Catarina's World

When democracies loose economic power democracy itself is weakened. Already now China has the third largest economy in the world and within 5-7 years it will be the main producer of goods globally.

Hu Jintao may be shorter but China has the upper hand

The US on the other hand, has a huge budget deficit and is already borrowing heavily, not least from China. So no wonder China is already starting to show its power.

At the Copenhagen climate summit Obama and many other leading heads of state took part. China however, sent an insignificant deputy foreign minister with no ability to take decisions without confirmation from Beijing. The Chinese government also protest against US actions with a new vigour and confidence.

China continues to produce and Westerners keep on consuming on borrowed money, not least from China, which is an equation that doesn’t add up. Soviet communism declined because the economy didn’t add up but that’s not the case with China whose economy is capitalistic while the government keeps a firm grip on power and its people.

According to the OECD, Western countries’ debts in 2008 were equivalent of to 100% of their GDP. China on the other hand has a deficit equivalent of 21 percent of GDP. So not only is the Chinese economy performing very well, they are also partly bankrolling the West. And money talks.

Unless the democratic part of the world, like the Chinese, start saving and stop consuming on borrowed credit, democracy as a whole will loose out. The US and Europe are the worlds largest democracies and China is the world’s biggest dictatorship. It does matter who has the best performing economy in the world. To ignore that would be a fatal mistake. But for some reason it seems the West can not be bothered to make an effort to stop power slipping away. That the center of the world is moving I have known for a long time, but what surprises me is that the West doesn’t seem to do anything to stop it from happening, or at least delay it. Where’s the fighting spirit?

photo: FlickrPhotosAccount

It’s not a coincidence that most successful Western corporations were founded last century. Then it was still possible to build up a highly profitable company in the West. Nowadays however, that’s easier said than done. Western tax authorities, led by Sweden followed by America, are tightening any loopholes there are.

Multinational corporations have already made arrangements to pay as little as possible to the taxman in the West. So they will not be much, if at all, affected by this. However the vast majority of companies are small and medium sized. And for them it isn't always possible to do what the big players do.

In the developing world however, companies can still do what used to be done here which gives them the upper hand. Cannot understand how tax authorities have been allowed, actually instructed, by politicians to hand out all the aces to competitors overseas? You have to play with the cards you have and with the odds stacked against them, Western companies have their hands tied.

Private sector companies generate the main part of taxes and fees that pay for government and the public sector. Hence cannot understand how Western governments can implement taxation laws that slowly but surely make Western corporations unable to compete on the global market? Where is the money going to come from to fund Western authorities? Obviously the problem is that politicians main priority is to be re-elected. They hence take opportunistic decisions to gain short term benefits. But how about keeping the West competitive in the long run? A lot of famous Western brands, such as Volvo, Rolls Royce and Range Rover, have already been sold to the developing world.

Where is the money going to come from to keep the West wealthy when companies are being taxed out of business? Tax authorities in the West are getting more and more militant and EU and US politicians are cooperating to make sure they squeeze as much taxes as possible out of companies. The justice system in Sweden is hence so twisted you are actually better of murdering someone than committing severe economic crimes since your jail sentence will be shorter.

The jobless recovery illustrates the tax problem very well. Many jobs lost will not be replaced, more likely outsourced or moved overseas. Most manufacturing has already moved to the developing world, not because companies wanted to move, but had to in order to be competitive. Fair enough since most Americans and Europeans are not keen on such jobs anyway. Catch is that all countries have a population of everything from brilliant to stupid people. What are Westerners with a low IQ going to do in the future? Non-skilled jobs are in the developing world but how many labourers in the West are prepared to start working in, say, a factory in China? Or Africa for that matter, because some experts believe manufacturing will start moving there since they provide cheaper labour than Asia.

Multinational corporations have already made arrangements to pay as little as possible to the taxman in the West. So they will not be much, if at all, affected by this. However the vast majority of companies are small and medium sized. And for them it isn’t always possible to do what the big players do. So weather they like it or not, they have to start thinking about moving their company head quarters to other parts of the world. Or, like IKEA, transfer ownership to a trust abroad.

Unfortunately politicians are not the do-gooders they ideally should be. Politics is a profession. And like the corporate world they are looking for short term gains. That companies do is one thing, but surely US and European politicians should have the long term welfare of their own countries at heart? Throughout history empires come and go. And the US and European empires are no exceptions. We all know that China, India and Saudi Arabia/the Gulf will take over. But what I cannot understand is why Western politicians are actually speeding up the end of their empires? Wouldn’t it be better to try to remain the leading powers for as long as possible by keeping the good cards? Apparently not since the West seems to be undermining its strenght from within without taking into account what this will do to future generations.

(photo: 427 – flickr)

Before you call that wishful thinking remember that when the Cultural Revolution was going on in China nobody would have thought someone like Deng would become the strong leader. But it happened. And not only did the party denounce Mao’s policies and what happened during the Cultural Revolution they also started slowly adapting market principles.

Where would China be today if someone like Deng Xiaoping hadn't changed Mao's disastrous policies? When will a similar North Korean do the same?

Deng Xiaoping with the help of reform minded party colleagues such as Zhao Ziyang and Hu Yaobang laid the foundation for the China we have today. Sure there were severe stepbacks thanks to fundamentalist communists such as Li Peng and Li Xiannian who regarded anything that questioned Chairman Mao’s philosophy as wrong. Zhao as a result ended up in house arrest for 16 years partly because he opposed Li Peng’s decision to crack down on the students at Tiannamen Square.

North Korea today and China during the Cultural Revolution have similarities Two countries closed to the outside world with populations that are petrified of the authorities and what could happen to them if they showed dissent. Am aware of how brain washed the North Koreans are, but so where the Chinese during the Cultural Revolution.

Visitors say there are open expressions of defiance by North Koreans. Apparently illegal DVDs showing South Korean soap operas gave northerners a taste of the better life their former countrymen enjoyed, helping to destroy the myth of South Korea as a downtrodden Yankee colony.

There must be people like Deng in North Korea who realize that instead of starving like they do, and the Chinese did under Mao, they have to do what Deng Xiaoping did in China? For the North Koreans, like it was for the Chinese, it’s simply a question of survival. If China hadn’t gone down Deng’s way the People’s Republic would, like the Soviet Union, no longer exist.

Deng didn’t call it market economy but Chinese socialism. The “North Korean Deng” could use similar tacticts so that he, like Deng, can avoid challenges to his power. Deng was far from perfect. His talk about political reform was, for instance, just talk. He had no intention of China ever becoming a democracy. But he was definitely a step in the right direction.

Am sure that the Chinese authorities are tired of North Korea, even though they wouldn’t say so in public. Kim Jung-il is a relic they inherited from Mao that can no longer be of any interest to today’s Chinese rulers. If a Deng surfaced the Chinese would most likely be more than happy to assist him to do what was done in the 80s and 90s in the People’s Republic. Even if Kim Jung-il turned himself into a Deng I’m sure the Chinese would be delighted to help and eventually be able to wash their hands of North Korea.

There are speculations that “The Dear Leader” have already lost power to the North Korean military. If so, it isn’t farfetched that someone like Deng Xiaoping could surface. But first, of course, they have to get rid of Kim Jong-il. The world media and the financial markets actually enable the little dictator to stay in power by paying attention to him. If he was ignored most of his power would be gone. That would facilitate for change to take place. Maybe even China could make it happen?

The Chinese know what must happen in North Korea, so let’s hope they step up to the plate and make it happen. Now that South Korea has cut all support, North Korea is surviving because of China. So time has come for the Chinese to act behind the scenes to pave way for a Deng in Pyongyang. To ebable such a step, the world community must, however, refrain from making China lose face for doing so.

(Photo: Kanigma – Flickr)

Am pleased to note that Saudi Arabia and Qatar are likely to lead recovery in the Gulf. Their proactive government support and spending have been instrumental in helping banks maintain relative stability. Can’t help reflecting how interconnected the world is.

We all know how the markets work, but isn't it incredible that Saudi Arabia on the other side of the world got hit by a global crisis made in the US? Shows how interconnected the world is, doesn't it?

Understand how the markets work, but isn’t it incredible that a financial crisis made in America can even hit Saudi Arabia. Not only is the kingdom on the other side of the globe, it also has more money than any other country in the world. Actually the Gulf banking sector as a whole faced a challenging 2009 with most countries facing limited or negative GDP growth, reduced liquidity, lower business volume, and a drop in asset values, representing a significant deterioration in banks’ operating environments. Mainly because of what started far away in the United States.

We are so interconnected what happens is sometimes crazy. Another example is the Swedish currency being hit by the problems in the Euro zone, despite the fact that Sweden’s budget deficit is next to none. At the same time foreigners investors have since the beginning of the year moved $21 billion into Swedish government bonds. And let’s not forget how North Korean sable rattling negatively impact markets world-wide.

Understand perfectly well that almost anything that happens can have an impact on the financial markets. However, what happens as a result is sometimes ludicrous. Where is the logic in Kim Jong-il being allowed to have a negative impact on anything, let alone the markets, outside of North Korea? The fact that he has gives him power he shouldn’t have. What are the chances of China lining up behind Pyongyang to start World War III? But financial markets all over the world still worry about it, which only plays into the hands of the little North Korean dictator.

For global markets, the renewed military tension on the Korean peninsula apparently came at a particularly sensitive time. The threat to South Korea’s fairly big economy — its GDP is four times larger than Greece’s — adds to the markets getting the impression of a world out of control. But why? Sincerely, there have been wars throughout history and we will have wars until the end of time, unfortunately. So why do the markets have to panic because of Pyongyang threatening to start another one? It’s all out of proportions. Not least since although the South Korean economy is bigger than Greece’s, it just accounts for 1,5 percent of global GDP. Europe on the other hand contributes 22 percent.

Maybe the markets impression that the world is out of control isn’t so far fetched? I’m truly international and would like to see the whole world becoming much more global than it is. But some of the negative effects are alarming. Thankfully Wall Street will now be regulated, but if the rest of the world doesn’t follow suit they will just start handling derivatives and other high risk financial products from offices elsewhere in the world.

Just read that until a few months ago, the governments, which had responded so powerfully to the financial crisis, were a comfort to the markets. But weak and wild policies around the globe are now suddenly undermining their conviction. Simply cannot comprehend how the markets could be unaware of the huge government budget deficits? Even I was aware of that escalating problem not only in Europe but also in the United States. How come the markets closed their eyes? And on top of it they suddenly decided it was a problem which wiped a few billion off the markets.

That the Euro slides against the dollar and investors head for the safety of gold makes perfect sense. But that while the Euro goes down European shares rebound sharply doesn’t make sense. Seriously I know this is how the markets work, but it’s crazy. The markets really are out of control. Or is it the whole world?

Photo: Patrick Q – Flickr

Everything and everyone is a product. A country, a city, a company, a product, a service a person – yes you and me included. And how the market perceives the product determines its value. It’s sounds cynic, I know. But if you want a high value and be sought for on the market you have to create a brand that is in demand and sells.

Want to be assiciated with Chanel or Wall-Mart? Depends on which market you are aiming for.

And then when the product is a success all of a sudden the brand matures, growth slows and it comes under pressure from competitors. This is the time to start innovating and spending again if you want to defend your market position. If not ,don’t complain if nobody wants to hire you, go on holiday to your country, do business with your company or buy the wonderful product or service you are selling.

You may object that some brands, like Cornflakes, or Chanel for that matter, have been around for a long time. But what we buy today is very different from the same product 50 years ago, not least when it comes to packaging and design. If your personal brand is out of date you will have to make an investment to innovate yourself. Maybe learn a new skill, have a make-over or simply learn how to better promote yourself? How you want to be perceived depends on what market you are aiming for.

When it comes to countries, Europe and the US have matured and competitors are moving in. But the West seem to take their current status for granted and the only thing they are doing to defend their market position is protectionism, unfortunately. And they really have to do much more if they want to keep their position in this globalised world. What happened to innovation and making their markets more attractive to investors not to mention more business friendly?

Nowadays it’s irrevocably one global market. And Sweden, to my great surprise, hasn’t wholeheartedly joined. Sweden as a product has matured badly and needs to innovate to get back the position it had on the market in the 60′s and 70′s. Join the global market wholeheartedly, reduce corporate taxation drastically and realize that there is a reason that Sweden’s unemployment is more than twice as high as it’s neighbours Denmark and Norway would make a good start. But there doesn’t seem to be any political will to do so.

More and more Swedish companies are using IT consultants in India. Naturally the Swedes, not least the trade unions, don’t like that. They conveniently forget that the main objective of a company is to make money. And using Indian IT consultants is far cheaper than using their Swedish counterparts. On top if it India, unlike Sweden, has four universities that when it comes to IT are on par with MIT. Unless taxation in Sweden, i.e. the politicians, change we will see more and more Swedish companies outsourcing IT to India.

Obviously this is not only happening in Sweden but in the West as a whole and there is no stopping it. Look at all the out-sourced call centres, for instance. Since it is an issue that is not going away I’m surprised that not more is being done in the West to adapt to the global market. It surprises me that we are not facing up to the issue.

Globalisation is irrevocably the governing principle of commerce. That does not mean it is popular everywhere. The US will continue to lose relative power because of globalisation. It’s ironic that thanks to its generosity in exporting the secrets of success, China and other emerging giants are catching up. Public support for protectionism has hence surged in the United States. But there is only so much current protectionism can achieve. Look at the way China is surging, despite Western protectionism.

Developing nations are not going to cede power to the US and Europe out of gratefulness. So it’s time for the West to face up to reality – their brand is loosing out. It’s time to innovate and make it profitable for businesses again to stop them moving to other parts of the world.

(Photo Handosh Flickr)

Middle class spending is crucial for economic growth. So now, with Western middle classes in debt and distress, many economists look to the new emerging-market middle class as the foundation for a new era of global prosperity.

Middle class spending power per capita in the Gulf is, for some reason, often overlooked by Western companies.

Last year 70 million people in developing countries joined the middle class, with incomes between $6,000 and$30,000. It is estimated that within 20 years they will surpass their Western pears when it comes to global spending power. The focus is mainly on Asia and it is estimated that in about a decade they will pick up the slack left by overspent America. Emergency market spending is in fact already bolstering the balance sheets of many Western firms.

Needless to say the worlds is focusing on China and India due to its huge populations as well as rapidly rising economies and middle classes. Correct if you look at the amount of people. But by looking at the issue that way we overlook a very potent and prosperous group of people.

When it comes to per capita spending I’m certain that the middle classes in Saudi Arabia and the other Gulf countries not only earn more but also spend far more than their Asian counterparts. It’s not for nothing many middle class Indians chose to work in the Gulf, despite the fact that they are paid less than the locals. Salaries are higher and you pay no income tax in the Gulf.

Shopping is a top leisure activity and when the weekend starts the malls are filled with people who literally shop until they drop. A woman who works in a Chanel shop in the area told me an average customer spends an absolute fortune every time they come to the shop. And the same goes for more expensive items like cars, jewellery and electronics. Considering the importance the Chinese put on saving money, I would be very surprised if middle class people in China, with the exception of some mega rich, spend that much.

The world, certainly multinationals, are already managing the economic spending shift to Asia very well. But quite a few Western companies are forgetting about Saudi Arabia and the Gulf, which in my opinion could prove costly especially for companies selling expensive consumer goods.

A large amount of Asian and Middle Eastern households have incomes today that position them just below the global middle class threshold and so increasingly large numbers of them are expected to become middle class in the next ten years.

Emerging-market leaders know that the Western system created the worldwide boom of the last quarter century that ended when Lehman Brothers collapsed 18 months ago. Now the boom has moved to emerging markets, and their leaders will increasingly choose to alter Western models to suit their countries. Consequently the fact that all eyes are on Asia and the Gulf forgotten could turn out to be a fatal mistake. The new emerging middle classes are supporters of globalization but highly nationalistic. And there is a vast difference between nationalism in China and, say, Kuwait.

Back to emerging middle classes in general, we can conclude that the Chinese bought more cars than Americans last year, and that India has as many Internet users as the U.S. Also it is estimated that by 2030, more than nine out of every 10 mobile phones will be owned by people in the developing world. Coca-Cola actually forecasts a doubling of worldwide revenues to $200 billion over the next decade, thanks to another 1 billion people expected to join the middle class by 2020. So Western companies who haven’t yet focused on developing countries middle classes should jump on the band waggon swiftly and not overlook the Gulf.

(photo: flickr – Lars Plougmann)

China needs to run a continued fiscal deficit and let its real exchange rate rise to rebalance its economy towards domestic demand and thus sustain the impressive growth of recent years, the OECD has said.

Will OECD's strategy to get the Chinese to spend more work?

In its Economic Survey of non-member China, the OECD maintained its November forecast of an acceleration in gross domestic product growth to 10.2 percent in 2010 from 8.7 percent last year. China should let its currency rise to cool inflation and help ease economic distortions as it emerges from the global crisis, the OECD said.

A stronger currency, coupled with more social spending, could help to reduce China’s high savings rate, boost consumer spending power and narrow its trade surplus. .It is appropriate for the exchange rate to appreciate,. said Deputy Secretary-General and Chief Economist Pier Carlo Padoan.

PHoto: Maharepa Flickr

Joining forces to combat global warming and save the environment instead of giving traditional aid. Good idea, isn’t it? And that’s exactly what the Swedish government is doing in India and China. Not that I understand why two economic powerhouses are getting aid from EU countries mired in deep recession? But regardless of that, the Swedish initiative to work together to improve the environment is laudable.

Swedish "wind power" know-how will benefit China and India

Obviously, like all traditional aid, it will benefit Swedish companies. But when it comes to environmental techniques, clean tech, wind power – actually the environmental and climate sector in general – Sweden has a multitude of innovative and pioneering world class companies. So Swedish know-how and techniques in this area will definitely benefit China and India, which is far from always the case when it comes to traditional aid from the West.

Both China and India are key when it comes to curbing global warming and, not to forget, cleaning up the environment. India’s current growth has generated affluence but also damaged the environment. So much so that after the US and China it’s the worst polluter in the world.

Sweden and China are already successfully cooperating on environmental and climate issues aiming to combat global warming and improve the environment. Joint projects in such areas are taking place on a continuous basis.

Replacing traditional aid with joint cooperation on improving the environment will actually kill two birds with one stone because by both benefitting poor people in India and China and contributing to saving the planet.

It is hence my hope that Sweden will influence other Western countries to follow suit when 170 governments meet at The Climate Conference in Copenhagen in December. If so, that should make a positive contribution towards signing the “Copenhagen Protocol” to prevent global warming and climate changes. The Kyoto Protocol runs out in 2012 and the conference in Copenhagen will be the last one on governmental level before that. Consequently progress is crucial because I’m not sure progress in other areas will compensate for letting global warming and environmental issues ruin our planet?