Posted in Finance Articles, Total Reads: 1011
, Published on 04 October 2014
The 19th century was the British century. The 20th one was the American. And now the 21st is being heralded as the Asian Century- the period when Asian countries will reclaim their preeminent position in the world order, the dominance on the world stage that they had been forced to cede to the Europeans 300 years ago, which precipitated an economic decline that continued for the better part of the last 3 centuries.
Arguments abound about the imminent arrival of the Asian giants on the world stage. The Chinese dragon started breathing fire some decades ago. The Indian elephant has started its dance, on the back of the economic liberalization ushered in the early 1990’s. The Japanese phoenix rose from the ashes of the World War 2 to build a powerful economy. It joined the ranks of the developed countries a long time ago. However, it has been a perennial superpower-in-the-making. Never really taking on the role that its admirers believe is preordained. The West is seemingly in a decline, battered on one side by an ageing population and the severe beating it seems to have taken in the last financial crisis on the other.
Against this backdrop, we are confronted with the question, will the next century herald the beginning of an Asian age, precipitated by the rising economic and military might of its nations and a Western inability to stand up and take the punches thrown by the newly invigorated Asian giants. Let us first put things in perspective and analyze the permutations and combinations of this very interesting drama unfolding in our times.
The New Challengers
In the late sixties and onwards, Asia witnessed tremendous growth. This was unprecedented in a continent rife with inter clan rivalries. The Asian miracle brought prosperity in much of the South East Asia- Thailand, Malaysia, Singapore, etc. China, for all its human rights violations, too has been relatively successful in bringing a medieval country into the modern fold. Approximately 300 million people of a 1.2 billion strong country were brought above the poverty line in the past few decades. This has been a tremendous feat, for a largely poor nation. Its economy is currently the 2nd largest in the world, poised to surpass that of the United States’ by 2025. Its economic might has given it the teeth to reach beyond its natural borders, and dictate terms to wider world. It has accumulated a staggering foreign reserves of $3.3 trillion on the strength of its mammoth exports (the Wall Street Journal reports that China’s Trade Surplus has hit a new high of $49.8 billion). Its economic footprint has reached Africa, Latin America. It is increasingly becoming the number one trading partner to a lot of countries in these regions. Its economic might is tremendous, second only to that of the United States’. Its economy has been consistently growing at 8-9% annually. Its exports have clocked a volume of $1000 billion, which too are growing at breakneck speed of 15%. These are mind boggling numbers for a country that was embroiled in a disastrous civil war a mere 50 years ago. China is the third largest exporter currently, behind only America and Germany but ahead of Japan. This is astonishing considering these economies were built by exports themselves. .
India too has come of age. Its performance may not be as impressive as that of China’s. But for a democracy, it has come a long way. Its policies have not been dictated by an oligarchical system, but have been debated and voted upon in the public domain. The weak weren’t downtrodden to accelerate the pace of growth. An inclusive approach has been the hallmark of India’s growth story. Since the liberalization in the early nineties, its economy has grown by leaps and bounds. It had grown at a tremendous pace of 9% annually before the financial crisis in the late 2000s. It remained relatively unscathed in that crisis, though its growth rates dipped. Inflation has been brought down to 5% from the double digit 16-18% prevalent in the seventies and eighties. Interest rates have been decontrolled. The ‘license quota raj’ has been done away with. It has been relatively immune to the crises that have gripped economies across the world.This was on account of the strict capital controls put in place by the early socialist governments. India set its own pace of growth and liberalization. Only when it became strong enough did it open its borders for trade. It has accepted current account convertibility, but still continues to have a cautious approach to capital account convertibility. Now, it is pursuing a policy of export growth of chemicals, textiles, generic medicines. Something that the early developers like Japan, Korea did and then moved on to more complex, R&D intensive manufacturing. India has an edge in the sense that it is liberalizing at its own terms and pace and inculcating the lessons from previous debacles in Asian countries.
The Fault lines of Asia
The newly independent nations in Asia (the so called Asian tigers) were impatient for economic growth. They chose the path of exports-led economy to fuel growth. Domestic companies were provided with incentives on taxation, duties, and subsidies to produce and export. A few favored industrial houses were allowed to grow big to curtail domestic competition. This was intended to give them the strength to compete on global scale. This exposed these countries to deflationary pressures with the decline in global demand. Weak global demand saw them fall like a pack of cards. China has been relatively unexposed to these dangers because of the strong demand that exists domestically. However, the dangers of excessive supply cannot be overemphasized. And a time could come when even the huge Chinese population is unable to consume all the supply generated in the global markets.
India too faces an uphill task in achieving its economic objectives. With the opening up of its economy, the dangers of arm’s length institutions from an advanced economy such as the USA, or the Europe pouring money into a developing country like India have increased manifold.
The battle lines are being drawn in an increasingly unsafe world. The Game theory of economics seems to be at work, where everybody is trying to take up a position of least damage. We believe that this is indeed the Asian century. China and India will be the principal players. The West will not relinquish its hegemony so easily. It will fight tooth and nail to hold on to the power for as long as possible. And they have been playing this game for a longer time than the Asians. The Asians may triumph eventually, but at what cost? Will the Americans successfully ward off the Asian danger? Or just postpone the inevitable?
This article has been authored by Sainath Zunjurwad and Hardik Barot from SIMSREE