George Friedman and Rodger Baker on the Post-China 16

8 MINS READAug 1, 2013 | 21:21 GMT
George: Hello, my name is George Friedman. I'm chairman of Stratfor. And with me is Rodger Baker, our expert on Asian affairs. We're here to talk about the decline of China and the emergence of countries that will replace it as a high-growth, low-wage region. This won't be one region — it'll be several regions around the world. We call these PC16: Post-China 16. Not in the sense that China is going anywhere, but it's not going to be behaving the way it was behaving before. Now Rodger, why don't we just start by kind of explaining what's happening in China, and what we believe is going to happen. Rodger: Well one of the things that we've been looking at in China for a very long time is whether or not its low-wage, export-based model is going to be able to last. And we've seen signs of strains on that for a while. Certainly the economic slowdown in Europe and in the United States exacerbated the problems the Chinese were having. They had intended to have a short-term solution to recover from that —- they pumped a lot of money into the economy, tried to a lot of infrastructure development — but after that point the Europeans had not picked up consumption, the United States had not substantially picked up consumption, and the pressures that were already inside the Chinese system: growing wage pressures, some of their labor moving up in the value chain. And really in some ways the instability of this constant rollover of debt to maintain these companies started to hit home. And we've been seeing, particularly some of the low-end companies, starting to move overseas to other places. George: I remember that one of things I was most startled by, was when I realized that Chinese wages, particularly in the industrial areas, were substantially higher that Mexico's. And that was kind of a startling thing. Then we really had to investigate that, really had to go look into that and find out this was a passing bubble or something structural. And it was very clear, I think, that there was a structural dimension here. And the structural dimension was that China had never had the efficiencies that recessions impose on an economy created, because they're afraid of unemployment. And they were afraid of unemployment because, that caused instability that had historical meeting for the Chinese Communist Party. It was that sort of unemployment that the party began history. So they didn't want unemployment, they didn't want greater efficiency, they didn't know how to get from here to there. And so we had a structural crisis. It's interesting of course because everybody says there can't be successor to China because no country is that vast, with that sort of dynamism. And clearly we found 16 that together will constitute it. Why don't you tell us about that. Rodger: Well, you know, as we looked at this, it was trying to find a place where we're seeing early movement, very low-end manufacturing. And there's a lot of places or some of the places on our list, that people have already started to look at in the past: Indonesia, Vietnam, Mexico, even to some extent Bangladesh. But even in these areas we're seeing either continuation, in the case of Bangladesh, that wage rates are staying so low that it's still very highly competitive in this market, or new areas of these countries that are opening up. New population centers that are becoming available, where you have really low wages, you have changes in the overall economic situation. So in Indonesia, for example, this is a country than in the past was based primarily on commodities. It's trying to move out of the commodity model. I think the Indonesians recognized earlier than many others some of the changes that were coming in China on absorbing those commodities, and they started to shift to trying to push value add in their commodities. At the same time, they're looking at expanding a lot of this low-end manufacturing in textiles and electronics to feed into the Asian markets. And Asia is a big piece of all of what we're looking at here. It's six out of the sixteen countries are in East Asia, two of them are in South Asia. And I think interesting from our perspective really was what we were starting to see emerge in Africa. George: I mean that's really one of the most interesting things. Part of it is what's happening in East Africa — countries like Ethiopia, Kenya, Tanzania, Uganda — where we're actually seeing first stirrings of footwear manufacturer, garment manufacture, cell phones assembly, really going into these countries. And when you back off you suddenly realize something interesting is happening. And it's the Indian Ocean basin. You have, in the western part of the Indian Ocean, in Africa, Sri Lanka, Myanmar, Bangladesh and even Indonesia is an Indian Ocean basin country. Yeah, there are some areas like Indochina and Philippines that are outside this area, but they're close in. It's easy to say, well this will be the generation of the Indian Ocean basin, as the Pacific was the past. It's probably not that simple. But isn't it really interesting, the manner in which these countries clustered in a particular basin. It's also interesting to note that these countries taken together, including the ones Latin America — Peru, the Dominican Republic, Mexico — collectively have a population of slightly over 1 billion people. So when the question comes up, who succeeds China, the answer is that not one country, but at least 16. And some of these may drop off, and some others may be added, but these sixteen, and it's about a billion people, and the process of global capitalism — for better or worse — goes on as countries are pulled into the development cycle. Rodger: Well I know there's been some eyebrows raised by some of the countries we put on the list, places like Laos or Cambodia, which is now going through a bit of a political crisis, or even some of the East African or the Latin American countries, where there's this view that one needs a lot of political stability to be able to pull this off. George: Yeah, I mean it is really interesting because if you go back to China in 1978, when it began, one of the things you saw in China was that just a few years before the great proletarian Cultural Revolution, which is essentially a civil war of sorts, ended. A year before, a struggle between Mao's wife and what was called the Gang of Four, it was Deng Xiaoping, nobody in his right mind would've regarded China has either stable, under the rule of law, transparent, or any of these things. In fact, when you look at some of the statements that are made about China about that time, about Deng's plan to transform China, there is generally incredulity that he could be that ambitious. But in fact, instability, lack of rule of law, all these things, are pretty much what you'd expect an entry-level country. That's where wages are low, that's why they're hungry for opportunities and it's not for the faint-hearted. But China wasn't for the faint-hearted in 1978. But certainly those who invested in the early eighties did very well. And it is these very things we were looking for. We were looking at, what made China possible. And tried to look for it elsewhere. And I think that is the basic idea. It's not that history repeats itself, but the same conditions ought to exist. One of the things that you know we'd like to think about here is, to understand that in making a forecast, you're not necessarily saying everything we say is going to happen just that way. Some of these countries aren't going to be there, other countries will join it. But the important thing I think to remember is that we're seeing a great rotation, like the rotation that happened between Japan and China in the 1990s. We're seeing another rotation. It is a natural, desirable or not, process that goes on. It's going to be very painful for these countries. Development is painful. Working in sweatshops is painful. It is not necessarily a happy time, but we have to also remember that what went before also wasn't a happy time. And we are now going to go through that process, not us, but others are going through that process. Rodger, thanks joining me. And everyone, thank you for stopping by and listening.

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