It's official now: the global economic and financial balance has shifted to Asia from the West, says Dr. Surinder Pruthi

History has mocked at those like Kipling who believe that they
have said the 'final' word on any matter. Dr. Surinder P.S. Pruthi
makes his 40th presentation at the Rotary Club of Bombay

The world may or not have become flat, but it has certainly changed perspective. And it can be said that the global economic and financial balance has shifted away from the West in favour of Asia.

Forget Kipling.s comment, .Asia is not going to be civilised after the methods of the West. There is too much Asia and she is too old.. History usually mocks at those who believe that they have said the .final. word.

Asia is now responsible for 50% of the world.s output, it consumes 50% of the world output, accounts for 50% of fuel consumption and is home to 60% of the world population.

Emerging economies and Asia have the largest consumer spending power in the world, according to the head of the Asian-African business of Unilever. With the three largest economies in the world being Asian (Japan, China and India), it is clear that the middle class life is within the grasp of most Asians today.

These and other nuggets of information were shared at the last meeting by the renowned Dr. Surinder P.S. Pruthi, who was delivering his 40th talk at the Club on .Changing global econo-mic and financial balance..

In a career spanning over 50 years, Dr. Pruthi has made a great mark as an economist, as well as an educationist, management guru, mentor, author and institution builder. With a Ph.D. from the London School of Economics and management degree from Harvard, he is a founder-professor of the Indian Institute of Management, Ahmedabad, and a visiting faculty associate at Harvard Business School.

He has served as an international senior adviser to the United Nations and consultant to the World Bank.

Author of several books and papers, Dr. Pruthi was nominated to the Reserve Bank of India Chair at the Institute of Social and Economic Change, received many prestigious awards and served as director of many companies and banks. He was also, for a while, the Vice-Chancellor of the University of Bombay.

You mean even India had become a basket case like China?
Subrata Mitra, who later introduced the guest speaker,
seen with Dr. S.P.S. Pruthi

Placing facts in perspective and presenting them without frills or fancy accoutrements, Dr. Pruthi started by recalling Kipling.s words about there being .too much Asia. and her being too old.

After pointing out that .history has a marvellous way of mocking at us when we think that we have just about said the final word., he admitted that what Kipling had said was true to an extent.

.Till 1975, Asia stood frozen in time. Nothing seemed to be going well. This was attributable to two major reasons . messy politics and murky economics. To help you recap the series of events and the cascading impact thereof, let me profile what happened in the .50s and beyond.

.Korea, already very poor, was flattened by the civil war. Indo-China and Vietnam, year after year, fought the French and the Americans. This was the period when Asian countries were fighting the infirmities of their infancy, having emerged from the yoke of colonial rule for well over 200 years.

.Indonesia had a blood bath and hundreds of thousands died because they were ethnic Chinese. Thailand, Malaysia, Burma and the Philippines went through insurrections year after year. China, under Mao Ze-Dong, unleashed the red guards and it is estimated that 30 millions were killed, leave aside Tiananmen Square some decades later. This brutality was surpassed only by the Khmer Rouge who killed 20% of Cambodians, mostly educated citizens..

And India was involved in three wars, the first beginning just after Independence in 1948 and culminating in 1965. In between came the .horrendous . invasion by China in 1962.

In brief, Dr. Pruthi noted, this was what happened in the first 20 years after most of the countries emerged from colonial rule. And this was the first reason, viz., messy politics, for Asia remaining frozen in time till 1975.

As for the second reason, murky economics, the situation was equally bad. Japan, which had been modernising for 100 years, in 1960 had a GDP per head of $380 (about oneeighth that of the USA); South Korea had a GDP of $110 (as did Sudan); and Taiwan, $160 (like Zaire). China, with a GDP of $60, was the 11th lowest in the world, and India was just a shade below, at 10th place with $58.

This was the situation during the period between 1950 and 1975.

In 1958-60, China attempted its most ambitious programme called .The Great Leap Forward. . when an estimated 30 to 50 million people died (a number equivalent to those who died in the Second World War).

Between 1966 and 1967, India went through two severe droughts. She faced a currency devaluation and went through PL-480; in fact, India went with a begging bowl all over the place and became a .ration card country .. People were told how many guests to invite to a wedding, what to eat and what not to eat.

China and India became basket cases and the subject and the object of international ridicule. All this happened because both took the wrong course . of self-sufficiency, import substitution and overregulation in 1951. They were written off.

With old friends and well-wishers. Dr. S.P.S. Pruthi snapped with,
from right, Assistant Governor Darshana Doshi, Dilnavaz Variava,
Atul Bhagwati, President Dr. Rumi Jehangir, Dolly Thakore,
Roda Billimoria, PP Haresh Jagtiani, IPP Harry Singh Arora and
Burjor Poonawala. In the second picture, Rumi presents a
memento to Dr. Pruthi

Many foreigners came to the country in the .60s and the .70s, from the IMF, the World Bank and the IFC. But India had no alibis to offer for the sorry state of affairs.

A Swedish economist and Nobel Prize recipient, whose wife was the Ambassador to India in the 1950.s, wrote in a book on .The Asian Drama. that it was the end of the road for Asia, .for the epoch of export-driven prosperity has ended.. Around the same time, there was a book on the population bomb, one on the limits to growth and so on.

There is a popular Chinese slogan, .What.s the use of sleeping early and saving on fuel, if the end result is going to be twins anyway?.

Thus, Dr. Pruthi said, Asian inanity, Asian insanity and Asian ineptitude became an item of international trade. Such was the predicament in which Asia found itself in those turbulent 25 years.

But miracles do happen and it was due to a miraculous turnaround that it took a mere 40-year period for China and India to recapture what they had lost over 400 years. And if the present pace of progress continued, as was likely, then history would have to be rewritten.

China .switched. in 1978 and placed two slogans before its people. First, if each man caught a mouse, the plague of hunger would go away. And second, that .greed is good..

India took longer to change because of the basic difference in their ethos. If China took a decision today, then it simply wiped out yesterday. India, on the other hand, engaged in polemics, arguments and debates.

But India did .de-strangulate. in the 1980.s, more decisively in 1991 when Dr. Manmohan Singh and Mr. Narasimha Rao joined hands.

East Asia, with its quiet export revolution, especially from 1965 to 1990, registered the fastest rise in incomes in the history of the world over the next 25 years. Japan went through a similar period from 1960 to 1985 with its own manufacturing revolution and became the richest country in the world.

The four .tigers. and the four .tigresses . of Asia, Hong Kong, Singapore, Taiwan, Korea, Thailand, the Philippines, Indonesia and China, did the rest.

Today, Asia was responsible for 50% of the world.s output; it consumed 50% of the world.s output; accounted for 50% of the world.s fuel consumption; and 60% of the world.s population.

Emerging economies and Asia possessed the largest consumer spending power in the world, according to the head of the Asian-African business of Unilever. With the three largest economies in the world being Asian (Japan, China and India), it was clear that the middle class life was within the grasp of most Asians.

But Dr. Pruthi said it was not fair to expect that everybody would become rich at the same time. Uttar Pradesh, which had the same population as Pakistan, was like the seventh largest country in the world. .Probability defies such an eventuality, but that does not not prove the point..

How did this transformation take place? This was difficult to answer and a subject worth studying in a classroom for a year. But there were certain things to be borne in mind. Development, like the human mind, was very difficult and complex, tough to fathom and extremely difficult to unravel.

But it was a fact that China was the richest country in 1500 . yet a destitute in 1949 when it got independence.

India was the richest country at the turn of the first millennium, but it was a total destitute in 1947 when it got its independence.

The Western world, too, had gone through traumatic times.

For four centuries before 1820 (the period which included the Industrial Revolution with the availability of various forms of technology), the West had a pathetically low GDP growth rate.

Then, in 1820, the Western world entered its capital epoch. For 170 years thereafter, till the end of the 20th century, its real GDP increased 2.7% per annum . or 70-fold; its per capita income rose 1.6% per annum . or 14-fold. During the four centuries before that, it grew at just one-eighth the speed of the capital epoch period.

Dr. Pruthi said there were four key reasons for countries becoming rich or growing poor; for remaining poor or staying rich; and why such reversals took place.

(1) Labour; (2) Physical capital (bridges, roads, infrastructure, airports and so on); (3) Human capital (the people.s ability, creativity and ingenuity; in short, a literate, modulated and groomed mind; and

(4) Efficiency (productivity and the ability to optimise all the available resources).

But another thing to be kept in mind was demography because demography could provide a bonus and also impose a heavy onus.

.Unless you have the right kind of demographic patterns, people grow young at the same time and they grow old at the same time. And that.s why today we find a predicament in most developed countries where 33% to 37% of the people are beyond 65 years of age and the states are cracking up. They just cannot afford to keep them intact..

In the 1960.s, America went through the era of .baby boomers..

.That kind of confluence is taking place today in this country . where 500 million people are under 25 years of age. But today we (also) have a situation where 90% of the people between 15 and 25 can read and write, another reason for the balance tilting in favour of Asia..

Dr. Pruthi then returned to his pet theme, viz., that it had taken just 40 years to recapture what was lost over 400 years.

In 1500, he said, China and India had 50% of the world.s population and 50% of the world.s income. From 1600 to the 19th century, India and China peaked at 54%. But by 1980 their population came down to 38% and their income to 8%.

This was a quirk of destiny that nations went through. But today, China and India produced 25% of the world.s output and, together with the emerging economies, 40% of the world.s output.

.As I said, we have taken back in 40 years what it took 400 years to shed. The question to ask is, how could it take 40 years to recover when the process of development itself is time-consuming and it takes 400 years to shed it?

.The reason is two-fold. One, transfer of technology and know-how which is easily available in this day and age when it is transferable and .joint venture-able.; you don.t have to go through the pangs of research (it may or it may not work); you can borrow instead of rediscovering Newton and thus short-circuit the time. And the second is the availability of cheap labour.

.Both these things, when used in juxtaposition, and used appropriately, give handsome results. My analysis is that if productivity is the key, education is the secret, skill is the recipe and organisation is the clincher. Wars are won by armies of equal merit and equal calibre but the difference is organisational capabilities. .

Dr. Pruthi said another reason for the .40 vs. 400 years turnaround story. was the realisation that heavy investment without openness or competition was a recipe for disaster. Both China and Russia went for heavy investments, but both faced collapse.

India was another case of heavy investment without openness or competition where an .ex-factory price. did not exist. The price plus margin was simply passed on to the consumer who (for all practical purposes) did not exist.

The only way out, the only mantra, was free market pricing of labour and capital and goods so that that, together with macro-stability of interest rates, inflation and exchange rates, made a massive difference and contributed to the .40 vs. 400 years story..

Dr. Pruthi next turned his attention to the civil service, pointing out that it was a fallacy to say that the civil service was a gift to India from Great Britain. In fact, Arthashastra, the science of polity, was penned by the great Indian philosopher Kautilya in 300 B.C.

Kautilya laid down the code of conduct for the civil service and even listed the examination that a civil servant had to pass. All this, way back in 300 B.C., when he also described what constituted an efficient and disciplined civil service. An ingenious thinker, he said that just as an elephant was needed to catch an elephant, wealth was needed to capture more wealth.

.All that we needed to do was to ask Mr. Mahalanobis to listen to him instead of following the Russian model for the Five-Year Plans and consigning us to the dustbin of history for forty long, wasted years..

That was the time, Dr. Pruthi said, when China and India were at their very best in terms of trade and technology.

They had gunpowder, printing presses, paper currency, a compass, a civil service and the hundi as an instrument of commerce.

Summing up the .story. between 1500 and 2000, Dr. Pruthi said there were four different situational happenings during that period.

During the first 200 years of that period, the world was poor, equal and stagnant; from the 18th century onwards, the Industrial Revolution started and, thanks to a conspiracy of circumstances, Europe was in the forefront and therefore the major beneficiary; the third event was colonisation where the superior military powers came and colonised, conquered, ruled or robbed the less strong.

.The fourth event was the two World Wars and the Depression of the 1930.s, which took history back to square one; you had to decolonise; you had to deregulate; you went into nuclearisation; the world became two . the haves and have-nots, North and South, developed and developing, rich and poor.

.There were no great miracles, just the tide of history..

Following this exposition, Dr. Pruthi took up the current world situation.

The present situation was proof, if any were required, that the balance of power, both economic and financial, had already tilted unequivocally in favour of Asia. A realigned world was painstakingly yet fitfully coming into being. The queries pertained mainly to the USA. Was the US going through a recession? If yes, then was there any way out? Was it only a financial (crisis) or was it deeper?

.In 2000, the IT industry collapsed all over the world, but today linkages are a great deal more complex. Today, you cannot have one segment untouched and the other plagued. I.m afraid the malady and the malaise are more deep-seated.

.It all started, as you know, three months ago with the sub-prime defaults. The banks. capital was threatened, inflation, food and fuel prices went up.

.Manufacturing fell to the lowest point since 2002, unemployment spiked to 5%, payrolls suffered their severest loss and the housing industry deteriorated.

.Foreclosures were higher than ever before. The mass recession of the .80s paled into insignificance. Securitisation, an enormous tradable instrument and a good mortgage, had turned into traded financial products such as CDO (collateral debt obligation) and ABS (asset-backed securities). .

What about the banks? Most of the defaulters were in Europe but their losses remained undisclosed. Only three banks had come out openly.

Citigroup had raised $22 billion (24% of its capital); UBS raised $15 billion (43% of its capital); and Merrill Lynch $14 billion (36% of its capital). Such was the erosion.

But the American Central Bank was helping by keeping the shortterm interest rates lower than the longterm interest rates, because the banks borrowed short and lent long, thus improving their margin. But this was a long-drawn process and didn.t happen overnight.

Typically, inflation declined when the US went down (because commodity prices fell); but today, China and India were thirsty (for commodities). Such was the shift in the economic and financial balance that the earlier hypothesis that inflation declined when the US went down, would no longer work. .In which case, we are in for difficult times..

Since the world was now much more inter-dependent than ever before, no one had the luxury of laughing in one.s sleeve over another.s misery. Already, the US was planning a $150 billion fiscal package because the first priority was liquidity. But would it work?

Dr. Pruthi pointed out that the US was too large a country to be ignored; it accounted for 20% of the GNP, 3% of the world.s population and 25% of the world.s natural resources to be consumed.

.It.s like a whole village on one side and one wealthy citizen on the other. Whatever the village produces has to be sold to this wealthy citizen. This wealthy citizen buys in the market $800 billion a year to be able to finance his own purchases. And whenever he needs money he prints currency and everyone sees value in that dollar. No one questions him.

.But sooner or later people are going to wake up and ask, is this a bottomless pit? Is it going to work, or go wrong?... People are wondering, are we at the end of the road?.

Another factor, Dr. Pruthi pointed out, was the capital adequacy of the banks. If people lost confidence in the banking world, then economic freedom (as it was known), would evaporate instantly.

It had to be remembered that most of the undisclosed erosion that had taken place was in Europe; and unless people spurred themselves to disclose and took steps for capital adequacy, .we may not be in for good times..

Thus, easing the financial stress as far as the housing market and the funds were concerned, was among the steps to be taken.

Dr. Pruthi said there were a few other reasons why power was swinging from the West to Asia.

One, the fall of the Soviet Union and the emergence of the US as the undisputed superpower (.it can almost to a point of strict enforcement ask for things to be obediently observed; and full marks to America for having performed this role extremely well.);

Two, globalisation and the opening of trade and investment, so that everyone with an enterprise and an appetite and a .fire in the belly. could outdo the others;

Three, the fall of .state-ism. and the rise of the magic of the market place; the winner was the one who succeeded in the open market; and Four, the fall of ideology and the rise of private-public partnership, .which I think is the answer for the future and that.s going to see a swing that will be difficult to reverse..

Dr. Pruthi said that modernisation and development were two altogether different things. .You have 400 to 500 million people who are illiterate in the whole of Asia... Modernisation will not touch them until they have the basic ability to absorb information, to read, write and exercise critical judgment. It takes a while..

Finally, Dr. Pruthi alerted his audience against the temptation of following the Western world in two specific areas, (a) social relations and family structure (.if we follow the Western model, we are in trouble.); and (b) the .codes of heaven and hell..

Expanding on the latter, Dr. Pruthi said .I think our moral code is what is good in this secular world rather than in the spiritual after world. Our moral code is that if you are going to leave me dying or dead, as a relation, you are going to be socially shamed and social shame is a much bigger compulsion than social security.

.So I would beg of you, as you grow and your families are still within your control, try and see that parental control is not shed in favour of the State..

The code of conduct that appealed most to him was the one enunciated as dharma.

As a student of economics, history and management, he could not help but being soaked in by the best in literature.

.Without being partisan, I find that the best scriptures I have read are the Gurugranthsahib, which is a way of life rather than a religious code.

.It talks about dharma, which is a code of conduct; it talks about arth, which means duty, value, the addition of wealth and so on; karam, which is to keep yourself gainfully occupied; and mukti which means a certain amount of bliss from the day-to-day entanglements of life.

.These are the four cardinal blessings that one can hope to have. If one has them, then one can understand the true purpose of life,. Dr. Pruthi concluded.

Subrata Mitra introduced the guest speaker, while the vote of thanks was proposed by Dolly Thakore.

Dr. Pruthi was accorded a standing ovation.