George Osborne has backed the wrong Asian emerging market horse
Give him his due; George Osborne is a clever man. He has rightly seen that a becalmed EU will not provide the UK with exciting new macroeconomic avenues for growth – for that he must look eastwards. This brainwave amounts to a massive macroeconomic and geostrategic shift for Britain, and is entirely in line with the new power realities of the world. I kept thinking of all this as I watched the British government fete Chinese President Xi Jinping to an almost embarrassing degree on his state visit last week. But there’s one basic problem with the chancellor’s master plan: he’s picked the wrong emerging Asian market to woo.
Beijing remains a rising power, likely – despite all its many problems – to continue to increasingly count in our new era. According to PwC, in 2000, EU countries together accounted for 25 per cent of global GDP, trailed closely by the US at 23 per cent, with China bringing up the rear at 7 per cent. By 2030, a blink of an eye in historical terms, these numbers are set to be dramatically reversed, with China accounting for 19 per cent of global GDP, the US 16 per cent, the EU countries 15 per cent, and India (up until now a blip on the global economic screen) 9 per cent.
So far, so good. But there are real macroeconomic and strategic problems in betting so strongly on the Chinese racehorse. First, the mandarins in Beijing have rightfully acknowledged that they are through the phase of easy catch-up growth. Growth rates are naturally slowing from northwards of 10 per cent to more sustainable territory in the 5-7 per cent range, as China moves up the value chain, morphing from a manufacturing colossus into an economy more reliant on services and domestic consumption.
Demography is also a huge (and largely underreported problem) that China will have to grapple with. This is a terrible self-inflicted wound, as the One Child Policy – government meddling at its worst – rather than alleviating overpopulation, has dramatically pushed the country down the demographic rabbit hole. In 1995, some 245m Chinese were in their 20s. By 2025, on current trends, there will be only 159m, a whopping decline of 86m within a single generation. As such, there is a real danger that China will get old before it gets rich.
Finally, last week’s slightly over-the-top love fest for Xi has begun to worry America, still by far the most powerful country in the world, as well as being the largest direct investor in the UK. No one in Washington thinks the Cameron government should shun China. However, by appearing to be so ridiculously accommodating to Beijing, London is raising eyebrows in the United States, which has long seen the UK – despite everything – as its best friend in the world. It is an odd time to pick to estrange the Americans, given that a Britain outside of the EU would certainly turn definitively to the US as its primary economic and strategic partner.
But while trade and economic policy are certainly not a zero-sum game, there is another good macroeconomic and strategic reason to question the chancellor’s judgement. This is because, in wooing an authoritarian China so assiduously, a rapidly rising democratic India has rather been forgotten. And over the next generation, I’d venture to say, India is a better economic and strategic bet.
India is the only major emerging market with still favourable demography, allowing it to indulge in easy catch-up growth for years to come. Given the improvement of the relatively new Modi government, India’s growth rate in the second quarter of 2015 was an annualised 7 per cent, already on a par with China. If Prime Minister Modi can win control of the Upper Indian House over time, he can pass the vitally important goods and service tax reform, actually and finally uniting India as a single common market. This would amount to the next big bang globally, and would undoubtedly economically propel New Delhi forward for years to come.
Finally, India is part of the Anglosphere, the democratic nations of the world that share a common British colonial experience. From America to Australia, India to Canada, this is a vital economic and strategic alliance worth exploring in the years ahead, as its members share a common ideological commitment to free markets and free peoples.
I have no problem with Osborne innovatively turning to Asia as the future of the world; I just wish he’d backed the right horse.