Posted by: michaeldavidpower | November 1, 2011

Advance Australia Fair!

“The farther back you can look, the farther forward you are likely to see.” So wrote Winston Churchill, thereby justifying the continuing value of history.
Given the tectonic shifts currently reshaping the world as we know it and the now repeatedly asked question of “What next?”, this is surely good advice.
What era then do today’s shifts in the global centre of economic gravity most resemble?
My answer would be the Age of Discovery from 1488 to 1500, when the West truly came to know about the Rest. In the late 15th Century, the West’s view of the world was a misty mix of Ptolemy’s Egypto-centric perspective and Marco Polo’s fantastical tales of Cathay.
Then in 1488, Bartholomew Diaz rounded Africa’s Cape of Good Hope and heralded an era of rapid change not unlike our own today.
In the 12 years to 1500, Europe’s outlook – and especially the perspective of European capital and the profit opportunities open to it – had been vastly expanded thanks to Cabot’s 1497 rediscovery of the route to Newfoundland had opened the way to North America, da Gama’s 1498 voyage had defined the shape of Africa and opened the sea-route to India and to Asia beyond and Cabral’s ‘accidental’ landing at Monte Pascoal had added South America to Europe’s world view.
Such was the volume of trade that grew out of Europe’s Age of Discovery that it helped redefine capitalism itself: within a century the first multinational company, the British East India, was formed, as was the first joint stock company, the Dutch East India. By 1602, the first stock exchange was established in Amsterdam.
Whilst it would still take some 350 years for a European economy, the United Kingdom, to eclipse that of China in size, the swing from East to West had invariably begun.
Of the many reasons cited as being behind Europe’s greatest ever coming out party, the urgent need for sea-born access to the riches of the Indies – most especially to a steady flow of spice that was not taxed multiple times on its overland passage to Europe – was arguably the most important. Post 1450, Europe was finding it increasingly difficult to store enough food for winter to feed its fast expanding population. Spice was the magic dust that could preserve food or at least disguise the smell of food that was off but still edible!
Running out of the capacity to support itself from home-grown sources was also the driving force behind China’s post-2000 coming out party, though China calls their Age of Discovery ‘zou chuqu zhan lue’ or ‘going out strategy’. And, of course, in the post industrial era, China’s resource needs now include both hard and soft commodities.
China in 2000 was broadly the equivalent of Europe in 1500: an economic imperative drove both abroad to seek out their resource-rich New Worlds. If Europe’s New World then was Africa, the Americas and Asia, China’s New World today is effectively the same only the now also resource-short United States would be replaced by now ‘on-the-map’ Australia and New Zealand.
The massive consequences for China’s growing appetite for imported resources are only now starting to be glimpsed. Commodity prices are rising, albeit following a saw-tooth pattern as the tug-of-war of demand elasticities, East versus West, sees the Western hold periodically slipping and causing prices to fall-back to a level where the battle can again resume. Overtime, the East’s appetite is inexorably gaining ground on the West’s as the relatively stronger economic health of the savings-rich and younger Orient gradually contains demand in the economically weaker, debt-ridden and aging Occident.
Price patterns are becoming confused: when determining their price of oil, the US look to the West Texas Intermediate benchmark whereas Asia looks at, increasingly, Malaysia’s Tapis: a $20/barrel differential has opened up between the two with, unsurprisingly, Asia willing to pay the higher price. The same pattern is evident in the price of tin. The positive Asian differential is now resulting in London Metal Exchange stocks being physically transferred to the Shanghai Metal Exchange.
The dynamics behind the copper trade in Shanghai are similarly far more bullish than they are in London. Such two-tier price structures are rarely sustained for long but they do illustrate the origin of the world’s most important ‘giant sucking sound’ when it comes to commodities: it is coming out of Asia and especially China.
Meanwhile a new order of corporate giants is emerging as a consequence of China’s New World: BHP-Billiton or more precisely China’s Minmetals and India’s Vedanta are the East India Companies of our age. (Since 2004, Chinese listed mining companies have increased from 8 to 33; their combined enterprise value has risen from $19bn to $320bn.)
A new national order is also emerging in this New World. Following Churchill’s advice and again looking back at 1900 when the United States and Europe were mid-industrialization, the richest countries on the planet (in GDP per capita terms) were half a world away from the centre of this industrial action: New Zealand led 1900’s ranking and Australia was 2nd; Argentina was 7th. In 2011, the accolade of the world’s richest country in GDP capita terms belongs to gas-rich Qatar, a country which has also led the GDP growth stakes since 2000.
Indeed of the 27 countries to have achieved a compound annual growth rate of GDP in excess of 6% since 2000, 21 were resource-rich; of the top 15, only China and India were not resource-rich. This year’s top 5, according to The Economist, are all likely to be resource-rich: Qatar, Ghana, Mongolia, Eritrea and Ethiopia.
The period of 1865 to 1914 – when the United States and Europe industrialised – also suggests the economic rise of China and its Asian hinterland will not happen without periodic hiccoughs. The United States experienced seven recessions in its 1865-1914 heyday, some of which, like the Panic of 1893, were severe. But with hindsight, they proved to be short-lived suggesting that young economies, as with young human beings, tend to recover quickly from knock downs whereas older economies, like aging Japan and now the US and Europe, do not. Youthful East Asia’s swift rebound from their 1997 crisis adds further weight to this thesis.
Since 2000, the world has echoed the era following 1488 and started to change rapidly only this time with the East in the ascendance not the West. By 2050 “the world as we know it” could be almost unrecognizable: Citibank even sees India as the world’s largest economy, not China, with the latter’s reign at the top lasting only 30 years, beginning with its surpassing of the US around 2020.
Given that not one but two Asian Leviathans will come out over the next 40 years, resource producing nations are indeed the Indies of our age. And, notwithstanding growing pains in the form of periodic commodity price pull-backs, the coming era could well represent the best years of the economic lives of those ‘Spice Islands’ that constitute the New ‘New World’.
Reflecting on current market conditions, the Arab proverb reminds us that “The dogs bark, but the caravan moves on”. Keep going, Australia: your Golden Age is yet to come.


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