Investing in Asia: A New Middle Class
- Mar 31, 2006
That Asia can become the engine of global economic growth is a recurring concept in the relevant literature, a theory floated variously throughout the centuries without yielding tangible results. Based on a perceived inability of the region to deliver on its potential, many peopleprofessional investors includedresist the idea that Asia can develop a sustainable, consumer-based economic growth model. Such resistance is rooted in the region's well-documented dependence on exports to the developed Western economies. Asia, in this construct, will remain a volatile investment proxy to global economic growth, stuck in a perpetual boom-and-bust cycle.
But consider the following set of circumstances: a large population in a demographic "sweet spot,"1 a high savings rate, an increasing bias toward consumption, and the fact that the world needs a new growth engine for the 21st century. These elements portend a rise of the Asian consumer that will transform the global economy. Although this transformation is still in its early stages, marked by periods of rapid advancement as well as periods of relative stagnation, Asia is steadily becoming the main growth game in town.
Due to the region's internal strengths, the knowledge gained during its boom-and-bust cycles, and the current state of the global economy, Asia's time is upon us.
The firmly entrenched belief that the world cannot grow without the American consumer being the sole dominant force will cost shortsighted investors the opportunity to identify and capitalize on an emerging, gigantic trend.
Because humans are creatures of habit, it is difficult to alter our ideas and identify change. The inability to see the transition to Latin American and Japanese growth in the 1970s after everyone had become extremely comfortable playing the U.S. growth stocks of the 1960s is an example of this stasis. A more recent manifestation of this resistance to change is characterized by the fear sparked by the 1996 collapse of the Japanese consumer that the world would have great difficulty finding a new consumption archetype.
History demonstrates that change in world economic leadership is constant. Consider the great European powers that used to hold the economic reigns of the world. When one city-state was at the height of its influence, neither the city's inhabitants nor people abroad were able to contemplate a change of the status quo.
In the 1300s and 1400s, the Italian powerhouses of Venice, Genoa, and Florence dominated, followed by Spain and Portugal. In the 1500s Antwerp, and then Amsterdam, took over as centers of world banking and trade. In the 18th century, the power shifted to London, with the start of the Industrial Revolution. Eventually, the U.S. took over the lead.
Today, those claiming things will stay the same sound even more naïve than those who grew comfortable in their respective dominant city-states. Given the already significant effects of globalization on the world's economy, change in the current context is a lot closer at hand than many people are willing to accept.2
Asia's road is a difficult one, perhaps more difficult than those faced by other fast-growing economic regions. Asia is coming of age during a period of explosive globalization and technological change. Access to technology and capital offers a lot of opportunities, but such access is also restrictive as the region is a member of an extremely complex and interconnected world. Complicated relationships make decision-making especially difficult.
In the past, developing economies did not have outsiders looking over their shoulders. As the road to prosperity is not always clearly defined and "fair," this relative solitude worked to these economies' advantage. Today, though, the rapidly emerging economies operate under the microscope of countless worldwide organizations and governmental agenciesall administrated by the economically developed nations (EDNs). Developing economies must find ways to grow and integrate into the global economic system, while answering the questions and satisfying the demands of the great economic powers.
What would have happened to the Industrial Revolution in England, or what would have been the rate of progress in the American colonies, if they had to play by the rules that developing countries in Asia are required to follow today?
To suggest that now is not the 18th century and that the world has come a long way in civility, freedom, and the like ignores the fact that developing Asia is today at the same position (relative to the progress that the world has made) as the emerging economies of more than 200 years ago. After all, 45 percent of China's total workforce is still employed in the farm sector, a clear indication that China is still at a relatively early stage in the industrialization process.3
Asia, especially China because of its size, has long excited the imagination of the Western world. Marco Polo talked about the great wonders of China, and Christopher Columbus—although he never reached China—spoke of an "incalculable amount of trade." In the 1800s, British merchants tried, unsuccessfully, to "conquer" China.
It is beyond the scope of this book to examine the details of these failures, but some brief points are warranted. Few people appreciate (mainly because of Britain’s and, later, continental Europe’s industrialization boom) the fact that parts of Asia, especially parts of China, Japan, and India, were on the same economic level as Europe until the end of the 18th century. As Kenneth Pomeranz noted, "In sum, core regions in China and Japan circa 1750 seem to resemble the most advanced parts of Western Europe, combining sophisticated agriculture, commerce, and non-mechanized industry in similar, arguably even more fully realized, ways."4
This lack of appreciation, coupled with Europe’s spectacular economic growth in the 19th century, led to unshakable misunderstandings when the West did business with China in particular. Carl Crow put the problem into perspective in 1937. "Every now and then," he wrote, "we are visited in Shanghai by an export manager, usually a new one, who appears to be spending his company’s money on an expensive trip around the world for the sole purpose of discovering how many points of superiority he and others of his nationality enjoy over the people of the country he is visiting."5 This shallow sense of superiority and a lack of sensitivity to the region’s idiosyncrasies has led to myriad mistakes by and financial losses for Western investors.
Of course, this is a two-way street; Asia’s own attitudes harmed Asia numerous times. In the 1990s, the region’s leaders and businessmen accepted the theory that there was something unique about Asia that made its economies thrive. But the work ethic of its people notwithstanding, a careful look reveals that the region’s success was more the result of good timing than anything else. At the time, Southeast Asia was the only part of the world not enmeshed in crisis, and it had fairly open markets facilitating an economic and stock market boom. With Latin America beaten down, Africa facing its chronic problems, and Japan at the end of its run, the "tigers" (for example, South Korea, Taiwan, Singapore, and so on) were the world’s only growth investment choice.
The only rational explanation for this "special status" misconception is the vanity of human beings and the conviction that, for whatever reason, their situation—economic or otherwise—is of a special kind that deserves special treatment, and above all is almost certainly irreversible.