|Review - CFO.com|
|Friday, 27 May 2011 14:26|
A Two-Track World
By Kate O'Sullivan
In a new book, Nobel laureate Michael Spence aims to help CFOs understand what growth will look like in a world where developed economies and emerging ones are moving at very different speeds.
The U.S. economy continues to bump along unsteadily, and the eurozone countries are grappling with ongoing debt crises. Japan, already stymied by years of economic stagnation, has been sidelined by a natural disaster. Yet, while these developed markets struggle, opportunities abound in the developing world, where a faster recovery, rapid industrialization, and booming populations are driving demand.
In his new book, The Next Convergence: The Future of Economic Growth in a Multispeed World, Michael Spence — winner of the Nobel Prize in economics, a former dean of Stanford Business School, and currently professor of economics at New York University's Stern School of Business — explores the history of these two segments of the global economy and examines the challenges and opportunities that will arise as the established economies converge with the new drivers of global growth.
Recently, he spoke with CFO about the key points for finance chiefs to consider as they think about growth and expansion in the ever-changing global market.
What are some of the critical points in your book that you would relay to CFOs?
These markets are also shifting fairly fast, so my second observation is that one would have to be fairly fleet of foot in moving portions of global operations or supply chains around. China's about to price itself out of lots of export industries where it appears to have been dominant in the past. So that economic activity will move to other countries.
My third observation is that there is a huge investment boom coming in the global economy to sustain the growth in emerging markets. So, while it's not a sure thing, it looks like the cost of capital is going up. I would say to CFOs that an efficient use of capital, focusing on access to reasonable-cost financing, should be a higher priority than it has been in the past 15 years in a very low interest rate, low cost of capital environment.
Because these emerging economies are moving up the value chain, they also represent a shifting pattern of competition in terms of our domestic activity. That affects so many industries differently.
If you're a U.S. CFO with a U.S.-focused business, how will the
growth in the developing world — and slowing growth in the developed
world — affect you?
Do you think the advanced economies will continue to be that, the advanced economies? Or will it reverse at some point?
It'll be a bigger economy and there will be more people participating in it. But it's not a zero-sum game. We don't have to lose when they win. In fact, we may win when they win.
That doesn't always seem to be the prevailing mind-set.
Are there things the advanced economies should be doing to stay competitive?
I think our economy has great strengths. We have a flexible economy. We have an innovative economy. I think most of the heavy lifting is going to have to be done on the government/public sector side. I think we're underinvesting in total, and we're going to have to improve our performance in education, improve our infrastructure, have an energy policy that makes some sense, and a tax system that makes some sense that doesn't have oddball incentives in it to invest abroad rather than at home.
We have been overconsuming and underinvesting for an extended period of time, and we're going to have to reverse that pattern to be as effective as we can be.
Is there a risk that the developing world will stall out?
There's nothing inherent that prevents [that transition] from happening, but governments can make mistakes. They can hold the exchange rate down, or they don't invest heavily enough in the human-capital base of the economy to sustain more-innovative work, or they subsidize the wrong things.
When you look at it, there are really only five countries that we're aware of that have kept the growth up and made the middle-income transition. [They are Japan, Korea, Taiwan, Hong Kong, and Singapore]. China's entering it right now, and it remains to be seen whether they're going to be the sixth country to do so.
Most of the Latin American countries and a number of the Asian countries slowed down significantly. The middle-income transition has never been made at the scale of an economy the size of China. So we'll see. I think they're working on it hard. They have a five-year plan that has most of the moving parts in focus. Now it's an implementation question.
Talk about the impact of population growth on the global economy.
Then you have countries that are going to have high population growth, and that's a problem for them. They tend to be poorer countries, and high population growth doesn't help at all.
There's also a more subtle issue in that countries differ in what they regard as areas in which people are allowed to exercise freedom of choice. Typically, the number of kids you have has been one, with China the obvious exception. But there are questions like how you build a city, how many cars you have, how much fuel you consume, that have fairly large external effects. One of the things coming down the road in the U.S. is a set of fairly fundamental questions as to where we view the line of individual freedom and constrained choice when it comes to the impact on natural resources and the climate.
Trying to tell people that they can't buy SUVs is going to be a hard sell.
The growing demand associated with substantial growth in the world economy is having an impact on commodity prices in agriculture, in energy. There's considerable concern about minerals and whether or not there are substitutes or whether we're just going to run out of them.
Prices will go up, and then people will start economizing on the use of these things by virtue of their own choices. There will be big incentives to develop technologies that economize further on them. That will all be helpful. That's really the market mechanism working well, maybe with an assist from the government in terms of providing certain incentives.
It may be a bumpier journey than is ideal. The whole thing is going to be a bumpy journey. One of the themes not just of my book but also of other books is that the integration of the global economy and global financial system is well ahead of regulatory integration on a global level, and there will be a lot of volatility. I don't think it's going to go away, even if Europe and America solve their current fiscal challenges.
What can CFOs do to manage in such a volatile environment?
|Last Updated on Friday, 27 May 2011 14:58|