Why the continued progress of today’s new economic stars will all be down to policy
High up, in one of Dubai’s glassy skyscrapers, a formerly London-based banker was explaining to me why he chose to move to the emirate. “It’s obvious and simple,” he said, “Shanghai, Mumbai, Dubai, or Goodbye.”
Cute catch phrase, I thought, but I got his point. Something historic had been happening to the global economy over the past generation – something that made it “obvious” for this London banker to move to Dubai. In 25 years, a geo-economic transformation has taken place: the rise of Asia and of emerging markets in general. Twenty five years ago, nobody would have said “Shanghai, Mumbai, Dubai or goodbye.” Twenty five years ago, bricks were what you used to build houses, not the leading growth economies of the world, coined by Goldman Sachs’ Chief Economist Jim O’Neill, the “Brics” – Brazil, Russia, India, China, and now South Africa.
Policy is an even more powerful determinant of a nation’s future than demography or geography
Twenty five years ago, AAA meant only the highest credit rating, and most AAA countries were in the West. Today, the “new AAAs” are the growth drivers of the world – Africa, Asia and the Americas.
Twenty five years ago, if you talked about the Silk Road, you were most likely an academic referring to the ancient trade routes linking China to the Mediterranean. Today, people speak of the New Silk Road of trade between the Middle East and Asia and the super-charged trade between and among emerging markets in the so-called global South.
Twenty five years ago, if you looked at the global GDP pie, the economic output produced by emerging markets would be a thin slice – about 15 per cent. Today that pie is evenly distributed – 50 per cent of global output from emerging markets, 50 per cent from so-called advanced industrialised economies.
Twenty five years ago, you could ignore emerging markets and still have a global business. Not anymore. Meanwhile, the share of that pie will continue to grow and tilt towards emerging markets. Why? What happened? Three things happened:
• Many emerging markets got their house in order. They developed sound macro economic policies and a regulatory environment that favours the private sector, abandoning inefficient command and control economies in favour of hybrid market economies with massive government investment in infrastructure and room for private sector growth.
• Globalisation happened. Globalisation is the increasing interconnectedness of everything on the planet: goods; capital; services; ideas. As the planet got flatter, the emerging world had new opportunities to sell its goods, attract investment, draw talent, and educate its populations.
• Population happened. Today, 75 per cent of the world’s population lives in Asia or Africa. For years, these so-called emerging markets were underperforming economies with growing populations. The economies began to catch up with the population, and in turn, these large populations drove economic growth.
Geography, it is often said, is destiny. Demography, others argue, is the new geography. In reality, policy is destiny. Countries with large, young populations have both a demographic gift and a demographic burden. They can channel the productive power of a huge population towards innovation and economic dynamism, or be pulled down by the weight of a population in need of services and jobs. The key difference will be the policies enacted by the government.
By moving towards a market economy in 1979, China has lifted 300 million people out of poverty and become a global economic behemoth. Policy changed China and, thus, the world. Policy, too, will determine the winners of the New AAA. Every year, 80 million children are born in our world – the majority from Asia or Africa. Sub-Saharan Africa’s population could double – even triple – in the next 40 years.
The difference between boom and bust, between unleashing the potential of the AAA and stagnation and underperformance, will be simple: policy. Governments that create enabling environments for trade, investment and entrepreneurialism through sound regulatory policies and investment in infrastructure will be the new AAA winners.
All one needs to do is look at small, economically dynamic city-states like Singapore, Hong Kong or Dubai to see the value of this simple proposition. It may not make for a cute catch phrase, but the reality is that policy is an even more powerful determinant of a nation’s future than demography or geography.