As Westerners face the painful end of living beyond their means, billions of Asians are gaining new hope for the future. History will record that the 21st century marked the beginning of a new world order.
June 23, 2011
by Gwyn Morgan
The pre-recession boom years saw Asian countries emerge as the world’s manufacturing workshops, with consumers in America and Europe buying enormous quantities of their attractively priced offerings, driving astounding Asian economic growth.
Conventional wisdom predicted, however, that when the financial meltdown ended the debt fuelled shopping spree, Asian growth would come to a halt. It hasn’t happened: Asian economies, led by China, have remained strong.
The reasons? While westerners maxed out their credit cards and mortgages, Asians continued their saving tradition. So while Western governments stagger under mountains of debt, China holds more than a trillion US dollars in cash. In the words of Stephen King, Chief Economist of global banking giant HSBC, “The West . . . has this tremendous headwind associated with the need to deleverage, a headwind largely missing in China and other emerging nations.”
Another headwind plaguing Western economies is actually blowing in from the East. Asia’s hunger for resources to fuel its growth is driving up the cost of energy and base metals. Resource rich Canada is one of a small number of developed countries where rising resource prices are benefiting.
For China, India and Brazil it’s as if the economic crisis never occurred. The question becomes: How did these exporting countries so effectively decouple their economies from those of their customer nations? The answer lies in what Stephen King calls “an absolute revolution in world trade” comparable to the Ancient Silk Road trade route that connected China, India, Tibet, Persia and the Mediterranean countries for almost 3,000 years.
A new pattern of trade flows – a Southern Silk Road – now connects Asia, the Middle East, Africa and Latin America. Trade between China and south Asian countries has grown robustly, reaching US$80 billion in 2010. China’s trade with Africa has doubled every three years over the past 15, reaching US$150 billion in 2010, and is expected to double again by 2015. More than 50% of India’s trade is now intra-Asian, compared with a combined 32% with America and Europe.
Since 2001, BRIC (Brazil, Russia, India and China) has been synonymous with the global growth stars. Now trade across CHIME (China, India and the Middle East) and MENA (Middle East and North Africa) and GCC (Gulf Co-operation Council) are redefining global growth.
“The Silk Road to Asia with the Gulf Cooperation Council countries, growing trade flows with Latin America, Africa and Russia will see exponential growth in trade flows running individually with each corridor in excess of hundreds of billions of dollars by 2020,” says Anand Pande, head of product management global transaction services, Asia-Pacific, at Royal Bank of Scotland.
And many believe that another “I” will be added to the CHIME group in the not-too-distant future. With 240 million people, Indonesia is the world’s most populous Muslim nation. After more than a decade as an increasingly stable democracy, Indonesia is beginning to take its place as an important player along the new Southern Silk Road.
The implications of this decoupling of developed and emerging economies are enormous. On the one side of the divide, massive deficits continue to drive the US and some EU countries ever closer to national insolvency. If it takes hundreds of billions of dollars to bail out little Greece and Ireland, what will be the cost if a major economy defaults?
Virtually every developed country has social programs that were already unsustainable before the great recession. Now these programs are driving national treasuries towards the edge of the abyss. As governments continue to print money, further erosion of currency values is inevitable, most notably in the case of the US dollar, which has dropped almost 18% over the past year against a basket of international currencies. With annual deficits over $1.5 trillion, more than 40 cents for every dollar spent, how much longer can confidence continue in the greenback as the world’s reserve currency?
Given these realities, how long will it be before trade settlements among Southern Silk Road trade countries move to the Chinese currency, the Renminbi? And how long will it be before the Renminbi rivals, and then surpasses, the greenback as the world’s reserve currency? And when the Chinese stop showing up at weekly auctions of US treasury Bills, the collapse of America’s precarious financial dominoes will shake the world.
A new day is dawning where those who pay their own way will stop funding those who do not. As Westerners face the painful end of living beyond their means, billions of Asians are gaining new hope for the future. History will record that the 21st century marked the beginning of a new world order.
Gwyn Morgan is the retired founding CEO of EnCana Corp.