It did not strike me but it should have served as a warning sign when I read this 2-pager on Jim O’ Neill in the FT in the flight from Zurich to Dubai on January 16th. The possibility of the magazine cover curse on either Jim O’ Neill or his ‘creation’ – the BRIC acronym – did not enter my head.
This BBC report should banish any thought of ‘magazine cover curse’.
Once, “the United States could export its recession around the world,” says Stephen King, the group chief economist of HSBC bank.
This crisis is different. Emerging economies, especially China and India, managed to avoid the worst of the contagion.
It’s “not perfect decoupling,” says Mr King, but over the long-term the crisis has sown the seeds for a move towards a “China-centric world rather than a US centric world”.
Stuart Gulliver, executive director at HSBC, sees a new economic bloc emerging that would sideline the US and Western Europe – stretching from China, Asia Pacific, the Middle East and Africa to Latin America.
As a bloc, these countries have “a lot of investable capital, huge commodity wealth, huge production capital and huge demand”.
It’s an area of emerging countries with so much domestic demand that a crisis in the West may cause it to stutter, but not to grind to a halt, argues Mr Gulliver.
Mr King points to the last three months of 2009, when China’s economy (and its exports) rebounded, even when US consumer demand did not.
The crisis has tipped the power balance.
But, reading this interview by Niall Ferguson with India’s Economic Times reminded me that that the thought of ‘magazine cover curse’ would have been legitimate. My friend Sushant had sent me key extracts – the aspects that dealt with the rise of China, India and the possible futures that the world could have.
I now read the full interview. He does make me some compelling points on the legacy of the British empire. I like his point about thinking of the counterfactual.
I am impressed by this reply:
You’ve compared the potential of China and India . How do you see the future of the world panning out in terms of the China-India equation and where the two countries are headed?
First of all there is no such thing as the future of the world. There are futures. We all try and choose the one that we find the most attractive and we get the future that we somehow collectively will. One future is that of a familiar one where China’s GDP catches up with that of the US in 2027 and India’s with the US in 2050. The world rebalances and the East takes its rightful position as the dominant economic power. We thus go back to 1700. That’s a future that I would call a Goldman Sachs future.
There’s another future in which China’s attempts to have economic growth without political reform and breaks down. There’s another in which rivalry between India and China or between China and America produce conflicts. There’s another one in which the consequences of the financial crisis include a breakdown of the global economy due to tariff protection, currency wars and so forth. And those futures don’t strike me as significantly less plausible. In fact being a pessimist at heart I find them slightly more plausible than this happy story of Asian capture.
When you go back 100 years it would have been impossible, in let’s say 1910, to forecast that Japan’s GDP would overtake that of Britain at some point in the course of the 20th century. That’s what I take away from my historical studies . Projecting linear trends forward and saying that’s the future is a mug’s game. History is too full of twists and non-linear relationships [Emphasis mine] and we’ll be surprised just as people have been surprised by China’s growth. I remember going back to look at the Economist surveys through the 1990s to 2007. What really struck me was that they had missed the China story until it was right under them. Now it seems obvious to us. I read an Economist survey from as recently as mid-1990 s asking what is China going to export – tinned mushrooms? You know the future is very hard to predict.
Thinking of horizons much shorter than a century, the question is whether there is genuine de-coupling and whether one could safely predict that, after the re cent sell-off in the stock markets around the world, should one go back to buying Asia – China and Indian stocks – or should one practice caution?
This TIME magazine article leans in favour of India, again, from a long-term perspective. They make a valid point on this one:
Most important, India managed to achieve its substantial growth without putting its banking sector at risk. In fact, India’s banks have remained quite conservative through the downturn, especially compared with Chinese lenders. Growth of credit, for example, was actually lower in 2009 than in 2008. As a result, economists see continued strength in India’s banks.
But, who is to say that India’s fiscal profligacy is better or would be less problematic than China’s banking loans and potential non-performing loans? For example, continued nominal GDP growth well in excess of domestic interest rates could result in a much larger rise in banking assets than the rise in bad loans, in China.
My question is not rhetorical. I am really curious to know the answers that would help me make my investment choices.
This report filed from Davos by Chris Giles for FT has a rather astute observation from Raghuram Rajan:
Kenneth Rogoff told the Financial Times that, although aggressive policies should keep growth reasonably strong in 2010, “over the medium term, global consumption growth is likely to be slow for several years as the US consumer deleverages and the Asian consumer only gradually notches up her game”.
His view was shared by another former chief economist of the International Monetary Fund, Raghuram Rajan of Chicago University, who predicted imbalances would re-emerge, “because the structural forces that created them have not disappeared”. He also told delegates that there was a reason emerging markets could not start to consume more quickly: “Historically, emerging markets have never managed demand well.” [Emphasis mine]
So, it is not going to be that easy to bet on the so-called de-coupling, yet. It would still be a case of hope over reason, at least for now, notwithstanding the BBC report above and this story in ‘Economist’. Of course, Niall Ferguson said that predicting future was never easy. That should have been obvious long ago. Most of us do it not because we are good at it but because that earns our daily rice and roti.