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Global Industrial Transformation – Where Is It All Going?

September 18, 2013

Following on from Mike Owen’s earlier excellent summary of the Chatham House report on Global Industrial Transformation, I want to look briefly at some of the issues surrounding our views on a future scenario.  Our starting point was the enormous growth in the Chinese economy, and growth in the other BRICs and the rest of the “emerging” markets.  Their dynamism contrasts sharply with the stagnation and lack of growth in the OECD area.  Some of our thinking was based, either formally or informally, on an assumption that this performance discrepancy would continue out to 2020 and beyond.  This might in turn lead onto a broad “China uber Alles” type of view, together with a glance at US economic performance.  At which point the spades come out, and we start digging the graves of Western predominance, and count down the days when Mandarin becomes the new global language.

In an exercise conducted around the edges of the final Chatham House conference, and using the Globegro model developed by my colleagues at TLE ltd, an alternative lower growth scenario in Asia Pac was developed, and then played through the model to see what the world might look like in 2030.  The results were interesting, somewhat unexpected, and plausible.  In particular, we wanted to understand the retail transformation, since this was the area that David Hurst and I both contributed to the overall project.

Moreover, evidence suggests that fundamental shifts in retailing patterns occur when per capita incomes move through the US$10k to $15k per person per year zone.  Below that, more traditional forms of retailing are found.  Through and above that zone, retailing looks increasingly similar to patterns developed in richer OECD countries.

Our alternative scenario was based very much around a view of Japan in 1988/89.  Prior to that, the Japanese economy had been growing rapidly, and had apparently shrugged off the earlier impact of oil crises that had taken their toll on other OECD countries.  Many forecasters then extrapolated out from recent Japanese experience, and suggested that Japan too was on its way to becoming the largest global economy.  It didn’t happen.  The stock market crash, subsequent deflation, and two “lost decades” later, Japan clearly did not take over the world.  Those forecasters thinking it would, made what turned out to be a classic “turning point” error – they failed to see how Japanese performance had shifted to a much lower growth profile, as its achieved growth subsequently under-shot that of the rest of the OECD thereafter.

The alternative scenario used reduced the default growth rates assumed for China and India by around half, to something in the region of 4 to 5% pa.  Growth rates in other BRIC countries were also shaved down by a lesser amount.  Building on recent activity around “fracking” and increased energy output in the US, growth there was nudged up to something closer to 3% a year.  European performance continued to lag that in other areas.

In terms of per capita income projections, this had some interesting consequences.  Global growth was clearly reduced.  The only country whose consumers made it through the US$10k to $15k per person zone was China.  China’s gross output did not overtake that of the USA, and in many ways the grand transformation was limited just to China – who therefore became the exception.  The alternative scenario contained some other interesting insights as well.  India and South Asia (treated as a single bloc) found that their expected income per capita remained below US$10k throughout the whole forecast period, as did that of Africa and South America.  Indeed, the situation in South Asia began to develop Malthusian dimensions, as population growth consumed more resources, preventing a rise in per capita incomes.

Exploring these alternative futures is interesting.  It shows how even within the rubric of “global industrial transformation” many different forms are possible. These in turn may have rather different impacts on the future geo-political situation.  As we know (with certainty) neither of these two scenarios will play out as the model suggests.  What is of interest though is to see how two rather different constructs appear as a result of relatively small changes in our economic projections.

For further details of this exercise, please contact either myself, or David Hurst at the following e mail addresses: Andrew.Black@bvaltd.com and David.Hurst@TLEstrategy.com.

(written by Andrew Black)

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