Economic Superpowers of the 21st Century
What about China? How has it come to be such a powerhouse? The reasons are more political than economic. This is a case of a Communist country that has not been debilitated by central planning.
01/20/06 7:00 AM PT
The world economic landscape is rapidly changing. Assuming that you regard the European Union as one economic entity, as of this writing, there are two economic superpowers. Those two superpowers are the U.S. and the E.U., which have roughly equivalent gross domestic products.
If your definition limits the term "superpower" to one specific country, then we have four economic powers today: U.S., Japan, Germany and China. Yes, China. Recently it has been added to the list of economic giants.
Factors Changing Worldwide Economic Dynamic
Europe became an economic superpower when the European Union was formed. In a recent article, US Versus EU: The Race is On, I discuss the evolution of the European economy in detail.
In brief, when certain European countries decided to combine their economies into one economic entity, they created an economic behemoth, the European Union. That governmental entity now has an economy that is roughly the size of the United States' economy. Quite a combination!
As far as Japan is concerned, the Japanese worked very hard over the years to extricate themselves from the ruins of World War II. Their focused and relentless efforts have brought them tremendous financial power, but it wasn't done overnight.
The same can be said of the Germans. They, too, have exerted tremendous efforts since the late 1940s to reincarnate their ruined economy. With the help of the U.S. and the Marshall Plan, their determination has paid off.
China Takes a Different Path
What about China? How has it come to be such a powerhouse? The reasons are more political than economic. This is a case of a Communist country that has not been debilitated by central planning. Historically, centrally managing an economy created stagnation, little wealth, and a national business environment that was non-competitive and non-innovative.
In China's case, however, central planning did work. Chinese government officials realized that they had to feed the largest population in the world. The only way to do that without resorting to massive foreign aid was to generate internal wealth.
They did this by realizing that their country's economic burden -- its enormous population -- could be its economic boon. Chinese officials looked at their population as their largest "natural resource." In a sense, it is a natural resource, and China has the largest of its type in the world.
The government exploited this resource by giving local businesses carte blanche to build and expand their facilities. Officials realized that these businesses could employ the vastly unemployed and underemployed population, and provide them with wages -- though paltry by Western standards -- that they would not otherwise have received. The rest is history.
Peering Into the Crystal Ball
Looking forward, there is another superpower that is emerging -- India. India has advanced economically because its government decided to invest in its "intellectual infrastructure" by creating India Institutes of Technology, or IITs.
These are elite universities that have extremely challenging technology and science programs that can compete with major universities throughout the world. Only the best and brightest are allowed to enroll in these academic institutions. Even though India has been known for its political cronyism, the government did not allow politics to intervene with the admission process. Anyone not highly qualified was not permitted to matriculate in these IITs.
India has the same "natural resource" that China has -- an enormous populace, the second largest in the world. It has a tremendous reservoir of people and talent to tap into.
Another thing that has been critical to India's economic success is technological evolution. The dot-com boom led to the laying of thousands of miles of fiber-optic cable, much of it going to India. That allowed Indian companies to more easily collaborate with American companies. In fact, many back offices of major U.S. corporations are now run out of India.
Another stroke of luck for India was the Y2K problem. If you recall, the world had to convert all of its computers to a new "clock," a clock that would not recognize the year 2000 as the year 1900.
To achieve this massive international conversion of computers, thousands of engineers were needed. Who had such a list of qualified engineers that were available for a reasonable price to boot? India, that's who.
Creating and Maintaining Superpower Status
In my opinion, there are three major factors that influence the creation and maintenance of superpower status. They are a cheap labor force, education in the sciences and technological competence.
China and India have made an enormous push in the last 10 years in the areas of education in the sciences and technological competence. Both countries are turning out huge numbers of qualified engineers, technicians and people learned in the sciences.
Unfortunately, the United States' educational system has not been stressing the sciences as it should, and the nation is beginning to lag behind in this area. In order for the U.S. to maintain its status as the top economic superpower, the government must start stressing the need to focus on the sciences early in the educational process.
Now is no time for the U.S. to lag behind. America has always risen to major challenges. This, in my opinion, is a major challenge, but I have no doubt that the U.S. will rise to it and prevail. Good Luck!
Theodore F. di Stefano is a founder and managing partner at Capital Source Partners, which deals in bringing small-cap companies public. He also is a frequent speaker on the subject of financial advice for small businesses as well as the IPO process. He can be contacted at Ted@capitalsourcepartners.com.