The Contours Of Recovery & The Asian Century

Painting above by Wassily Kandinsky

The Contours Of Recovery & The Asian Century


Prime Minister Manmohan Singh and Premier Wen Jiabao reportedly had a very pleasant meeting on the sidelines of the 15th Asean Summit in Thailand.

They talked of the need to promote greater functional cooperation and not about
much publicised and thorny cross-border issues. There is already some economic cooperation and convergence of views on climate change, but clearly nothing near a true alliance or partnership.

The two leaders dutifully agreed that India-China cooperation: “Is in the interest of the region and the whole world”. They also reiterated that: “For the Asian Century to become a reality, it is important that India and China live in harmony and friendship and enjoy prosperity”.

This is indeed great news, and taken at face value, it is the right prescription for the Asian Century exactly. Its chances of succeeding beyond pleasantries however, are probably best described under the concept of détente or balance of power, much beloved of arch-hawk Henry Kissinger, Nixon’s Metternich admiring Secretary of State. With détente it becomes impossible to exploit a perceived weakness for short term gain or leverage, forcing reasonableness into all bilateral negotiations as a consequence. Unequals don’t usually make good partners.

But meanwhile, in the West, the financial system is clearly back into profits for the second quarter in a row. Unemployment, amongst those still looking for jobs, will however stay near or above the 10% mark for most of next year. This is because the return to profitability is not through the portals of manufacturing or retail servicing that employ great numbers at the lower reaches of the pyramid.

Right now, the economy is recovering because of a revival in business confidence, rebuilding itself from a stand-still and lending again. Demand for money is picking up and so is the willingness to lend it. John Maynard Keynes’ spirit is smiling.

And in the West, unlike India, where low lending rates mean rates ranging between 9% to 15% per annum, there is still a benign low interest scenario of 3% or under, without much threat of inflation apparent as yet.

And this, in a overall growth environment of not more than 2% per annum anywhere in the large economies of Western Europe, America, Japan and Australia, is probably as good as it is going to get for the coming decade.

That is, barring unforeseen spikes in the price of oil owing to disruption, unrest, terror-strike or warfare in the large oil producing regions. And provided the world does move away from its dependence on the stuff as it constantly promises to do, in order to dampen down the ever growing demand profile for petroleum and its derivatives.

But in the closing months of 2009, we can see banks, investment companies, insurance and mortgage lenders and their surviving white collar staff are finally over the hump. Threats of more bank closures and collapses are not getting the play they used to.

Something similar is happening here in India too, struggling to ratchet up from a slowed rate of GDP growth of around 5% to maybe 7% in 2010, notwithstanding an inflexible unemployment and under-employment rate amongst eligibles in the 25% region!

Here too, it is the banks and their activity that is perking up. And in India, with its perpetual pent up demand for infrastructure, the order book is filling up for capital goods.

In the US the Dow Industrial Average is again above 10,000 points. The Standard & Poor 500 is above 1,000 too. Newsweek magazine thinks it will go to 11,000 and S&P 500 above 1200 in 2010 and no back-sliding.

And the upswing will come, not so much in reflection of domestic consumption, as the expected profits earned by American companies from their international operations, particularly in India and China.

The Indian stock market too, with revived industry and foreign money pouring in, can expect a new all-time high in 2010.

The world today is indeed interconnected. America was saved from years of recession, if not depression, by a combination of massive Government stimulus spending and staunch financial confidence from China and the oil-rich Middle East. But then, saving the American economy has become tantamount to saving the international economy. And whatever goes for America goes also for the West as a collective, in a corollary sense.

India is not so important on the downside because of our anchoring in the domestic economy. And because our foreign exchange surpluses are not that grand. But it is highly interconnected on the upside as an engine for international recovery.

The same applies to China which may have been earning 30% of its GDP from exports heretofore, but may have to concentrate on its domestic growth for the foreseeable future.

China has already revived to nearly 9% GDP growth on the back of its own stimulus programmes. More will come from domestic investment into its large and impoverished rural hinterland and its shiny, modern cities alike.

The Chinese, like the Indians, are split between those who think pouring money into the countryside will be so much money down the drain and those who think its exact opposite. The countryside, argue the former, cannot benefit substantially from improved infrastructure because it has nothing to sell beyond low yield agricultural produce. The cities such as Beijing and Shanghai, on the contrary, are capable of returning substantial returns on investment.

The catch is in the fact that some 60% of the Chinese, like rural Indians, live in the countryside in more or less abject poverty. So not lifting these people up the economic ladder is asking for certain trouble.

In India, the proposition is less ambiguous because we are a democracy and all politicians are dependent on the rural vote. Besides, even amongst the 40% in the towns and cities, there are many toiling migrant villagers, whose ties to and sympathies for the countryside are very strong.

But in the bigger picture that the world is looking at, India and China are growth engines pure and simple. The Asian Century, Thy Kingdom Come, they pray. We may be grappling with infrastructure development, greater consumption needs, and priorities. And all this on a massive, unprecedented scale because there is much left to do. But to everyone else, it’s all good healthy economics that will uplift us and simultaneously come to their rescue as well.

(1,052 words)

25th October 2009
Gautam Mukherjee

Published in The Pioneer as Op-Ed Leader entitled "Towards an Asian Century" on October 28th,2009. Also simultaneously published online at www.dailypioneer.com and archived there under Columnists.