The Great Reverse - Part I

There are those who argue that history is cyclical, while others prefer to conceptualize it as an ebb and flow. As the economies of China and India continue their dizzying growth, it seems that history is preparing to repeat itself. Economist Clyde Prestowitz, in the first of a three-part series, coins the term "The Great Reverse" in reference to the projected Asian-leaning shift in the global balance of power. In his exposition of three discreet waves of globalization, Prestowitz details the developments that facilitated the rise, fall, and rise, once again, of the East's global influence. And if history is any indicator, India and China may, in the coming century, compete for the title, "World Economic Superpower." – YaleGlobal

The Great Reverse - Part I

After two centuries of Western domination, China and India are poised to claim their places
Clyde Prestowitz
Thursday, September 2, 2004
China - due in part to the silk trade - boasted the world's most powerful economy in the 18th century Enlarged image

WASHINGTON: "The balance of influence in this region is shifting rapidly to China - not yet the balance of power, but the balance of influence."

That statement, made recently to me by a senior leader in Singapore, is an early indication of how a new, third wave of globalization is ending the era of the West's global dominance and restoring Asia to its traditionally powerful and influential role.

The history of the past 500 years has largely been the story of the dynamism and expansion of first European and then American power. The initial wave of globalization was launched in the late fifteenth century by the early Portuguese and Spanish explorers. The high technology of that day was embodied in the Spanish galleon and the navigating skills that guided it. Using this technology, intrepid Iberian captains could go anywhere the wind blew, enabling the kings of tiny Portugal and Spain to lay claim to nearly half the world.

Soon thereafter, the Dutch and English developed the joint stock company and built the "capitalist road" by enabling the amassing of large amounts of capital on a relatively low-risk basis with the potential for very large gains. And the gains were sought largely in the East, where the legendary wealth of the Indies beckoned, for at this time, the standards of living in the West were well below those of the East. By the end of the 18th century, the countries of the European periphery had combined their technological leadership with low-cost labor - sailors from the lower rungs of society were routinely pressed into service - to acquire huge empires in Asia and elsewhere.

The second wave of globalization began at about the time of the founding of the United States, with the onset of the Industrial Revolution. The steam engine and new manufacturing technology multiplied productivity and wealth a thousand-fold. Over the next 200 years, this further accelerated the rise of Western wealth and dominance. In 1776, the year of the American Declaration of Independence, China still had by far the world's biggest and most powerful economy, with the area we now call India and Pakistan following close behind. Indeed, at this time, Asia accounted for well over half of global gross domestic product. Industrialized mass production dramatically reversed the balance; by the end of the 20th century, the US and Europe accounted for two-thirds of global GDP, while Asia was responsible for only 20 percent.

In the 1990s, four developments laid the foundation for the third wave of globalization, which is now leading to the Great Reverse. In the wake of the Tiananmen Square incident, the leaders of China concluded that the only way to hold onto power was to bring China fully onto the "capitalist road." India, seeing the rapid success of China, also decided to abandon its socialist protectionism in favor of getting on the capitalist freeway. At about the same time, the conclusion of the Uruguay Round of trade talks, along with China's inclusion in the World Trade Organization and the opening of most countries to foreign investment, removed most of the classic barriers to the global flow of goods and capital. Finally, the development and deployment of the internet after 1995 largely negated time and distance as significant cost factors for a vast number of products and services.

China is now, without question, the location of choice for most manufacturing. Its huge population provides a continuing supply of low-cost labor. By widely opening the doors to foreign investment, emphasizing education of technologists, and providing major incentives for technology transfer, it has combined inexpensive labor with technology to create a huge competitive advantage similar to that enjoyed by the Portuguese and Spanish half a millennium ago.

This is not just a matter of low-tech, labor intensive manufacturing. On my recent trips to China, I have visited state-of-the-art plants for manufacturing semiconductors and other high tech products equal in quality to those produced in the West - and at less than half the cost. Moreover, in recent interviews, top Silicon Valley venture capital executives emphasized to me their plans to shift start-up companies' Research and Development activities to China or India as fast as possible. Indeed, some said they would not fund any start-up that lacked a China or India R&D strategy. The logic is simple: There are a lot of good technologists in those countries who can do much of the high-tech work at 10 to 15 percent of the cost in the West.

India has not yet become the same magnet for manufacturing as China, but it is clearly the location of choice for software development and many other services. Again, one should be careful of the conventional wisdom that thinks only in terms of call centers and grunt programming. For example, the British National Health Service recently announced that it is shipping all blood samples to India, where they will be analyzed and the results faxed or e-mailed to the appropriate medical facilities in the United Kingdom.

As a result of these kinds of development, both China and India have enjoyed annual GDP growth of about ten percent over the past several years. In fact, China has been racking up such growth for the past twenty years. Projected into the future, these growth rates show why the senior Singapore leader made his comments about the shift of the balance of influence. By the year 2025, China's current GDP of about $2 trillion (adjusted for the undervalued renminbi) would be $16 trillion, and India's current GDP of $700 billion would be about $5 trillion. Over the same time, the current U.S. GDP of $11 trillion would reach $21 trillion if it grows at the average rate of U.S. growth of the past forty years. Even if these estimates are well off the mark, they show a dramatic narrowing of the gap between Asia and the West. China is already the biggest trading partner for Japan, Korea, and the other key economies of Asia. Its influence will only grow from here, as will that of India.

To this must be added the demographic story. Europe is literally dying. Its people are aging rapidly, and birth rates are far below those necessary to maintain current population levels. By 2050, the population of Germany, for example, will shrink from the present 83 million to about 75 million. This will put a severe limit on European growth prospects. The United States, by dint of immigration and high Hispanic birth rates, will maintain small population growth, but it will age substantially over the next 45 years. Because of its one child policy, China will also begin to age rapidly in about 20 years. But half of India's nearly one billion people are presently under the age of 25, and there is no one child policy here. Thus, in the long run, the 21st century could well turn out to be the Indian century. In any case, it will surely be the century in which Asia resumes its historical position of economic power and influence.

Clyde Prestowitz is the author of Rogue Nation: American Unilateralism and the Failure of Good Intentions. He is also President of the Economic Strategy Institute and a former trade negotiator in the Reagan Administration.

© 2004 Yale Center for the Study of Globalization