Economics: Enter The Dragon

As everybody knows, there is another global economic recession along the way. Some (including me) would argue that we never got out of the one that started in 2008, never mind what the economists and statisticians say. The UK’s GDP growth last quarter was an anaemic 0.2% and the rest of the year looks worse. I would argue that the developed world (as it is defined currently) is in a state of terminal economic decline and will never recover.

Why do I say this? Looking at Western Europe (the United Kingdom and France in particular), you will notice that there are no great globally competitive manufacturing companies left in these countries. Britain’s largest manufacturing employer is the India-based Tata Group. Britain’s economy is now kept afloat by the healthcare industry which provides jobs, and financial services, which provides profits and tax revenues.

As a result of the recent seismic events in the banking and financial services industry, a host of new banking regulations have been proposed in Britain that would curtail the powers of banks to raise capital and ultimately increase the cost of capital for both banks and borrowers. As a result of these proposed regulations, many of the banking giants based in London are threatening to relocate to other parts of the world. It is unlikely that all banking operations will be moved elsewhere, but investment banking operations would be a probable candidate. If this happens, it would greatly diminish Britain’s economic power in the developed world. And the key question here is – what would replace banking as a generator of jobs, profits, taxes and economic growth in Britain?? There is no replacement for banking at the moment in Britain. Manufacturing is not an option (why would an automotive company want to open a plant in Britain when it can produce cars at a fraction of the cost in South Asia?) and service industries moved out of Britain many years ago.

Southern Europe is in even worse shape. Britain has financial services as an engine for growth. Countries such as Greece, Italy and Portugal don’t. The only way these countries could compete earlier was because they had their own currencies and costs were lower in these countries as compared to Northern Europe. With the advent of a single currency, the euro, the disaster waiting to happen has happened. In one stroke, the competitiveness of these economies was destroyed. They were no longer less expensive economies, the cost of living increased dramatically (with the advent of the euro) and these economies were no longer able to export their way out of recession. The only hope for these countries is if the euro is disbanded, and these countries revert to their original currencies and once again become less expensive economies that can then export their way out of a recession. This will mean incredible short-term pain as these countries default on their debts, but there is no other option. Expecting German taxpayers to pay Greece’s bills indefinitely is not feasible, and there are signs that Germany itself is slipping back into recession.

The United States and Germany will hold out for another decade or so. Both these countries still have reasonably strong manufacturing industries that provide employment. However, as the years go by, more and more large manufacturing companies will move – to China and other places in South Asia that can provide a labour pool with the same skills for a fraction of the costs of production in the US or Germany. And the same key question applies here as well – what will replace these industries once they leave??

It is nothing short of a huge global transference of wealth from one part of the world to the other. It will lead to chaos and the rise of populist, nationalist parties in Europe that will blame foreigners and immigration for all their ills.

India would have been very well-placed to take advantage of this transference of wealth, but will not be able to do so due to frailties and divisions within its political system. A handful of politicians and bureaucrats will prevent India from becoming an economic superpower. When it comes to those who govern India, I agree completely with what Winston Churchill said at the time of Indian independence: “Power will go to the hands of rascals, rogues, freebooters; all Indian leaders will be of low caliber & men of straw. They will fight amongst themselves for power and India will be lost in political squabbles”. This prophecy has come to pass, and unless something changes dramatically, India will continue to be mired in indecision and administrative paralysis that will prevent real change.

So who will benefit the most from this transference of wealth? Beneficiaries will be countries that have an educated labour pool with a strong work ethic and governments that want their citizens to benefit from this transference of wealth. The primary beneficiary will be China. China is already the US’s largest trading partner and owns trillions of dollars of US debt. They are buying up European debt, and the Chinese are the largest investors in places as far-flung as Australia and Africa. The dragon is not rising. It has already risen. The king is dead, all hail the new king!