Three Billion New Capitalist reviewed in The Economist
The power of economic growth: Asia ascending
6/11/05 Economist 17
2005 WLNR 9244453
Economist
Copyright 2005 Economist Newspaper

Three new books examine the rise of China and the rest of Asia, and draw starkly different conclusions about what this means for the rest of the world

CLYDE PRESTOWITZ'S "Three Billion New Capitalists" will make unhappy reading for Americans. China's growing domination of global manufacturing and India's booming IT services sector have led to a shift of skilled jobs from the west to the east. Declining standards in American schools and government laisser-faire are costing America its position as a world centre for science and innovation. America's trade imbalances are putting the dollar under terrible strain. All in all, Mr Prestowitz argues, the economic transformation of China and India will mean the demise of America and a looming global economic crisis.

But is his pessimism overdone? The emergence of all those new capitalists (more than a billion each from China and India, the rest from Russia and eastern Europe) is surely grounds for celebration, given the increase in world growth that this portends. But Mr Prestowitz, a former Reagan administration official who runs his own Washington think-tank, writes from a narrow national perspective. He sees only threats--to America's jobs, its living standards, even its survival.

Some of his points hit home. The dollar's role as the world's reserve currency has indeed exempted America from having to worry overly about its debts. Meanwhile, many Asians are saving too much, hence the economic imbalances facing the world today. Parts of America's educational system and infrastructure badly need modernising and the country has lost much of its manufacturing industry, from 28% of GDP in 1949 to 12% or thereabouts now.

But the remedies that Mr Prestowitz proposes betray his agenda as a disillusioned Republican. He wants America to institute an "industrial policy" to regain competitiveness and protect its technology; in other words for the government to pick winners among industries and companies. And he advocates protectionism where other trading partners do not play "fairly". While such an approach might save jobs in the short run, open markets and trade surely remain the best way to raise overall global growth and wealth sustainably--the reason why the three billion have turned to capitalism in the first place. Mr Prestowitz seems more concerned about dividing the pie than expanding it. In making his point, he overstates his case. America's corporate sector, technology,research and entrepreneurial traditionremain second to none. Nor are the emerging Asian nations (even China) as monolithic and as single-minded in their quest for advancement as he implies.

Indeed, the point that China is an agglomeration of loosely coupled regional economies--some successful, some less so--is well made by Michael Enright, a professor at the University of Hong Kong, and his colleagues in an excellent and exhaustive new study of the greater Pearl River Delta (PRD) area. This region of southern China, encompassing much of Guangdong province, Hong Kong and Macao, is where the mainland's economic reform and renaissance began in 1979. It still leads from the front today; with a GDP of more than $270 billion, the PRD is the world's sixteenth biggest economy and tenth largest exporter. Mr Enright is optimistic for the future, arguing that as China liberalises further, the PRD--with its high density of companies benefiting from foreign investment and operating at world-class standards will benefit disproportionately.

But the PRD's rise was made possible only because of its proximity to Hong Kong, which offered access to capital and business know-how and which served as an investment platform into Guangdong, first for its own companies and then for those from the rest of the world. The success of China's economic engine, in other words, was not the foregone conclusion that Mr Prestowitz would argue.

Another example of the importance of luck comes in Donald Sull's new book, "Made in China". Taiwan's Wei brothers had tried to build a food business on the mainland. They were almost ready to give up, when the youngest brother, during a long train trip to Beijing, opened a package of Taiwanese instant noodles and was nearly mobbed by his fellow passengers. Today, the Wei's Master Kong noodles have nearly half the mainland market--far more than they enjoy back home.

Mr Sull, a professor of management at London Business School, decided to look at China's entrepreneurs in order to learn about managing in a highly unpredictable market. It is a good idea in principle. Unfortunately, his profiles are little more than thumbnail sketches, while the lessons drawn from the entrepreneurs' experiences are too often banal--one should seize "golden opportunities" and execute a strategy aggressively. Few readers outside China will have heard of the eight companies studied, apart from a white goods group named Haier, and Lenovo, which has just taken over IBM's personal computer division. And although the book is only just finished, one company has already had a severe profit warning (UT Starcom, a telecoms equipment group), a second may shortly be taken over by a rival (Internet portal Sina) and a third lost its chief executive in April after a sharp drop in profits (AsiaInfo, another telecoms firm). It may happen one day, but China is not yet ready to take over the world.