Tuesday, June 3, 2008

a new focus of economic development

2008 has indeed been unravelling much of what globalization had achieved this past decade. This unravelling is being accelerated by the twin forces of economic stagnation and runaway inflation.

The economic stagnation is propagated by the US economic slowdown. For all intents and purposes, globalization has been moved forward more than anything by American consumerism. For decades, the American consumer has fuelled the onward progress of global trade by buying and making a market for the products and services churned out by the world’s efficient production economies.

Now because of the current housing problem and credit crunch in the US, the American consumer is being pinched to the point of exhaustion- economic exhaustion. Previously easily available bank credit is now being rolled back by capital-hit banks and lenders, making consumers unable to fund new acquisitions, or worse, roll over existing debt. Consumers’ net worth and 401K are seriously hit, making the consumers feel a lot less richer, and a loss less prone to conspicuous consumption. The economic slowdown in the American economy is also creating a vicious cycle of less people willing and able to support a precarious economy with their purchases.

The recent run-up in inflation is also catching with what is left of the American consumer’s ability to spend. Inflation has hit the most basic of necessities – food, gas, heating, such that these purchases have been eating into discretionary income. Where before, discretionary income consisted a large bulk of the consumer’s income, nowadays, income for basic necessities has taken the lion’s share for most people.

So with the engine of global trade, the American consumer, severely handicapped, what is to be of the fledgling economic development efforts of the world’s developing countries, much of whom depend significantly on the continued growth of global trade?

Many are already experiencing the bitter reality of greatly decreased orders coming from the US market. And this decline in production orders is affecting not just the developing countries, but virtually all of America’s major trading partners.

For as long as the American consumer remained the principal source of growth for the rest of the world, there was to be no decoupling of the global economy from the American economy. In fact, now more than at any time in the world’ history, if America sneezes, the rest of the world will catch cold. The hardest hit will be the developing countries.

For decades, starting with Japan, and then with Asia’s economic tigers, and with the latest economic dragon, China, the principal strategy of economic development has been to run trading surpluses, and to use this surplus as the fuel for domestic economic growth. Running trading surpluses was such an effective and successful strategy that many countries simply relied on this as their principal source of continued development.

Running trade surpluses, by its very nature, means that countries need to sell more goods than they buy. Therefore, an effective trade surplus program couples an aggressive export growth program with a severely restricted importation policy and program.

Potential growth of consumption has been curtailed by economic disincentives to spending more. High tariffs on imported items and a national collective consciousness focused on ever greater savings, as opposed to growing consumer spending, has prevented many countries that have already achieved NIC (newly-industrialized country) status from shifting their growth strategy towards developing a robust domestic consumer economy.

This is how it's always been in much of the developing world. Years of economic growth may have resulted in constantly improving national accounts, but comparative advantage that comes from maintaining low wages, instead of true value creation, does not a vibrant domestic consumer economy make. So their continued growth have rested on the American consumer continuing to buy their excess production.

Hence, with the fallback in American spending, who is left to plug the gap in orders from these countries. Certainly, it hasn’t been the domestic consumer in these countries. To begin with, many industries in these NICs have been over-specialized and focused more on world-beating production efficiency. They have not been diverse enough, nor focused enough on consumer marketing and consumer R&D, to be able to effectively shift gears and focus on making a market for new and innovative nationally-produced products for their domestic economy.

In many ways, this situation is a result of a primary method whereby these NICs were able to beat other countries in terms of being the lowest-cost producers of many global products. They simply did not pay many of their employees sufficiently enough to be able to afford many modern luxuries enjoyed by the American consumer. Hence, while countries such as Thailand and Malaysia were world-beaters in producing apparel and electronics, their domestic consumers simply did not buy as many of these same goods as the American consumer did.

Not that I am advocating transforming domestic consumers of these NICs into the profligate consumers the Americans were. That would surely lead to the same economic mess that the American economy is currently mired in. But simply, many national economies, particularly, in Asia, may need to re-assess their portfolio of industries.

Many of their biggest companies are global suppliers of particular and specific products. There are not enough small and medium sized companies that achieve enough prominence to take up the slack in the economy if and when there is a significant downturn in the fortunes of these big global suppliers. There aren’t enough sufficiently large enough small companies focused on selling and making a market for an eclectic array of goods to the local consumers. After all, many of the products that are currently produced by these developing nation’s world-beating locally-based global suppliers started out as eclectic products produced by the headquarter companies that have now outsourced their manufacture to these same countries.

In short, many developing and NIC countries need to develop more local entrepreneurs who are focused on developing niche markets in the domestic economy. The goal of becoming the back-end supplier of finished goods for some other global company is now insufficient to guarantee continued economic prosperity. To maintain economic prosperity for all, countries need to diversify away from focusing on specific sectors, being the world supplier for these sectors, and into selling a greater array of products and services FOR DOMESTIC CONSUMERS. After all, if a company succeeds in creating a market for a product that the domestic consumer falls in love with, then there is great likelihood that these products will eventually find a niche market in the global economy as well.

Again, a national economic program that countries might find useful going forward is nurturing local entrepreneurs who know how to make a market for their products, not merely produce goods at lowest cost. A good training ground for these fledgling companies is the domestic economy, so governments need to put up measures to enable and encourage domestic consumers to support these fledgling companies.

In this new economic reality, the biggest advantages, naturally, will go to those companies fortunate enough to be located in countries with large domestic populations. Particularly populations with sufficient disposable income, and no existing heavy debt burden.

As much of the developed world retreats in terms of spending and growth, the world’s best investors are currently looking to China, India, Russia and Brazil as the biggest growth areas of the world, and the most profitable places to invest. It is no coincidence that these are large countries with sizable populations. The market potential of the domestic economies of each of these countries, alone by themselves, can be many times greater than many of the current developed countries.

Much smaller countries, therefore, may be better off forming large regional trading blocs with their closest neighbours. The European Union is the best model for this. If it were not for the increased growth potential of a much bigger European market, many companies located in any of the EU’s member countries may now be finding themselves in much direr circumstances. The much bigger home market in which to make a market for their products significantly offsets any reverse growth from the US market.

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