Bernardo M. Villegas
Articles  >> more topics
What’s In Store Beyond 2024 (Part 2)

             Following the advice of Dr. Roberto Ocampo to shed our traditional short-termism and insular outlook, we have to try our best to understand developments in  China which has the largest GDP in the entire Indo-Pacific region and will continue to loom large in the economic future of every country in this most dynamic area in the world today, even if the Chinese economy can never return to its double-digit growth rate in GDP in the last century.  As I told the Xinhua News Agency reporter in an interview, the great strength of China is the high rate of innovation among its scientists and entrepreneurs.  The Chinese represent the best role models of what the great economist, Joseph Schumpeter, first defined as the “entrepreneur” in his trail blazing book “The Theory of Economic Development.”  Working together with the scientist, the entrepreneur is the person who finds a new market for an old product; who introduces a new product or service to satisfy an old need; a product or service to satisfy a new need; a new way or technology of producing an old product.  China has been leading, together with India, in our region in the following activities of a Schumpeterian entrepreneur:

            -Launch of a new product or new specie of an already known product;

            -Application of new methods of production or sale of a product not yet proven in the industry

            -Opening of new market (the market for which a branch of the industry was not yet represented).

            -Acquiring of new source of supply of raw materials or semi-finished products.

            -New industry structure such as the creation or destruction of a monopoly position.

            The high rate of innovation and entrepreneurship in China may help the Chinese economy to mitigate the serious problem of ageing in the future through the introduction of more productive technology, especially in the service sector which will increasingly take the place of manufacturing as the engine of growth.  Innovation in China will also benefit many of the emerging markets in the Indo-Pacific region that are transitioning from low-middle income status to high-middle income status and) them avoid the middle income trap that has victimized many Latin American countries.  If they are able to separate their political differences with China from many of the common economic grounds they have with this second largest economy in the world, especially the VIP (Vietnam, Indonesia and the Philippines) will benefit most from the transfer of modern technology from China.

            China, however, will have to compete with India in the process of investing and transferring technology to these emerging markets.  India is a also a good source of innovation, especially in the IT and BPM and bio-technology sectors.  India has the distinct advantage of still having a young and growing population.  Despite recent attempts of the political leaders of China to encourage families to have more children, such efforts are doomed to fail as has happened in all countries that introduced population control programs in the last century, such as Singapore, Thailand and South Korea.  It is highly possible that China will have to depend on countries like the Philippines and Indonesia to supplement their dwindling labor forces, especially in the hospitality, health and education sectors.

            China has to be complimented in its success in introducing products and technologies that are addressing the serious problem of climate change.  By exporting these products to the emerging markets, its contribution to a greener world will be enhanced.  Its success in digitalization will help countries that are also suffering from a declining fertility rate  and thus have to resort to increasingly replacing human labor with Artificial Intelligence, Internet of Things, Robotization and Data Analytics. The last question asked by the Xinhua News Agency reporter was about the urgency of cooperative measures among countries in the region to promote green development.  I answered him with the following: “Green development is urgent, especially in the Philippines that is the most exposed country in the world to natural calamities.  The Philippines is trying hard to reforest its denuded mountains and other areas.  It is also trying hard to shift more and more to green energy, such as solar, wind, geothermal and hydro although it may take some time before coal-powered plants can be phased out. Even more urgent than addressing climate change in the short run is reducing the cost of electricity, which is one of the major stumbling blocks in attracting in FDIs in manufacturing, which at the moment are flocking to Vietnam. Under the leadership of President BBM, there is also greater commitment to consider the introduction of nuclear energy in the form of modular nuclear energy plants in partnership with U.S companies. With a few dissenting voices, there is increasing consensus that the adoption of nuclear energy is the only solution in the short run to bring down energy costs.

            Other global trends identified by Dr. de Ocampo that can impact on the longer-term future of the Philippine economy are a parallel global financial structure with less dependence on the US dollar as the universal currency of trade and reserves (referred to in some circles as dedollarization); the beginnings of a new multilateral development finance structure apart from the World Bank and the International Monetary Fund; the plan to introduce a new currency of exchange referenced to gold rather than the US dollar; and the creation of a global currency mechanism parallel to the Society for Worldwide Interbank Financial Telecommunication. 

            There is less consensus on the prospects of dedollarization.  An alternative view is that the US dollar will continue to be the universal currency of trade and reserves for as long as the next fifty years.  At the time that China was growing at double-digit rates in GDP in the recent past, there were expectations that the yuan could be an alternative to the US dollar for the international currency.  The recent slowing down of the Chinese GDP and collapse of the real estate sector and allied industries are casting doubt on this possibility.  The Euro is not performing any better.  As Financial Times columnist Tej Parikh recent wrote (FT March 15, 2024), Western European countries may be facing what can be called an “upper-income trap.”  As he commented:  “The western world has a growth problem.  From the postwar boom to the global financial crisis in 2008, GDP per head in G7 countries drifted higher by the decade.  But for the past 15 years its growth has slowed in most of them.  The primary culprit is lacklustre productivity: average growth in GDP per hour worked in the G7 has dropped…The remedies—upskilling, boosting infrastructure and innovation—are well established.  But they seem easier to identify than to fix.  Skill shortages, crumbling roads and inefficient public services persist…”

            These global trends should remind us of our own predicament of possibly being caught in the middle-income trap as many economies in Latin America have been.  The solutions have been identified by the present Administration:  increase the productivity of the agricultural sector, improve the quality and quantity of vital infrastructures, upskilling and reskilling of the labor force at all levels and continue the pace of liberalization reforms.  Let us just make sure that we have the political will—both in the public and private sectors—to implement the identified solutions.  For comments, my email address is bernardo.villegas@uap.asia.