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Asia Economy Last Updated: Aug 24, 2010 - 2:35:39 PM


Globalization and Asia’s return to economic supremacy
By Michael Hennigan, Founder and Editor of Finfacts
Apr 23, 2010 - 4:15:49 AM

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Chinese Premier Wen Jiabao (c) presides over the first meeting of the National Energy Commission of China in Beijing, April 22, 2010. Chinese Vice Premier Li Keqiang (R) also attended the meeting. Photo: Xinhua

Globalization in recent decades has propelled Asia back to regional economic supremacy in the world and with it has come many challenges.

British journalist Robert Fisk has written of turning up at the Saudi embassy in Beirut and handing his visiting card to the press counsellor. "Robert Fisk, Middle East Correspondent" was printed in English and Arabic. And the English-speaking diplomat looked at him quizzically. "What is 'Middle East'?" he asked.

By 1890, when the United States economy, powered by a quarter century of surging growth after the Civil War, had replaced China's economy as the world's biggest, the area of the globe east of Suez was classified as Near East, Middle East and Far East. That of course was from a Western perspective and at a time when the West was strengthening its foothold in Asia.

According to the eminent economic historian, Angus Maddison (see box at bottom of page), until 1800, about three fifths of the world’s commerce and production took place in and around China and India. So did much of the world’s scientific and technological progress, including the Chinese invention of paper, explosives, and printing, and medieval India’s launch of modern mathematics. In the early 1830s, when President Andrew Jackson sent the first US envoy across the Pacific to Siam (Thailand), Asia still accounted for over half of global GDP (gross domestic product).

It's important to understand that the current post-Mao Zedong modernisation of China, is not a simple story of a backward country achieving an economic miracle. A vast unified country over a span of two thousand years, overwhelmingly dominated by one ethnic group, the Han, was a pioneer in bureaucratic modes of governance. Maddison says that in the tenth century, it was already recruiting professionally trained public servants on a meritocratic basis. The economic impact of the bureaucracy was very positive for agriculture

They nurtured it with hydraulic works; printing enabled the distribution of illustrated agricultural handbooks; farmers settled in promising new regions; a public granary system to mitigate famines was established. They fostered innovation by introducing early ripening seeds which  permitted double or triple cropping. New crops were introduced  - - tea in the T’ang dynasty, cotton in the Sung, sorghum in the Yuan, and new world crops such as maize, potatoes, sweet potatoes, peanuts and tobacco in the Ming.

From the nineteenth century, internal rebellions and colonial intrusions resulted in China's share of world output falling from one third in 1820 to one twentieth by 1952. Its real per capita income fell from 90 per cent to less than a quarter of the world average. Nineteen foreign powers established colonial enclaves; three wars were fought with Japan and two with France and the UK, the Boxer rebellion in 1900 involved action with an international force including Americans from their new colony of the Philippine Islands; Russia seized 10 per cent of Chinese territory in the 1850s in what is now Eastern Siberia and in the first years of the Chinese republic from 1912, it helped detach Outer Mongolia. After all these foreign wars, the victorious powers exacted large financial indemnities.

It may explain China's tendency to bristle at foreign lecturing even though its record towards its own people including during Mao's Cultural Revolution, also merits a lot of soul searching.

China's neighbour Japan, was closed to contact with the outside world for more than two centuries, apart from limited trading concessions for the Chinese and the Dutch, until a flotilla of four US naval ships steamed into Edo (Tokyo) Bay in July 1853. The locals were amazed to see the ships belching coal smoke and also the big onboard guns. In March 1854, Japan signed a treaty with the United States, represented by Commodore Matthew Perry, to open ports and provide coaling facilities. In 1868, the restoration of power to the emperor ushered in a period of transformation from a feudal society to an industrial and military power.

In 1858 in India, the British government took over responsibility for the country from the East India Company. In common with Ireland, the colony was a useful source for commodities and market for British manufactures. In the eighteenth century, there had been a big market for Indian cotton in Britain but with the help of productivity gains from the Industrial Revolution, technical progress made Lancashire cotton competitive even in the Indian market.

Manifest Destiny: Contemporary print, showing the USS Olympia in the left foreground, leading the US Asiatic Squadron in destroying the decrepit Spanish fleet off Cavite, on the south side of Manila Bay, May 01, 1898.

From General James Rusling, “Interview with President William McKinley,” The Christian Advocate 22 January 1903: "When I next realized that the Philippines had dropped into our laps I confess I did not know what to do with them. I sought counsel from all sides—Democrats as well as Republicans—but got little help. I thought first we would take only Manila; then Luzon; then other islands perhaps also. I walked the floor of the White House night after night until midnight; and I am not ashamed to tell you, gentlemen, that I went down on my knees and prayed Almighty God for light and guidance more than one night. And one night late it came to me this way—I don’t know how it was, but it came: (1) That we could not give them back to Spain—that would be cowardly and dishonorable; (2) that we could not turn them over to France and Germany—our commercial rivals in the Orient—that would be bad business and discreditable; (3) that we could not leave them to themselves—they were unfit for self-government—and they would soon have anarchy and misrule over there worse than Spain’s was; and (4) that there was nothing left for us to do but to take them all, and to educate the Filipinos, and uplift and civilize and Christianize them, and by God’s grace do the very best we could by them, as our fellow-men for whom Christ also died. And then I went to bed, and went to sleep, and slept soundly, and the next morning I sent for the chief engineer of the War Department (our map-maker), and I told him to put the Philippines on the map of the United States (pointing to a large map on the wall of his office), and there they are, and there they will stay while I am President!" Photo: US Naval Historical Center

In modern times, China's decision to develop a market economy in 1979 and the end of communism in Europe a decade later, has enabled Asia to benefit from globalization and double its share of world GDP since 1980 to over one-third compared to less than a fifth each for the US and the European Union. Meanwhile, the competitive threat to the West from Japan abated as the country has struggled with a sclerotic political system; a high public debt; an aging population and a high cost economy where more than one-third of the workforce are temps paid less than the Irish minimum wage.

Some 54 per cent of China’s population is rural and 73 per cent of India’s; the typical manufacturing monthly wage is $130 in China but because of the one-child policy, the working-age population will only rise by 10m in the next 20 years in contrast with 240m in India.

The populations of China, India and Japan today are 1.3bn, 1.1bn and 129m compared with 380m, 280m and 40m respectively in 1890.

In his new book “Losing Control, The Emerging Threats to Western Prosperity,” HSBC’s Stephen King argues that the growing might of China, India and the other emerging nations has killed off the assumption of continuously improving living standards for those in the United States and Western Europe:

 

Dr. Michael Spence, a recipient of the 2001 Nobel Prize in Economics and chairman of the  Commission on Growth and Development, says that sustained high growth in developing economies is a recent, post-World War II phenomenon. Using annual GDP figures of above 7 per cent, "sustained" over 25 years or more - - he says growth at these rates produces very substantial changes in incomes and wealth: income doubles every decade at per cent.

There are 11 such cases of sustained high growth, and eight are in Asia. These are Botswana, China, Hong Kong, Indonesia, Korea, Malaysia, Malta, Oman, Singapore, Taiwan and Thailand. Each case had an export sector as a driver of growth and an increasing share of external trade in GDP.

Dr. Spence said this month that China has come to a point where its size and impact globally are large. And that has occurred at a much lower level of income than is true of any of its predecessors. Last February, Foreign Minister Yang Jiechi said in Munich that China’s per capita income ranked it 104th in the world.

Spence says China's household income has fallen to less than 60 per cent of GDP and savings out of disposable income is at 30 per cent. High corporate profits have been used to fuel an investment boom but he says internal demand needs to be boosted, including reform of health care and pensions systems to reduce the high savings level while rebalancing the economy from an overdependence on investment and exports.

In November 2009, the European Union Chamber of Commerce in China launched a report which examined the impact and influence of industrial overcapacity in China, which it said is “wreaking far-reaching damage on the global economy.”

China is the world's biggest steel producer and its steel industry accounts for nearly half of global output. In fact, its output is so large that it matches the combined output of the next four biggest steel makers, namely: Japan, the United States, Russia and India.

Led by China, intra-regional trade as a percentage of total Asian trade has risen from 9.2 per cent in 1990 to over 50 per cent in recent years. So the rest of the world remains important.

Hostilities between the US Army and defenders of the First Philippine Republic broke out in Manila in February 1899. Picture shows bodies of Filipinos on February 05, 1899. By 1901, following the killing of 40 Americans in a guerilla attack at a Catholic mass on the island of Samar, General Jacob Hurd Smith issued orders to "kill everyone over the age of ten" and make the island "a howling wilderness."

"America is proud of its part in the great story of the Filipino people," President George W. Bush, said in October 2003. "Together our soldiers liberated the Philippines from colonial rule." That remark prompted journalist John Judis to comment in the July/August 2004 issue of Foreign Policy: "the McKinley administration, its confidence inflated by victory in that splendid little war, annexed the country and installed a colonial administrator. The United States then waged a brutal war against the same Philippine independence movement it encouraged to fight against Spain. The war dragged on for 14 years. Before it ended, about 120,000 US troops were deployed, more than 4,000 were killed, and more than 200,000 Filipino civilians and soldiers were killed.

President McKinley advocated Benevolent Assimilation but a history of repression by Spain and its hated Catholic friars, did not make the prospect of more colonial rule palatable.

Globalization is irreversible and despite the resort to protectionist measures during the Great Recession, the level was insignificant compared with the rampant self-destructive beggar-my-neighbour policies of the Great Depression period. Globalization so far is a striking debunking of the "lump of labour" fallacy -- the mistaken notion that there are only a fixed number of jobs to go around in the global economy.

In recent decades, globalization has been driven by Western investment and capital, and structured to supply Western demand. This is going to change.

China's search for natural resources is boosting development in Africa and in coming years, we will witness more evidence of emerging market companies moving into Western markets and the impact of breakthrough frugal innovation that will challenge Western companies. The European Union integration of the former Soviet controlled states in Eastern Europe has been one of the understated achievements of our age for globalization.

In the US, globalization has fuelled over-consumption and manufacturing jobs fell from 19.3m in 1980 to 11.5m in 2009 as total US employment grew from 90m in 1980 to 131m in 2009.

The fall in higher paying manufacturing jobs and the rise of superpay for a small sector of the population, while real incomes of most Americans have stagnated, has widened the inequality gap. In 1965, US CEOs in major firms earned 24 times that of a typical worker; by 2007 the ratio had risen to 275.

Jeffrey Immelt, head of General Electric, one of America’s biggest companies, in a speech last year  that was a searing indictment of US  corporate leadership, said of his generation of business leaders: "Tough-mindedness, a good trait - - was replaced by meanness and greed - - both terrible traits. Rewards became perverted. The richest people made the most mistakes with the least accountability. In too many situations, leaders divided us instead of bringing us together. As a result, the bottom 25 per cent of the American population is poorer than they were 25 years ago. That is just wrong."

President Obama has proposed doubling US exports in 5 years. The Chamber of Commerce says it happened in the 1970s and early 1980s, and almost occurred in the five years ending in 2008. Doing it again will depend on the dollar's strength, economic growth in key markets and policies adopted in Washington. Big US companies today generate more than 40 per cent of their sales revenues overseas.

In Europe, there are also challenges but as Newsweek magazine says contrary to the widespread cliché of American dynamism versus European economic stagnation, over the past decade Europe's top companies have beaten America's (not to mention Japan's) by an often substantial margin. Despite the rise of China and the rest, Europe has held roughly steady, at about 17 per cent, its share of world exports since 2000, while America's has fallen by more than a third, from 17 to 11 per cent  - - a crude but significant indicator of global competitiveness. Since the early 1990s, Europe has steadily expanded its share of the world's 100 biggest multinationals compiled annually by the UN Conference on Trade and Development, from 57 in 1991 to 61 last year, while the US number has dropped from 26 to 19.

Whether in Europe or the US, prudent economic management in an accountable political system; an educated workforce and a competitive economy, are key factors in meeting the challenges of globalisation. Scandinavian countries such as Denmark, Sweden and Finland, can produce world beating companies in countries of high taxes and good social safety nets, because they are well-governed with sophisticated electorates.

Conventionally defined living standards may end up lower but is that a bad thing where there is an absence of permanent unemployment?

Antoine van Agtmael coined the term "emerging markets" in 1981 as it was a more optimistic one for investors than “the third world” or “the developing world.” From Washington DC, his company, Emerging Markets Management, today controls some $13bn-worth of investments in them.

He told The Economist that most people have no idea how serious the challenge from the emerging world has become.

Finally, British economist David Ricardo (1772-1823) who bought the Portarlington, Co. Laois seat in the House of Commons, in 1819 - - where there were said to have been 12 electors - - is renowned for his theory of comparative advantage. Using an example of two nations (Portugal and England) and two commodities (wine and cloth), Ricardo argued that trade would be beneficial even if Portugal held an absolute cost advantage over England in both commodities. Ricardo's case was that there are gains from trade if each nation specialises completely in the production of the good in which it has a "comparative" cost advantage in producing, and then trades with the other nation for the other good. 

ANGUS MADDISON (1926-2010)

A day after posting our article, Professor Angus Maddison died in Paris. He was 83 years old.

The New York Times said in an obituary: Some people try to forecast the future. Angus Maddison devoted his life to forecasting the past.

Professor Maddison, a British-born economic historian with a compulsion for quantification, spent many of his 83 years calculating the size of economies over the last three millenniums. In one study he estimated the size of the world economy in A.D. 1 as about one five-hundredth of what it was in 2008.

In his research, he tried to reconstruct thousands of years’ worth of economic data, most notably in his 2007 book “Contours of the World Economy 1-2030 A.D..” He argued that per capita income around the globe had remained largely stagnant from about 1000 to 1820, after which the world became exponentially richer and life expectancies surged.

In another influential book, “Chinese Economic Performance in the Long Run,” in 1998, he tracked the history of Chinese growth since 960. The book demonstrated that China’s recent rise was merely a return to economic superpowerdom, as the Middle Kingdom had already dominated the world economy for many centuries.

Autobiographical essay, “Confessions of a Chiffrephile" (pdf) published in 1994.

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