Thursday, May 20, 2010

The Search for Growth

Sovereign balance sheets are under intense media scrutiny. Sadly, the scrutiny lacks actual analysis. What makes a debt-to-GDP of 120% for a country more palatable than debt-to-GDP of 80% for the other? The answer is growth. So where is growth going to come from?

From the first principles approach, we know growth is derived from two sides. First, an increase in the penetration of current activity to cover more population leads to growth. Second, inventing new activities leads to growth.

Developing countries are growing using the first method. They have population where goods and services are yet to reach and mature. The risks involved in such growth are well understood.

Developed countries essentially rely on second approach to growth. The technology boom created one innovation driven growth wave in late 80’s and early 90’s. Internet created next one in late 90’s and early 2000. So where will the developed countries get the next source of growth? The answer is still not clear.

First, the tech-led triggered after more than 3 decades of scientific research. Modern computers and the Internet were inventions of 60’s and 70’s before they became a true mass-invention capable of driving GDP growth. At the moment only alternative energy seems to be on such a take-off point. In my limited understanding both nanotech and biotech will take more time and won’t be mass-inventions for another few decades.

Finally, it means that investors should be better off targeting “penetration-led” growth in the interim.

Monday, May 17, 2010

West - decline or browning

Stephen King of HSBC has come out with a new book. According to the reviews, it forecasts the decline of the west in the context of the current crisis. I was of a similar opinion. 

The decline of west is not specifically a decline but more like mean reversion. Asia was a significant player in the global context for mos of the past 2000 years. The recent 500 years have pushed the west ahead. With this background, coupled with the current weakness in the households and governments, there is a compelling case for a relative decline or more correctly a stagnation of the west.

Yet the infrastructure in west is fundamentally very sound and hence it is hard to make a definitive conclusion. A more reasonable approach seems to be one suggested by John Hempton. He refers to what I call a "browning" of the west. It implies a population growth through migration, predominantly from Asian region.

If and how will the western world react to this new trend remains to be seen. One predictable response should be a wave of protectionism against people movement. Possible job protection and corresponding labour harsher labour laws is likely. Yet even this is not certain. Europe has shown surprising resilience in protecting and upholding democracy and capitalism. It is possible they might stand up to negative developments again.