2010 - a year of growth

Whilst most of the world as we know it has been wading through the gloom of economic recession and unconvincing upturn, the world as we should see it has been behaving rather differently. Global output rose by 5% in 2010 in PPP terms (3.9% in market exchange terms) after falls in 2009.  How can this be?

Well it is simply that the balance of power in the world economy is shifting, with Asia in particular growing rapidly whilst the US, Japan and Europe struggle albeit from a wealthy starting point.  Indeed, in an article in today's FT by Martin Wolf he also points out that Brazil, China and India have grown more rapidly than the US, Japan, UK and Eurozone countries since 2005, and that this shift is further emphasized by the proportion of world GDP in the "advanced" countries falling from 63% in 2000 to 56% in 2007 and 53% in 2010, with projections of 50% in 2013.

If ever one wanted empirical evidence of the changes now occurring in the world economy, then this must surely be it.

The Euro Crisis

The running story of the year has been the crisis in the Euro Zone.  Greece was the first to run into trouble, undermined by the lies and corruption of previous Governments and bailed out to avoid the contagion spreading to others.  Now Ireland is in trouble, despite having E20bn to deal with its crisis, the markets have decided that Ireland's position is untenable.  Unfortunately the Irish Government stepped in during the early stages of the economic crisis and guaranteed their Banks debts.  At the time I assumed this meant that they guaranteed the deposits of the account holders but now I realize that they guarantees ALL of the Banks' debts.  So the Bond holders knew there was no risk and that they would get their money back as the State stood behind every debt. Then it became apparent that the State could not meet all of those obligations without help and suddenly Ireland was in trouble again.

The neighbours have rallied around and seek to assist Ireland in staying afloat but voices outside of Dublin are starting to question the price to be paid.  It is not yet clear if the Government can survive, nor is it clear to me if Ireland might be better served by defaulting on its debts and letting the Bond holders take a lot of the pain.  After years of fighting for independence, Ireland now finds itself giving up that freedom to institutions and it is not yet clear whether the Irish people will stand for this.

Even more confusion will now arise as the markets turn their attention to the next areas of concern.  There are some who always thought that the Euro was an implausible project as a currency not linked to economic fundamentals would end in tears, and they are certainly making a point now.  However, it is the fundamentals and not speculation that continues to fan the flames.  Where next, Portugal?

The Portuguese claim their Banks are sound but they have been unable to borrow on the open markets for some months and so rely on the European Central Bank for around E40bn per month to keep going.  A bail out for Portugal might not be far away. 

Spain?  Certainly Spain has also had some problems but the Banks are sound and the level of debt for the economy is not large.  Italy? Debt is huge compared to the economy and might suffer yet.  Surprisingly Belgium comes up in these thoughts, as market rates have climbed on worries about the Belgian levels of debt and the ability to service these debts.  When coupled to political concerns there are even persistent rumours that Belgium might not survive as an entity.

The critical question is not so much about the next weak link in the Euro chain but more about how long Germany can continue to bail out other economies before the price at home exceeds the willingness to pay.  It is Germany that will ultimately call time on the Euro experiment and Angela Merkel is already hinting that the markets will need to bear some of Ireland's pain, perhaps an indication that Germany's appetite for this fight has a limit.  If the contagion aflicts Spain or Italy then the numbers involved are so much larger that it is difficult to see the Euro surviving.  At that point, what happens next?

Future Gazing

On my Oprel Blog (see http://www.oprel.co/blog/) I was commenting on the way the world might be in 25 years time.  Some of the thoughts on this were not really relevant to the business blog so I thought I would include more on this topic here.

It is clear that on current trends we will see a massive move of economic power as China overtakes the US as the world's largest economy, with India and the rest of the BRICS also growing rapidly.  This implies that world institutions will need to change to reflect this shift in power and some countries will find this uncomfortable.  The UK, France and Germany will find their individual powers diminished and so collective approaches will be vital if they are to have a continuing influence on world economic affairs.

The USA might find the adjustment most difficult.  It is difficult to see what effect a decline in economic power might have on the US psyche, but it will undoubtedly find it more difficult to use that power to obtain political outcomes.  Perhaps more worrying is that history teaches us that as empires decline from a position of dominance they are more liable to use military power to obtain the objectives previously achieved by economic influence.  Already the US is finding that China is prepared to increase its military capability such that the US cannot assume military and technological dominance in any dispute - most notably when a Chinese nuclear submarine appeared amongst the US fleet.  Not only was the submarine undetected but the US did not even know that such a class of submarine was in operation.  US interests in the Pacific rim can no longer be assumed to be under unchallenged US protection.  Quite what this means is difficult to determine, however the future for Taiwan is liable to look rather different to its recent past and some accommodation with China will be needed.

It is also clear that the changing economic power will finally see the individualistic free market approach promoted by the US and the Chicago school in particular, will finally be overtaken by other approaches.  The European model will continue on a more socialised model regardless of the fate of the Euro experiment.  State directed capitalism of various shades characterizes the rapidly growing economies and so we will see various competing forms of capitalism in operation around the world.

There is an assumption that China will continue its present course. Some commentators - such as Will Hutton - have suggested that the social strains within China and the Communist Party including ethnic tensions and the need to maintain staggering growth rates in order to satisfy the population will halt this rapid economic progress.  There is some evidence to support this and it is indeed a possibility. The divisions in Brazilian society are also evident from the current police operations and to anyone who has watched "City of God" and "City of Men".  India has similar stresses and so the whole global growth model might be flawed and be halted by these socio-political issues.

However, a counter argument could be made that the growth will prove sustainable at least over the next 20 years and that the US will be the one to suffer from its profound social divisions. Alongside the US' great economic successes are the obvious failures to meet the needs of large black and Hispanic populations.  As the US economic advantage disappears and political influence shrinks, will the US retreat towards the insular approach that characterized it up until WW1?  The political system in the US is broken (See The Economist's recent debate) and will not meet the needs of the changing population, perhaps the rich, urban states will split from the Union? My point is not that this is what will happen, but that the tensions in the growing economies are only as significant as those in the currently dominant economies.

Fighting Malaria

In an interesting New York Times article, the difficulties of eliminating Malaria have been highlighted (see http://www.nytimes.com/2010/10/09/opinion/09iht-edshah.html?_r=1 ).  It poses some interesting questions about the possibility of ever eliminating it from the human population and is well worth reading.

The follow up questions are fascinating and informative too - http://freakonomics.blogs.nytimes.com/2010/09/02/the-malaria-wars-sonia-shah-answers-your-malaria-questions/

This week, Next week

The first through train to London from Frankfurt is coming via the Channel Tunnel this week.  A sign of things to come but this is just a dry run.  Disputes between SNCF and Deutsche-Bahn following the enforced opening up of competition on high speed rail across Europe as well as technical issues look delaying service until 2013.  However this week will see safety tests as the train stops in the tunnel and checks are made about such fundamentals as the positioning of the doors in an evacuation and rescue situation.  The hope is that these services will lower pricing and provide real competition to short haul air traffic.

This week saw the BBC's History of the World in 100 Objects select the 100th object - a Solar Powered Lamp.  Of particular interest to Oprel as we are closely following a project to introduce solar lamps into Africa where they would replace Kerosene Lamps - these are expensive but also cause fires and noxious fumes.  A potentially transformative technology, and as the object selected shows, they have the potential to provide mobile phone charging too and this is another technology transforming lives across Africa.  Mobile phones have allowed farmers and fishermen to know the best pricing and to cut out middlemen, providing a real change in the lives of many. See http://www.bbc.co.uk/ahistoryoftheworld/

Similar transformation is being sought by a campaign to improve hand washing around the world.  The availability of soap since the industrial revolution is now taken for granted by most of us but it is not widely used in other cultures.  A campaign aiming to reduce the huge numbers killed or made ill from easily preventable diseases has resulted in the launch of Global Handwashing day - October 15th. Simple steps will reduce infant mortality and improve the lives of millions. See http://www.globalhandwashingday.org/ for a lot more on this.

More prosaic news from the UK where the Government has announced the abolition and substantial reform of many Non-departmental public bodies (NDPBs - most commonly called Quangos).  Whilst many of them will continue and perform good work at arm's length from Government, one must wonder how some have survived this long.  Next week sees the results of the Comprehensive Spending Review (CSR) and we will then know where the cuts to Government spending are really going to occur.  Anyone expecting to do business with the Public Sector is looking on with interest, not to say trepidation.  

Whilst both of these aim to reduce "Government waste" we heard this week from Philip Green about how the UK Government might spend its money more effectively.  Greater centralisation and use of its buying power seem to be the message and whilst this is probably true for many items - for instance the Government has around 112 Data Centres but probably only needs 10-15.  However the central issue with Government is how difficult they can make it for themselves in buying a service that they want, inventing rules that do not help them to achieve the best value.  So in order to buy consultancy they seek a supplier from a list that was written some years ago and to which only big firms can afford the time and energy to ensure that they get on it.  They then seek support from these firms who sub-contract to smaller firms not on the list.  The Government then gets support from a smaller company but pays a big name premium to do so; Government could save time and money by going direct.  What will become of the Green review and its findings?  Who knows, but this is the umpteenth review and whilst it might bring improvements in some areas it will probably drive more smaller businesses away from public sector work.