"East is East and West is West"

Sydney M. Williams

Thought of the Day

“East is East and West is West”

April 28, 2011
In 1990, China’s GDP was less than 10% of the United States; in 2010, it was 40%. China reflects not only a rising Asia, but surging economies in the developing world. Between 1990 and 2007, China’s economic growth compounded at 13.3%; Vietnam’s at 15.1%; Macau and Cambodia at 11.5% and 11.3% respectively; Brazil’s growth compounded at 10.2% and Chile’s at 8.3%; Malaysia at 8.6%, South Korea at 7.9% and India at 6.8%. Even Russia, notwithstanding the problems the country has with its oligarchs, grew its economy during those years at 4.9%. In contrast (and as a warning to the U.S.,) Japan’s economy, the one “developed” nation in the region, compounded at 2.2% during those 17 years.

The developed countries in the West have not kept pace. The size of their economies is one reason – rapid growth from a small base is easier done than from a large base – but as important is the fact the state-controlled economies (mercantilist economies) in Asia have been more free-wheeling and more aggressive, with less regulation, than their counterparts in Europe and the U.S., countries where wealth transfers and social programs play bigger roles. With wealth come societal concerns and responsibilities about the poor and the environment. As productivity improves and hours spent working for the necessities of life diminish, it leaves more time for leisure activities. The U.S., between the years 1990-2007, grew its economy at a Compounded Annual Growth Rate (CAGR) of 5.3%; the UK at 6.2%, Germany at 4.3% and France at 4.0%.

In terms of per capita GDP growth between 1990 and 2007, China, with a CAGR of 12.37% ranked 4th out of 220 countries; in contrast, the U.S. ranked 123rd with a CAGR of 4.17%. On the other hand, China still has a long way to go in terms of per capita GDP. Based on data from the United Nations Statistics Division, GDP per capita in China, at the end of 2010, was $3,011 versus $45,047 in the United States.

Tuesday’s Financial Times had an article, referring to Latin America, with a misleading headline: “China is now Region’s Biggest Partner.” China’s trade with Latin America soared from $8 billion in 1999 to $130 billion in 2009 – a sixteen fold increase in ten years. Nevertheless, bilateral U.S. trade with the region was $489 billion (largely because of Mexico,) more than three and a half times that of China. However, China is now the largest trading partner of Brazil and Chile – two of the regions fastest growing economies. It is almost certainly a harbinger of things to come.

There has been much said and written about China overtaking the United States as the world’s largest economy. Barring an unforeseeable event, it seems inevitable. If China grows its economy over the next 15 years at a 10% CAGR and the U.S. does at 3% –discounts to both their historical rates – China will overtake the U.S. by 2025. Small changes in growth assumptions make for big differences in outcomes. For example, if the U.S. manages to grow its economy at 4% instead of 3% it would add another $4 trillion to U.S. GDP in 2025.

China is not without potential problems. Rapid growth and the high costs of commodities are causing inflation problems. The results of a national census, conducted last year, were released yesterday. It confirms that the population is rapidly aging – almost a guarantee that future growth will slow. The percent of the population over 60 increased three percentage points to 13.3% – within spitting distance of the United States at 17%. At the same time the percent of the population fourteen and younger declined from 22.9% to 16.6%. The ratio of old to young has risen from 45% to 80%. (In comparison, 22% of the U.S. population is under 18.)

With economic growth will come increasing responsibility to help maintain peace in the Pacific region – a function that has largely fallen to the U.S. Bad guys and bad countries have not been outlawed and Asia, as we know because of North Korea, is no different. China’s defense spending will increase and is necessary, but will not contribute to economic growth with the same multiplier that growing one’s industrial base does.

Countries, like companies, mature. They are born; they go through periods of robust adolescence and persistent growth. Countries and companies must continuously evolve; otherwise they grow old and die. Thirty-five years ago China had a rebirth. Its economic aggression is not unlike that of Apple thirty years ago taking on an aging IBM, or like Google or Facebook battling traditional media today. It is not so different from the hedge fund that fifteen or twenty years ago competed for assets against traditional mutual funds, or even like our firm, which competes in an arena against giant brokerage firms.

The United States must recognize that its twenty-odd years of unilateral hegemony are being challenged. We cannot (and should not) stop progress. But we should take up the challenge and begin competing more aggressively in the global world in which we live. As a mature and wealthy society, we have a responsibility to ensure that the elderly, poor and sick are taken care of. But to compete, we cannot lose sight of those traits that made this country great and rich: a government that inspires individual performance, encourages entrepreneurship, values education and welcomes immigrants.

Rudyard Kipling begins and ends his ballad, “The East and West,” with the following refrain, a refrain that hints at both risk and reward:

“But there is neither East nor West, border, nor breed, nor birth,

When two strong men stand face to face, tho’ they come from the ends of the earth.”

Over the next couple of decades, China’s growth will rise to match that of the United States. South Korea will persist in its growth. India, Indonesia and Vietnam will continue to emerge as developing nations. It will not be a smooth ascension. Inevitably, economies will fall into recession and possibly worse. If history is any guide, there will be clashes, but hopefully, with China assuming more responsibility and with a continued U.S. presence in the region, any military action will be limited. The internet and globalization have made the world smaller. Europe, if it can get its act together, would become a third area of economic power and influence. There are a lot of “ifs”, but the possibilities and the potential are there.