed west.

I disagree with both schools of thought. First, I will address the skeptics. I think that, if anything, the China-India story is under-blown. The numbers show the huge potential for spending on middle-class goods and infrastructure. China, a nation of 1.3bn people, bought just 5m cars in 2004, according to The Economist. France, a nation less than one-twentieth the size in population, purchased half that.

In all, China and India are expected to spend more than $2,000bn on infrastructure in the next 15 years, on everything from roads to airports to dams. The opportunity is even greater than most realise.

Of course, it is true that China and India face enormous challenges if they are to live up to their promise. Under-employment, limited infrastructure, constraints from natural resources, environmental concerns, over-regulation and underdeveloped banking systems are just some of the factors that have the potential to derail the opportunity for growth. China’s one-child policy, for example, has created one of the most rapidly aging populations in the world – a massive fiscal problem when it comes to funding its social welfare programmes.

Another challenge is to stimulate domestic spending. While growth in China has averaged more than 9 per cent in the past 25 years, that has largely been on the back of booming exports. Rising foreign demand will not sustain China’s economy for ever, especially if US consumer spending drops off. As for India, its combined state and federal budget deficit is about 9 per cent of gross domestic product and its foreign direct investment is barely one-tenth of China’s.

In spite of the challenges and the sceptics, I remain bullish on China and India. While the hurdles they face may trip them up temporarily, the secular growth trend of these emerging economies is clear. Spend even a little time in these nations and you cannot help but be struck by the wondrous sense of opportunity among the people. That is the fuel of their expansion over the next 50 years.

Now for the doomsayers, who view the ascendancy of China and India as a threat to the west. This vision seems blurred by a sense of entitlement. Entitlement is an insidious disease that weakens even the strongest economies and sows the seeds of uncompetitiveness.

The feeling of entitlement concerns not only pensions and healthcare but also employment – and to being paid for long periods even when not in work. In the US motor industry, restrictive labour contracts and lacklustre offerings have wiped out thousands of jobs and billions of dollars of shareholder wealth. History shows that for individuals, for businesses and for nations, feelings of entitlement lead to stagnation and protectionism and eventually erode the primacy that first made the entitlement possible.

Encouragingly, some western leaders have recently taken on this issue directly. Last month George W. Bush, US president, in his State of the Union speech, called protectionism a form of “economic retreat”. Also last month, at the World Economic Forum in Davos, Angela Merkel, the German chancellor, called on the European Union to tear down trade barriers. She characterised the World Trade Organisation’s progress in establishing freer trade as “slight”. Germany, she said, must reduce regulations and make workers less reliant on the government for jobs. Loud applause greeted her remarks.

In the same spirit, rather than fear the advancements of China and India, we must celebrate them. The development of these elephantine economies is likely to lead to greater freedom, democracy and stability in the world, and make for stronger global growth. (Imagine the dangerous alternative of another 2.4bn people with no economic future.) Yes, we must be sensitive to the plight of individuals caught out by these global transitions. But if we, as developed nations, are to avoid our own decline, and indeed capitalise on the opportunities in the emerging markets, we must remember the catalysts of our own success – education, innovation, self-reliance and open markets. And we must resist the siren song of entitlement and protectionism.

Todd S. Thomson is CEO of Headwaters Capital and is fromer CEO of Citigroup Global Wealth Management (The Citigroup Private Bank, Smith Barney and Citigroup Investment Research). 

Industries: Executive Offices; Public Admin; General Government Administration;
Countries: China; France; India;
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