Op-Ed Contributors

Ready for the next big one?

By Stephane Garelli (China Daily)
Updated: 2010-09-17 07:42

A jobless recovery for about a year is the norm. Companies start hiring again only after being convinced that the recovery is for real. Experience shows that even companies that fare relatively well during a recession tend to cut jobs or hire part-time employees to increase productivity.

Then there have been the unexpected repercussions.

First, the "boomerang" effect is broken. For years, the US and European governments have lived at the expense of others. Both regions ran current account and budget deficits without really suffering the consequences. The money accumulated by emerging economies would always come back "home" - re-invested in government bonds or real estate.

That was because of a lack of political stability and stable investment opportunities in emerging economies. Without noticing it, industrial nations have expanded their public debt to dangerous levels. Today, a significant part of this debt is owned by emerging economies. China holds $877 billion and 520 billion in US and European governments' bonds. But now the money is invested "elsewhere"!

The money is also not where it used to be. Emerging economies are accumulating funds at an impressive rate - more than $9 trillion - with China boasting $2.5 trillion in foreign currency exchanges. The sovereign funds, which have become the new global investment bankers of emerging economies, manage more than $3.8 trillion. This huge amount of money attracts indebted governments, such as Greece, as well as private companies.

For a while, emerging economies did show some interest in investing in industrialized nations or in buying Western companies. Now, however, new alternatives are available.

We have seen the emergence of a "South-South bloc", too. For the first time, an increasingly self-sufficient "South bloc" - lying south of a diagonal between Mexico and Moscow - is generating its own momentum. Despite disparities, these economies can rely on an emerging middle class, huge raw material resources, home-grown technologies and money. They breed an impressive number of global brands in banking and industry of the model.

Haier from China - practically unknown a decade ago - recently became the largest household appliance company in the world. Many companies enjoy the active support of their governments: 21 of the 22 largest Chinese companies are State-financed. These economies also develop a new business model for the "emerging poor", a population emerging out of absolute poverty but which has not reached middle class status. Microfinance, mobile phone transactions, cheap cars or computers are just a few examples.

In the end, the next recession will be the real moment of truth for advanced economies and businesses and governments better be prepared for it. An aging population used to a standard of living increasingly subsidized by state aid and public borrowing abroad may be in for a harsh reality with a reduced standard of living. What would happen, economically, politically and socially if emerging economies decide to close the money tap? Advanced economies have never been so vulnerable. They are now in dire need of a new solid economic model and they may have to rediscover frugality.

The author is a professor and director of World Competitiveness Center at IMD, the global business school based in Lausanne, Switzerland.

(China Daily 09/17/2010 page9)