NASSCOM Engineering Summit 2013: Is the Global Centre of Gravity Shifting to Asia? - Parag Khanna, Geo Strategist

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  • - Talk about today’s changes, but focus on the oceans of opportunity long-term
  • - Power has diffused, but the system is inclusive
  • Diffusion of power matched by a structural economic convergenceWorld GDP by regionEssentially a “Big Three” regional world led of NA, Europe, Asia – India/Japan/Australia triangle with China at centerIf there is a US-EU FTA and block, that would still exceed Asia; US-EU TTIP
  • - Zoom in on Asia as the first circle of opportunity
  • Asian GDPs rising on the back of industrialization but also trade; China as most trade dependent nationSo Asians are bullish on globalizationAsian corporate debt markets will be larger than Europe and other EMs combinedhttp://www.tradingeconomics.comhttp://www.asean.org/images/2013/resources/statistics/Macroeconomic%20Indicators/table5.pdf
  • Demographic convergence in the sense of global migration patterns in which all regions are both origins and destinationsToday more expats than ever before: 250 million; transnational migrant class that is permanently settling outside nation of originTraditionally we see arrows moving in opposite directionChina has drawn back over 400,000 “sea turtles” through “green card”/”red card” scheme; India doing sameRe-pats are a lead indicator of stability and positive future: Colombia, Brazil, Turkey, Kurdistan, MyanmarStory of Parthenon visit in Mumbai: used to be foreign manager and local staff, but now local manager and foreign staff!Americans are the new economic migrants! Traditionally America has a low percentage of expatriates compared to Europe Currently 6.3 million Americans studying or working abroad (highest ever recorded)- Percentage of Americans 25-34 planning to move abroad risen from 1% to 5% since 2007; 12% to 40% for 18-24 demographicTruly a global war for talent: What do they want? What does it take to recruit them? Which immigration policies are working?
  • New division of labor emerging in the global economy as this structural convergence also levels the playing field of infrastructure and production capacityShifting of manufacturing but also a rise in services coming from non-traditional sources
  • Many countries transitioning from traditional growth sectors up the value chain and diversifying as wellChina’s 7 strategic emerging industries (as per US-China Business council, march 2013)1. Energy efficient and environment technologies2. Next generation IT3. Bio-technology4. High-end equipment manufacturing5. New energy6. New materials7. New energy vehicles (NEV)
  • We know that being open to talent and new ideas, and promoting commercialization is the key to turning technology into economic growthAccording to research published in The Scientist, we are witnessing the emergence of a globalized innovation revolution, one that is advancing at the expense of the United States. Rather than measure only papers published or patents filed (which have national legal and bureaucratic distortions), we have to measure the cross-border flow of PhDs/talent and the mixing of ideas that generates "innovative, high-impact scientific outcomes”A better measure is the turnover in new product introductions and market penetration times (Samsung much more a leader) Countries that lay out the welcome mat for foreign research talent and allow their own researchers to go abroad freely do better than closed research economies in every sense. ... Only through expanding the shared global knowledge-base will we be able to ignite the spark of innovation behind new industries that will create jobs
  • Center of gravity shifting to all emerging marketsKey to global recovery; cross-border EM FDI back to record levelsClose to $250 billion annuallyChina leads this with about half the total, but other countries such as Singapore and Malaysia plays an important role through M&As
  • Asian companies are key to this cross-EM globalizationBCG 2012 “Allies and Adversaries” report lists 100 new “Global Challengers” including 30 from China, 15 from India, 2 from Malaysia, 2 from Indonesia, 4 from ThailandBCG companies demonstrate: rapidly growing in sector diversity, growing revenues, rising productivity, growing R&D spending; fewer state-backed firmsNot a single Indian company on this list or Fortune 100
  • - China has managed to maintain domestic stability while still pursuing its international ambitionsOutbound FDI projected to reach $200 billion by 2020 CIC feeling unwelcome in US as GaoXiqing said at Boao Forum; CIC has hinted it will diversify away from Western financials and treasuries which account for 45% of its portfolioSentiments aside, as CIC diversifies away from North American financial services (which are 43% of its current holdings) to other geographies and sectors (energy, natural resources, infrastructure), it will become a truly global portfolio-Source: Heritage China Investment Tracker
  • - Key Asian sector to watch is infrastructure and transportationRail strategy has been intimate to China’s fiscal stimulusChina’s Gwadar port is most recent intersection of both Chinese land and sea strategiesDespite anti-Chinese sentiment, the Eastern 2/3 of Eurasia are slowly knitting together the way EU has through its major infrastructure/rail investmentsIndia is largely excluded from this infrastructural picture b/c of the Himalayas and its poor relations with Pakistan and Myanmar’s long-frozen status
  • What makes for a good investment?Countries where investment/GDP is highChina accused of over-investing but it is notSource: http://world-economic-outlook.findthedata.org/
  • G-20 agreed in Moscow agreed to continue stimulusBut also began new focus on infrastructure: agreed that building new roads, telecom, power, is important for jobs and growthInfrastructure finance as most productive aspect of G-20;BRICS also announced fund for major projects- How to reduce risk for infrastructure investment for pension funds and insurance who prefer stable cash flows? - Encourage banks and NFIs to finance construction and re-finance projects - Infrastructure trusts such as USG / Chicago fund - IFC co-financing - MIGA bonds for PP-investments- Purposely put the image here not of the G-20 leaders but the B-20; B-20 report pointed to need for dramatic growth in stagnant productivity growth in the construction sector; recommended the creation of a Project Preparation Fund (PPF) to help countries structure projects to be more ready/credible for capital market investment
  • - Urbanization: Vietnam fastest- Youth: Philippines, Malaysia IndonesiaConnectivityInvestmentCould add: political stability, savings rate, educationView of EMs has been negative since Fed tapering began, but that is a blip; countries much better prepared than 1997/8; stronger current accounts, greater reserves, more savings, more investment; regional instruments such as financial lifelines; BRIC countries pledged $100 billion at same time as G-20 summit a few weeks agoAlso,ASEAN inching towards an FTA in good and services by 2015; and also the ASEAN-China FTA
  • Rising wages and anti-Japanese sentiment in China combined with steady growth and lower costs in ASEAN have shifted Japan’s focusJapan has been locating auto production to ASEAN, buying airlines in Myanmar, investing in port projects, precision car parts factories in ThailandOverall Japanese investment in ASEAN rose 55% in 2013, and fell 31% in ChinaOverall Japanese outbound FDI was $122 billion in 2012, not far behind ChinaIn 2011 Japan’s exports to China surged and helped its anemic recovery; Japan looked to be the key player capitalizing on China’s investment in infrastructure; but political volatility can spark significant supply chain shifts
  • Why be optimistic? New national economic pragmatism emergingNo more debate about free-market vs. state capitalismThese are lessons for IndiaCould be the real meaning of the “Mumbai Consensus”
  • But we do not have convergence in Asian diplomacyNo shortage of regional bodiesCoupled with China’s “smile diplomacy” and support for Asian economies post-1997, China experienced a decade of frictionless commercial expansionAsian institutions multiplied beyond ASEAN and ASEAN+3 to ARF and EAC – even “Asian Union” (Rudd)China,Japan, South Korea, India, Australia, New Zealand, and the ASEAN 10 launched a Regional Comprehensive Economic Partnership intended as a free trade group that contains 3 billion people;$20 trillion in GDP; 40% of the world's trade
  • Long history of geopolitical rivalries: “Asians rarely forgive and never forget”China took things too far starting in 2008/9Pendulum has swung in other directionNot only maritime disputes with Japan, Philippines, Vietnam, etc.But now tensions with many of its other neighbors – more than any other in the worldMyanmar and Mongolia are now test cases of balancing/limiting Chinese influence – North Korea next
  • But China has been persistentAble to maintain its domestic obligations and international ambitions better than people predicted in 2009/10Most recently formally took over operations in Gwadar; and has sailed commercial vessels to Iran
  • Playing the Heartland / Eurasian game isn’t going to work given India’s geographyMore than a decade was spent in false strategy of attempting equivalency or parity with China; emphasis was air force, nuclear modernization, armyHas become 4th largest defense spender, but lacks a clear grand strategy and force readiness is weak, defense sector is too rigid and bloated
  • Must invest much more substantially in naval modernizationIndia has spent about 1/3 on its navy even though it self-evidently has to look both East and WestIndia commands the SLOCs, and China is a long-way off from overcoming the Malacca trap
  • Have long supported TAPI and IPI pipelinesIran will eventually open up; current sanctions either won’t hold; or conflict/termination will open itIndia should be at the leading edge of thatThis means deepening the commercial integration with PakistanIt’s a curious and new phenomenon that your largest foreign investor can be a rival – just look at China in Mongolia and MyanmarSo India should seize opportunities wherever possible in Pakistan, and as far as the Caspian SeaThis will matter more than whether there are Indians embedded with Karzai, especially when he’s gone
  • Time to not just talk about looking East but actually do itMuch more serious engagement with Myanmar on energy and infrastructure as it leans away from ChinaRenewed emphasis on energy and naval ties with Indonesia and VietnamRestore the confidence of Japan in FDI into India
  • Ironically, technology, not politics, could unwind some of globalization/interdependencyMaersk Triple-E future assumes more global supply chains
  • - 3D printing scenario posits a world where anyone can make anything
  • How we think about geography has changedEast is now AsiaWest is three-pillaredBoth competing for regions in between

Transcript

  • 1. Is the Global Centre of Gravity Shifting to Asia? NASSCOM 8 October 2013 Dr. Parag Khanna Senior Fellow, New America Foundation Senior Fellow, Singapore Institute of International Affairs Adjunct Professor, Lee Kuan Yew School of Public Policy, National University of Singapore
  • 2. The World of the 1990s China European Union Japan India
  • 3. Today’s Global Marketplace European Union Africa South America North America Asia Middle East
  • 4. Structural Economic Convergence Accelerates
  • 5. Where is the Center of the World?
  • 6. Asian Growth Stacks Up 2011 (USD Billions) 8000 7000 6000 5000 4000 3000 2000 1000 0 China Total = 19 trillion USD India Japan Australia ASEAN
  • 7. Global Brain Flow: Expats and Repats
  • 8. Old and New Production Centers "Historical" market, which is losing dominance (19th and 20th century) Great growth market (end of the 20th century / beginning of 21th century) Market growth and new establishment (21th century) Relocation Second Phase Relocation
  • 9. Leading Sectors and the Spread of Innovation Sources: BrightHub, Scientific American, Lux Research, World Resources Institute
  • 10. The “New” New Thing Country Traditional Industries New Industries Philippines Agriculture, shipbuilding Electronics, logistics, BPO Bangladesh Garment manufacturing Pharma, agro processing, ICT China Industry, agriculture Clean-tech, advance manufacturing, automotive, telecom India Food processing, industrial machinery, agriculture BPO/KPO, animation, pharmaceuticals, retail Singapore Shipping, logistics, refineries Bio-tech, advanced materials remanufacturing, water treatment, alternative energy
  • 11. From “Brain Drain” to “Global Brain Flow” USA Scientific Papers Published Patents Filed New Products/ Market penetration EU China Japan South Korea Israel India 2,967,957 3,712,570 719,971 770,252 254,599 108,706 266,230 490,226 125,774 391,177 344,598 170,101 7,306 34,287 IBM Nokia Huawei Canon Samsung Dexcel Pharma Infosys Microsoft Siemens Lenovo Toshiba LG TCS Teva Pharma Motorola SAP ZTE Sony Hyundai Intel Robert Bosch Panasonic Dongbu HP Ericsson Shenzhen Futaihong Precision Xerox Philips Innocom Technology Sharp Cipla dbMotion Qualcomm Honda Tata Motors Gamida Cell Ltd
  • 12. Recovering – and Rising – FDI Outflow
  • 13. Top 20 Asian MNCs Rank Company Global 500 Rank Country 1 2 3 4 5 6 7 8 9 10 11 12 13 14 15 16 17 18 19 20 Sinopec Group China National Petroleum State Grid Toyota Motor Japan Post Holdings Samsung Electronics Nippon Telegraph & Telephone Hitachi JX Holdings Nissan Motor Hon Hai Precision Industry Industrial & Commercial Bank of China Honda Motor SK Holdings Panasonic Petronas Nippon Life Insurance China Construction Bank China Mobile Communications Indian Oil 5 6 7 10 13 20 29 38 41 42 43 54 64 65 66 68 74 77 81 83 China China China Japan Japan South Korea Japan Japan Japan Japan Taiwan China Japan South Korea Japan Malaysia Japan China China India Revenues ($ millions) 375,214 352,338 259,142 235,364 211,019 148,944 133,077 122,419 119,258 119,166 117,514 109,040 100,663 100,394 99,373 97,355 90,782 89,648 87,544 86,016
  • 14. Huge increases in Chinese Overseas FDI
  • 15. Asia’s New Iron “Silk Roads” How$ the$ will$ new$ railroads$ silk$ affect$ Singapore?$
  • 16. Investment/GDP Ratios Higher in Asia No. Country Year Investment (% of GDP) 1 China 2010 47.742% 2 Indonesia 2010 32.574% 3 Japan 2010 19.774% 3 Malaysia 2010 21.416% 4 Korea 2010 29.572% 5 United States 2010 15.836%
  • 17. 18.0 Infrastructure Investment Delivers Higher Growth 16.0 14.0 12.0 10.0 8.0 6.0 4.0 2.0 0.0 GDP Growth Rate (2010) % of GDP spent on infrastructure
  • 18. Infrastructure & Jobs on top of the Global Agenda
  • 19. ASEAN’s Growth Drivers Urbanization • 2-3% per annum urbanization rate • Mega-cities and commercial centers Demograhics • Average age: 27 • High female participation in education and workforce Connectivity • Over 20 regional airlines • High-speed rail network Investment • Infrastructure spending rates rising to approx. 8% • ASEAN Infrastructure Fund
  • 20. Japan Looks to ASEAN
  • 21. Convergence of Policy Priorities • • • • • • • Capital controls; currency devaluation Long-term infrastructure investment Industrial policy/national champions Net benefit laws Counter-cyclical fiscal policy (“stimulus”) Reducing Gini co-efficient/inequality Enhancing productivity/return on capital
  • 22. Diplomacy without Unity
  • 23. Can Asia Stay Stable?
  • 24. China’s “String of Pearls”
  • 25. This should have been answered by now
  • 26. India Needs Better Navigation
  • 27. Look West
  • 28. Look East
  • 29. India: States versus the State
  • 30. The Future of Globalization (I)? The Maersk Triple-E
  • 31. The Future of Globalization (II)? The 3D Printer
  • 32. Competition Redefines Regions
  • 33. Contact PARAG KHANNA paragkhanna@gmail.com