All doom and gloom?

I think it has become clear, that I am a bit pessimistic about the economic development in the USA and also the European Union to say the least. This is because it seems a severe decline is the most coherent narrative of what lies ahead, when you extrapolate the past developments – not so much of the economics, but the politics – into the future. I will try to substantiate this point in future postings, but for now, I want to have a look at the rest of the world.

The outlook for the rest of the world is radically different from the developed countries. It is very hard to draw historic comparisons between the development of formerly underdeveloped countries to the contemporary state of the art and not paint a rosy picture of the economic future of places like China or India.

Countries like South Korea, Taiwan (as a mostly independent economic entity), Japan, Malaysia and others caught up to levels of roughly half of western per capita GDP from a severely underdeveloped economy within decades – at which point growth rates started to slow down significantly. It basically follows something with the general characteristics of a logistics curve. (*)

And the main point is, that neither India nor China or most of the African countries are even close to half the per capita GDP of the USA or Europe. And it is clear that those countries have a lot of potential to grow, because a lot of people are still left behind – not for lack of resources or deliberate impediments, but simple lack of infrastructure and economic development that is currently in the process of being build and coming into existence.

This doesn’t imply that there won’t be anything that could stop this development – but for the next few decades the question those countries face has really turned from “How do we get development started?” to “How can we avoid to mess it up?” However, once modern technology, infrastructure and business practices have spread, the next relevant question turns from, “How do we get what all the others already have?” to “What can we do to be better than all the others?”, which is much harder to answer.

The development of Africa typically still eludes the western media – it has seen a spectacular development over the last decade. While some people blame it entirely on investments by China (or a rush for resources by that country), it is far too widespread to have that as its singular cause. Rather, it must have been a widespread structural change in the economies of the 54 countries on that continent.

There is a case to be made that investors became much more interested in investing in Africa during the early 2000’s after the burst of the dot.com bubble led to a shortage of high-risk high-profit investment opportunities in developed countries. But there is one much more fundamental change that happened at that time – mobile phones.

Ok, I know what that sounds like. Technology comes in to save the day – welcome to nerd-topia. But whenever a technology has transformed a society, it has always been held back by the necessary investments. But those happened to be very low – at least compared to putting copper wire or optical fibre to every last home – and came partly from foreign investors. Wireless technology can serve several square kilometers with a single, relatively cheap base station – which is about as advanced a technology as you need to start calling it magic compared to previous attempts at telecommunication in Africa.

Combined with the huge supply of redundant handsets from Europe (and eventually also brand new low-cost handsets specifically for Africa, India and so forth) they provided an ideal basis for extremely fast and thorough adaption of telecommunication devices by the population. There are now about half a billion handsets in use in Africa, over half the population seems to own one – as many as in the USA of the year 2000. (Btw. this also follows a logistics curve.) Figures for South and East Asia are very similar.

As mentioned below(*), one of the important parameters of the underlying models of any growth that follows a logistics curve, is the number of people whom people with knowledge or capital to invest can contact in order to find investment opportunities.

Having working telecommunication, instead of having to send everything by (slow and unreliable) letters or having to be present in person even for the most basic transmission of information – like the price of wheat at two or three neighboring markets, almost cannot fail to dramatically increase economic activity. In fact, you would have a lot of explaining to do, if such an increase had not happened.

Places like Africa are, actually unsurprisingly, some of the most innovative places regarding mobile phones. When you don’t have an infrastructure of established banks in virtually every last village, the idea of transferring money via cellphone simply has no established alternative and it is simply done. Whether you’re somewhere in Africa, India or Bangladesh, transferring money via cellphone is the most normal thing in the world. Whereas in industrialized countries you can’t do anything of the sort, because there are established (and more profitable) alternatives that people are used to and the banks are very reluctant to give up.

So, yes, I’m extremely optimistic about the development of places like Africa, India and China. This won’t help the industrialized countries much within this decade – but it puts a floor under some of the most pessimistic scenarios of economic development (barring a major war).

Within 20-30 years, the combined GDP of the developing countries will have surpassed that of the developed countries (at an average level of about 20% of their per-capita GDP). So that they will eventually provide a sufficient source of demand for exports and supply of investments to stabilize the old industrialized countries.

Both China and India are actively trying today to help stabilize Europe with their currency reserves already – because trouble in Europe would put another dent into their economic growth (as in the Asian crisis of 1998) and likely lead to social unrest – but one may doubt whether they have the economic and political heft to do that. The Chinese criticism of European and American economic policies may still be shrugged off by both western governments and the media, but they have made some good points about them being uncoordinated and unhelpful (to put it mildly).

(*) All of this is not surprising, as it describes the typical spread of technologies, business practices, knowledge etc. There is no fundamental reason why an African, Indian or Chinese should not be as economically productive as an American or European. But they need access to comparable (or superior) infrastructure, knowledge, capital and so forth. But those tend to come about only by some people already having access to knowledge and spreading it or capital and investing it.

The limiting factors are the number of people who have knowledge or capital and those people having connections with people who need knowledge or capital. Typically, at first the limit to growth is the number people in possession of those things, but also their opportunities to spread them, as infrastructure is underdeveloped and communication often limited to direct contact. In the later stages, the limit to growth is simply a lack of investment opportunities – because so many people already have access to the latest conveniences of economic development that it gets hard to find people who do not.

In fact, a single logistics curve doesn’t do an economy justice (although  it can be remarkable accurate for single products) – in fact it is a superposition of several logistics curves, distorted by dependencies and other factors. But you can expect the general features to be recognizable almost everywhere – very slow initial take-up, an unavoidable slowdown of growth once 50% of potential spread has been surpassed – because it is hard to modernize a country, when you have an increasingly hard time finding places that have not been modernized yet (or that are more expensive/difficult to supply).

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