The rise of the East
Following are the edited excerpts from a speech delivered by the Union finance minister at Harvard University on Tuesday:
The rise of once-upon-a-time poor countries has been the central economic story of our time. More than the growth, it is the pace of the growth that tells a more fascinating story. It took Britain 150 years, after the Industrial Revolution, to double its economic output per person. The United States, the emerging market of its time, took 50 years to do so in its period of fast development. When China and India began their period of high growth in recent decades, they took 12 and 16 years, respectively, to double per capita GDP. And while Britain and United States embarked on their take-off with a population of 10 million, China and India started out with a population of a billion or so each. So, in terms of force, as a McKinsey report on emerging markets suggests, the two leading emerging economies in the East are experiencing roughly 10 times the economic acceleration of the Industrial Revolution at 100 times the scale.
In 2012, at market exchange rates, emerging economies accounted for 38 per cent of world GDP and 61 per cent of world growth. The transformation in world trade has been of a similar magnitude. At purchasing power parity, emerging markets accounted for 80 per cent of world growth, with China accounting for 35 per cent and India accounting for 10 per cent. If you are a businessperson looking for growth and new markets, you have to look East (and perhaps South).
Another way to see this is to look at market shares. Emerging markets have over three quarter of the world’s market share in steel consumption, cellphones, and foreign exchange reserves. They account for more than one-half of the motor vehicles sold, with China overtaking the United States as the largest car market in the world. They account for more than one-half of global investment. While China’s investment story has been much commented upon, India’s is just starting out.
Before examining the consequences of this shift in economic power, it might be useful to note that the East is recovering from a long growth recession lasting nearly 250 years. As Angus Maddison of the University of Groningen has noted, India was the largest economy in the world in the early 1700s, before the onset of the Industrial Revolution, with China close behind. India’s goods were sold around the world, though not always welcomed. After all, it was only a few miles from here that tea from the East, transported by the British East India Company, was unceremoniously dumped in Boston Harbour 240 years ago. Of course, we respect the sentiment that led you to do it, but hope you will not do it again. Fish do not drink tea and it would be a waste of good Darjeeling…
A lot of the growth in the East is still to come as it reaps its demographic dividend. For instance, India’s share of the working age population will continue to rise. Nearly one-half the additions to the Indian labour force over the period 2011-30 will be in the age group 30-49, even while the share of this group in advanced countries will decline. This means greater production, savings and investment in India as the demographic dividend is reaped…
Ladies and gentlemen, the world has to adjust. Industrial countries have to save more while emerging markets have to spend more. Such an adjustment will help industrial countries pay down heavy debt loads, even while leaving global demand to be supported by the emerging markets. Of course, the nature of spending will vary across emerging markets. China probably has to consume more, while India has to invest more. But as the world moves towards one where consumption and investment shifts towards the emerging markets, especially in Asia, and ageing industrial countries will learn to save more, what are the opportunities and challenges? That is what I want to speak on in the next 15 minutes.
I wish to talk about challenges to corporations, to the location of investment, to global financing, to social pressures, and to global governance that will come about from these momentous changes. Start first with corporations around the world. As demand from emerging markets accounts for not just the bulk of a multinational company’s growth but also the majority of its sales, it will have to make changes. Products must now be designed for the emerging markets rather than designed for industrial countries. Who would have imagined that buying a burger at McDonalds could mean getting an aloo tikka — or potato — burger? Shift in demand will require big changes in the mindset of the product designers as well as changes in the location of decision making.
Some industrial country firms have managed the transition. For instance, it may interest you to note French luxury brand Hermes’ foray into saris. The patterns for these saris are based on the popular Hermes scarves, which in turn, interestingly, were inspired by Indian design. In another interesting twist, a Spanish porcelain manufacturer now has an entire range of Buddhist and Hindu deities, including several fascinating interpretations of the popular elephant-headed Hindu God Ganesha and images of Kwan Yin, a goddess of compassion revered in Buddhism, Taoism and Confucianism.
Such changes require corporations to restructure their decision-making. After all, it is easy for fashion decisions to be made in New York when the primary wearers of the fashion are promenading outside the store windows on Fifth Avenue. But what if they are 10,000 miles away? Can you make product decisions at long distance? Or do you have to shift headquarters to Shanghai or Hong Kong, as global bank HSBC has done?
Emerging market companies understand local needs better. Consider frugal engineering, an entirely new way of designing, engineering, and delivering products cheaply so that they can cater to the enormous number of people making a few dollars a day. To produce innovative frugal products, emerging market firms know they need the design capabilities and technologies possessed by industrial country companies as well as the scale for catering to global markets. Indeed, while the number of majority acquisitions increased globally by six per cent, acquisitions of industrial country companies by emerging market firms grew at an annual rate of 26 per cent. India, Malaysia, and China, account for more than half of the M&A deals, with India spearheading the acquisitions market.
What I find interesting is the extent to which these companies have gone global. The Unctad calculates a trans-nationality index based on the average of foreign assets to total assets, foreign sales to total sales, and foreign employment to total employment. In this, Hutchison has a whopping score of 80.8 per cent, Tata Steel 64.5 per cent and Singapore Telecom 64.3 per cent. In comparison General Electric has a score 59.7 per cent, Toyota Motor Corporation 52.1 per cent and Exxon Mobil 66 per cent. That is, some of the new eastern multi-national companies are actually more global than established global giants. Tatas is the largest private sector employer in the UK today…
The rise of the East may also be contributing to social tensions. Historically, advanced industrial economies have adapted by creating new jobs and endowing their workers with the skills to do those jobs. But the pace with which the East has grown may have reduced the time companies and workers in industrial countries have had to adapt. The high levels of persistent unemployment in industrial countries may reflect, in part, the lack of such adaptation. This is creating new problems. How will the West deal with a 55-year-old auto worker who is too old to learn a new trade but too young to retire? How will advanced industrial countries find people for the jobs that are vacated by retiring workers if their fertility rates fall below the replacement rate? The answers will determine the character of such societies in the years to come. The wrong answer is to blame immigration, trade or technological progress. The right answer will be to harness these forces to provide the remedies.
Emerging markets too have their problems of adaptation. Some sections of their people are already in the post-industrial society that we see around us here in Cambridge. They live in gated communities, travel to air-conditioned offices in air-conditioned cars, invest in equal proportions at home and abroad, consume as much as their peers in industrial economies, and believe naively that they have shut out the heat and the dust and the pain and the suffering of the emerging market. But governments cannot ignore the growing disparity between these winners in the process of globalisation and the masses, the majority of whom in a country like India are still dependent on agriculture or low paying casual jobs. Inclusive growth is not an option for India , it is an imperative. In my view, a good, decent job is the best form of inclusion. So, India’s efforts have been focused on trying to enable the poor to obtain better nutrition and health, education and skills, and financing...
Let me end by saying that the rise of the East is not, and should not be seen as, a threat to the West. Properly managed, it can result in enormous gain for all and a true meeting of civilizations. Perhaps the third line of Kipling’s poem will in fact come true: “But there is neither East nor West, Border, nor Breed, nor Birth.” It is with that hope that I leave you today.