Posted by: Bruce Nussbaum on December 13
Here is the speech I gave at the Design Korea 2009 International Conference from December 3-4 in Incheon. There were some great talks by Continuum’s co-founder Gianfranco Zaccai, SeymourPowell’s Nick Talbot, Frog’s President, Doreen Lorenzo, Core77’s Stu Constantine and others. The Mayor of Incheon, Ang-soo AHN, showed us his plans for a 20-million person new city, that included a Central Park and a Milano Design City.
Here goes the speech—
“Designomics: How Design Navigates A World In Change And Creates Global Economic Growth And Prosperity
Bruce Nussbaum 2009
Thank you very much for inviting me to Korea. This is my first visit and I have been waiting a very long time to come here. My fascination with Korea began long ago when I was a young man in college in New York City studying Political Science. There I was shocked to learn about the Pottery Wars of the late 16th Century, when Korea was invaded and its potters taken away. Now, we all know that human history is full of wars over land, gold, oil, slaves, and food but the Pottery Wars is the only conflict I know of based on the high economic value of artists, design and design technology.
At that time, in the 1590’s, much of Korea’s prosperity was based on its design and production of the highest quality ceramics in Asia, and probably the world. Designomics was already being practiced in Korea four centuries ago. That tradition of economic growth based on design is very rare in world history. Today, it gives Korea a significant global competitive advantage because I believe we are returning to design-based economic growth.
My personal connection to Korean design did not end with college. In the 1980’s, I began collecting Asian art, including Korean ceramics. Five of our most beautiful bowls and plates are made by Shin Sang Ho. They are examples of his early work in celadon and quite beautiful. What this told me was that Korea was keeping its art and craft alive through the centuries. And as the work of Shin Sang Ho has evolved, it is clear that Korean fine art is evolving to blend both traditional and more modern styles.
I realized that design was again becoming a major driver of economic growth in Korea in the mid-90s when I had dinner with a group from Samsung at one of the annual Industrial Design Excellence Award ceremonies. At that time, I had persuaded my magazine Business Week to sponsor the IDEA design awards and I personally presented the awards for nearly two decades. Samsung and LG started entering and winning these prestigious design awards and began attending the ceremonies. So every year, I found myself having dinner with a group of very conservative Korean businessmen and designers in black business suits. They were all very nice but looked identical.
But one year the Samsung design group came to the design awards with three very young designers with wild hair and no ties and great shoes. Wow. This was a big breakthrough. Ah, I thought, Korea is beginning to get serious about designing its consumer products for a global marketplace. If conservative Korean companies, such as Samsung, are willing to go outside their own level of comfort to hire young people with different aesthetics and ways of using technology, then they have a chance at becoming global, not just local and regional, brands.
Of course, we now know that Samsung, LG and other Korean companies took that chance. And today, Korean auto companies are following Korean consumer electronics companies as global brands in the US, Europe, Latin America and elsewhere in the world economy. They are taking their place in the world economy among established European, Japanese and American brands and they will soon face new competition from rising Chinese, Indian and Brazilian brands.
Now we come to the heart of my talk on Designomics. Designomics is a beautiful term because it conveys the meaning of design driving economics. Who came up with that term? Is that person in the audience? Great language!
Designomics is important because both parts of the word—design and economics—are undergoing vast change as we speak. The global economy is emerging from the Great Recession, the worst recession since the Great Depression, with a very different shape, a very different trajectory and a very different set of growth engines. Design, with a capital “D” is also emerging from the recent crisis, with a different form and function. A design-based business model and a design-based economy provide the best new opportunities for creating value, growth, revenues, profits, jobs and wealth for the decades ahead. Why do I say this?
? Because we now live in a world of constant, cascading change. That constant, cascading change is eroding our business and social institutions, reshaping our careers and remaking our lives. Powerful geopolitical, demographic, technological, and economic forces are disrupting life as we know it. Old behaviors and methods of generating growth no longer work as well as they once did. Traditional business and economic models based on making efficient choices among existing options and maximizing efficiency within stable business and economic systems are starting to crumble.
Increasingly, people are turning to Design and creativity as a new paradigm to understand the needs and desires of changing cultures and create new options that never existed before. It is the ability to generate new concepts today that lead to new products, services and even social systems of great value. In an era of cascading change that doesn’t pause or end, Design is providing a pathway to the future.
This speech, Designomics, will examine the major forces changing our lives today and show how Design provides a package of tools, methodologies and perspectives that can generate new economic value.
First, I will discuss three of the five most powerful global forces at work transforming our lives—geopolitics (the relative rise of Asia and fall of the West); demographics (the rise of the Gen Y generation (which is the demographic group between 16 and 27 years old) and the decline of the Baby Boomers) and technology (the rise of social media and the spread of new digital cultures). If you invite me back, I will discuss the other two global forces at work—urbanization and global warming.
Secondly, I will examine the rise of Design Thinking and explain how it is the most appropriate means of generating economic growth today. I will explain how the tools and methodologies of Design have evolved so that Design has moved from creating artifacts to shaping human interactions; from focusing on materiality to shaping social systems. I will end the talk with a suggestion that the organic, generative, culture-based model of Design may well surpass the mechanical, engineering model of current business organizations for the 21st Century.
Let’s begin with the forces behind the cascading change sweeping through global society. First, the relative—and I repeat relative— rise and fall of nations and what it means for culture and commerce. Last month, the internet regulator called ICANN announced that it would allow web addresses to be written in non-Latin languages. In effect, it reflects the end of English dominance of the web. Chinese, Korean, Hindi and Arabic speakers will be able to address their email in their own language. I predict this move will go down in history as being as important as the dollar going off the gold standard in 1973. In fact, they are two data points on an historic arc representing a trend—the rise of Asia vis a vis America and Europe.
So what does this mean for the future? When one or two nations have the economic and political strength to lead world society, the cultures of those nations tend to dominate much of world culture. Music, education, economic models, art, political systems. We know this. What we sometimes forget is that the homogeneity of world culture makes it easier for world commerce. You only have to worry about a handful of cultures that you do business in—your own, the dominant one, and the others that copy the dominant one.
Today, with the rise of Asia, Brazil and other countries, if you do business, you have to know many, many cultures. We live in a growing diversity of cultures, a heterogeneity of independent societies and you have to understand them all.. But you need to understand each and every one of their cultures to do so. We are moving from global cultural homogeneity to diversity as we move from economic and political hegemony to multiplicity. This makes doing global business a lot harder. Old tools and methods won’t work. We need new ones.
The second trend, the rise of the Gen Y or Millenial generation and fall of the Baby Boomer demographic is perhaps even more important. Each Millenial generation in every country varies somewhat, but most share a distinctive culture that is very different from older generations. In the US, Gen Y has a unique and powerful culture—urban, collaborative, participatory, green, generative—it likes to use tools and make things—,public, pan-ethnic, trans-gender and trans-national. Millenials in China share many of these traits—except they are very nationalistic and are pro-ethnic. I don’t know what are the cultural characteristics of the Gen Y generation in Korea, except that the gap between them and their parents is probably much wider than the gap between their parents and their grandparents.
Millenials live in a culture of free information that is instantly available, with constant communication with friends that is global in scope. They live on digital platforms that are ever changing. They inhabit a participatory media that gives them the tools to create, share and reappropriate content, including their own fluid identities. I believe Millenials live in what I call a Learn-Share-Make culture.
In the US and elsewhere, the Gen Y generation is already changing how businesses and society shops, brands, communicates, educates, delivers health care, transports itself and even raises families. I believe the rise of this Gen Y generation is so important that I am launching a new Gen Y research institute at Parsons School of Design to study global Gen Y culture.
The third transforming force in our lives is digital social media. For the first time in history, it is now easy and inexpensive to create our own communities, our own cultures, anywhere, anytime. We can belong to cultures that we aren’t born into, cultures that we choose to enter and leave easily. Social media is creating tens of thousands of digital cultures every year—cultures you need to understand and engage if you want to sell them products or services. You know there are 40,000 villages in India that you may want to do business in, but now there are also 40,000 digital villages every week on the web that you have to follow if you want these “villagers” as customers.
These three global forces—the rise and fall of nations, the rise and fall of generations and the spread of digital social media—are combining to transform our world and especially our global economy. The first 50 years of the 21st century will looking very different from the second 50 years of the 20th century. We are on the cusp of a New Normal. This New Normal situation in the world will need a new paradigm and fresh tools and methods to generate economic growth and prosperity.
Which brings me to Design. During the time that big political, demographic and technological forces of change have been reshaping the global economy, the field of Design has been evolving into a serious discipline that can help us navigate today’s economic uncertainties and generate value for tomorrow’s products and services.
Design has made a revolutionary journey in the past decade from a narrow field able to focus on artifact and aesthetics to a broader space that has the ability to engage and interact with social systems in culture. Design has expanded its tool kit and methodologies to be able to move beyond materiality and the making of stuff to the design of social systems and the transformation of healthcare, transportation, education, shopping. Today, corporations are asking designers to design brand strategies as well as the products and services composing the brands themselves.
Building on the user-centric roots of industrial design, Design has an ethnographic core that allows businessmen and others to connect with any and all cultures, real and digital, anywhere around the world. And Design’s ability to learn from these cultural connections and translate that data into new concepts for products and services gives it the power to generate revenue and profits in a global economic environment of deepening uncertainty. If Six Sigma and management thinking were our guides to efficient choice-making and profit maximization in yesterday’s era of global hegemony, stability and homogeneity, then Design is our guide to deep consumer understanding, generative option-making and strategic brand finding in an era of global heterogeneity, instability and diversity.
So what does this mean for Korean—and all—global corporations, especially as the world moves into economic recovery? Technology used to dominate innovation. Today, technology is everywhere and accessible to all. Design is far more important to innovation than technology. There were many touch-screen cell phones available in the world when Apple came out with the iPhone. Motorola had a good one in China. But Apple designed the touch-screen platform to make it so easy to use and opened the platform to developers who created 100,000 amazing applications that millions of consumers just love. Love. Emotion. Connection. Engagement. Interaction. That’s Design. Finding relevance and meaning to consumers living in a multiplicity of real and digital cultures is the new key to business success. Co-creating, designing with people, not just for them, will generate new economic value in the future.
Take the Kindle, the electronic book delivery device by Amazon. The Kindle is the first online technology platform embraced by the elderly in America. Why, it was designed to do just one thing very easily—it delivers and presents books cheaply and easily online in a way that people in their 60s and 70s can use. There’s no interaction, no color, no video. The Kindle provides print on an electronic page, exactly what the elderly, book-reading elderly demographic wants. Designing for specific demographics and their own cultures is crucial when generations are so far apart in their use of technologies.
Of course, young Millenials hate the Kindle because it doesn’t deliver what their generation wants—video, interaction, sharing—on their social media platforms, such as the iPhone or Facebook. They await the Apple tablet. That’s their culture. I believe Korean Gen Yers live online in social media as well. Within the marketplace, this cultural preference translates into what I call the “iPhonization of service.” Young people want service delivered over Facebook or iPhone or MySpace where they can instantly access it, share it, change it and use it. That means designing games, tax-advice, healthcare, movies and educational curricula so they can be delivered on a social media platform. This is the new field of Design.
Korea’s fast broadband allows such companies as SK Communications and others to understand that the cell phone business is now a service business based around applications. The next challenge is to go beyond Korea and learn to understand cultures all over the real and digital world in order to deliver what people want, wherever they live, and on their platform of choice. That could mean designing applications that deliver current crop prices in Hindi to Indian village rice farmers using cheap ugly cell phones or providing movie-making tools in Portuguese to Brazilian teen-agers over expensive, beautiful smart phones.
Design means designing the entire customer experience, from discovering what people really need to shaping interactive solutions for them and finally creating a hard product package such as a cell phone or car that is both aesthetically pleasing and useful to people.
This is the where companies create economic value today. This is heart of Designomics, where Design drives Economics to generate growth and prosperity in the world.
I would like to end on a philosophical note. One reason why people are turning to Design today is that it is essentially optimistic. Design has a future-facing perspective and a tool-using core competence. The whole purpose of Design is to make the new. In a world of uncertainty and cascading change, Design can be our navigator. We should embrace it.
Thank you,”
What do you think about the issues raised here?
[3]
Dr. Kim Hak-su, chairman of the Asia Economic Community (AEC) Foundation and Former ESCAP Executive Secretary
Asia takes up 40% of the world’s land area, and 60% of the world’s total population. Although Asia proved itself to be a great superpower after producing 23% of the world’s GDP recently, unity is something Asia lacks. There was no Jean Monnet of the European Union to stand up to do the job, and there was no country to act as a catalyst either. However, Dr. Kim Hak-su, chairman of the Asia Economic Community (AEC) Foundation and Former ESCAP Executive Secretary commented, “Within fifty years, an Asian Union will appear and South Korea has the potential to be a promoter.” In other words, the rise of an Asian Union is a sure possibility.
There are regional alliances and forums being held around parts of Asia already. For example, the Association of South East Nations (ASEAN), first started in 1967 by Malaysia, Indonesia, Thailand, the Philippines, and Singapore has developed into a strong alliance of 10 nations. Seven countries including Pakistan, India, Nepal, Bhutan, Bangladesh, Sri Lanka, and the Maldives are also taking part as a union through the South Asian Association for Regional Cooperation (SAARC).
The Economic Cooperation Organization (ECO), with headquarters in Iran, consists of 10 countries including Afghanistan, Azerbaijan, Uzbekistan, and Kazakhstan. The Pacific Islands Forum, a yearly conference which started in 1971, is attended by 14 independent states and 2 autonomous regions.
Kim Hak-su, chairman of the AEC and Asia Economic Community Forum states, “It is only the Northeast Asian countries including South Korea, China, Japan, Russia, North Korea, and Mongolia that don’t have an alliance. If we form a union to discuss topics of common interest like economy environment and energy, then other regional alliances will be able to join within 10 to 20 years.”
Chairman Kim added that South Korea, China, and Japan should lead the process and emphasized South Korea as a strong candidate. Chairman Kim stated, “The three countries have a population of 1.5 billion and take up a sixth of the world’s GDP and take up 70% of the GDP of Asia.” If Japan or China were to rise and create the Asian Economic Union, there would be criticism about an attempt to gain hegemony, but in Korea’s case, this wouldn’t apply.
Chairman Kim said, “Just as all the Secretary Generals of the UN were from small countries, there is the expectation for Korea, as the last divided country that has achieved great economic development after a history of war and colonialism, to step up as a mediator for the Asian Economic Union. Chairman Kim, who served as Under Secretary General for the UN and Executive Secretary of ESCAP, and also played a crucial role in the Asian Highway and Trans-Asian Railway (TAR) projects, retired and took up his position as chairman of AEC. He stated, “I’m happy I had a chance to serve my country. I will use my years of experience at the UN to help Korea lead the Asian Union.”
Asia, the Original Civilization
An interesting sight was caught on the last day of AECF when a Poet Kim Chi-ha and an author Guy Sorman carried on a vigorous discussion on the note of global value risk of East and West. In spite of the 9,000 km distance apart between Seoul and Paris, they together concerned on the note of China’s role and its limit in the world financial market, while in one voice they promoted the unification of Asia
China’s Role in Asia in the Coming Decade
One of the consequences of the rise of China has been the rising expectations on China in the international society. This is especially the case since the outbreak of global financial crisis. All of a sudden, many in the world are looking for China to live up to its great power responsibilities to help the world come out of the financial crisis.
But concerning voices of the top economists and intellectuals at the AECF mostly agreed that China’s domestic challenges such as urbanization, uneven development, and lack of knowledge and skills to tackle many of the world’s problems all limit what China can do in regional affairs. The conclusion, therefore, was the Togetherness.
“Although China may not live up to excessive expectations of some people, China will not let down China’s neighbors in its willingness to work together with them on a mutually respectful basis for a better and more promising Asia,” said Jia QingGuo of Peking University.
In the end, we are striving to reach the same destination, Asia Economic Community, but how we are going to get there is the problem. A man who represents the East says we should reach the fair ground as many particles in the water that cannot be stopped from flowing, while a man who represents the West says that the unification must come from the Asian values that can satisfy the Westerners.
Right Mindset before Establishing Economic Community
A Man of the East
[4]
Poet Kim Chi-ha
How good is the Asia Economic Community if it cannot stop the wave of the financial crisis? The relationship between money and mind has not been solved yet. This is the reason why there is economic crisis, culture crisis, and big chaos. One of the representatives of Eastern culture, poet Kim Chi-ha, said, “The reason why America has a financial crisis is they have the wrong mindset in the monetary system.”
Kim quotes Buddha’s teachings by saying that the mind has both gold and excrement inside. The Avatamska Sutra says, “Don’t be greedy, even though there’s dust all over you.” Through this quotation, Kim asserts about the communication and exchange with mutual benefits.
“For example, in Kyrgyzstan, there are traditional markets which date back 2000 years at mountaintops 1500m high. Uzbekistan’s biggest Samarqand Bazaar, Korea’s five-day-bazaar, Turkey’s bazaar, and Vietnam’s Dong ba Market all have kept the long lasting history of mutual benefit markets. This is the reason why I believe Asia is the foundation of civilization,” Poet Kim Chi-ha added.
Kim portrayed, “The first spring water of the entire human civilization is Asia. We need a true mutually benefitted world where a moon reflects differently to a thousand river and where the universe (mind) is alive even in a tiny dust (money).”
A Man of the West
[5]
Guy Sorman, expert of conflicts in politics, culture, science, and philosophy
Author Guy Sorman stated, “With the next generation value system, we will avoid conflict between the U.S. and China.
“China’s economy depends heavily on other countries, so their renovation ability is limited. So they are not considered a strong country yet. And China’s model of politics is unattractive, so China did not export the common value to other countries yet. Currently, China has a stable position, however China has to worry about a civil war breaking out. And the lower classes will only give the elite class the political power only in the case that they receive economic benefits with the country’s rapid economic growth.
On the other hand, America has entrepreneurship scholastic superiority and the position of dollar currency which allows to export American value to other countries and makes them a global leader.
Guy Sorman stated, “The real freedom of choice and gender equality must be involved in the Asia value. When this is accomplished, Asia’s value becomes to be the real voice and the Asia stable alliance must embrace China in order to make Asia more stable and make the world more harmonized.
Asia Economic Community, What Do Cosmopolitans Say?
Guy Sorman points out inevitable interdependence between western and Asian economies, and implied the fragility of the connection. He suggested starting an “Asian Project” with a whole new Asian paradigm, which can replace western capitalism and individualism.
EU Integration Model can be imported to Asia
[6]
Gerald Roland, professor of Berkeley
Professor of Berkeley Gerald Roland suggests that the two key ingredients for the success of the European Union were a deep political will among European countries to create an institutional structure creating commitment for peace, and the community method of decision-making where countries delegate to the European Commission the exclusive power to make proposals for further integration. In the context of Asia, historical events after World War II have prevented a reconciliation between Japan and China and a political will for integration like existed in Europe is absent. The Community method can be introduced in Asian supranational organizations but the absence of a strong political will for integration will not make it as effective as in Europe.
Let’s Begin Asia Project
Guy Sorman strongly suggested that the only place where a new power can rise and save the greedy capitalism, which is prevalent through out the world, is Asia. At the same time, however, he criticized the lack of power and effort by Asian countries to replace the dominant but wrong and old financial system. The solution for this, he suggested, was the unification of the Asian countries. A whole new project would have enough congregated power to change the current dominant system. The first step that should be taken by Asian countries is to create the conglomeration of the whole Asian countries. Like European Union, Asia needs enough power to confront the old power. Also, he suggested watching China, the biggest country with biggest population in Asia. The democratization and politics of China will determine how China will lead Asia.
Without Education, Asian Community is Incomplete
In Europe, the EU has been successful in systematically developing students’ mobilization beyond borders through the Erasmus Program and the Bologna Process, which as greatly contributed to developing the international competency of schools in the EU countries. Can the same be said about Asian universities? Kiyofumi Kawaguchi from Ritsumeikan University says, “In Asia, Japan, South Korea, and China are trying at last to promote the internationalization of universities as their national policy. The next step is to organically link the universities of these three nations as a consortium, for the purpose of boosting the international competency at universities within the East Asian region.” Ritsumeikan Asia Pacific University launched the Global 30 Project for the purpose of selecting core universities for receiving and educating foreign students. It was designed to increase the number of foreign students from the current 120,000 to 300,000 by the year 2020.
As Many have quoted, Asian Economic Community has already been existing. Some question, “Will a growing equalization of power lead to conflict between the United States and China?” Many countries’ power have risen and changed in the world since World War II. Have them all led to conflict in history? Strengthening Asian Economic Community is not about rising China that fuels expectations on what China can do in the region. It is about creating a better and more promising Asia on a mutually respectful basis to push everyone’s economy. The community must grow and more forums are expected to make it happen in the upcoming years.
Published on Korea IT Times (http://www.koreaittimes.com)
Technology’s Galapagos: Mobile in Japan -
William Gibson is known mainly for science fiction work, but these days he is more often referenced as the man who wrote the line “The future is here, it’s just not evenly distributed”. When it comes to mobile marketing, the future clearly is here in Japan. The future is also found in Korea, but unlike Japan’s mobile market, it has two levels to its mobile business; the first is very advanced and linked to Korea alone; the second is global, with Samsung and LG being players on the world stage; the local business is much more futuristic than the global business.
In Japan, everything the “outside world” does on a PC, is done on a smart phone - and more. The list of attributes, functions and services on Japanese handsets is impressive and includes auctions, blogging, compasses, conference calls, contactless payment for soft drinks and subway fares, e-Books, e-commerce, games, GPS, manga downloads, navigation systems, iPTV, QR code readers, phones that can be used as projectors, search, social networking, solar charged phones, voice activation, waterproof telephones, etc..
Like the original Galapagos Islands, Japan’s mobile phone industry has evolved under a unique set of conditions, including:
While the Japan mobile market can be seen to be a local paradise, it is really an enigma. Japan’s telecom industry has developed largely in isolation, and like a number of local technologies - including super high speed trains (France has done this as well) robots, Washlet toilets - these have not really gone global. As a result, Japan has become somewhat of a “Technology Galapago”s.
Like the Galapagos, the Japanese telecom environment is vulnerable to outside threats such as Apple’s iPhone which recently disrupted the market. The iPhone pushed cell-phones beyond the technology arena into the experiential arena and redefined the space. The Japanese industry also remains vulnerable to the Korean, Taiwanese, and Chinese marketers who can often provide comparable technology at a lower price. This threat is real because value for money is becoming more important in Japan, as it continues to wrestle with a difficult economy.
So what are the lessons from this “Galapagos syndrome” and what – if anything – can the Japanese mobile marketers do about it?
The good news is that the Japanese are already working on a Post Galapagos plan. I’m looking forward to see it in action.
Investing 2009 Nov 06, 2009 - 09:46 AM
By: Andrew_McKillop
Battle Of The Titans - The debate is now open. Commodities, like equities have enjoyed fantastic and fantastically volatile price growth since around March 2009, growing about 60%, like equities, to date. The global ‘real economy’ trails far behind, with perhaps 2% or 3% growth in the same period, and much less inside the OECD. Is a sharp correction in view, and if it comes, will it be commodities or equites that shrink fastest ? Roubini tends to think both will drop.
On this question, Jim Rogers and Nouriel Roubini are now officially slugging it out. Roubini has reacted fast, on November 4th, to the claim or forecast made by Rogers earlier the same day on Bloomberg TV that “gold could reach $ 2000 an ounce”. Speaking at the Inside Commodities conference in New York, Roubini laid on the scorn, saying: “If a severe depression came to pass, with investors buying canned goods and hiding out in log cabins, maybe you want some gold in that scenario,” adding that he thinks gold prices could or might reach $1,100 or so, “but $1,500 or $2,000 is nonsense”. To be sure, also on November 4th, gold was trading near $ 1,090 an ounce and WTI futures around $ 80 a barrel. This is a relatively low gold/oil ratio, but nothing extraordinary.
In a Singapore interview with the UK Daily Telegraph on 8 October, Rogers forecast a commodities boom able to last 20 years. He said: “Commodities are the best place to be, if you ask me, based on supply and demand”. “The supply of everything continues to decline,” he said, adding: “If the world economy recovers, commodities will do the best, because supply is being restricted. If the world economy does not recover, commodities will still be the best place to be, because governments are printing huge amounts of money.” As I have said in previous articles, this is twostage reasoning with a big faith-based gap between the two halves.
FAITH BASED REASONING
Rogers, and plenty of other commodity boomers like to ignore what happened through the 2004-2007 ‘Petro Keynesian growth’ interlude. Driven by oil price growth, and limited supply growth of other commodities levering non-oil commodity prices up almost across the board, commodities clawed back a lot but certainly not all of the territory they lost, versus equities, through the late 1980s and all through the 1990s. This was the Clinton boom, for equities only.
But this already ignores an essential basic component of the process. What is called the ‘financiarization’ and interconnection of all tradable assets on 24/7 electronic trading platfoms, with cheap credit helping drive the volume yet higher. Many, in fact most of the “new tradable assets” are almost imaginary, like the fuzzy jungle of structured and derived products, and deliver surprising (to some) zero sum game total loss outturns, when confidence slips.
Oil, and the other commodities, have been surely and certainly drawn into this process. Extricating real oil oil from paper oil is not going to happen overnight. The same applies to soybeans, copper or anything else. In fact, for both fundamental reasons and due to financiarization, now spurred by incredibly ambitious plans to make a switch to green energy, the energy markets will get a lot more reactive, segmented and volatile in the next 3 to 5 years. Tradable assets, in the energy sector, are set to grow mightily, and this can itself give Rogers his peak prices - and Roubini his price crashes.
Global climate mitigation effort and green energy expansion with feed-in tariffs, carbon taxes and other carbon finance trimmings, twinned with peak oil supply shrinkage impacts on world export offer will also rather surely raise energy prices. Higher energy prices is not good news for a limping, slow growing, slowly reviving OECD economy, still generating over 50% of world GDP.
On the other hand, the rapid growth in natural gas supplies, lowering gas prices, perhaps making electricity cheaper, will add more energy market confusion. Uranium prices, however look set to grow to extreme highs, unless supply can be cranked up. In several countries already, when the wind blows there is too much electricity, from windmills, leading to huge spot price swings and shedding of unsold, untransportable power. The ruined biofuels sector could or might revive, during the decade, perhaps capping oil price rises.
Thiss is not the stuff which generates a long, solid and sustained commodity price boom, à la Jim Rogers. We are set to have a confused and volatile “global energy adjustment” period able to last right through the coming decade. Both related and unrelated, global macroeconomic volatility also promises to be at vintage level.
TRADING UP AND TRADING DOWN
The result of massive financiarization of oil and commodities, in 2008, was shockingly clear. Exactly the same way that a 2% growth of the economy since March 2009 drove a 60% growth in most equity and commodity prices (over 90% for oil), the 3.5% fall in world oil demand through 2008-2009, now bottoming, drove a 75% fall in day traded oil prices.
With this kind of reactivity, where is the long commodity boom Rogers promises ? A small demand fall (which Rogers can call a pause) generates a price wipeout. Put another way, what kind of production limiting agreements would be needed to stop oil price erosion, when this kind of financiarized leverage operates ? To be sure, oil has big-bad OPEC to supposedly limit oversupply anytime demand weakens, ignoring exports from Russia, Norway, Canada, Mexico, African producers, world biofuels, and gas-related hydrocarbon liquids supply growth. While oil could or might be “supply limited” the other commodities, for example natural gas and the metals, and the soft commodities, have no effective mechanisms in place to rapidly trim supplies or stop it growing, when prices crash.
Through 2009 we have almost daily proof that governments printing huge amounts of money has only one impact on tradable financial assets, apart from golden boys getting bonuses again: asset value inflation and volatility, chronic low visibility, and little or no trickle down to the ‘real economy’. In this poor and distant cousin to 24/7 financial markets, as Roubini says the current problem is deflation, unemployment, remaining high debt levels, overpriced assets, and so on.
Finding anything more unrelated, firewalled, or ‘segmented’ than that is difficult. Rogers however thinks he can square this circle by claiming the supply of everything is shrinking. His main or only supporting argument for this seems to be Asian decoupling.
ASIAN DECOUPLING - LIMITS TO FANTASY
The Asian decoupling theory first surfaced around 2006-2007 as a handy way to explain why commodity prices were growing as fast, or faster than equity prices. To be sure, in the long-term using a 20-year timeframe, decoupled economic growth in Asia would only generate what will be a terminal boom for commodities, and equities also, if Asian 9%-a-year growth was sustained. Back of envelope checks on what happens to the car fleets of China and India after 20 years of growing at perhaps 20%-a-year on average - enabling China and India to attain about one-half the EU27 or Japanese current ownership rate of around 400 cars per 1000 persons, starts proving it wont happen.
Unless these new car fleets are massively ‘electrified’, or run on home-brew biogas, or have lawn mower sized engines, the world oil supply system will go into vast and permanent supply deficit. And if these new car fleets were ‘all electric’ by around 2040, the lithium to make their batteries, or neodymium for their motors would not be available.
As we know, about 75% of China’s electricity is coal-based, and over 50% of India’s, like that of the USA. But per capita electricity consumption in the two emerging countries, if it grew to US or European levels, would demand an expansion of 20-fold or 30-fold in total generation. If their new and massive all-electric car fleets (of the imagination) were built, the power plants needed for their recharging would add more triple zeroes to the GigaWatts of new power plants they have to build, within 20 years.
These kinds of factoids are used by Rogers and other commodity boomers to defend the beguiling idea that, at least in theory, it could be possible to have this Asian growth explosion almost uninterrupted, for a sustained 20-year boom. This rosy outlook however faces strict climate change limits to its growth, that is the OECD’s new quest to hunt down CO2, or at least its quest to start cutting oil consumption without destroying consumer confidence. Lower economic growth in the OECD is likely. Asian exports to the OECD are not likely to regain their 2004-2007 rates, perhaps never again.
Plenty of other limits to Asian decoupling exist, ranging through mineral and bioresource supply growth constraints, water and food supply constraints, to its financial implications. Indians and Chinese are being urged, by OECD leaders, to spend more at home, supposedly on almost nonexistent export goods from the OECD. When China spends its trade surplus dollars at home, on its homemade products and services, its purchase of US T-bonds can only drop.
CHANGING PARADIGMS
In the short-term future, probably before 2015 and following the next commodity and equity price slump, other ideas will take the high ground. Likely rejected out of hand by Rogers and other believers in Asian decoupling (the IMF for example), fast domestic, national and internal economic growth of China and India surely levers up commodity prices - but does little or nothing for economic growth in the OECD countries.
The US subprime crisis of 2007 and its Big Brother financial crisis of 2008-2009 are now often described as intensified, or even triggered by oil at $ 145 a barrel. In China and India, these oil prices had much less devastating impacts. Economic growth dropped from double-digit to high single digit. Asian decoupling, from negative oil price impacts was well demonstrated, underlining that ‘decoupling’ means what it says. Asian decoupling is unrelated to the OECD economy when it concerns growth inside the OECD, but is related when it concerns commodity prices paid by OECD consumers and how the OECD economy reacts. As we know, through 2007-2009, the tilt into deep recession was greased by small but continual consumer price rises for energy and food.
Ironically, therefore, the OECD ‘postindustrial’ economy is more exposed and less able to weather commodity price hikes, than the much lower income Chinese and Indian economies. When the going gets rough for the Asian decoupled economies, they decouple further. Their potential for playing locomotive to the OECD economies is low, and is likely to get lower. By 2015, for a host of reasons including climate change mitigation and the shift to the green economy, this trend could get so strong that we have a form of ‘autarkic’ national self reliant growth quest by ‘Chindia’.
ROUBINI VERSUS ROGERS
One fatal similarity of their public pronouncements is clear: they like to ignore how fast the US dollar devaluation rout could grow, setting a trap for Bernanke. Perhaps pretexting oil reaching $100 a barrel, he would hold to his ‘Bernanke oil price doctrine’ spelled out, publicly, at Jackson Hole on August 21. Beyond $ 100 a barrel, he more than hinted, interest rates should move up. This could stem the rout of creeping dollar devaluation if not trim oil prices - until the economy tilted back to deep recession, and stayed there as long as interest rates rolled to a Volker tune.
In his August 21 speech Bernanke said that $145 oil in 2008 was a main driver of the recession meltdown, conveniently ignoring the facts of US financial rout and budgetary insanity. The most recent record high year for US oil trade deficits, 2007 at about $320 billion, is dwarfed by spending on the Afghan and Iraq wars at about $860 bn in 2009. It is reduced to pale and tiny insignificance by ‘Keynesian recovery’ spending in 2008-2009, at about $ 3750 bn, excluding guarantees and TARP, and related spending engaged for 2010.
Why he focused on Demon Oil is simple: it affects the real economy. High energy prices crank up food prices, and the two reduce household disposable ‘discretionary spending’ income. Rogers makes another big mistake in imagining that huge amounts of ‘Keynesian spending, in any OECD country, has ‘trickled down’ to the real economy: if that was the case, unemployment would not be rising.
By Andrew McKillop
Project Director, GSO Consulting Associates
Former chief policy analyst, Division A Policy, DG XVII Energy, European Commission
October 22, 2009, 5:00PM EST
At the parade marking the 60th anniversary of the People’s Republic of China, tanks and missiles trundled past the Forbidden City and down Beijing’s Chang’an Avenue. Battalions of soldiers goose-stepped in perfect unison. Overhead, fighter jets soared in tight formation.
But close on the heels of this military extravaganza came floats highlighting a less bellicose side of China, what the leadership calls “indigenous innovation.” On one, a 10-foot-high microscope, giant test tubes filled with blue liquid, and a white telescope signified China’s scientific and technological achievements. Another featured a replica of a bullet train and a passenger jet to represent China’s ambitions in transportation. A green-energy float was studded with windmills and oil rigs and flanked by hundreds of red-helmeted energy-industry workers, each carrying a solar panel.
From a rostrum perched above the giant portrait of Mao Zedong at the Gate of Heavenly Peace, President Hu Jintao watched over the proceedings. “The Chinese people have stood up,” Hu declared, quoting Mao, who uttered those words at that very spot 60 years ago. The country, Hu added, is “full of confidence in the bright prospects of the great rejuvenation of the nation.”
That sense of triumph permeates China these days. The mainland’s quick rebound from the worldwide financial meltdown seems to have vindicated its brand of state-led capitalism. As the West struggles to recover, China is on track for 8% growth this year and is about to overtake Japan as the world’s No. 2 economy and Germany as the No. 1 exporter. Now the mainland is charging ahead in new industries, unveiling homegrown airliners, electric cars, and high-speed trains.
But delve beneath the muscular statistics and hype about advances in strategic industries, and China doesn’t seem so prepared to catapult into a role of global economic leadership. Experts familiar with highly touted Chinese achievements such as commercial jets and high-speed trains say the technologies that underpin them were largely developed elsewhere. There is no Chinese Sony, Toyota, or Samsung on the horizon. While Beijing’s $586 billion stimulus package and a 150% increase in bank lending have spurred impressive growth, “the question,” says Morgan Stanley (MS) Asia Chairman Stephen S. Roach, “is the quality of that growth.”
By Beijing’s own admission, the economic model that has powered China for three decades can no longer be counted on to move it forward. The mainland has prospered largely through construction and by exporting all manner of consumer goods churned out in low-wage factories; workers parked their savings in state-run banks, which then loaned the money to companies to make more stuff. But technology and managerial knowhow came mostly from multinationals, and the costs—pollution, decaying social services, and a yawning gap between the urban rich and rural poor—were largely ignored. Though that model has fueled phenomenal growth, Hu and others now call it “unbalanced” and “unsustainable.”
So in recent years, Beijing has been heralding a new economic vision. The key elements: Grimy factories will give way to renewable-energy industries and a growing service sector; Chinese consumers, rather than stretched Americans and Europeans, will underpin demand; and instead of churning out me-too goods for little profit, Chinese companies are supposed to create innovative products based on home-grown technologies.
As President Barack Obama prepares for his first state visit to the mainland on Nov. 15 though, some economists are taking a skeptical look at China’s evolution. While Beijing has honored many of the market-opening commitments it made to join the World Trade Organization in 2001, promised reforms such as allowing greater foreign investment in telecommunications and financial services have stalled. Over the past three years a steady stream of directives flowing from a raft of ministries and the National Development & Reform Commission—successor to the old central planning agency—have tightened the state’s grip on the economy. In June, for example, the commission ordered that wherever possible only goods made by Chinese-owned companies be used in any project funded by the government.
The state’s comeback is easy to spot. The vast majority of new loans are now going to government-controlled enterprises, for instance, while less than 20% end up at small and midsize firms, which tend to be private, Standard Chartered Bank estimates. And in strategic industries from wind turbines to nuclear power generators, Beijing is favoring its national champions and trying to whittle down the role of foreign companies. “They are rolling up the red carpet,” says Joerg Wuttke, president of the European Chamber in China, which recently released a 584-page white paper arguing that China has hit the brakes on opening its economy. Says a U.S. trade official: “China’s focus seems to have shifted from accelerating market reforms toward a more state-controlled model. It is very worrying.”
Besides aggravating trade frictions, the Communist Party’s renewed penchant for control could undermine China’s competitiveness overseas. Clamping down on the ability of foreigners to do business in China would make life easier for Chinese companies at home; the downside is that it would let them avoid honing the skills needed to succeed outside the mainland. And funneling funds to state companies and connected insiders leaves creative entrepreneurs starved for capital. “The government wants to stimulate innovation and job creation but is doing the opposite,” says economist Xu Xiaonian at the China Europe International Business School in Shanghai.
There are already signs that Beijing’s policies are undermining the transition to a more balanced economy that might propel growth around the world. Over the past decade, consumer spending—what should be the mainstay of a new Chinese economy—has slumped from 45% of gross domestic product to 35% and now stands at about half the U.S. level. A full 88% of this year’s GDP growth, Morgan Stanley’s Roach estimates, will come from the usual source: fixed-asset investment in infrastructure, real estate, and yet more production lines. In the past two years, Chinese steel capacity has swelled by a third, and the mainland’s idle capacity this year will nearly equal the combined steel output of the U.S. and Japan. “If anything, we are seeing a retreat to the old formula of support for large-scale manufacturing and exports,” says David Hoffman, China managing director for the Conference Board, a business group.
For a glimpse of what may lie ahead if China fails to transform its economy, head to the southern city of Dongguan. The thousands of factories in the Pearl River Delta industrial hub churn out televisions, furniture, toys, and a seemingly infinite number of other products for consumers worldwide. But with China’s exports down 15% in September—the 11th consecutive month of decline—Dongguan is reeling. In the Changping district, once dubbed “little Hong Kong,” shuttered factories are overgrown with weeds. The karaoke bars and restaurants, which once catered to the thousands of Hong Kong and Taiwanese managers who have fled, are quiet. Sure, the economy of Guangdong Province is on track for 9% growth this year, but that’s due mainly to massive government spending on public works, such as an airport expansion and a nuclear power station. “What Guangdong is facing, all of China is facing,” says Wang Yiyang, vice-director of Guangdong’s development research center, an arm of the provincial government. “We have to find new sources of competitiveness.”
In response, Guangdong is launching a crash restructuring that the provincial Party boss calls “emptying the cage and changing the birds.” Dongguan and eight other Delta cities are moving low-wage factories into new industrial zones 50 miles or more to the north in poorer parts of the province. Greener industries, such as biopharmaceuticals, renewable energy, and information technology, are to replace them. But hopes for a surge in foreign investment have been dashed by the global recession. So Guangdong is courting state-owned companies from elsewhere in China and pressing local enterprises to become more innovative.
In pockets across the country, officials have made far more progress toward the new economic vision. China is aggressively promoting wind power, greener solid-state lighting, and high-speed trains. Shanghai, Beijing, and dozens of other cities are building vast subway networks to complement the highways already in place. To persuade citizens to spend more and save less, Beijing is expanding public health care and subsidizing small cars and electric appliances. Millions of small private companies have sprouted, and hulking state industries that provided cradle-to-grave benefits have been downsized. Cities and provinces are boosting research spending, retraining workers, and courting investment in new industries such as biotechnology, which is attracting top Chinese scientists from the U.S. “China’s growth seems unstoppable,” says Rao Yi, a former Northwestern University neuroscientist and now dean of Beijing University’s life-sciences school.
China has a long way to go, though, in innovation. The mainland has dramatically boosted research spending and boasts the world’s biggest pool of science and engineering graduates. But aside from Internet games, the country creates few breakthrough products, due in no small measure to the perennial problem of rampant counterfeiting. China last year exported $416 billion worth of high-tech goods. But subtract the mainland operations of Taiwanese contract manufacturers and the likes of Nokia (NOK), Samsung, and Hewlett-Packard (HPQ), and China is an electronics lightweight. Beyond Tsingtao beer and low-end Haier refrigerators, “China has zilch brand presence in the U.S.,” says Kenneth J. DeWoskin, director of the China Research & Insight Center at Deloitte & Touche. Instead, most mainland companies mine existing technologies and compete on high volume and low cost in commodity goods.
Take cars. For decades, Beijing has sought to shore up the industry. But Volkswagen (VLKAY), Toyota, Buick, and other foreign brands dominate in midsize sedans and SUVs. Domestic carmakers such as BYD Auto, Geely, and Chery have thrived by developing subcompacts that sell for as little as $4,400. They’re now China’s great hope in electrics and hybrids. Beijing, meanwhile, is ramping up support. To meet a goal of producing 500,000 such vehicles by 2011, the Science & Technology Ministry plans to put 60,000 electric buses and taxis on the streets and offer subsidies to buyers in 13 cities.
BYD Auto has generated the most buzz. The Shenzhen company this year expects to sell 400,000 cars, and its parent is one of the world’s largest producers of lithium-ion batteries for mobile phones, PCs, and other gadgets. Next year it plans a U.S. launch for the e6, a five-seat electric plug-in with a claimed range of 249 miles. BYD’s stock has rocketed so high that fabled investor Warren E. Buffett’s 10% stake already has earned him a paper profit of more than $1 billion. BYD vows to be China’s largest carmaker by 2015 and overtake Toyota as the world’s leading brand by 2025, producing 10 million vehicles a year—half of them for export.
BYD has a long way to go. This year it will be lucky to match its 2008 export record of 8,000 cars, all sold in Russia and developing nations from Africa to Latin America. It says it has delivered only about 100 of its $22,000 F3DM plug-in hybrids in China this year—far from its sales target of 4,000. BYD’s biggest advantage? It’s not design, cutting-edge technology, or state-of-the-art manufacturing. Instead, it’s a fairly conventional battery that BYD manages to produce cheaply. “Making affordable products is key for the development of the electric vehicle industry,” says Henry Z. Li, BYD’s general manager for international sales. BYD declined a request to tour its factories, but visitors to the company’s plants say its batteries and electric motors are hand-assembled by long lines of blue-uniformed workers rather than the robots that have become standard in most of the industry. Whether BYD or other Chinese carmakers are anywhere near meeting European and U.S. safety regulations is another question. “In mature markets the barriers are very clear and standards very high,” says Yale Zhang, China director for auto consultancy CSM Worldwide.
Disassemble other widely hailed successes of indigenous innovation, and there is little Chinese about them. Beijing has long craved its own commercial aircraft industry, and its first offering—a 90-seat commuter jet dubbed the ARJ21—is to hit the market next year. Next up is the C919, a midrange plane with up to 190 seats that state-owned Commercial Aircraft Corp. of China (Comac) unveiled on Sept. 9. The airliner, scheduled for delivery in 2016, is intended as a direct challenge to Boeing (BA) and Airbus.
Western experts familiar with Comac’s planes say they’re based on older jets designed by McDonnell Douglas two decades ago, before the U.S. company was acquired by Boeing. The avionics, engine, and other key systems on the ARJ21, meanwhile, come from Western suppliers such as Honeywell (HON), General Electric (GE), and Rockwell Collins (COL). “China wants to be self-sufficient, producing everything itself,” says Nathan K. Smith, aerospace analyst at market research firm Frost & Sullivan. “But it simply doesn’t have the capabilities to develop these aircraft without Western technology.” The prospect of Comac competing with Boeing and Airbus outside China even two decades from now, says Smith, “is a long shot.” Comac declined interview requests.
Some Chinese industrial policies have flopped. Beijing has long viewed semiconductor manufacturing as a key industry, for example, and eight new silicon wafer plants—some heavily subsidized—have been built just since 2005. The aim was to start out competing as low-cost contract manufacturers for foreign chip design firms. But China’s wafer factories rely on technologies that are at least two generations behind those of Taiwan, the U.S., Japan, and South Korea, and few have ever been profitable. At the nadir of the recession last winter, 60% of China’s capacity sat idle. But with next-generation wafer plants costing $3 billion and up, a major shakeout looms, says Len Jelinek, semiconductor analyst for market research firm iSuppli. “Most Chinese companies don’t have the technology and the money to invest in research and development to stay in the game,” he says.
Of course, China has plenty of smart entrepreneurs who are steering their companies in new directions. They’re tapping the mainland’s engineering talent, stressing design, and reorienting old-line manufacturing operations to unearth new opportunities. Guangzhou’s Devotion group typifies the shift. The 17-year-old company’s primary business—making huge diesel-fired boilers for factories and big buildings—has been hit by the slowdown, rising fuel costs, and growing government efforts to reduce air pollution. Sales plunged 45% in the first half, and its Singapore-listed shares trade below their 2003 offering price.
So Devotion has shifted its focus to biofuels and the boilers that burn them. Outside its headquarters are piles of broken wooden pallets, containers filled with corn and rice husks, a patch of elephant grass (a fuel source that can grow 10 feet high in a few weeks), and a hulking refinery that turns such materials into biogas, oil, and flammable pellets. Devotion offers to install boilers for free and says it makes its money on long-term contracts to sell the biofuels. The company says it now has 30 biofuel customers and aims to triple sales, to $600 million, within five years, with most of the increase coming from new-energy products and services. But with diesel boilers accounting for 90% of sales, it will have to ride out tough times. The biofuel business “is still small,” concedes Devotion’s burly president, Ma Ge.
Given China’s many signs of progress, it’s easy to forget that it remains an underdeveloped economy facing huge challenges. Yes, it has an immense, youthful population, gifted entrepreneurs and scientists, ambitious officials—and lots of money. So it’s likely Beijing will someday get the formula right. But China’s economic reforms are now three decades in the making. That’s several years longer than Mao Zedong and his loyalists spent imposing their extreme brand of socialism. “Japan and South Korea took 30 years to make a similar transformation” to an economy driven by innovation, consumer spending, and services, says Guangdong Academy of Social Sciences economist Ding Li. “Our expectations can’t be too high.” But expectations of China’s arrival as a superpower already are high both at home and abroad. The longer Beijing waits to update its tired growth formula, the longer it will take for China to fulfill that destiny.
In separate papers published this autumn, the U.S.-China Business Council and the European Chamber of Commerce in China both identified rising protectionism and economic nationalism as pressing concerns for foreign companies doing business in the mainland. Some markets are effectively closed to international investors, while in others, laws and regulations are selectively enforced to favor domestic companies at the expense of foreign-owned rivals. And while China’s immense stimulus package has created opportunities for a few foreigners, especially those involved in infrastructure, most of the funding has gone to mainland companies.
To view the papers, go to http://bx.businessweek.com/china-business/reference/
With Huang Zhe in Beijing
Roberts is BusinessWeek’s Asia News Editor and China bureau chief. Engardio is an international senior writer for BusinessWeek
Thu, 10/08/2009 - 12:50pm
By Clyde Prestowitz
In his new book, The Next Asia, Stephen Roach demonstrates yet again why he is the best economic analyst out there, not only on Asia but on the structure and underlying dynamics of the globalization that is revolutionizing our world and dramatically shifting the balance of international power.
The Next Asia, a collection of Roach’s columns and analyses over the past several years, could just as well be read from back to front as in the traditional front to back mode. Going backwards gives one the feeling of traveling with Sherlock Holmes as he unravels the threads of a great mystery to find the ultimate secret cause of the crime or accident. But either way you read it, the book is a constant reminder of how on target and correct Roach has been in his analyses of the causes and effects of economic trends over the past decade. In particular, he saw the recent crisis coming before almost anyone else, and also correctly foresaw that the much ballyhooed notion of Asian decoupling from the U.S. economy was a dangerous fallacy.
More important than what Roach saw in the past, however, is what he sees coming in Asia in the future. His fundamental view is bullish but realistic. The achievements of Asia, and particularly of China, in the past twenty years are presented not only as obviously impressive but also based on extraordinarily wise policies and leadership. At the same time, Roach focuses on the “four uns” of Chinese Premier Wen Jiabao whose statement at the conclusion of the March 2007 National People’s Congress acknowledged the economy’s strong performance but then went on to emphasize that despite its apparent strength, the economy was “unbalanced, unstable, uncoordinated, and unsustainable.”
Coming more than a year before the fall of Lehman Brothers and the eruption of the recent crisis now being called the Great Recession, that statement was prescient not only for China but also for the whole global economy. In The Next Asia, Roach makes a double point. Whether China and India and the rest of developing Asia will continue to prosper and to lift hundreds of millions out of poverty while shifting the center of the world economy to the east will depend on removing the “un” prefix from in front of each of Wen’s adjectives. This will entail two particularly daunting challenges. The Asian developing economies are unbalanced and unstable by dint of their reliance on exports to generate growth. To become balanced and stable, they must shift to domestic consumption led growth. That sounds easy but in fact will be quite difficult because the physical, institutional, political, and social structures are all organized around exports. Changing that will not be just a matter of a stroke of the Premier’s pen. Similarly, the second challenge of developing in a way that does not result in unacceptable global warming and environmental degradation will also not be met only by making policy statements. Roach shows that spectacular as the Asian performance has been thus far, it will have to be even more spectacular going forward.
His second point is that the outcome is just as important to the United States and the rest of the world as it is to Asia, and that a positive outcome is not possible unless America also acts much more wisely in the future than it has in the past.
Clyde Prestowitz is founder and President of the Economic Strategy Institute.
Review by David Pilling
Published: October 11 2009 18:38 | Last updated: October 11 2009 18:38
The Next Asia: Opportunities and Challenges for a New Globalisation
By Stephen Roach
Wiley $39.95 (£26.99)
Stephen Roach, Morgan Stanley’s perennial bear, had long predicted a terrible reckoning for a supercharged US economy, hopped up on private consumption and propped up by savings-surplus countries willing to fund US debt. When, finally, in 2007, Morgan Stanley sent him to live in his beloved Asia, about which he had always been bullish, his thoughts on that region quickly turned gloomier, too.
In The Next Asia, a collection of essays on the region’s place in the world, Roach could not fairly be described as bearish. “Don’t get me wrong,” he says at one point in a typically down-to-earth interjection. “I am a long-standing optimist on Asia.”
But he does challenge, and in forthright terms, any notion that the world can go back to business as usual. If Asia, particularly China, thinks that it can simply wait for the west to recover before merrily recommencing its export-dependent growth strategy, it is kidding itself, he argues. Only if it can rebalance its economy towards greater domestic consumption will it fulfil its enormous promise. “It may be premature to crack open the champagne. The Asian century is hardly as preordained as most seem to believe.”
So far, Roach has been disappointed by the Asian, particularly the Chinese, response. In the section on Chinese rebalancing, he concludes: “There are worrisome signs that China just doesn’t get it, that it is clinging to antiquated policy and economic growth strategies that presuppose a classic snapback in global demand.” He cites as evidence the make-up of the $585bn two-year stimulus package that, he says, is biased towards old-fashioned infrastructure projects and too light on pro-consumption measures such as bolstering national health insurance, the absence of which encourages people to make precautionary savings.
He welcomes China’s willingness to engage more actively in debate about the global financial system. But for Roach, Beijing’s emphasis on the US deficit and on seeking alternatives, such as special drawing rights, to the dollar as a reserve currency betrays a complacency towards its own problems. China’s massive holdings of US Treasuries, he contends, are the flip side of America’s: they reveal a dependence on exports and the need to recycle foreign currency reserves abroad for fear of putting upward pressure on the renminbi.
Roach’s writing is always clear, opinionated and fun. In other sections, he lays much of the blame for the financial crisis at the feet of Alan Greenspan, whom he criticises for encouraging a series of asset bubbles by concentrating on overly narrow definitions of inflation. On globalisation, he swipes at what he calls the “win-win mantra” of rigidly applying Ricardo’s theory of comparative advantage. Globalisation is asymmetrical, he says, arguing for example that the addition of 1.5bn workers from China, India and the former Soviet Union has put downward pressure on wages in the US and other rich countries, forcing the labour share of national income to a record low of 54 per cent. Yet he is equally forthright in rejecting what he says would be a ruinous attempt either to impose protectionist barriers or to force China to revalue.
Put simply, both the US and China must look in the mirror: the US must save more and better educate its workers to compete in a flatter, IT-enabled world. China must save less, spend more and shift to a form of growth that is less energy and commodity intense. Above all, the huge transfer of savings from the poor world to the rich one, what he calls a “reverse Marshall Plan”, is no longer sustainable.
If the book has a fault, it is that it is not really a book at all, rather a collection of essays cobbled into themes. Written over a four-year period, the format does bring immediacy and progression of thought as Mr Roach reacts to events – the reprinted FT blogs from Davos are a good example of this intellectual excitement. But the book lacks a fully satisfying narrative and suffers from repetition. Even some of Mr Roach’s best lines – “You either believe in decoupling or globalisation: but not both” – begin to wear thin the fourth time around.
Still, the collection is bristling with ideas and bold calls. What it lacks in narrative thread it makes up for in intellectual coherence. The strongest theme is the link between the US consumer and Asian growth. From 2001-07 the export share of China’s output rose from 20 per cent to 36 per cent, a surge that coincided with a rise in the global export share of world output from 24 to 31 per cent. China rode globalisation to perfection. But that is over. Asia, says Roach, must come up with something else.
The writer is the FT’s Asia editor
Copyright The Financial Times Limited 2009. You may share using our article tools. Please don’t cut articles from FT.com and redistribute by email or post to the web.
While I have great respect for Minxin Pei and his work, I disagree with most of his article (“Think Again: Asia’s Rise,” July/August 2009). It seems to suggest that the rise of Asia will not fundamentally change anything. Nothing could be further from the truth. Asia will demonstrate that the Western domination of world history over the last 200 years has been an aberration. With China and India moving once again to center stage, we will return to the historical norm in which these countries are the world’s two largest economies, as they were for 1,800 years. It took extreme underperformance by the Chinese and Indian populations for them to fall behind, but that era is now over.
Pei suggests that Asia’s rise could lead to divisions among Asian powers. This is quite possible and wouldn’t be very surprising. But so far, the rise of Asia has been accompanied by diminishing rather than rising tensions between Asian powers. There is a remarkable degree of geopolitical calm in East Asia today. Pei’s article makes no effort to explain this remarkable development. One cause is that the caliber of Asia’s geopolitical thinkers is today superior to that of their Western counterparts.
The most dangerous aspect of Pei’s article is that it will encourage complacency among U.S. thinkers. It seems to suggest that the United States can continue on autopilot and will always remain on top. This would be a disastrous course of action. The good news, as I explain in my book, The New Asian Hemisphere: The Irresistible Shift of Global Power to the East, is that the new Asian societies want to replicate, not dominate, the West. But they also expect the West, especially the United States, to share power and not hog it. Every society must adjust as the world changes. So too must America.
In short, Pei is correct that we should “think again” about Asia’s rise, but the only reasonable conclusion is that it will change everything.
Kishore Mahbubani
Dean
Lee Kuan Yew School of Public Policy
National University of Singapore
Singapore
Minxin Pei correctly notes that China, despite its growing importance, will not be dominant anytime soon if ever, either in the world or in Asia, and that a number of negative factors could slow or even halt the rise of Asia’s developing countries.
But surely, anyone can see that the United States’ relative power and influence in Asia has declined and will continue to decline. The loss of relative U.S. power is partly due to East Asia’s pragmatic economic model, which flexibly mixes government and private resources and incentives. With its false, debt-driven growth subtracted, U.S. performance over the last 20 or 30 years is revealed as inferior to that of all Asian countries including Japan, with its much-mourned “lost decade.”
It also seems indisputable that all of the fast growth in Asia outside India has taken place under authoritarian or, in the case of Japan, bureaucrat-dominated political systems. Indeed, South Korea, Japan, and Taiwan all began to falter as their political systems became less authoritarian. It must be stated that in many democratic developing countries there is democracy fatigue, and the soft authoritarian approach of Singapore or even the more muscular Chinese model has appeal. It’s no surprise that in Latin America, where the so-called “Washington Consensus” has produced very little growth, the only thing anyone wants to know is how China and India are doing it.
It may be comforting to believe that the U.S. political system will self-correct, but there is just as much reason to think that the United States will not recover because of the increasing intractability of its politics, dominated as they are by powerful, well-financed interest groups.
So, yes, a little contrarianism might be in order regarding the inevitable rise and dominance of Asia, but please: not too much.
Clyde Prestowitz
President
Economic Strategy Institute
Washington, D.C.
Minxin Pei replies:
I deeply appreciate the comments of Kishore Mahbubani and Clyde Prestowitz, both of whom have written bestsellers on Asia. But Mahbubani mischaracterizes my argument when he says that I imply nothing fundamental has been changed by Asia’s rise. Although I reject the notion that Asia will be a dominant power, I emphasize that Asia’s rise is real and will lead to a multipolar world.
As for the geopolitical calm observed by Mahbubani, appearances are deceiving. If Asian countries are indeed “calm,” why is the region experiencing the world’s fastest growth in military spending? Why do the Indians view the Chinese with distrust and fear? Why does Sino-Japanese animosity remain as entrenched as ever? The current calm might very well be the sort one sees before the storm.
Prestowitz is right that some East Asian countries experienced their fastest growth under authoritarian rule. But he neglects the fact that other Asian autocracies — such as Burma and North Korea — have scored miserably on growth. It’s tempting to prescribe a little authoritarianism to spur development, but there is no guarantee that it won’t quickly become too much. It often does.
With so many economic and political differences, is it possible that the interests of Asia’s major players can ever coincide? In the second of a two-part series, Jean-Pierre Lehmann describes possible scenarios for the future of the international system.
South Korea, India, Indonesia and China — as is the case for the rest of the continent — should share a common interest in trade.
All four are strongly dependent on foreign trade and would suffer considerably in protectionist global market economy. And all four are members of the WTO.
India was actually a signatory member of the GATT, Korea acceded in 1967 and Indonesia joined in 1986 when the country undertook a deep program of economic reform.
China applied for membership of the GATT in 1986 and after 15 years of painstaking negotiations (which were interrupted for a while following the Tiananmen massacre in 1989) it finally acceded to the GATT’s succeeding institution, the WTO, in Doha, Qatar, in 2001.
China, India and Indonesia have, at least on the surface, been allies in the arena of the Global South in its campaign versus the North.
In the WTO trade ministerial meeting in Cancún, Mexico, in September 2003 (which was meant to be a half-way mark to concluding the Doha Round) China and India along with Brazil and South Africa, formed what was initially known as the G-22, of which Indonesia was a member. This was supposed to be the group that would confront the North’s bullying and unfair tactics and policies.
Korea was not part of the Northern alliance, known as the Quad, comprising Canada, the EU, Japan and the United States. Instead, it joined a smaller grouping, known as the G10, which includes smaller but generally advanced economies, such as Switzerland and Taiwan. They have a common aim in resisting agricultural trade liberalization.
In both the Cancún and the subsequent Hong Kong WTO ministerial meetings in 2005, Korean rice farmers engaged in militant demonstrations. One committed suicide in Cancún and one drowned in Hong Kong Harbour.
However, in spite of their interests and in spite of their undoubted clout, whether for demographic or economic reasons, neither China, nor Indonesia, nor Korea have been especially influential or pro-active in the course of the Doha Round negotiations.
In contrast, India has been hyper-active and highly influential, though generally — or at least such is the perception in Geneva — as an obstructionist. Indeed the consensus view is that it is the United States in the North and India in the South are the main obstacles to a conclusion of the Doha Round.
Though there has been a possible warming of relations between the two countries on trade following their respective elections, this has as yet had no impact on Doha, nor is it generally expected to.
Western dominance since WWII has resulted in the mission of spreading democracy, respecting human rights, promoting the rule of law domestically and internationally and fostering an open global market economy. The West did not always practice what it preached, but there was nevertheless a reasonably clear “mission statement.”
At the moment, it is not clear what the Asian KIICs might share as a common mission, or indeed as common values.
Assuming that the G20 remains the de facto centre of global governance, as the successor to the G7, Korea, India, Indonesia and China will be the key players of the new Asian hemisphere.
As the second decade of the 21st century approaches, however, the scene is reminiscent of a Pirandello play. We know who the actors are, but we (and they!) have no idea what is the script.
There are many scenarios for the future of the planet as globalization and global governance shift to Asia.
One is the “clash of civilizations” concept made famous by the late Samuel Huntington and embraced by a number of opinion leaders in both East and West. That thesis is not, however, the most persuasive.
As has been explained, while the centre of economic gravity may well have shifted to Asia and will continue to do so, there is no perceptible Asian “bloc” emerging — nor an “Eastern” counter version to the “Western” system of global governance.
There is no strong bond uniting the four KIICs. Things look even more tenuous when including the other two Asian players, Japan and Saudi Arabia.
A number of tensions and fault-lines between the Asian states hinder the prospect of an Eastern alliance comparable to the Western alliance of the last 60 years.
Another scenario could be a state of lawless anarchy as the Western system disintegrates without any re-integrating principles or force to replace it.
Yet another scenario, would be that the Asian powers gradually absorb and becomes the main custodians of the “Western” system. The Western system of post-World War II global governance has rested on the principles enunciated in the Atlantic Charter co-signed by Franklin Roosevelt and Winston Churchill in 1941.
By 1991, as the Soviet system disintegrated and countries pretty much throughout the world, notably in Asia, underwent major reforms, the Atlantic Charter can be said to have become practically universal.
A central thesis in Kishore Mahbubani’s book, cited above, is that the West is no longer living up to its own principles, hence, as power shifts to the East, this is in good part due to its implementation of “Western principles.” When Greece declined as a state, Hellenism lived on for centuries and spread to many neighboring emerging civilizations, including Rome, Persia and the Arabs.
In a recent article in the Financial Times, Mahbubani and former Massachusetts Governor William Weld further re-enforce the point by asserting that Asia is most likely to be the custodian of the open global market economy and its Atlantic Charter-based governance architecture. After all, as the authors point out: “Asian economies only began to perform well when they accepted and implemented Adam Smith’s theories of free-market economics”.
This is the most optimistic scenario and possibly the most likely to evolve after a period of turbulence and uncertainty. It will not arise from deep philosophical musings, but from a recognition on the part of Asian leaders that doing so is in their best enlightened self-interests.
But very much depends on other events. While economic power is shifting to Asia and the Asian middle class is rising, there are formidable dark clouds hovering above the silver lining.
Nuclear proliferation in Asia is clearly a big and very real menace. As recent terrorist events in Mumbai and Jakarta, among others, remind us, there is an explosive political element at work. In spite of the rising middle class, there is also a huge amount of poverty. And there is the monumental issue of climate change that hinges on the actions that Asian economies are willing to take.
It is by no means all gloom and doom. There is reason to believe that Asia may emerge not only as the center of economic gravity, but also as a center of genuine global governance.
However it is important to remember that scenarios do not evolve into reality because of some deus ex machine. It is not “things that happen”, but people who make things happen.
For the most desirable scenario to become reality, both Atlantic and Pacific thought leaders will need to work very hard to make it happen.
With ever greater economic power, how will Asian countries influence international politics? In the first of a two-part series, Jean-Pierre Lehmann describes the importance of the diverging cultural and political scenarios in major Asian players such as India, China, South Korea and Indonesia.
he global center of economic gravity has been moving steadily towards Asia for the last three decades, a trend intensified by the current crisis.
In the words of Kishore Mahbubani, we are witnessing the rise of “the new Asian hemisphere,” which implies “an irresistible shift of global power to the East.”
Asia’s rise has brought into question the current global institutional framework and highlighted the imperative of reform. There is little sense, however, of what more Asia-oriented global governance would look like. Insights might be gleaned from the recently established G20, especially as it is likely to replace the G7/G8.
Current full membership of the G20 includes: five Europeans (France, Germany, Italy, the UK and the European Commission; two Eurasian nations (Russia and Turkey); five from the Americas (Canada, US, Mexico, Brazil and Argentina); one African (South Africa); one Oceanic (Australia); and six Asians (Japan, Korea, India, Indonesia, China and Saudi Arabia).
For the purposes of this article, Japan can be put to one side. Despite recent doldrums, it remains a formidable economic entity — but it is also an established 20th century power and not an emerging 21st century power. Though geographically in the “far East,” it has been a close ally of the West for over a century.
All of Japan’s alliances have been with Western nations — Britain from 1902 to 1922, Germany and Italy during World War II, and the United States since World War II.
At the other Asian extreme, its “far West,” Saudi Arabia, can also be put aside. Saudi identity is mainly as an Arab nation. Though in recent years there has been a growing Asian-Arab investment arc, Saudi Arabia is otherwise not actively engaged in Asian affairs.
This leaves us with Korea, India, Indonesia and China (the KIICs) as arguably the forerunners of what a future, more Asian system of global governance could look like.
What can one say about the KIICs?
Three (China, India and Indonesia) are geographically and demographically huge, together comprising over 40% of humanity. By force of sheer size, they would seem to deserve a place at the global table. Korea, on the other hand, is a medium-sized nation with a population of 48 million.
All four are successful economies. Korea, Indonesia and China are among the 13 economies identified by the United Nations Commission on Growth as having maintained an average annual GDP growth rate of 7% for 25 years or more since 1950.
Though India has been a comparative laggard — with high growth having only been generated since its reforms in the early 1990s — on the present course it should be joining this august group in the next few years.
The four economies differ considerably. Korea is an advanced/high income economy as classified by the IMF and World Bank, and is a member of the rich nations’ club, the OECD. China, India and Indonesia are low income countries with huge (and generally poor) rural sectors.
China is emerging as both the world’s largest trading and manufacturing nation, totally dwarfing India and Indonesia. India is a global leader in information technology. Korea is one of the world’s leading trading nations, and is an important source of inward investment in all three countries.
In cultural/religious terms, Korea is predominantly Buddhist, albeit with one of Asia’s largest Christian minorities (30%). India is predominantly Hindu, with a strong Muslim minority (over 10% of the population) and other religious communities.
Indonesia is the world’s largest Muslim nation, but with roughly 15% of the population comprised of religious minorities, including Christians, Buddhists and Hindus. Lastly, China is “Confucianist-Communist,” but with important religious minorities that experience diverse degrees of suppression.
Ethnically, Korea is a quite homogenous nation, and China is predominantly Han-Chinese at 92% of the population. However, both India and Indonesia are among the most heterogeneous countries on the planet.
Managing diversity has been a huge challenge for both nations and both have met it reasonably successfully, albeit with some dangerous flash-points.
Politically, India has been a democracy since independence in 1947. Both Korea and Indonesia have democratized peacefully from military dictatorships: Korea since the late 1980s, and Indonesia since the late 1990s.
Along with Saudi Arabia, Indonesia is the only predominantly Muslim country on the G20. It is also one of the infinitesimally few predominantly Muslim countries that is democratic.
China is what is termed a “Market-Leninist” state, combining an open market economy with a closed Leninist form of political dictatorship. There are hardly any vestiges of Marxism, let alone Maoism, in China — under the previous president, Jiang Zemin, even bourgeois entrepreneurs were brought into the Communist Party.
In all four countries (as well as in the other two Asian G20 members, Japan and Saudi Arabia) the death penalty is permitted. According to Amnesty International, in 2008 China, Saudi Arabia and the United States accounted for the highest number of global executions.
Indonesia, India and China feature among the most corrupt nations, according to Transparency International. Korea is in a different league, though among OECD countries it ranks as one of the most corrupt (but less so than Italy!).
China, India and Indonesia are heavy emitters of greenhouse gases and are recalcitrant on climate change issues. They are more likely to delay than accelerate the agenda. Korea, on the other hand, appears proactively engaged in meeting the next great challenge of its development.
Not only is it investing heavily in multiple new engines of “qualitative” (welfare enhancing) and sustainable (low carbon) growth, but it also has a very ambitious and commendable green agenda, known as the “Green New Deal”. Climate change mitigation and sustainability are the top priorities of its current five-year plan. The government is investing $40 billion over a four year period with a view to creating 960,000 “green jobs.”
This is a region of the world with numerous geopolitical fault-lines. Both India and China are nuclear powers, with the former having not yet signed the Nuclear Non-Proliferation Treaty (NPT). South Korea lives under the constant menace of North Korea and has a strong American military presence.
All four have border issues with one or several of their neighbors that could deteriorate into acute tension or indeed outright conflict, depending on the circumstances.
For instance, India has been at war with two of its neighbors, Pakistan and China. For China, there is the Taiwan question. And then there is one of the most dangerous situations: The simmering dispute between China and Japan over what the former calls the Diaoyutai Islands and the latter the Senkaku. This territory is claimed by both and prized by both for its energy resources.
In terms of relations between the four: Korea was historically a “vassal state” of China, and they share a number of cultural affinities, notably Confucianism.
South Korea has significant and close economic ties with China, infinitely more so than the North. But in the geopolitical game, North Korea remains an ally of China. Korea has traditionally had no ties with India or Indonesia, nor does it have any particular cultural affinities with either.
India and China have had relations over the millennia, though in recent decades there has been a good deal of rivalry and mutual suspicion between the two. Cross-border trade and investments, however, are booming, and there are attempts at building a sturdier bilateral political relationship.
Ties between Jakarta and Beijing have been quite distant. In fact, for several decades, not only were there no diplomatic relations between Jakarta and Beijing, but Chinese imports were forbidden — as was anything that carried Chinese written text. However, there is a small (3.5% of the population) but economically powerful Chinese minority in Indonesia.
India was a big influence historically on Indonesia, though it waned long ago. In the 1950s their respective heads of government, Jawaharlal Nehru and Sukarno, were active in the creation of the non-aligned movement. Today both nations are closely, even if informally, allied to the United States.