Napoleon was looking at a map of the world and remarked Oh China! There is a sleeping giant. Let it sleep. Two centuries on,we are about to repeat that for Europe. The struggle going on about the IMF succession is reflective of the massive shift which has happened in the global economy over the last twenty years of globalisation. The centre of economic gravity is no longer in mid-Atlantic but somewhere in Central Asia. Growth and prosperity are in Asia and Latin America. Even African countries are bouncing on with five per cent growth rate.
Europe is in the meantime a low growth,ageing territory. There are severe debt problems at the heart of many of which is the issue of affordable pensions for its increasingly ageing population. The Great Recession has also weakened the US though this may be temporary. Yet there can be no doubt that while the US and EU are debtor regions,the creditor regions are in Asia and Latin America. How has this happened?
The Asian Tigers taught China and the rest of South East and East Asia. Even India got the message after forty years of a futile pursuit of a socialist economic model. Then came the breakthrough with globalisation. The constraint of lack of investment funds was removed as Western private capital began to move southwards. Even the Asian crisis did not quite stop it. High domestic savings plus foreign investment funds and a willingness to work hard lifted Asian countries from low to a high growth trajectory. Their populations became a strength not weakness as younger generation came on to the labour market.
The WTO helped to liberate trade,and manufacturing moved away from North to South. The developed countries moved to high-tech manufacturing and to financial and IT services. They began to lose the demographic advantage they had after the Baby Boom of the 1950s. Sustained prosperity was translated into a generous welfare state. But the Great Recession showed that the roots of the prosperity were fragile. The developed countries are losing their edge in export markets; welfare states have made large scale unemployment tolerable but also irreversible. There is a lot of human capital being wasted since the welfare state cannot be reformed to make work pay for the unskilled and the semi-skilled. This is why,there is a massive budgetary crunch across the developed countries.
Ratan Tata was prescient when he complained the other day that British managers have lost the habit of hard work while Indian managers are keen to finish the job at hand whatever the schedule. Britain used to be like India,but now the shoe is on the other foot. Everywhere the savings rate is low and work practices are lax. These are partly the fruits of sustained prosperity. A rich country may choose to take its dividend in terms of less work and more leisure. There are many attempts to calculate new measures of income and well-being which take happiness and community solidarity,low hours of work etc as positive things. This in itself may be laudable but is also a sign that income growth is no longer possible as it used to be.
Ratan Tatas ancestor was told by a British engineer that an Indian could not build a steel mill. He now tells the Brits that they cant build much of anything.
