I was recently asked an intelligent question by an intelligent person: Why and how did China and India transform themselves from being basket cases to investment cases?
The Why is easy – to improve the lives of their people.
Economists will tell you that there is no easy or single answer to the How. True, but we know do know enough now to generalise and come up with an answer that is shorter than the Bible.
My answer would be as follows:
China especially got all its demographic ducks in a row, started generating surpluses (critically of domestic savings, but supplemented by external surpluses) and then used those surpluses to invest in the growth that sparked economic take-off! Critically this process was supported by a government that “got it” by underwriting the whole process with appropriate infrastructure spend, literally building the runways for that take-off in growth. Critically in China’s case, many of these run-ways supported the export sector.
Economists will tell you that there are plenty of other “nice-to-haves” that can help this take-off process: an increasing commitment to education, basic property rights and some sort of private sector for example. But as China has shown to great effect, these do not need to be fully-fledged pre-conditions for take-off to happen.
India is now beginning to emulate China in many ways though as yet it falls short on the external surplus (domestic savings are however up to a very respectable 35% of income) and a commitment to improve infrastructure (this latter constraint looks like being eased under the new more far-sighted Congress government).
The take-off cocktail therefore mixes a young, numerous, prepared-to-work-hard, competitively priced workforce with significant savings that can fund high investment and so generate high economic growth. A virtuous circle is then born and becomes self reinforcing as that young, numerous, prepared-to-work-hard, competitively priced workforce having initially been a producer gradually becomes a consumer thereby giving rise to the real rocket fuel of any take-off: the emergence of a middle class.
South Africa has a long way to go to achieve such a virtuous circle of growth. Three things stand out above all – it is a society that emulates the US and the UK far too much and so is more driven by consumption than production. Resultantly, it has little pre-disposition towards saving either internally or externally (the latter implies the Rand is overvalued given the purpose at hand: to generate surpluses that become savings to fund investments). Secondly, its workforce is not competitively priced in global terms i.e. when comparing wages in like-for-like export-oriented industries elsewhere in the world and especially Asia (this again implies the Rand is overvalued). Thirdly – World Cup 2010 aside – the Government’s infrastructure spend has not been directed at building ‘runways’ that support the export sector.
What I learned in Latin America is that Brazil, Chile, Peru and Colombia are starting to ‘get it’ even if the ‘locos’ (crazies) who run Venezuela, Ecuador, Bolivia and (sadly) Argentina are not. Indeed in Brazil and Peru are even allowing the likes of the Chinese to fund and build that export-oriented infrastructure for them.
This has led me to realise the essence of what is making the good guys prosper and the bad guys flounder in Latin America – those countries that recognise and are developing the needs of their countryside even ahead of that of their towns (in other words promoting their agricultural and mining strengths) are doing better than those countries that are pandering overwhelmingly to the towns. Nowhere is this more clear than in Argentina where politics has degenerated into a slanging match between subsidized 18 million strong greater Buenos Aires and the more agriculturally oriented rest of the country.