CONCLUSION
A BETTER WORLD
The first ten years of my post-BRIC life have been a composite of study, analysis, remarkable travels and an inquiring intellectual journey around our world. Perhaps I can sense a glimmer of how it felt for the early pioneers and explorers. I am in the middle of an exciting and very different course for our century, in my own field of global macroeconomics.
The first decade of this journey has revealed to me a story that is emerging and developing beyond my highest expectations. That journey has transformed my thinking—from my early forays into considering the potential for the four BRIC nations to today’s Growth Market world. The exciting prospects of these countries are good not just for them, but for us all. As we go through dramatic changes in the economic landscape, it is important for people to keep remembering this.
The anecdotes that I have recounted in earlier chapters will multiply: Indians paying high prices to go up in ski lifts in Switzerland in the summer; Chinese traders offering rewards to native Parisians to buy them Louis Vuitton bags; Tibetan street traders walking across high mountain ranges in the Himalayas using mobile telephones; Russian entrepreneurs developing some of the best global Internet businesses. Such stories will grow and grow.
In July 2011, in the middle of the mayhem of the sovereign debt crisis raging in Europe and the United States, one of the biggest news items that caught my attention was the earnings results from Apple. Revenues at the high-tech gadget darling had risen sixfold in the first three quarters of 2010–2011.
As desirable and must-have as Apple’s iPhones and iPads are in the West, their second-quarter earnings were much stronger than expected owing to their sales in China. Like many other traded consumer companies, Apple is opening more outlets in Shanghai and other rapidly expanding wealthy Chinese cities. I’ve heard that one of the Shanghai stores attracts even more visitors than the company’s famous glass cube on Fifth Avenue in New York. (Just after the results were published, it was even reported that some fake Chinese Apple stores were popping up—pictures of a shop in Kunming, a city in the southwest, appeared in the New York Times.) Who said that the United States can’t benefit from the growth of the BRIC world? I wonder whether Apple’s top executives still refer to China and those other nations driving world business as emerging, or whether they are joining the leadership at General Electric, who now also refer to them as Growth Markets.
For the overindebted, burdened nations of the West, selling goods to the rising Growth Markets is their future. Before this decade is over, I expect the dollar value of consumption in the BRIC economies to exceed that of the United States. Many of us in business and finance have grown up thinking that the U.S. consumer drives the world. By 2020, this notion will be a mere historical observation. The next decade will power the BRIC economies to be bigger than the United States, power the eight Growth Market nations to be nearly as big as the G7 and determine most Western multinationals’ global success or failure.
In the early, rocky years following the global credit crunch, it might seem to many in Europe and the United States that the Western economic model is broken, that life will never be the same again and that the BRICs are taking over at our expense. But my guess is that within a couple of years this depressing mood will lift. If the BRICs and N-11 achieve their goals, it will be good for the world, and good for us.
In fact, the financial crisis gave my colleagues and me the chance to check on the robustness of our BRIC and N-11 assumptions. We found that collectively these fifteen nations have emerged from the crisis in much better shape than the major Western economies. While most of the G7 economies have not seen their output return to precrisis levels, virtually all the BRIC and N-11 countries recovered any lost output quickly and easily. In fact, three years on from the crisis, it seems the shift in the balance of world growth leadership has been accelerated rather than hindered. This is a huge opportunity for the exporting sector of the developed economies, and presents the strongest opportunity for those economies most challenged to rebalance and restore health.
I now also passionately believe that if we can stop thinking about these rising economic giants as purely exotic emerging markets, it might help us to understand better the balance of risks and opportunities. And this is why I call the BRIC nations, plus Indonesia, South Korea, Mexico and Turkey, Growth Markets. It is not a marketing gimmick or a way to sell a new investment fund. It is a way to help all of us think more globally.
Some of the rest of the N-11 countries might also enjoy this status in the future: Egypt, Nigeria and even the Philippines. Those nations seem risky, mysterious and possibly too unpredictable for many investors right now. But for them to reach their dreams of economic success would be fantastic for us all. Just imagine how transformational a large and wealthy Nigeria could be for the whole of Africa.
It might be that changes in the investing world could help others beyond it. I’m so excited each time Indonesian and Nigerian policymakers ask me about Goldman’s latest growth environment scores. If we can help them to use such information to enable their vibrant populations to become wealthier, then I would be proud. Actually, the fiscal health of most of the Growth Market economies is an additional force: investors can help develop a virtuous circle that could reward those nations that are successfully improving their act.
As I watched the scary sovereign debt crisis swirl in the summer of 2011, I found myself reflecting on the original Maastricht Treaty governing the criteria for countries joining the European Monetary Union. The Maastricht Treaty was signed ahead of the EMU to ensure old-fashioned Bundesbank-style economic and financial discipline for all members. It stipulated that no member’s inflation rate should exceed that of the member with the lowest rate by more than 2 percent, that budget deficits should not exceed 3 percent or overall debt-to-GDP ratios 60 percent (or at least be heading that way). Based on data for the actual fiscal and debt positions as things stand at the summer of 2011, only Finland of the current EMU members satisfies those criteria. Even Germany, fond of criticizing the other strugglers, doesn’t quite make it on a rigid definition. In the unlikely event that other major developed nations should be judged on the same criteria, only Australia and Sweden and perhaps Canada come close. The EMU could be technically feasible for these four countries. The United Kingdom, the United States and, of course, Japan have an even worse debt position than the euro area average.
By contrast, most if not all of the Growth Market economies could satisfy the fiscal aspects of the Maastricht criteria, and all eight of them easily in terms of debt. Why then do we insist on calling them emerging markets? Their fiscal discipline is something that would make not only the German Bundesbank but also perhaps the old-style Swiss central bank proud. If you add this fiscal responsibility to their remarkable growth potential, I really think it seems very outdated to think of those countries as emerging. Bringing some of their currencies into the IMF’s currency basket, the SDR, and credible index creators such as Morgan Stanley and Standard & Poor’s, can probably help many (not just investors) think differently about these nations.
I also passionately believe that one basic trend of international economic theory holds true: overall, international trade is good for everyone. Yes, there are some losers, especially during the most challenging times of rapid adjustments, but not only theory but also evidence shows time and time again that we all benefit. Tens of millions of U.S. consumers benefited for years from the success of Walmart bringing to their customers dramatically cheaper consumer goods, which was largely due to their success in importing products from China. As time has passed and China raises the incomes, wages and wealth of its citizens, it is not so easy for Walmart to employ this same tactic. It has to move on, and it is. Today, in addition to trying to keep itself at the forefront of supplying its domestic market with cheap, affordable goods, Walmart is trying to expand significantly in the BRICs and beyond, with Brazil and South Africa as notable markets. This is similarly true for the UK’s leading retailer, Tesco.
Anyone who struggles to see the trade benefits of the BRICs story should spend some time with the executives of BMW, Bosch, Mercedes, Siemens and countless other German companies. Or perhaps the German trade statisticians. The chart showing the changing pattern of German exports since 2007 reproduced on page 115 is probably the most powerful single image I can think of depicting the scale of the change and opportunity facing us all. Today it is German exports; tomorrow it could be the UK and/or the United States. And not only in products. The China Daily recently carried an article about the setting up of a campus of Nottingham University in mainland China. The expansion of educational products and services could and should become a huge export opportunity for the West in both China and India.
The 2008 global credit crisis was the most frightening shock to me in my long financial career. We skirted perilously close to a prolonged and severe global economic slump, but our policymakers rescued us with bold and decisive action. The sluggish recovery in much of the West and rising unemployment are the remaining scars of that event, but I do find myself thinking that aspects of the crisis were not all bad. Raising the domestic U.S. savings rate, reducing the U.S. dependency on foreign capital and making others realize that they can’t depend on the U.S. consumer have to be positive developments.
Before its dramatic appearance and the crashing of the U.S. housing market, many, myself included, worried about the lack of a domestic household savings culture in the United States, the country’s seemingly never-endingly deteriorating external balance of payments and (on the flip side) China’s colossal export dependency on the United States. This has all changed. The United States is learning to save, it requires less foreign capital, its trade balance has improved slightly and China certainly is trying to move away from an export model.
There are those who worry that the United States is heading for fresh trouble, especially when China stops buying so many U.S. Treasury bonds, but this fear is overblown. It is only an outward sign of the worry that preoccupies the minds of the pessimists. If the United States increases its domestic savings rate, which has gone from 0.6 percent of income to around 5 percent since late 2008, it means that the country will need less overseas finance. To improve imports, the United States requires less foreign capital. In aggregate, the balance of payments will always equal zero; if the trade deficit declines, the capital inflow surplus will decline. The United States should indeed welcome less Chinese (and other) foreign buying of U.S. Treasuries, so long as its trade balance improves.
Despite all this, I can understand people’s anxiety. Change, especially for those with narrow or manual skills, is always demanding. It might often seem that things will never be the same again. When I was growing up in Manchester in the 1960s and 1970s, that city was often portrayed as never being able to recover from the loss of the cotton industry. The same was said about Leeds and its wool industry, as well as of Liverpool and Newcastle with their dependency on the sea and shipbuilding. Each of those cities still faces a variety of challenges, but life has moved on dramatically and in many ways they are thriving. Until the UK property market bubble burst in 2008, Leeds had arguably become the most buoyant major city outside London, a far cry from its historical roots. Even though Leeds has suffered in the fallout from the credit crunch, I am hopeful that something fresh will appear as that city finds its edge.
The world’s motor manufacturing industry often gets a lot of attention in the context of broader economic change, and it’s true to say that its fortunes are highly illustrative of the BRIC story. While the UK no longer has its own domestic industry, lots of foreign companies produce cars in Britain. When I traveled to meet clients and policymakers in Tokyo in June 2011, they told me that they thought the disruption to the supply chain from the tragic earthquake and tsunami in northern Japan would be felt all over the world; for instance, a Japanese company, Renesas, produces 40 percent of the world motor industry’s high-tech chips. Another policymaker predicted that the UK would probably see the largest negative consequences of the post-quake disruption. Sure enough, when the UK Office for National Statistics came to explain the UK’s disappointing 0.2 percent rise in real GDP in the second quarter of 2011, it cited the Japanese supply disruptions as one element hampering UK growth. The UK has some of the most productive plants of Honda, Nissan and Toyota.
Earlier in the book I gave several examples of how Germany sees direct benefits from the BRIC consumer appetite for its cars. BMW, Mercedes, Audi and Volkswagen all are experiencing dramatic growth in their sales to the BRICs, especially China. This destroys any myth that it is impossible for developed countries to maintain significant production and jobs in their own car industries.
This is something U.S. policymakers should ponder. Why is it that Germany, not a low-income country, can provide cars that the Chinese and Russians want to buy? Why is it that GM can only do the same by effectively turning itself into a Chinese company? It used to be said that what is good for General Motors is good for America. Maybe that is still true, and bodes well for the future of that company. If GM and Ford and Chrysler can produce what the rising wealthy Growth Markets’ consumers want to drive, then it will.
In 2009, I participated in a fascinating debate with, among others, Larry Summers, then director of Barack Obama’s National Economic Council. Larry kept talking about how, under the Democratic administration, life would be geared toward helping Joe from Flint, Michigan (home of General Motors), and he implied that policies might have to be introduced to influence world trade in order to achieve this goal. While I shared the implied view that the United States would need to produce more at home and export more to recover from the impending credit crisis, I took exception to the notion that world trade should be interfered with simply to help American autoworkers.
I provoked Larry into debate by suggesting that he might not personally be that familiar with many “Joes from Flint, Michigan,” but I was, because I grew up in a region where manufacturing industries had become obsolete. I cited the regenerated plants in northern England (Derby and Sunderland), where the Japanese now produce cars. If U.S. multinationals are to produce more manufacturing goods at home to satisfy foreign demand, then the right thing is for them to have the competitiveness and brand. German auto companies are demonstrating how it is done.
Of course, Larry is one of the smartest thinkers around, and he might be right. I appeared to be among the minority who believed President Obama’s goal to double exports over five years from early in 2010 was actually achievable, because of the demand in the BRICs and Growth Markets. I still do, despite the Boston Consulting Group’s recent prediction that within five years the United States will recover any lost manufacturing competitiveness to China.
This is an exciting story. It goes far beyond business and economics. We are in the early years of what is probably one of the biggest shifts of wealth and income disparity ever in history.
It irritates me when I hear and read endless distorted stories of how only a few benefit and increase their wealth from the fruits of globalization, to the detriment of the marginalized masses. Globalization may widen inequality within certain national borders, but on a global basis it has been a huge force for good, narrowing inequality among people on an unprecedented scale.
Tens of millions of people from the BRICs and beyond are being taken out of poverty by the growth of their economies. While it is easy to focus on the fact that China has created so many billionaires, it should not be forgotten that in the past fifteen or so years, 300 million or more Chinese have been lifted out of poverty. In India the lives of many tens of millions have been similarly improved, and perhaps 300 million or more will join them in the next decade or two. Brazil has seen many millions of its population join its middle class, and I have seen with my own eyes how one of the biggest favelas in Rio is now on the road to escaping destitution. Brazil has actually reduced its Gini coefficient, a widely used measure of inequality, indicating that the gap between its rich and poor is narrowing. We at Goldman Sachs estimate that 2 billion people are going to be brought into the global middle class between now and 2030 as the BRIC and N-11 economies develop. The same is beginning to happen in some of the most challenging parts of Africa, and while it is very early days, the uprisings in the Middle East suggest it could happen there too.
Rather than be worried by such developments, we should be both encouraged and hopeful. Vast swaths of mankind are having their chance to enjoy some of the fruits of wealth creation.
This is the big story.
I want to finish with a specific example that reinforces this point. Tales of corruption, inefficiency and waste in India are all too familiar, and yet here is just one of the many initiatives being implemented to bring about monumental change.
In mid-July 2011 I was visited by an inspiring man from Delhi, a senior figure for the Unique Identification Authority of India (UIDAI). The UIDAI initiative was created by the Planning Commission in 2010 to provide all of the country’s 1.2 billion people with their own unique twelve-digit identity number, a process that will bring them into the welfare services, allowing even those living in the most remote parts of India access to health care, education and banking facilities for the first time. The head of the software giant Infosys, one of India’s largest IT companies, has been seconded to implement the project.
The success of UIDAI would change the lives of hundreds of millions of Indians and their country. It could be genuinely transformational. It could also help in drastically reducing the role of the corrupt middlemen and getting rid of so much waste in the allocation of public resources by directly linking provider and consumer. The UIDAI people hope to be rolling out to 600 million Indians by 2014.
As he spoke, I found myself overcome with excitement for this project. If it is successful, then India may be a step closer to realizing the dream of economic growth that they have embraced from our own mere projections. This very singular but remarkable example typifies what the BRIC story has done for me. And what I hope it will do for all of you.