It is really easy to compare growth rates of emerging and developed markets and the developed markets feel inferior. But imagine this practical example: a toddler could say to a teenager, “Percentagewise, I am growing faster than you.” The teenager would respond, “Percentagewise? You don’t know what it means, kid, and I am growing faster than you inch-by-inch. Your day will come, kid, but cool your jets for now.”
So it is for the developed versus emerging markets, with the premier matchup being the US versus China. There is an undeserved inferiority complex in the US over China at present. China has a lot of people, but the US is far more productive per person. The Chinese may have a variety of show projects that evidence technical brilliance in copying Western technology, but it is all a thin veneer over a society that is much poorer, particularly in rural areas.
The concentration of power in the hands of the Chinese government makes everything look more impressive, but it also distorts the reality, because investments flow into GDP whether they are good investments or not. GDP can grow very rapidly, and be an illusion, because productive capacity can be built up in areas no one wants, like Japan in the late 1980s. Remember how bright Japanese bureaucrats were relative to US businessmen? After 20 years of decline with no end in sight, we should be able to lay to rest the idea that state capitalism is effective. After all, the Japanese are considerably more productive than the Chinese. If Japan couldn’t do it, why should we think that China can?
Yes, the emerging markets will grow as a percentage of global “GDP”. But there are a lot of structural changes that have to occur before they can become even close to the productivity of the developed nations, particularly the US.
What’s that you say? The US owes China, not vice-versa. True enough, but China will get paid back in cheaper dollars, one way or another. Their neo-mercantilism will fail as it did for the mercantilists. Those that try to force the world to do their bidding, like China, tend to lose. The US will find a wayto give China the short end of the stick — possession is nine-tenths of the law, and the debts are denominated in US dollars. China will get back less than they gave, which is their reward for forced industrialization. Add to that forcing their banks to lend in dodgy situations, and industrialization that misestimates global demand.
Now, the author’s book is far more polished and nuanced than my screed here. It is a very readable 340 pages of text, with few graphs, from which I learned a lot.
The main point is that the development of soft institutions that allow for greater societal flexibility and growth are no small things. The willingness to give people freedom to develop their businesses as they like is no small freedom. Property rights are a major part of human rights. The emerging markets, particularly China, don’t have that yet. As the Third Way failed, and Japan, Inc. failed, so will China, unless it allows for freedom, but that will require cultural change that would eliminate the dominance of the Communist Party; can’t see that happening soon.
Who would benefit from this book:
Almost any investor would benefit from this book. Those that think the US or the West are being out-competed, and will lose to the Chinese, will benefit from this book. Everyone should read this book.
If you want to, you can buy it here: Uprising: Will Emerging Markets Shape or Shake the World Economy.
Full disclosure: This book was sent to me, because I asked for it, after the publishers offered me a copy.
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