Look East for Economic ’Super-Cycle’
While Ireland hovers on the brink of a bailout, Greece spells out yet more cuts and Portugal lurks in the wings of the euro-crisis drama, it takes a degree of chutzpah for a European institution to proclaim that "The world is in a super-cycle once again."
But, however gloomy it currently feels in the West, there is no denying that the world is going through "a period of historically high global growth," and if that should last for a generation or more, as this one seems set to do, then that would probably constitute a super-cycle in any economist’s book.
Standard Chartered is the bank that has just produced a hefty tome documenting the scope of this phenomenon. The reason why it feels able to produce such an upbeat study at a time when Europe is beset by difficulties is perhaps not unconnected with the fact that this is a bank that has deliberately concentrated its efforts elsewhere in the world. For unlike the previous two super-cycles which it describes—the first from 1870 to 1913 and the second from 1945 until 1973—the current one is led by Asia.
That fact will hardly be a cause for surprise, given the excitement already occasioned by the rise of the BRIC countries—Brazil, Russia, India and China. Nevertheless, the speed at which Standard Chartered sees this cycle racing is remarkable, for it believes that by 2020 China will have overtaken the U.S. as the world’s largest economy, significantly ahead of most projections.
This is not to underestimate the pace of progress in India: By 2030, the report estimates that Mumbai and Delhi will be established as two of the largest five global cities.
While the previous two super-cycles were restricted to the West, and the beneficiaries were a small proportion of the world population, this time round, the effects could benefit as many as 85% of the global populace. The good news for those currently contemplating the economic ills of their home territory is that the massive increase in world trade that is currently under way and set to gather steam should benefit the West.
Peter Sands, the Standard Chartered chief executive, recently returned from the business summit that ran alongside the G-20 meeting in Seoul, is optimistic about the potential benefits for some developed nations in this changing world balance. Over the 20 years to 2030, the report estimates that the 27 countries currently in the EU will average annual growth of 2.5%. China, however, is put at 6.9%, with India achieving 9.3%. Those rates will mean that the relative shares of global GDP change dramatically, with the EU almost halving, to 14% from 27%, India growing to 10% from 2% and China soaring to 24% from 9%.
The overall cake, however, will have grown and the best of the West should be able to take full advantage of the potential new opportunities. But Mr Sands’ message is that businesses that want to sell, particularly to China and to India, have to realize that "This isn’t a sprint. Relationships in these territories are built up over a long time."
That is particularly true for the financial sector. No wonder that Standard Chartered can look at the mushrooming demand for financial services in these regions and feel optimistic about the future. Prudential’s plan to buy AIG in Asia, aimed at capitalizing on just that market but thwarted by its investors, may yet be seen as one of the big lost opportunities for a U.K.-based business to enjoy the fruits of this super-cycle.
The dramatic change in the shape of the world by 2030 is illustrated in a graphic showing the growth in the middle class in the next 20 years. That of Asia Pacific expands to the extent that it way exceeds that of the rest of the world. Sheer scale of population becomes one of the main driving forces as education and innovation enable that work force to generate wealth.
There will be hiccups along the way. Although Mr Sands is confident that China’s growth will be genuine, not like the bubble-driven expansion that has characterized the past few years in the West, he accepts that growth on the scale now being experienced in Asia will "create froth" along the way. He believes, though, that the underlying growth will be solid and lasting.
While China will be the biggest beneficiary of this super-cycle, the potential benefits for parts of Africa are possibly being underestimated. China is, somewhat controversially, already gathering up vast tracts of the continent’s natural resources and Standard Chartered’s own profits from the region have been growing significantly over the past year. But while Nigeria and Mozambique, for instance, appear to have bright prospects, the social problems that still dog so much of the region will continue to limit growth.
Such drastic changes as there are set to be in the relative wealth of the world will bring problems. Mr Sands acknowledges that "Such a polarized growth dynamic creates quite a difficult political dynamic." Some of the language that has recently been heard on the subject of currency exchange rates may just be the early vestiges of that and cries for protectionism may get louder.
But the trend east is under way and has unstoppable momentum. The challenge for the West is to find the most effective means of benefitting from it. That means first putting in the groundwork, however painful, to strengthen their own economies while endeavouring to equip their businesses to compete for in these rapidly growing markets.
As the report points out, the literacy rate in China is now almost 100%, a boast that the U.K. would be hard-pressed to make with any confidence.
