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World economic power shifting back to Asia from the West

Nov 28, 2010 9:38:36 AM- transcurrents.com

by Ranil Wickremesinghe

By the 4th century BC, Asia had begun its first cycle of economic growth and power. This was the reason why Alexander the Great decided to travel eastward to establish an empire. At that time there was nothing worthwhile to the west of Greece. On the othr hand, to the east of Greece was Persia, and beyond were rich kingdoms in India and China. A Roman Emperor once complained Rome had to import all its luxuries from India and China; but had nothing to offer these Asian countries. Until the 1820s, Asia was responsible for 60% to 75% of the world’s GDP.

Asia is not a continent that can be brought together like the European Union. Historically, culturally and climatically we fall into five distinct categories: East Asia, Indo-China, Central Asia, West Asia and the Indian Ocean region. In the past these regions were all integrated by the Silk Route. This is why I have titled this speech ‘The Return of the Asians’ - because contrary to common opinion what we are witnessing today is not the rise of Asia but the return of Asian countries to recapture the global economy.

The first cycle of Asian dominance was crushed by the rampant forces of European colonialism, and by the Industrial Revolution which led European manufacturers to look to Asian markets for their goods. Thereafter, for the greater part of the 19th and 20th centuries, Asia was turned into captive markets for European industry.

No Asian country, other than Japan benefited from the Industrial Revolution. As a result by 1940, Asia accounted for only 20% of the world’s GDP. In a reversal of fortunes the affluent western consumers of the seventies enabled Japan and the four Asian Tiger economies, South Korea, Singapore, Malaysia and Taiwan to emerge as low-wage manufacturing bases for consumer goods. The story of the return of the Asians begins here.

The next phase was in 1979; the year which ushered in the Thatcherite revolution. I remember listening to Mrs. Thatcher at the Commonwealth summit of 1979 explaining to us her policies for promoting economic competitiveness. That same year Jiang Zemin - the successor to Deng - visited Singapore and Sri Lanka to study our free trade zones. This was the start of the migration of industries to China.

Thereafter, China became the workshop of the world. China, which barely produced a few thousand air conditioners in 1978, today, manufactures nearly 50 million air conditioners, half of the world’s microwave ovens, 1/3 of its television sets, 70% of its toys and 60% of its bicycles are manufactured in China. Chinese exports in 2005 were 1.15 trillion US$.

Today, as much as China is the centre of global manufacturing, India has become the international hub for global service industries. India’s IT and outsourcing exports amount to over 40 billion US$. The economic resurgence of China and India has also made way for the emergence of Thailand, Indonesia, Pakistan and Vietnam as manufacturing bases.

This shift of world economic power from the west back to Asia is highlighted in the Asian Development Bank Key Indicators (for Asia and the Pacific) for 2010.

Today, the Asia Pacific accounts for 36% of the world economy. Europe comes second, and North America, third. Within Asia over 65% of the GDP comes from three countries - China, India and Japan. It is predicted that Asia will be the main driver of global growth over the next two decades with a newly emerging Asian middle class of nearly 1.5 billion. Since 1980, 400 million Chinese people have transcended poverty lines. By 2030 the Chinese middle class is expected to exceed 600 million. In numbers - this will be the largest middle class in the world; and the world’s third largest consumer market. India will be the fifth largest in the world with 520 million consumers. It is this demographic transformation of 1.5 billion Asian consumers which will fuel global economic growth.

This trend has been evident from my visits to India during the last two years; as there is a channelling of new products specifically aimed at the Indian domestic market on the part of Indian entrepreneurs. The best example of this is the Nano-car or the one-lakh car that targets the lower middle class – the Indian version of the model T Ford. This is what I call the return of the Asians. The Asia of 2050 will be similar to the Asia of the mid 17th Century which dominated the world in total wealth – what we call the GDP today – despite the fact that some of the European countries had a higher per capita GDP. Similarly, in 2050, most of Asia will be middle income economies while the west will constitute high income economies.

However, the return of the Asians will not be an automatic phenomenon. Nor can it be allowed to be confined to economic growth only. The success of the region depends on correct political decisions and appropriate action being taken by governments and civil society – if it is not to be a flash in the pan. In the remaining half of my speech I propose to speak on the key issues that will require our attention in the years to come.
At one time the regions of the Indian Ocean were the richest in the world – even richer than East Asia. This was the reason that compelled Elizabeth I of England to send an Ambassador to the Court of the Mogul Emperor Akbar the Great in the 16th century. The wealth of Nizam of Hyderabad in the 19th Century (valued according to the present day) would be 200 billion dollars, four times the wealth of Bill Gates.

Once the sailors had mastered the Asian monsoons, the merchants wove a web of trade across the seas. It was a maritime crossroads bringing together traders from the Mediterranean, Arabia, South Asia and China. The kingdoms of South India, Sri Lanka and Sri Wijaya rose to prominence due to two reasons, due to merchandise exports, and as a centre for trans-shipment from East to West.

By 2030, not only will India become the world’s third largest economy, it will also be the world’s fastest growing major economy. Indonesia – the successor to Sri Wijaya, will become the fifth largest economy – overtaking Russia. By then the combined GDP of India and Indonesia will be US dollars 39 trillion – the same as the predictions for the US during this time. Add to this, the fast growing economies of Pakistan, Bangladesh, Malaysia, Tanzania, Mozambique and Uganda on the one hand together with the Gulf oil economies, Singapore, Brunei, Iran, Myanmar, South Africa, Kenya and Australia and you have a cocktail of rapid growth.

Unlike East Asia and the Pacific which has APEC (Asia Pacific Economic Cooperation), the Indian Ocean has no regional mechanism for trade and economic cooperation. Indian Ocean Rim Association for Regional Cooperation (IORARC) is a non-starter. One reason for this is the predicted increase in its population by an additional 500 M. by 2050. Furthermore, the lower income levels of the Indian Ocean - compared to East Asia - gives a natural advantage to Indian enterprises who have already commenced designing low price products and services to reach the lower income rural consumers. The ADB calls this ‘frugal innovations’; and foretells its prospects of reaching the east African coasts, creating new trade linkages.

It is time that SAARC, ASEAN, OAU, and the Commonwealth which has 19 members in this region initiate discussions to seriously consider this new alignment of trading nations; and create a formal mechanism to bring together the three continents – Africa, Asia and Australia which border the Indian Ocean. Those of you who are part of civil society can make people to people contact within this region and thereby complement regional level economic cooperation. Rotary International should take the lead in bridging the continents of the Indian Ocean.

The return of the Asians will not be without adverse effects and strains on the region; particularly on the demand for global energy and food. Finding an appropriate food – energy – water nexus is an immense challenge. For example, by 2025, the world oil consumption will increase to 120 million barrels, 80 per cent of which will be to supply the demands of the Asian economies. Since the bulk of these oil supplies have to pass through the Straits of Malacca and Straits of Hormuz Asia’s strategic importance will be tremendous. 50,000 ships pass annually through the Straits of Malacca which is only 2.5 kilo metres wide at its narrowest point; and the Straits of Hormuz (between Iran and Oman) through which the Gulf oil passes is only 89 kilo metres wide. The vulnerability of these straits to terrorist attack is of grave concern to economic and military planners.

The surge in economic growth has led to the swell in the demand for other commodities and minerals - such as uranium, iron, and coal. In 2009 alone, China accounted for 39% of the world consumption of aluminium, copper, iron and nickel. Thus resource rich countries will be the natural beneficiaries; and as the demand for energy and minerals keep augmenting many poor countries in Africa and Latin America will also develop alongside Asia.

The global food balance will be determined by Asia’s economic and population growth. There will be additional numbers to feed. Asia will dominate both demand and supply. Two things are certain by mid century: much higher food prices and a greater stress and strain on the already limited water resources. We are already aware of the intensifying problem of water scarcity - since the availability of per capita water is limited in the West, South, and South East Asia. The Indian Network of Climate Change Assessment (INCC) says that India could get warmer by 2 degrees Celsius by 2030 - leading to changes in rainfall patterns, and vulnerability to more severe floods, droughts and other natural disasters.

Already, periodic floods hit South and South East Asia; cyclic droughts have intensified due to widespread weather changes; while rising sea levels continue to threaten both the Maldives and the Mekong Delta.

North China including Beijing and the Hai River basin have experienced wells and rivers drying up, and groundwater levels falling two metres per year. While all Asian countries need to take heed of these predictions, the regional giants of China and India have a singular responsibility to safeguard the climate security of the region; as in the long run it will be the energy, de-carbonization and the emission targets of China and India that will determine the success or failure of this effort. This is why many of us were disappointed with the stand taken by India and China at the Copenhagen summit of last year.

On the other hand, Japan has shown the region how to tackle climate change – as the Japanese have achieved an appropriate balance of meeting demand and de-carbonizing. The media and civil societies in many of our countries have taken the lead in creating awareness of climate change. The time has come to exert greater pressure on governments to ensure that the impulse for economic growth does not compromise on other imperatives.

When I visited India last week, my Indian friends jokingly referred to their country as the Scam Raj. This was in reference to the two big corruption scandals dominating local news. One is the 2G spectrum issue where the Indian government’s loss of revenue in the allocation of telecom spectrums is deemed to be Rs. 176,379 Crores (US$ 38.6 billion). This comes two months after another scandal where Rs. 7,000 Crores (US$ 1.5 billion) were alleged to have been misappropriated during the Commonwealth Games. Being an open society, the Indians are able to discuss these corruption scandals freely, while the Indian media is able to report their views fearlessly. Unfortunately, this is not so in many of our countries.

Yet, the challenge of human greed - corruption - is not limited to India. Corruption is also unchecked in China where Party cadre and bureaucrats make so much money that it is today called ‘a predatory state’.

The following doggerel by Chinese peasants from The Blue Book:

Seven hands, eight hands, everybody extends hands to the peasants
You collect, I collect, he collects, and peasants are distraught;
You solicit, I solicit, he solicits, and peasants are upset.
Demand grain, demand money, and demand life;
Guard against fire, guard against theft, and guard against cadres.

In my own country, political power has become the quickest avenue to amass wealth. On the other hand, in many Asian countries there is a new development; that of the countries’ leading business enterprises seeking to capture political power. In this context, civil society needs to take its responsibilities more seriously; and become more strident and effective in demanding the right to information laws and their strict enforcement by Parliament. Corruption touches all of us as it delays, detracts and destroys human development and promotes inequity.

This brings me to the next critical side-effect of the current economic system of growth – social inequity. We are all aware of marked income disparities between the industrial urban areas and the backward rural areas; the large pockets of poor migrant workers living in slums in big cities, the poverty of female-headed households, the neglect of street children, and those who have regressed into poverty due to the global economic recession.

After decades of ineffective welfare and poverty alleviation schemes and scams, how should Asia address this issue so that it can make a real difference in the lives of people? One example can be from the Grameen Bank in Bangladesh. Though micro-credit shemes sometimes take a generation or so to bear fruit, the GrammenPhone empowered the poor in Bangladesh to purchase cellular phones. This sparked a revolution as people utilized cellular phones in their daily life and business to become more productive. A case in point is the Philippines. In the 1980s the Philippines government offered low-interest housing loans to the poor – well below the market rates.

While on the surface the programme seemed to be a success, a World Bank evaluation found it had been hijacked by the rich and middle-income households - with only 21 per cent of the beneficiaries being from the poor. Meeting the aspirations and frustrations, hope and despair of the poor in Asia remain a massive challenge particularly as recent reductions in government spending have affected health and education services - the two sectors the poor have always been able to access. Thus it is doubtful that many Asian countries will reach the targets set by the Millennium Development Goals.

There is a common stereotype in the West that Asians are submissive animals due to our past histories; a myth that Asia will accept the inequalities that have arisen due to market predominance. I seriously doubt this as being the case.

Already, there are social protests taking place in China, the growth of the Naxalite movement in India and the Maoists in Nepal. Moreover, we in Asia have shown our opposition to inequality in alternative ways for thousands of years. The spread of Buddhism in India, the dispersion of Theravada Buddhism in South East Asia, the expansion of Islam in both these regions were basic responses to social and economic inequalities existing at that time.

Today, however, in the midst of a system that has resulted in sharp divisions in wealth we need a remedy that will satisfy the basic needs of the underprivileged. There is no other way than for the winners to look after the losers and the marginalized. In other words, the Asians have to take the leadership in ensuring that socio-economic systems are in place that can take care of those in need. Examples can be found in the Nordic countries and the Japanese who have developed such fallback systems to care for the sick, the homeless, the poor and the disabled.

This is imperative, especially that the IMF has failed us – first in the Asian crisis of the late 1990s and then in the global economic meltdown of the last couple of years. The bottom line then - a system in which the market punishes the poor and the middle class for mistakes they are not responsible for and rewards the wrongdoers is abominable.

The G20 – the self-appointed global leadership committee has so far not advocated reforms. Nor have the Asian leaders within the G20 displayed any boldness in suggesting reforms; rather they have merely perpetuated the existing system of inequity. In contrast, the German Chancellor, Angela Merkel has shown singular courage when she stated last Tuesday ‘that the primacy of politics over the markets should be enforced’. The need of the hour is not the additional voting power in the IMF that seems to be the focus of the G20 but far-reaching restructuring of the global financial architecture.

The time has come for Asian leaders to capitalize on the shift in global political power that accompanies the shift in global economic power so as to wrest control of our future. Today, as we face the promise of an Asian resurgence we cannot afford to ignore the warning signs of inequity and social dissent, environmental degradation and depleting resources.

Kishore Mahbubani in his book The New Asian Hemisphere, refers to a remark by Larry Summers that during the Industrial Revolution living standards in Europe improved by 50% in one life time. The super cycle boom driven by Asia will increase our living standards not by 50%, nor by 100%, but by a 100 fold - in one life time. If this occurs, then the return of the Asians will indeed be one of the biggest revolutions in history.

(Speech made by Ranil Wickremesinghe - leader of the opposition, Sri Lanka at the Rotary International South Asia conference in Bangkok on November 27th 2010)