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India vs. the Asian Model

A lot of ink was spilt in the past few years about the glories of globalization and free trade.  We are big believers in the virtues of free trade, and we were happy to see world policymakers move this direction (even if it was in direct opposition to public opinion).

The problem is that in an integrated world economy, the trade partners that grow rich together also go broke together.  We wrote about this at length in the May 2007 issue of the HS Dent Forecast.(“Going Down With The Ship”), and more recently in the pages of this blog. 

Today, virtually all of East Asia is fighting its worst recession since the Asian crisis of 1998.  With demand in the US and Europe—the ultimate destinations for most Asian exports—drying up, many of these countries are wondering if their embrace of free trade was more harm than good. 

Though the world trade system is in tatters, we believe it would be a monumental mistake to pull back from free trade and slip into economic isolationism (may Messrs. Smoot and Hawley forever live in infamy for the havoc they wreaked on the world economy in the opening years of the Great Depression).

Erecting new trade barriers would make matters worse, but ironically those countries that already had them in place are faring comparatively well.  Consider this account by the New York Times:

 “The Upside to Resisting Globalization”As globalization spread in recent decades, the pace of world economic growth picked up. Open economies, it turns out, can grow faster than closed ones. But now, as the financial crisis has turned to an economic one, it appears that those running a closed economy may be in better shape to weather the storm. Kenneth S. Rogoff, the Harvard economist, noted at the International Monetary Forum in Davos, Switzerland, last week that India, which has “comparatively stringent restrictions on international capital flows,” also seemed to have the most optimists and seemed to be in line for economic growth in a year when few countries are.

We have written positively about India since 2006, and we have repeatedly said in the HS Dent Forecast that we see India as a better long-term bet for precisely the reasons discussed above.  India has an economy based primarily on domestic consumption.  This insulates the country from global turmoil to an extent.

The “Asian model” of exporting to the West is a moneymaker…so long as the West is buying.  Now, China, Japan and the other East Asian economies are struggling to find a new model that can sustain the levels of growth to which they have become accustomed. 

Meanwhile, India—which never enjoyed the export-fueled growth of her emerging market contemporaries—continues to plod along.  While there has been much to criticize about India’s economic policies in the past (and today too, for that matter), India may well emerge from this long-term recession as the new economic leader of Asia.