According to a recent study by Standard & Poor’s, the best-performing stock markets over the past five years were all to be found in emerging economies. Australia, whose avoidance of recession in the wake of the last financial crisis was widely described as a miracle, was the sole developed nation to feature in the upper half of the table.
One subsequent poll of experts painted a particularly unpromising picture for anyone with a spread of investments geared largely towards the West. The overwhelming consensus was that developed markets are unlikely to reassert their dominance. Indeed, developed economies mustered a grand total of one vote – for the US – when it came to tipping the leading performers of the next five years.
Published ahead of November’s G20 summit in Cannes, the study offered further compelling evidence of how the global axis of economic power is moving from West to East. This inexorable shift, not least as the West’s problems continue to mount, is now quite beyond dispute – and at its heart, of course, is China.
Earlier this year the Dragon officially overtook Japan as the world’s second-largest economy. Ministry of Commerce figures reveal foreign direct investment in China in the first eight months of 2011 alone totalled more than $77bn. Asia Society, a non-profit organisation that works to strengthen relationships between the US and Asia, predicts Chinese overseas direct investment could reach as high as $2trn by 2020. China surges on; Japan, by stark contrast, finished in the bottom three of S&P’s study.
Yet China did not top S&P’s rankings. And guess again if you think one of its BRICs counterparts claimed the honour instead (Brazil was second). In fact, the number-one spot went to Indonesia, whose stock market delivered an annualised return of 18.7%.
This clearly tells us something about the wider potential of East Asia. It is easy to be blinded by China’s surge towards superpower status, to be awed by the remarkable figures generated by its transformation into the epicentre of the worldwide economy, but it does not have a monopoly on success.
Many academics have for years argued that the Far East’s economies should cooperate rather than compete if they are all to prosper in the long term. Designed to reduce the threat of naked self-interest and resultant trade warfare, a number of Regional Trade Agreements have been inaugurated since the Asian financial crisis of 1997, with the most significant of all, the RTA between China and the Association of South East Asian Nations (ASEAN), coming into effect on January 1 2010.
China is without question in charge of its own destiny, and its influence on those around it cannot be denied. But new research by the Globalisation and Economic Policy Centre (GEP) and Nottingham University Business School sheds an instructive light on the sophistication of supply chains and production networks in the area and underlines that, while China predictably dominates, many of the Dragon’s neighbours still have vital parts to play – and thus something to offer.
The research looks at Malaysia, which, like Indonesia, is a member of ASEAN and one of the so-called “New Tigers”. These burgeoning economies have on the whole been pursuing the same export-driven policies favoured by the original Tigers – Taiwan, Singapore, Hong Kong and South Korea – which enjoyed a sustained boom from the early 1960s.
In the 1970s it was these first Tigers that received foreign direct investment (FDI) from the multinationals of developed economies such as the US, Japan and European countries. In the mid-1980s the focus moved to ASEAN, and in the late 1990s it switched to China and, to a lesser extent, Vietnam.
Thus ASEAN’s share of FDI has decreased as China’s has rocketed, with Malaysia’s proportion falling most of all. The familiar conclusion is that Malaysia has therefore lost out to China in the race for FDI, but GEP’s survey of multinational enterprises in Malaysia – although partly confirming this inference – uncovers a more complex set of changes.
In reality, the flow of FDI into China is not entirely a diversion from Malaysia. Rather, multinationals are rationalising their activities in such a way as to gain from common governance of geographically dispersed activities. Effectively, Malaysia has assumed a position that is complementary to China’, serving as a source of managerial talent and regional coordination.
How might Malaysia take full advantage of this situation? As the research suggests, if its policymakers keep pace with multinationals’ business objectives by upgrading the workforce to fill more knowledge-intensive jobs – an important consideration in view of the intense competition for talented “human capital” in the region – Malaysia could maximise the benefits of its new place in an increasingly well-organised trade nexus.
We should not be remotely surprised, especially given the brittleness of Western economies and their interrelationships, that Chinese Premier Wen Jiabao’s speech at November’s China-ASEAN Summit, held in Bali and marking the 20th anniversary of the first constructive dialogue between the Dragon and the New Tigers, was a veritable paean to the spirit of collaboration.
“Many leaders of ASEAN countries have told me ASEAN’s relations with China are the most practical, most extensive and most fruitful,” he said. “I couldn’t agree more. China and ASEAN countries are all developing countries. We pursue economic development and improvement of people’s lives as the most urgent and important task and place top priority on bringing tangible benefits to our peoples and our region. China and ASEAN countries enjoy geographical, cultural and historical proximity, maintain close contacts and exchanges in various fields and have unique and favourable conditions for carrying out cooperation.”
Cynics could argue that China’s pre-eminence facilitates such noble proclamations and renders them less than wholly sincere or meaningful. And yet would the same address from a Western leader sound more or less convincing in the current climate? Some might say Western cooperation – such as exists as present – is merely a ramshackle expedient by comparison.
It was inevitable that the extraordinary growth of China’s economy should reshape our universe of global economic activity. But if China is increasingly the sun around which others revolve then many of those closest to it might just as easily bask in its glow as be consumed by its fire; and it is the West, not the East, that looks likely to feel the chill for some time to come.
Dr Eunice Ngat-Chin Lim is a Lecturer in International Business Strategy and Strategic Management at Nottingham University Business School in Malaysia, where she is also a Research Fellow with the Globalisation and Economic Policy Centre (GEP).
Posted on Friday 4th May 2012