ASIA: ALL ABOARD THE ORIENT EXPRESS.

ASIA: ALL ABOARD THE ORIENT EXPRESS. - Eurosclerosis is not going away - and the tiger economies are not slowing down. Get ready for a world where Asia is the dominant region, economically, politically and culturally.

by David Smith.
Last Updated: 31 Aug 2010

Eurosclerosis is not going away - and the tiger economies are not slowing down. Get ready for a world where Asia is the dominant region, economically, politically and culturally.

Something dramatic is happening to the world economy, and with it the way that business should be shaping its strategies for the 21st century.

Any business that ignores these changes - both current and impending - could be condemning itself to a future of underperformance or stagnation.

Most of us are aware of two related facts. The first is that the performance of the older industrial countries is noticeably unexciting. This is true in Europe, where both Germany and France have been skirting perilously close to recession, and where pan-European growth in 1996 will struggle to reach 2%. Britain, with half of its overseas markets represented by the rest of the European Union cannot, in such circumstances, make a unilateral declaration of independence.

Slow growth elsewhere in Europe has impacted on Britain, and will continue to do so.

In the 1980s, economists identified the condition of Eurosclerosis, endemic slow growth in Europe brought about by over-regulation, uncompetitiveness and an absence of creative drive. In 1989, when a wave of counter-revolution swept throughout eastern Europe, opening up these Rip Van Winkle economies to the energising forces of capitalism, and East Germany to absorption by its powerful Western neighbour, it was widely held that the condition of Eurosclerosis could be consigned to the history books. Europe, and in particular Germany, would embark on a new economic era, based on the opening up of the East.

But the first diagnoses were correct. After an initial spurt, economic growth in Europe has, if anything, become more stultified than in the 1980s. The same concerns about inflexible, uncompetitive economies are back, and look to be permanent afflictions.

Meanwhile, in both North America and Japan, the other two points of the global triangle for the club of old industrial countries (Japan having moved from newcomer to senior citizen in double-quick time), the outlook is scarcely any better. Revised official figures for the US economy, based on a new method of measuring gross domestic product (GDP) - the so-called chain weighting approach, which takes fuller account of changes in product prices - show that growth has been slower than previously thought.

Growth was overstated because it did not take full account of factors such as falling computer prices - on the previous figures every PC manufactured commanded a value in the national production data of perhaps twice its actual price. And the outlook in an atmosphere of budget deficit reduction, which is also restraining the economies of Europe, is for subdued growth.

Indeed, a common thread linking Europe and America is the fact that, despite efforts to restrain government spending, the tax burden associated with welfare and other commitments will severely restrain growth. According to one alarming calculation, a child born in the US today would need to pay over more than 80% of lifetime earnings in taxation to meet existing government spending commitments.

Japan, which in the 1980s could still be regarded as an economy in which exceptional growth rates were the norm, has come down to earth with a bump. Some time in the past few years, because of the combination of an overvalued yen, falling property prices and a financial system under strain, it has become a slow-growing economy. And, while a modest recovery is now under way, the glory days appear to be over. The second related fact is that, while the older industrial economies struggle, spectacular growth rates are being recorded elsewhere. In the first half of the present decade, GDP in China rose by an average of 12.2% a year, in Thailand by 8.9%, Malaysia by 8.6%, Singapore 8.3%, Indonesia 7.9% and Taiwan 6.5%. India and Pakistan are growing by 5% to 6% a year, as is Hong Kong, in spite of the uncertainty created by the approach of 1997. These newly industrialised countries, some of them not so new, are recording growth rates of between three and six times those that are now the norm in the old industrial economies.

Faced with numbers such as these, the economist's natural response is to conclude that there is a significant 'flash in the pan' aspect to them. Professor Paul Krugman of Stanford University, puts it forcefully: 'From the perspective of the year 2010, current projections of Asian supremacy extrapolated from recent trends may well look almost as silly as 1960s-vintage forecasts of Soviet industrial supremacy did from the perspective of the Brezhnev years.'

What Krugman is saying is that growth in these economies will slow from its present breakneck pace 50e and, perhaps more importantly, that there is nothing 'miraculous' behind their current pace of development. It can be explained, he insists, with reference to known factors of production - investment and the rapid shift of labour from agriculture to industry.

Today's mature industrial economies went through the same process. This emphatically does not mean they can be ignored but, as Dr Gerard Segal of the International Institute for Strategic Studies (IISS), director of the Economic and Social Research Council's £2.2 million Pacific Asia Research Programme, says, it should mean that British businesses break out of the '10-feet tall' mentality.

'We are still at the stage where many businesses regard what is happening in these countries as a miracle - they believe the people there must be 10-feet tall,' he says. 'What we need to develop is a frame of mind which recognises that these countries have both strengths and weaknesses, that they represent market opportunities as well as competition, and that the economic potential of these markets is huge.

'Like all late-developers, they have certain advantages over incumbent industrial powers, just as America in the early part of this century had an advantage over Britain. They can learn quickly and avoid mistakes.

But Krugman is right to say there is no miracle - the recipe for the current success of countries in the Asia-Pacific regions is that of following a well-understood pattern.'

The East Asian economies have benefited from high levels of investment which typically takes advantage of low labour costs and productive workforces.

'Asian values,' the peculiar brand of Eastern capitalism in which the role of the family is paramount, appears to be conducive to rapid rates of economic development. But even in these economies, the price of such development is a gradual erosion of the advantage of low labour costs. Industrialisation, which typically begins when national income per head is $500-$1,000 (£300-£600), begets consumerism as incomes rise to $3,000 a head, a demand for basic banking and financial services at $5,000 a head, an expanding market for luxuries at $10,000 a head, and so on.

All economies grow rapidly during the initial phase of industrialisation, slowing to a more manageable pace as they mature, and the Asian economies will be no exception.

This sounds, however, more reassuring than it should do. Japan, remember, grew to become the world's second most powerful economy, which it still is, before settling down to more modest growth rates. In the case of the present generation of fast-growing Asian economies, the combination of that rapid growth with the sheer size of population in the region - four times the total in the Group of Seven (G7) leading industrial countries - means that it is difficult to argue with the conclusion that this will be the hub of the world economy. China, with five times the population of the United States, only requires a GDP per capita to exceed one fifth of US levels (it is currently one tenth), to become the world's biggest economy. On present trends that could be achieved before we are long into the new millennium.

Michael Howell, chief economist at ING-Barings, who describes the flood of investment from the old industrial nations to Asia as 'a financial silk road', says: 'The Asia-Pacific economies comprise a market of 1.6 billion people which is growing at 8% a year in real terms. By 2010, four of the top 10 economies in the world - China, Japan, Taiwan, and India - will come from Asia compared with only two today. Economic power is shifting from West to East.'

John Naisbitt, author of best-selling US book Megatrends Asia (published in Britain by Nicholas Brealey Publishing) puts it even more forcefully: 'What is happening in Asia is by far the most important development in the world today. Nothing else comes close, not only for Asians but for the entire planet. The modernisation of Asia will forever reshape the world as we move towards the next millennium.

'In the 1990s Asia came of age. As we move towards the year 2000 Asia will become the dominant region of the world: economically, politically and culturally. We are on the threshold of an Asian renaissance. This is not a change the rest of the world will readily accept. Yet it is time for all of us to face reality.'

Currently, the G7 economies (the US, Japan, Germany, Britain, France, Italy and Canada), account for nearly 70% of the world's GDP, measured in US dollars. In just 15 years, that share is likely to be down to 50%, a shift comparable with the rise of America in the early part of this century. In fact, for the Asia-Pacific countries, this represents something of a second coming. Segal of the IISS points out that, at the beginning of the present century, the region accounted for about a third of world GDP, before suffering from relative (and in some cases absolute) decline, principally because, under Communist rule, China and many other countries of the region closed themselves off to the world economy.

In the current period, as far as trade is concerned, Britain and the other older industrial economies have felt the effects of competition from the newly industrialised economies of Asia. Both Britain and the OECD (Organisation for Economic Co-operation and Development) economies shifted from trade surplus to deficit with these countries during the 1980s. Currently, Britain has a trade deficit of around £4 billion a year with these countries, while the combined OECD deficit is between £12 billion and £15 billion a year. There is evidence, according to a Bank of England research paper, Trade with Newly Industrialised Economies, published in February, that such trade has had an impact on wage levels among unskilled workers in Britain, driving them lower.

There will be yet more dramatic evidence of a shift occurring in the world economic axis. According to William Purves, head of the Hongkong & Shanghai Bank: 'By 2018 the Hong Kong stock market will be the largest by capitalisation in the world, its daily turnover will exceed Tokyo, the Hang Seng index will be the world's financial pulse; and HIBOR (the Hong Kong interbank offered rate) will replace LIBOR (its London equivalent) as the rate against which the world's debt instruments are priced.'

Richard Grant, head of the Asia-Pacific Programme at the Royal Institute of International Affairs, takes issue with any suggestion that growth in the region will burn itself out in the near future, thereby justifying a cautious approach on the part of business. 'My view is that this is going to be a high-growth region for several decades,' he says. 'European companies that aren't there should be getting there, and those who are there should be looking to expand. Sure there will be recessions, there will be setbacks. But you don't jump out, just as you don't jump out of a roller coaster while it's still moving.

Look at these countries over a 10-year period, 1985-95. If you first went to China, Malaysia or Thailand in 1985, and you went back every couple of years, you'd know there is no way that you can turn that clock back. There is a momentum in these economies that is not going to be stopped.'

Britain lost out once by not taking seriously enough an earlier development in Asia - Japan's rapid emergence as an industrial power. Without determination not to make the same mistake twice, Britain could lose out again.

The biggest block to British fortune would be for UK companies to regard these markets, and the local competition they may face there, as invincible - Segal's '10-feet tall' mentality. But the greatest risk would be a failure to respond to the dramatic shift in the balance of the world economy that is now occurring.

A market that's open to small and medium-sized firms, not just multinationals

What strategies should businesses adopt to ensure that they are riding on the wave of this rapid movement in world economic power, rather than merely watching it from the sidelines, an approach that would condemn Britain to an ever-widening trade deficit with Asia? Richard Grant, head of the Asia-Pacific Programme at the Royal Institute of International Affairs, makes the point that small and medium-sized firms should not persuade themselves that these distant markets are only for the big boys, or the multinationals. Gerard Segal of the IISS stresses an essential aspect of business strategy in the Asia-Pacific region is that countries in the region need to be approached in different ways. 'There is no single East Asian strategy,' he says. 'The countries themselves are very different. Compare the Japanese-style corporate model with, say, the traditional Chinese approach.'

Increasingly, the Government's approach to driving trade with the region is recognising the logic of concentrating on areas in which Britain has competitive advantage. In January, Anthony Nelson, the trade minister, took executives from 10 banking and insurance groups on a week-long trade mission to China. The aim, said Nelson, was 'to promote the importance of London as an international finance centre and encourage the Chinese to work more closely with UK institutions in the development of their own financial services sector'. Such is the size and potential of the Asian market, however, that with the exception of those sectors in which local producers have a clear competitive advantage, there are few sectors that cannot benefit.

The Government, says Segal, is taking a more far-sighted attitude to the Asia Pacific region than most of its European counterparts. The Pacific Asia research programme, funded by the Economic and Social Research Council (and therefore the Government), is the most comprehensive of its kind in Europe. Research topics include the challenge of Asia Pacific trade, manufacturing organisation in the region, growth and transformation in China, the implications for Europe of technological development in Pacific Asia, technology transfer in the economic development of the region, resource prospects in the Russian Far East, agriculture and industrialisation in East Asia and East Asian welfare systems.

The Department of Trade and Industry has established an Asia Pacific Advisory Group (APAG), chaired by Peter Godwin, managing director of West Merchant Bank. In its latest report, APAG lays particular stress on the region's commitment to 'free and open trade' with industrialised countries by 2010, as agreed at a recent summit of the Asia Pacific Economic Community. APAG is also keen to emphasise trading opportunities for small and medium-sized companies in the region.

The DTI, meanwhile, is co-ordinating a series of product and service-based trade missions to the Asia Pacific region.

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