China Analysis and Outlook 2007

China Analysis and Outlook 2007 offers political insight into the global knowledge market.

The Strategic Management Association, the Harvard Business School and the CDMA sponsored the 2007 China Outlook, which was given by Lyric Hughes-Hale, Founder China Online in Chicago 9 January 2007. Her presentation was preceded by David Hale’s 2007 Economic Forecast.

As a long-time China watcher and analyst, Lyric has rare and unusual insights to which I’ll try to do justice before giving my observations. The Global Human Capital Journal also covered the 2006 China Outlook.

Lyric’s China Outlook reflected global political transformation and how yesterday’s Cold War politics are becoming more outmoded with each passing quarter. She didn’t say it directly, but her comment about increasingly irrelevant organizations like the World Bank could easily apply to governments as well. Democracies and legal agreements increasingly lag technology development, and the gulf between them is accelerating. Are they becoming less relevant or effective? China is not burdened by dissent, which currently seems to add to its competitive advantage because it can move quickly and decisively.

Refreshingly, Lyric sees that the biggest threat to the U.S. is its leaders’ own limited thinking, which is causing them to lose tremendous opportunities to engage the world. Here are her remarks, from my notes:

• Climate for global trade: 2006 continued to see the rise of regionalism as the dream of international institutions faded.
  • The Doha Round is failing, and international organizations like the World Bank and the World Trade Organization are falling apart. They cannot reform themselves fast enough to keep up with globalization and remain effective. New institutions will emerge.
  • Bilateral trade agreements are inefficient creators of economic value (when compared to global agreements), but they are increasingly being done as global initiatives fail (Doha). In North America, NAFTA will grow. The European Union is growing in scope. Tremendous regional growth in Asia will continue, and an Asian trade block will emerge (like the E.U.).
  • Technology is far ahead of legal consideration, and it is accelerating, so the gap between them is widening. Intellectual property rights and digital rights are two battleground. This affects the value of all kinds of goods.
  • National resource-based economies always struggle because power is always concentrated in the hands of the few, and corruption is rampant. Current examples are Russia, Nigeria and Sudan. Benefits do not trickle down to create wealth among all classes, causing political instability.
• World leadership: times are changing:
  • As a world leader, the U.S. has lost a tremendous degree of respect in the world, and we will increasingly be stymied in achieving our initiatives due to increased suspicion and objection. Bush has lost credibility, and most U.S. leaders do not fully appreciate this.
  • Surprisingly, China is seen as a more moderate, rational power by many. The U.S. is increasingly perceived as revolutionary, not rational or impartial.
  • This situation is reflected by the weak U.S. Dollar, which will lose its status as a reserve currency. Politics trumps economics.
• U.S. quick takes: the Democrats are more sophisticated today and will not be as anti-trade as David fears. With respect to the dollar’s value relative to other currencies, U.S. buying habits are more relevant than the fundamentals.
• The new Asia: look beyond yesterday’s paradigm: the two fastest-growing economies in Asia are “Communist” regimes that are mandating economic “experimentation” to achieve their political ends, China and Vietnam. The rest of the world needs to reexamine its pre-conceived notions to understand this shift. The U.S. and other democracies are stratified and cannot keep pace.
• China-U.S. dynamics:
  the U.S. and China are increasingly interdependent:
  • U.S. companies’ profitability and stock prices are driven by ever-higher levels of dependency on Chinese workers to keep prices low. Chinese serve as “shadow employees”; they are largely invisible to consumers.
  • Shadow workers have contributed to wage stagnation in the U.S., Japan and Europe for the past several years.
  • Competition to keep prices low (and market share up) is relentless. Chinese wages are increasing, and productivity increases will fail to maintain the price/quality ceiling, and we will see widespread quality issues.
  • China will increase its competitiveness by launching global brands and selling direct to consumers worldwide, bypassing multinationals. They will take out U.S. companies and maintain their profits.
• Middle East: this is another area in which the U.S. must change its perspective:
  • U.S. leadership has tended to demonize people and governments that do not agree with its initiatives. Iran, along with North Korea and Iraq, was branded as the “Axis of Evil.” Iran has been shunned. But if one regards Iran as a nation with its self-interest like any other, it has withstood significant pressure from the international community and the U.S. Iran’s leaders are smart.
  • Ahmadinejad and Chavez are given extensive negative press in U.S. news media, but they could be seen differently, as “a new kind of leader” willing to stand up to established interests. The point is not whether they are “good” or “bad”; what is important is that the U.S. lose its outdated (Cold War) world view to regain its relevance.
  • Syria has likewise been consistently rebuffed by the U.S., and we are losing opportunities there. Assad and his wife are also smart leaders, if the U.S. would bother to really look at them. Assad is a physician, and his wife worked at Morgan Stanley. They want to reposition Syria in the world as an “emerging country.” They have launched a stock exchange and liberalized the banking system. In 2003, Syria warned the U.S. against attacking Iraq, to no avail.
  • Ironically, the U.S. has accomplished in Iraq what Iran only dreamed of, and Iran is increasing its influence due to Iraq’s collapse and the changed balance of power.
  • The Middle East’s instability is driven less by religion and more by economics, and leaders are starting to recognize that regional instability is an excuse for not pursuing economic changes. In many countries, 30-40% of the people are unemployed. Malaysia, with a large muslim population, has an unemployment level of between 3-4%, and it is very peaceful.
• India: India is already 15-20 years behind China, and the gap is widening. Its infrastructure is a drag on economic development, and 55% of its women are illiterate. Mobile phone penetration is relatively low. These weaknesses will continue to compromise its ability to realize its potential.
• Concluding points:
  • The current U.S. leadership is a problem, and the U.S. is already far less relevant in much of the world’s eyes than it was several years ago. Its current world view is limited and compromises its leadership.
  • The U.S. needs to experiment more by engaging leaders with new ideas. For example, it continually spurns Vietnam, which is very open to it. There are opportunities to open dialogs with Iran and Syria.
  • Globalization is an environment in which U.S. leadership would be very natural, as the country has traditionally been diverse, flexible and open to change. It is an ideal, not a place.
  • Unfortunately, the U.S. has a militaristic viewpoint that will probably result in a war with Iran before the end of Bush’s presidency.

Analysis and Conclusions

• Like many other transformations, globalization can be deceptive—not because deception is inherent to it, but because the observer is limited in his understanding. We humans learn by experience, and we find it difficult to “unlearn” lessons of the past that are either untrue in the new environment or are true in a different way. As I have written elsewhere, leaders have sung the praises of globalization so long that it seems a familiar tune, but that leads to problems when additional verses are in different languages. For example, captains of industry and government began talking about it within the Industrial Economy paradigm, and that still colors their thoughts. It used to carry an imperialist flavor.
• As I wrote in The TransAtlantic Partnership and Its Implications for U.S. and E.U. Economies (see World Turning), the terms “first world” and “third world” are trappings of the Industrial Economy, where political and industrial power was determined by countries’ ability to exploit their natural resources. In the Industrial Economy, geographical position (geopolitics) was held to be of paramount import; in the Knowledge Economy, geopolitics warms the bench in favor of regulatory environment (witness the continued rise of London as a financial center at the expense of New York; London uses [less] regulation as a competitive weapon). Because people, education and knowledge work produce most value-add, economic development can be much faster and the balance of power changed. This shift will catch many leaders flat-footed. In the Knowledge Economy, traditional levers of power are not as relevant, and new ones emerge.
• In a sense, the U.S. “won” the Cold War, but this has led to serious lock-in in which leaders want to remain in the past in which they prevailed rather than embracing the present. Today, “Communist” is increasingly out of the context in which it was born.
• Of course, oil is very zero sum. Finding alternative energy is far more important than going to the moon ever was. There should be nothing less than a no-holds-barred effort to develop other energy sources.
• Lyric’s mention of technology and digital rights reflected the Knowledge Economy shift. The Industrial Economy was a zero sum game because it was built on transforming raw materials into goods as efficiently as possible. Conversely, the Knowledge Economy creates value from information, which is far less zero sum. This will undoubtedly change the context around ownership. In a raw materials context, exclusive use was extremely important. In the new environment, it is less so.
• The conventional view recognizes that China is a tremendous industrial power, but its rapid progress on the banking system and the torrid development in Asia will rapidly transform it into a banking powerhouse and financial center.
• The Knowledge Economy offers a fundamentally different way to create wealth, which is not based on raw materials. As cities look to Silicon Valley as the paragon for technology innovation, countries look to India and China as examples: they are “third world” countries rapidly ascending to first world rank.
• Lyric implied that democracy was a competitive disadvantage (from a strictly economic point of view) because it leads to extensive discussion and lack of action. An interesting idea to ponder.