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Throughout history, unequal development has been the norm; there has
never been a time when different nations did not have radically different
levels of development. But the economic forces causing a convergence of
development levels have never been so powerful as they are today. The
countries moving ahead most quickly, including India,
China, Egypt, Brazil
and Russia,
might be called "late developing nations". It goes without saying
that the late developers face many huge challenges. But they also have advantages.
Many have leapfrogged transitional stages of development by adopting more
advanced technologies.
For example, China
has jumped directly to ATM cards, bypassing the checkbook stage. Since its
ineffective legal and banking systems can hardly support the wide use of
checkbooks, ATM technology has nicely covered up the holes. Another example
is mobile phones being adopted before conventional landlines: China now has
more handsets than wired phones, 340 million versus 317 million, a direct
result of developing late.
China's rapid development
has generated vast interest around the globe. Any developing nation that can
consume 100 million hamburgers, sodas, and chocolate bars a day is sure to
attract interest from the McDonald's, Coke and Nestle men. As the Chinese
saying goes, "it is easier to share good fortune than misery".
Today, foreign investors are racing into China and benefiting hugely from
the expanding pie. But they are contributing more than capital, products and
services: these foreign "wolves" are making the domestic
"sheep" run faster. Lenovo, the Chinese PC maker that recently
acquired IBM's legendary PC unit, is only one of the new domestic competitors
produced by the "wolves".
India provides more examples
of this phenomenon. Indian railroads may be third-world quality, but its
"IT army" is world-class, and has become a powerful link between India and
global economy. And watch out for the Indian biotech industry, which is also
on the move.
China and India are not
the only late developers. Islamic states, Latin American countries, and the
ex-Soviet states are other examples of countries facing a common situation:
underdevelopment, but with plentiful natural resources. Rising commodity
prices recently have been a boon for these nations; resource revenues,
particularly for oil, have boosted their economies more than any conceivable
aid program ever could. The resource windfall has opened the door to
sustainable development for them - if they are wise enough to enter it.
Today, the late developing states, especially China and India, have become new theaters
for globalization. By being open, they can better employ their best resources
and energy for development. The vast entrepreneurial armies in the two Asian
megastates are the best creations of the new openness, and have helped both
nations to participate effectively in global development. These new
entrepreneurs are vast in number, limitless in their capacity for hard work,
and boundless in their aspirations. Indeed, it is not too strong to say that
they represent the best hope for a better society. The recent history of both
countries shows convincingly that what most impoverished nations really need
is more entrepreneurs and less bureaucratic meddling. If the number of
government bureaucrats can be halved and the number of entrepreneurs doubled,
the potential gains to humanity are staggering.
Problems of late developers
The flip side of the coin, of course, is a set of common problems
faced by the late-developing economies. These formidable obstacles include
weak financial markets and regulatory structures; growing income inequality,
which threatens social stability; and corruption.
The ups and downs of China's
stock market are a good example. The Chinese market has only existed about 13
years, but it has already gained some 71 million investors. Foreign investors
are interested, too, although they were only allowed market access in spring,
2003. Numerous overseas financial players - including HSBC, Citibank, UBS and
Nomura, are now investing in Chinese stocks. Even Bill Gates's family trust
fund has bought into China.
Overall, nearly $4 billion of foreign money has been injected into the
Chinese equity market, which now has 1,400 listings with a market value of
more than $500 billion.
But the market has also shown frightening volatility, caused many
naive investors to lose their shirts, and now stands at a six-year low,
having deflated even more dramatically than the notoriously over-invested
NASDAQ in the US.
It is seriously affected by widespread abuses, built-in flaws, and populated
by many Chinese Enrons and WorldComs. As a result, investor interest in the
Chinese stock markets has cooled so much that reforming the stock market has
become a major priority for the government.
Why did China
fall into this trap? One would think that, being a late developer, China would
have learned the hard lessons from older markets elsewhere. Every nation with
financial markets has seen great crashes. But the Chinese, instead of
learning from past mistakes, are reliving them. It seems that folly knows no
nationality, and "the madness of crowds" is universal.
But the Chinese are not alone. In India, certain statements of the
new Congress government caused a panicky selloff, reducing the stock market's
value by more than 20% in just two days. Although dramatic new reform
policies have now pushed the index to an all time high, what turmoil Indian
politicians have created for investors! Russia
and Latin America have faced similar
problems; wild currency fluctuations have caused all sorts of damage.
The potential instability in the late developers casts new light on
the current clamour to revalue the Chinese currency. Strengthening the yuan
might provide temporary relief for developed countries facing a trade deficit
with China, but China's
trouble-prone legal and financial system, with its chronic corruption, means
that a revaluation now might seriously destabilize the country. Eventually,
there is no doubt that China must free its currency, and have a free flow of
capital, but to take that step now without rooting out corruption first would
create more problems than it would solve.
Although the late developers' recent progress has attracted a lot of
attention from the outside world, in actuality they have made only a small
step towards prosperity. China
may have 16 million cars on the road, legions of millionaires, and even a few
billionaires, but its GDP per person is still only around $1,200 and the
average manufacturing job pays only around $115/month. In fact, its economic
development remains very much at the beginning. Lifting the standard of
living for 1.3 billion people is no small task.
In particular, China
is going through a painful transition from a state-run economy to a
market-oriented one, and stands uncertainly between a failing old system and
a new one which is very slowly being introduced. Moving to the next stage for
a country like China
is not straightforward; rather, it is like an aquatic animal slowly evolving
to live on land. It would not surprise the Chinese if it took a couple of
generations, or even more, to build a functional market economy and legal
framework, fair to all, and free from bureaucratic meddling.
So far, China
has been undergoing a painful transitional experience, and many of the
remaining problems cannot be resolved without fundamental reform. There are
just too many barriers to overcome. At the same time, countless people depend
on the old system; in 2004 alone, 43,757 government officials were found
guilty of corruption. Knowing the depths of these problems is a necessity to
understand the tremendous struggle China is going through. Although
exaggerating the problems may be harmful, minimizing them could be equally
damaging.
The developed world's role
The developed world, which is hardly problem-free itself, has a great
influence on the prospects of the late developers. Indeed, increasingly, the developed
world risks losing its historic role as the engine of global growth. Now, the
well-known problems with the anemic Japanese economy pose a direct threat to
global health. What are the possible root-causes behind the Japanese mess?
They stem directly from the tightly closed Japanese system. This closed
system is most effective in fending off foreign interests. Yet, it is most
venerable to deal with the foes within. In short, it is still a very ancient
practice based on a tribe mentality. It has backfired as now. Walking out of
this mess is easier said than done. So, more than likely, the Japanese
economic problems will become worse unless it can walk its old orbit
effectively. That would demand to make Japan a truly open economy and
society.
Furthermore, there is great uncertainty currently over the weakening
dollar. What is really troublesome is not the dollar's declining value per
se, but what lies behind it.
The United States
has become the biggest debt-issuer ever. Spending beyond one's means would
spell trouble for anyone, and the US will ultimately be no
exception. There is a great need for the US to put its fiscal house in
order; failure to do so risks reduced long-term borrowing power, an economic
downturn, or both. To express these concerns is not scare-mongering; the US savings
rate is flat, but spending keeps rising. At the same time, the US government
keeps borrowing from the outside world, with total borrowing now exceeding $1
trillion. Even some US
writers forecast a potential economic doomsday if current trends continue too
long.
One way out is for faster development in the emerging economies, which
will give rise to more consumption there. In this regard, the high-speed
growth in India and China is very
positive. China
imported $560 billion worth of goods in 2004, and this statistic could reach
$1 trillion by 2009. India,
Russia, Brazil and
many other emerging nations have been sharply increasing their consumption of
late. One thing is clear: developed nations and the late developers are in
the same boat as never before.
George Zhibin Gu is a business consultant based in
China.
He is the author of a forthcoming book, China's Global Reach:
Markets, Multinationals, and Globalization (Haworth
Press, Fall 2005). He can be reached at gzb678@yahoo.com.cn
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