By Joseph Anton
The world is moving toward a more robust and efficient trading market. It has been driven by a series of intentional and unintentional events and is setting the stage for an explosion in world trade. The growth will be led by the migration of people from the Second World Economy (SWE) to the First World Economy (FEW). A simple demographic movement made possible by the confluence of the most distinct events that have occurred in the last half century.
There are 6.6 billion people in the world and approximately 2.2 billion people are not poor. They live in developed or developing countries have access to modern technology, clean water, and some health care and essentially make up 90% of the world’s GDP—which is estimated at $66 trillion. They are part of the First World Economy. The balance of 4.4 billion is poor but they won’t be for long. Between 80 million and 120 million people per year are moving to the FWE from the SWE. On a population base of 2.2 billion people that is an annual growth rate between 3% and 5%—and in population terms that is an explosion.
There are a number of factors responsible for this phenomenon. In fact, with hindsight it is easy to point to several of the seminal events that have shaped this continuing trend: the fall of the Berlin Wall—which underscored the failure of Communism and the concomitant entry of almost 500 million people into modern society; the expansion of democracy around the world and the absence of World wars. Moreover, growth was enhanced by the continued economic expansion of developing countries fueled by the availability of inexpensive labor and the absence of restrictive tariffs.
A further impetus to growth has been the advances in technology which has provided big gains in productivity. A prime beneficiary of the technology advances has been the declining cost of communication which in large part is the result of the boom and bust of the telecom era that provided a cheap post-bankrupt infrastructure. The development of modern business practices like “just in time” inventory; the elimination of State-controlled master plans, and the basic human instinct to have “more” when “more” is available, have also made a contribution.
The First World Economy is comprised of people from all developed countries (U.S., EU, Japan, etc.) and portions of developing countries like India, China, and remnants of the Soviet Union.
China has a population of 1.3 billion people. About 300 million live along the coastal communities and participate in the First World Economy. The other 1 billion live in the rural mountains and spend their time trying to subsist. As a result of the economic explosion in world trade, millions of Chinese are moving from the mountains to the cities. A similar phenomenon is occurring in India as Second and Third World people enter the First World Economy.
India’s urban areas still hold less than 30% of the total population. China’s urban areas hold less than 25% of their population—in 20 years, 850 million Chinese will be urbanites. Urbanization is a phenomenon, and it is considered the second wave in modern world growth.
The first urbanization wave took place over two centuries (roughly from 1750-1950) in North America and Europe. Urban population increased from 10% to 50% or 15 million people to 400 million people. This produced industrial societies that now dominate the world. The process was slow and gradual and only involved a few hundred million people over a span of 200 years. In the second wave of urbanization the number of urbanites will grow to 4 billion people within a few decades!
Until now mankind has lived and worked primarily in rural areas. That has changed—more than half the world’s population lives in towns and cities. And these people are in motion—they are moving to the cities, drawn by an enormous opportunity of increased wealth, economic prosperity and improved living conditions. At the global level, all future population growth will occur in towns and cities. And most of this growth will be in developing countries—in fact, urban population will barely grow in developed countries.
A feature of urban population growth is that it will be composed to a large extent of poor people entering the First World Economy for the first time, and requiring First World Economy goods and services. This population “growth” is unlike any in the past. It is the passage of adults from the Second World Economy to the First World Economy. Nor is it like a baby boom era when the population rose substantially and steadily with the newly born. This population boom exists of adults (families as well) who need material things now—food, shelter, goods and services. And not in baby-size quantity—in the adult-size packages!
The current market corrections will most certainly interrupt this growth trend—but it will not derail it, simply because the foundation has been laid and the nations of the world are cooperating (relatively.) The silver lining within this credit crisis is that the world’s industrial nations reacted quickly and definitively to avoid a melt down. Even more importantly was that many of the creative and swift responses came from outside the U.S.
In 2007, global output rose by 5.2%, led by China (11.4%), India (9.2%), and Russia (8.1%). Worldwide, nations varied widely in their growth results. But the nation-state as bedrock of economic/political institution is steadily losing control over international flows of people, goods, funds and technology. Of the top ten container ports in the world, only one is in the U.S. Although the U.S. has over 5,100 airports (defined as paved runways) China has only 400. I think there is room for expansion!
The U.S. is often criticized for its trade imbalance and many often criticize China for its trade surplus, especially with the U.S.—but one should note that China’s imports have been growing steadily as their domestic demand continues to grow. In 2007, China’s imports totaled $902 billion while its exports totaled $1.2 trillion—only a slight imbalance in my opinion. And India imported $80 billion more than it exported!
No one can predict the tough problems that will be encountered by this explosion of growth. But I believe the problems will be managed and resolved, although some with greater difficulty than others. But the unprecedented growth will at least provide a resource for some solutions as we bring the rest of world into the First World Economy.
These trends are positive for the U.S. and certainly positive for investors who allocate on a worldwide basis and take advantage of relative growth rates. Developing countries need American products (aerospace, software technology, bio and pharma, etc.) and as the First World Economy grows, so grows the U.S.
Finally, I would not be surprised to see developing countries institute Keynesian type mandates to assist in stimulating internal consumption during periods of slower growth. Their current reserve balances are sufficient to engage in such policy even though they are new at that game.
What are the consequences of a rich and robust explosion in world trade? I don’t wish to sound like an idealist, but the consequences are no different than the issues which we face today.
Americans have a tendency of not facing difficult issues until they are on the brink of disaster. We have watched an informed citizenry postpone decisions on social security, Medicare, climate change, terrorism, energy policy; and unfortunately, this behavior pattern is unlikely to change until a crisis exists. So future policy changes will be abrupt and disruptive, but in a world that is growing so rapidly there will be resources to relieve the shock.
Food will be in abundant supply, and the world will be fed. Political turmoil and logistics may prevent adequate food supplies to the poor but Malthus is dead. Modern technology and the ratio of arable land to population are sufficient to feed the world’s population.
The true challenges that we will face are the ones that man can resolve but will be tortuously slow in doing so. Pollution, social upheaval, transition from Second World to First World economies—any issue that requires a consensus will be difficult and require a new set of leadership skills. But commerce will prevail and practitioners should be prepared to deal in every time zone around the world.