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India vs. the Asian Model, Part II

In a prior post on India, we wrote, “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),Indiamay well emerge from this long-term recession as the new economic leader ofAsia.”   A few days later, we wrote in a follow-up, “Unfortunately, the “good” countries who followed the economic rules have gotten punished…hard.  Meanwhile, the “bad” countries, who broke all the economic rules have survived relatively unscathed.”  Today, we see more evidence that India’s “bad” behavior has been rewarded.  The country’s rather dirigiste economy, in which the dead hand of government is quite a bit heavier than in most countries, continues to hold up relatively well.  Consider this recent article from the New York Times:

“India Maintains Sense of Optimism and Growth”

 India’s trillion-dollar economy remains a relative bright spot, some say, in part because the country’s bureaucracy and its protectionist polices have kept it insulated from the fallout of the global downturn…. 

Advocates of free enterprise often complain about many of the country’s economic policies, including a state-dominated financial system virtually unconnected to foreign markets; sluggish export growth because of bureaucracy and shoddy infrastructure; and hundreds of millions of farmers who raise crops mainly for domestic consumption. But such policies have helped the country maintain its ground as the world slides into a recession.

After reading the Times article, we found ourselves with the old Alabama song “Song of the South” stuck in our heads:

Well somebody told us Wall Street fell, but we were so broke that we couldn’t tell.  The cotton was short and the weeds were tall, but Mr. Roosevelt’s a gonna save us all.

 What we are seeing is that, at this stage, India remains so economically undeveloped and unintegrated, they’ve managed to not notice the chaos surrounding them much like the poor Southern sharecroppers in the song.  Meanwhile, the US turns to a new “Mr. Roosevelt” in the person of President Obama to “save us all.”   It would be tragic if countries learned the wrong lessons from India’s relative success and rolled back the gains in globalization in the years ahead.  The last great era of globalization came to an end with the First World War with perhaps the low point coming with the passage of the Smoot-Hawley Tariff at the onset of the Great Depression.   At this stage, freer trade cannot “fix” our problems, but erecting trade barriers can certainly make them worse. Moving on to the other emerging market giant, we see that 

“China Starts Investing Globally”

 

China is taking advantage of the economic downturn to go on a major shopping spree, investing in energy and other natural resources that could give it an economic advantage it has never had before….

 Chinais flush with cash—thanks to trillions of dollars from decades of selling goods to the West—at a time when credit markets are tight and collapsing commodity prices have left energy and natural resource companies desperate for cash.

 This is good news for China and for the rest of the world.  By buying commodities now, when prices are distressed, China is stockpiling for the future.  With the Western economies in tatters, the world could benefit from a strong China absorbing excess supply.  As we have written repeatedly in the HS Dent Forecast, China is not ready to “replace” western consumption.  The Chinese economy is not yet big enough, and it may never be big enough for that matter.  But at this stage, even a mild mitigation would be a positive.