profit-paper 21th january, 2013

IntervIew The limits of

China’s consumer

revolution

SHANGHAI

Zhang Monan

China’s economy is at a crossroads. As2013 begins, foreign and domesticobservers alike are asking which path thecountry’s economic development shouldtake in the next decade. How can Chinaensure stable and sustainable growth inthe face of significant internal andexternal challenges, including slowingmedium- and long-term growth, risinglabor costs, and growing inflationarypressure? The global economic crisisweakened external demand, whichsustained China’s unprecedentedeconomic growth for three decades, theauthorities agreed that internal demand,especially domestic consumption, mustbecome the country’s new growth engine.At the Chinese Communist Party’scongress in November, China’s leadersdeclared their intention to double percapita income by 2020, unleashing 64trillion renminbi ($10.2 trillion) ofpurchasing power. Indeed, with roughly130 million middle-class consumers,China’s domestic market holdssignificant potential. The BostonConsulting Group estimates that, with anaverage annual GDP growth rate of 7% inChina and 2% in the United States,Chinese domestic consumption will riseto half of America’s by 2015, and 80% in2020 (assuming that the renminbiappreciates at an average rate of 3%against the US dollar over the next fewyears). Moreover, the current-accountsurplus plummeted from more than 10%of GDP in 2007 to 2.8% in 2011,reflecting China’s decreasing reliance onexports to drive economic growth. In2010, China’s imports ranked second inthe world, and are expected to grow at anaverage annual rate of 27% in 2011-2015,outpacing export growth by fivepercentage points. As a result, the totalvalue of imports is expected to exceed$10 trillion in only two years, providinglucrative investment opportunities andbroader markets to foreign investors.This potential is not lost on multinationalcompanies. A survey conducted in May2012 by China’s State CouncilDevelopment Research Center asked 394Chinese and foreign companies abouttheir future strategic orientation inChina. The respondents most oftenviewed China not only as a marketopportunity, a research-and-development base, and an export base,but also as a high-end manufacturingbase, a regional-headquarters site, and aservice base. The results also reflectedChina’s declining attractiveness as a basefor product assembly, low-costmanufacturing, and parts production. Infact, while the US and other developedcountries have sought to bringmanufacturing home (“reshoring”), theyhave been establishing innovationfacilities in China. Multinationalcompanies have created nearly 1,000R&D centers in China, including 194 in2010 alone, enabling them to developproducts for the local market. More than1,400 foreign-funded R&D institutionsare currently operating in China, anddata from China’s Ministry of Commerceindicate that 480 of the world’s top 500companies have established localsubsidiaries. But China cannot rely onconsumption as its only growth engine.History has shown that a one-dimensional development model cannotensure sustainable competitiveness, justas no single market can sustain globaldemand. Given this, China must continueto develop its manufacturing sector.China is the world’s top manufacturingcountry by output. But, while it accountsfor 19.8% of total global manufacturing,it receives less than 3% of the world’smanufacturing R&D investment. As aresult, China’s innovative capacityremains relatively low, with its high-techand knowledge-intensive industriesunable to compete globally.

PAKISTAN TODAY: Tell our readers aboutShan Foods (Pvt.) Ltd. that you joined inJuly, 2007.FAISAL MUBIN GANATRA: The journey of Shan’sremarkable success starts from 1981, when the dreamof one man became a reality. A visionary entrepreneur,an avowed humanist and a committed philanthropist,Shan Foods (Pvt.) Limited CEO Muhammad SikanderSultan, helped pave the way to success by pioneeringin the spice business. “We are one of the most reputedfood company and a powerful global brand with pres-ence in more than 63 countries across 5 continents.”

Shan Foods has been governed by its core values.They shape the culture and define the character of Shan,forming the foundation on which its employees performand make decisions. Long term thinking, integrity, mu-tual respect, pragmatism, openness to diversity, passionfor quality and delighting consumers in accordance to theIslamic laws remain at the core of our company culture.”

“By the grace of Almighty Allah, our Islamic cultureand value remain our single most important competi-tive advantage”.

Company’s vision is to become a global food com-pany offering premium quality innovative productswhich delight our consumers. “We are determined toreach every kitchen by diversifying into growing foodcategories through innovative, healthy and safe prod-ucts for the ultimate delight of our consumers”,

Shan Foods is committed to producing top qualityproducts. To do so, we pay a higher price compared withour competitors for premium raw materials. We are also theonly second company in the Asia Pacific region that usesCryogenic Technology to preserve the taste, texture andaroma in order to ensure our spices & foods are bacteria-free. Finally, we use food-grade nitrogen & aluminum foilpackaging to preserve freshness and quality (V Lock Fresh-ness). Our dedication to producing the highest standardproducts and our belief in long-term mutually beneficial re-lationships means we are happy making nominal profits:that is a key reason for our survival and prosperity.

In 2006, our CEO Mr. Sikandar Sultan and BOD’sdecided to induct a professional team for the survivalof brand, sustainable growth and transformation intoa corporate company. When I joined Shan Foods, it wasbeing run as a sole proprietorship, but we had a planthat by January 2008 we would start business as a Pri-vate Limited concern which I have been responsiblefor. I started as Chief Financial Officer and have beenheading business operations for the last 1.5 years.

Today, Shan is Pakistan leading Food Companywith its products being appreciated globally and con-tinues to introduce new products that better cater tothe changing needs of the consumers. In order to takeadvantage of growth opportunities, Shan has now en-hanced its production capacity even further with themanufacturing units installed in United Arab Emirates(UAE) and Saudi Arabia and United Kingdom.

PAKISTAN TODAY: What difference did theinduction of professionals make? What is thesecret of Shan Foods success?FAISAL MUBIN GANATRA: Shan has been growingsince it was founded but the professional team that wasadded to the company in 2006 has had a huge impact onthe company practices. By implementing a new set ofprocedures and cultivating a new corporate environment,Shan has become an increasingly transparent companywith proper systems in place and a culture respect, trust,transparency and sharing information at all levels ofmanagement. This change has reaped benefits in 2011-12, our turnover was double what we made in 2009-10.The secret of our success lies in the upholding of our val-ues & the belief that change comes from the top.

We abide by Shariah Laws and we always try togroom and guide our employees to succeed in both ofthe world. To do so, it is important to understand thatapart from our individual relationships with Allah,everything else is fleeting.PAKISTAN TODAY: How do you compareHuman Resources here & aboard? Whatincentives do you give to your employees?FAISAL MUBIN GANATRA: Pakistanis are highly in-telligent & that is why they fill senior posts all over theworld. But each country and each company within thecountry breeds a different environment which is respon-sible for how people behave. Shan Foods and other multi-national companies are maintained by creative thinkersthat flourish. But similar people in companies that arenot as organized are not as productive as they could be.

At Shan Foods, we place respect and trust in our employ-ees and get the best out of them in return as our successesshow. Shan’s atmosphere empowers employees who arepaid the kind of salaries offered in a multinational com-pany. Shan’s dynamic nature and ambitious vision alsoencourage and motivate employees to give their best.

Q: Shan products are exported to sixty coun-tries in four continents, where your productsare sold the most?FAISAL MUBIN GANATRA: 60% of our productsare consumed locally whilst the rest is exported. NorthAmerica contributes to 45 % of our international busi-ness whilst 15% goes to GCC, 15% to UK/Europe & therest goes to the other parts of the world.

PAKISTAN TODAY: Tell our readers aboutvarious Shan products? From where do youacquire premium quality raw material?FAISAL MUBIN GANATRA: We acquire our rawmaterials from predominantly Pakistani growers butalso import some ingredients from abroad. We acquirefrom different sources because we are devoted to usingthe best tasting and highest products.

We are in 8 categories: the biggest one is recipe mixes(including Nihari, Qorma, Paya, Haleem, Bombay/SindhiBiryani & Pulao). Secondly, we have plain spices (like co-riander, chilies, turmeric, blackpepper & garam masala);

Thirdly, we have a range of pickles (such as mixmango, garlic, lemon & chili). Fourthly, we have refined,iodized & pink salt which contain 84 different minerals.Fifthly, we have chutneys (such as plum, ginger/mango).Sixthly we make pastes (i.e. garlic and ginger). Seventhly,we produce traditional desserts (like Sheerkhurma, ras-malai, kheer, badaamkheer). Last Ramadan, welaunched contemporary desserts under new brand calledDelve Desserts which includes custard, jelly & pudding.Lastly, we sell Basmati rice which we export to the inter-national market (USA, UK and Europe). We will actuallybe launching a new product in the month of Ramadan.

PAKISTAN TODAY: How do we know thatShan is delighting its consumers?FAISAL MUBIN GANATRA: Shan Foods is known forits taste, quality and healthy food solutions because atShan we believe that customer satisfaction is a step to-wards achieving our ultimate goal which is customer de-light. No stone is left unturned in making our customersfeel superior because customers are the sole motive forour existence and motivation behind the continuous in-novation happening at Shan. Be it the finest selection ofpremium quality ingredients, use of state of the art tech-nology or the most modern packaging methods, Shan isa brand which encompasses all. This is the reason whyShan today is one of the most successful and motivationalbrands while it’s journey is a remarkable inspiration forthe business world. By the grace of Allah, Shan today isriding on the waves of success. The company is on a dou-ble digit growth trend and it is venturing into new fron-tiers globally which is all driven by consumer pull for thebrand. This is a clear sign of consumer’s trust and confi-dence on the brand. Winning countless local and interna-tional recognition such as the ITQI Award (threeconsecutive years), Consumer Choice Award (three con-secutive years), and Export Performance Award (10 con-secutive years) for taste, quality and customer confidenceShan is one brand which the customers have learned to

trust with conviction and confidence across the globe.

PAKISTAN TODAY: What does brand ‘Shan’mean to the consumers? If it were a humanbeing, what kind of a person would Shan be?Does it have a unique identity? Is it relevantand is it authentic?FAISAL MUBIN GANATRA: Shan embodies the per-fect combination of quality, taste and convenience. Shanis a person who is a trustworthy and reliable partner whichwill never let you down. Shan has a progressive outlookand constantly looks to improve and re-vitalize itselfthrough innovative and most modern product offerings.Shan is young and energetic which sets itself high bench-marks willing to inspire and lead its consumers towardsachieving newer heights in quality and taste. This person-ality can be easily reflected in the customer feedback aboutthe brand Shan based on brand equity studies. Customersrefer to Shan as a reliable, trustworthy partner who pro-vides convenience, peace of mind and innovative products.

PAKISTAN TODAY: Will the consumers allowthe brand ‘Shan’ the license to extend itsappeal beyond masalas?FAISAL MUBIN GANATRA: Shan’s brand essenceis taste. The brand stands for providing the best tastingmeals which always delight consumers. Staying withinthis realm Shan can innovate and expand its productline beyond masalas into other related categories suchas basic spices and ingredients, salt and accompani-ments. However brand extension does come with itslimitations. The extensions shall be backed by heavyconsumer research and the resultant products appealto the consumers’ taste buds as strongly as the existingproduct portfolio. Therefore it is absolutely vital thatbrand extensions are carefully planned out and backedby the same degree of detail and perfection that con-sumers have come to expect from Shan.

PAKISTAN TODAY: Is the organization DNAan identity anywhere close to brand ‘Shan’identity? Where is the mismatch if any?FAISAL MUBIN GANATRA: The identity of the or-ganization is in complete conjunction with the identityof Shan.

As an organization Shan stands for winning the trustof its internal and external customers. Shan believes incaring for the community, working with passion, abidingby the rules of Sharia and delighting its consumers.These are the in-built characteristics of Shan’s personal-ity. The consumer confidence on Shan has been built andpolished through years of blending expertise, use of mod-ern technology and innovative food solutions which dif-ferentiate Shan as an organization from the rest. Shanhas always been keen to pre-empt its future needs by put-ting in place check and balances which enable a smoothpassage for the organization even in tough economic con-ditions. In this context Shan has always been keep toadopt the business growth model for expanding its cur-rent facilities, product portfolio and resource base. Thesingle most important identity which Shan stands for isanticipating and exceeding customer expectations. Thisvision is shared by all employees at Shan who work dayin and day out to deliver on this customer promise.

Shan as a brand symbolizes all of the above. It is a car-ing and reliable friend which believes in progression andinnovation. Shan has always capitalized on brand stretchopportunities to expand its portfolio and give customersvalue for money solutions. Shan complies by all the localand international Halal food laws. The communicationthat comes out from Shan is always in compliance withcultural and Sharia values that give the brand the recog-nition and growth it needs to move forward. Keeping withthe organization’s identity, Shan believes in giving its cus-tomers the quality, depth in product line, most modernpackaging and innovative food solutions which is whyconsumers all around the world say: it is “Just Perfect”

PAKISTAN TODAY: Are you optimistic aboutthe future of business in Pakistan?FAISAL MUBIN GANATRA: Yes. Pakistan has apopulation of some 200 million & there is huge poten-tial here. It is very rich as far as agriculture & mineralsare concerned. The time has come for honest, sincere& visionary leadership. Business is growing as not onlylocal but multinational companies are investing here.I wanted to become a doctor to serve my country but Iam serving my people in my present position too andtrying to contribute to the future of this country.

Shan Foods COO says big ideas notmoney make big brands!

Monday, 21 January, 2013

Faisal Mubin Ganatra, Chief Operating Officer of Shan Foods in Pakistan

FAISAL MUBIN GANATRA

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ZACHARY KARABELL

agEnCIES

EARLIER this week the Bu-reau of Labor Statistics re-leased its monthly inflationreport. The numbers camein at 1.7 percent a year for

all items. Excluding the ever-volatile foodand energy, it was 1.9 percent.

That’s about as low as inflation hasbeen in the last 50 years. Only 1986 (1.1percent), 1998 and 2001 (1.6 percent),2008 (0.1 percent) and 2010 (1.5 percent)have come in lower, and a few years in themid-2000s registered the same.

The disappearance of inflation overthe past 20 years, however, has barelydented the pervasive belief that inflationremains one of the greatest threats toeconomic stability. These convictionspersist in spite of all evidence to the con-trary: Inflation is nowhere visible. Formany, that is just proof that we are livingin a lull — a phony war soon to be dis-rupted when that age-old enemy reap-pears and wreaks havoc.

At the Federal Reserve – legally man-dated guardian of price stability and respon-sible for monitoring and containing inflation– the president of the Richmond Fed, Jef-frey Lacker, has been warning that the cur-rent policy of very low interest rates andexpansion of the balance sheet is almost cer-tain to spark inflation in the near future.

In Europe, those views are even moredeeply held. The German Bundesbank –still seared by memories of hyperinflationin the 1920s and the collapse of politicalorder that gave rise to the Nazis – re-mains ever vigilant. Its president, JensWeidman, is strongly opposed to many ofthe recent sovereign bailouts to preservethe euro on the grounds that good money

chasing bad will spark inflation.These officials tend to be firm yet meas-

ured in their concern ‑ something thatcannot be said of populist politicians andanalysis. The Tea Party is fueled not just bydebt animus but by a deep-seated belief that“real” inflation is much higher than whatthe government reports, and it insists thatthe spending habits of the government willend in the collapse of the dollar, hyperinfla-tion and the government’s de facto stealingfrom hard-working Americans’ money.

That is the fear of gold bugs, and addedto the mix are the views of former Represen-tative Ron Paul and his son, Senator RandPaul (R-Ky.), that the Fed is putting theUnited States in inflation peril. Many pro-fessional investors and economists are sim-ilarly convinced that the current policies ofzero interest rates and deficit spending aresetting the stage for massive inflation.

How to explain the inverse relation-ship between inflation concerns and infla-tion realities? Yes, low inflation in recentyears has been juxtaposed with modesteconomic growth and wage stagnation formost Americans ‑ as well as for most Eu-ropeans and Japanese. Given that percep-tions of economic well-being are ultimatelytied to disposable income, these forceshave largely canceled each other out.

In addition, people tend to be acutelyaware of the volatility of energy and foodprices, which have spiked – and then re-ceded – many times in past years.

Yet even with food and fuel, inflationperceptions can be deceptive. Many peo-ple are aware that the price of a loaf ofbread has risen from less than 40 cents inthe 1970s to an average of more than $2today. Food prices have also risen period-ically over the past few years in the faceof global demand and droughts. That ce-ments a perception of inflation.

Yet over the past few decades, food asan overall percent of income has gonedown, down and down. In 1972, Ameri-cans spent 15 percent of their disposableincome on food; today, that figure is 11percent. The only shift has been in eatingout ‑ people spend more on restaurantsand much less on food at home. And thathas happened even as incomes have stag-nated. Gasoline, which has fluctuatedwidely, has maintained a steady share ofdisposable income for decades, at about3.5 percent, which is now decreasing be-cause of production from shale oil de-posits and ever-more-efficient vehicles.

One of the strongest arguments for vig-ilance against inflation comes from econo-mists following the dicta of Milton Friedmanthat “inflation is always and everywhere amonetary phenomenon.” In that view, theactions of governments and central bankersare the determining factor, and the experi-ence of the 20th century was that inflationoften followed government policies, espe-cially promiscuous government spending.Since that is what happened in the past,many are firmly convinced that it will, per-force, happen in the future.

One pernicious cliché is that historyrepeats itself. It doesn’t. Historians re-peat each other and economists then pileon with theorems based on a limitedamount of history that then constitute“laws” of economics.

Unquestionably, inflation was a sys-temic threat not just in the 20th centurybut for centuries before. Thus the absenceof inflation today is explained as ananomaly soon to end; an artificial state ofaffairs generated by easy-money policiesof governments and central banks aroundthe world; or a false statement in that in-flation is underreported by governmentsinterested in pretending it doesn’t exist.

The virtue of these arguments is thatthey are not falsifiable. You can’t provethere isn’t a government conspiracy about“real” inflation, and you can’t prove thatsomething isn’t about to happen. If youargue that there has been a systemic shift– that, say, technology and globalizationhave combined to send manufacturedgoods ever lower (with food as much amanufactured good as a computer) – youcan easily be dismissed for foolishly con-tending that “this time it’s different.”

What, then, is the statute of limita-tions for inflation? How long must therebe low, low inflation before the risk of itis judged as de minimus?

Yes, it might rear up in future. Yes,past patterns may prove correct. It wouldbe foolish not to be on guard about thepossibility and the risk ‑ just as it wouldbe foolish not to forget that we still live ina world suffused with nuclear weapons.

Yet it would be equally foolish to ignore

the weight of evidence about low inflationeverywhere around the globe, not just forthe past few years but over the past fewdecades. The consequences of planning fora war that never happens can be just asdeleterious as fighting that war unprepared.

If inflation is not the proximate risk oftoday’s economy, then we are radicallymisjudging our problems and missing so-lutions. If inflation is not a dire threat,then we need not be so concerned aboutgovernment spending or central bank pol-icy. We should instead focus on the abilityof our national economies and the globaleconomic system to generate sustainableliving standards for billions of people.Right now, so many are so fixated on in-flation that these other challenges receiveshort shrift. If inflation revives, that fixa-tion may be justified. If not, we will havesquandered our time chasing echoes in-stead of meeting our present with eyeswide open to the possibilities of the future.

FIGHTING INFLATION. BUT WHERE IS IT?Business 02

Monday, 21 January, 2013

GORDON BROWN

agEnCIES

Four years ago world leaders, meeting in the G20 cri-sis session, agreed they would all work to move fromrecession to growth and prosperity. They agreed toa global growth compact to be delivered by combin-ing national growth targets with coordinated globalinterventions. It didn’t happen. After the $1 trillionstimulus of 2009, fiscal consolidation became the es-tablished order of the day, and so year after year mil-lions have continued to endure unemployment andlower living standards.

Only now are there signs that the long-overdueshift in national macro-economic policies may be tak-ing place. The new Japanese government is backing upa “minimum inflation target” with a multi-billion-dol-lar stimulus designed to create 600,000 jobs. In whatsome call the “reverse Volcker moment,” Ben Bernankehas become the first head of a central bank for decadesto announce he will target a 6 percent level of unem-ployment alongside his inflation objective. And the newgovernor of the Bank of England, Mark Carney, hastold us that “when policy rates are stuck at the zerolower bound, there could not be a more favorable casefor Nominal GDP targeting.” Side by side with this shiftin policy, in every area but the Euro, there is also policyprogress in China. It may look from the outside as ifNovember’s Communist Party Congress simply re-an-nounced their all-too-familiar but undelivered wish tore-balance the economy from exports to domestic con-sumption, but this time the promise has been accom-panied by a time-specific commitment: to doubleaverage domestic income per head by 2020.

The intellectual case for change is obvious. A chronicshortage of demand has developed for two reasons.First, as the IMF announced at the end of 2012, the ad-verse impact of fiscal consolidation on employment anddemand has been greater than many people expected.Secondly, the effectiveness of quantitative easing has al-most certainly started to wane. As former BBC chiefGavyn Davies has put it, “the supply potential of theeconomy is in danger of becoming dependent on, or ‘en-dogenous to,’ the weakness of domestic demand. …Withdemand constrained in this way for such a lengthy pe-riod of time, supply potential is beginning to downsizeto fit the low level of demand.” It is a new equilibriumthat can be reversed only by boosting demand.

But why is there so little optimism when the par-adigm shift sought in 2009 is finally starting to mate-rialize? Why do experts continue to downgrade theirforecasts for 2013 and even 2014, while discussion sooften drifts toward talk of a lost decade? It is, I sug-gest, because while countries are today adopting na-tional growth strategies, they have missed out on theother part of the 2009 decision — the necessity of co-ordinated global intervention. And the big question is

whether the momentum for growth can be sustainedby national initiatives alone in the absence of globalaction or will instead melt away once again under thepressure of narrow, self-defeating national policies.

There is depressing testimony to stagnation pro-duced by a lack of global demand. Olivier Blanchard,the IMF chief economist, has deployed devastatingfigures to demonstrate how fiscal consolidation hasdepressed the Western economy. Jonathan Portes ofthe National Institute of Economic and Social Re-search underlines the point: Austerity in one countryreduces demand in the next and vice versa. ”The hitto output in Germany is now 2%. In the UK it is 5%;and in Greece 13%,” he wrote. Still more shocking isthe impact on debt-to-GDP ratios. As Portes pointsout, fiscal consolidation was supposed to improve fis-cal sustainability; instead, it makes matters worse.“This isn’t true just in extreme cases like Greece – fis-cal consolidation across the EU has raised debt-to-GDP ratios in Germany and the UK as well. In boththe UK and the euro area as a whole, the result of co-ordinated fiscal consolidation is a rise in the debt-GDP ratio of approximately five percentage points.For the UK, that means a debt-GDP ratio of close to75% in 2013 instead of about 70%. We are not run-ning to stand still; we are determinedly heading inthe wrong direction.”

The negative impact of austerity on economicgrowth is not only greater than was originally as-sumed, concludes historian Robert Skidelsky, butquantitative easing quickly reached the limits of whatit could achieve. “Most of the money of QE was largelyretained within the banking system and never reached

the real economy … the policy mix favored by practi-cally all European governments has been hugelywrong.” And it is of course in Europe that the pes-simism is greatest, the rethinking least and the re-sponse weakest. In 2011, the IMF predicted that theEuropean economy of 2012 would grow by 2.1 per-cent; instead it shrunk by 0.2 percent, and the IMFnow predicts that the European economy will be 7.8percent smaller in 2015 than it thought just two yearsago. But the only “rethinking” has been to accept theECB as lender of last resort. Of course the bank is alsofree, in theory at least, to set the eurozone inflationtarget higher for two or three years, without any treatyviolation. But there is resistance, and not just in Ger-many, with the result that Europe is indeed draggingthe world down — locked in an austerity cycle, facingits own lost decade and lacking the confidence toadopt domestic measures to stop euro area unemploy-ment rocketing above 11 percent, toward 20 million.

And thus four years on, instead of regeneration, aself-fulfilling pessimism has been gaining ground. It isthe view that because of a debt overhang we are doomedto high unemployment and low growth and that there isnothing, either through fiscal expansion or monetary in-novation, to be gained by attempting to counter it. Idon’t agree. We are not doomed to miserably lowgrowth. The reason the world is not moving fast enoughout of recession is that we have failed to understandwhat a fast-changing global economy needs to do to sus-tain higher growth. And we will continue to performbadly if we stick to a model of the global economy wherewe rely on nations doing their own thing, attempting”solutions in one country” devoid of any attempt at real

global cooperation. That course doesn’t take us forward— only into a cul-de-sac of nativism and protectionism.

Here is the great and grievous disconnect of ourtimes: that even as our economics have gone global,our politics have remained viscerally local. If “all pol-itics is local,” as U.S. House Speaker Tip O’Neill fa-mously proclaimed, will there be too small anaudience for global coordination, and nothing to begained domestically by advocating it? If so, even asthe global challenge grows larger, the agendas of in-ternational summits will be smaller, their ineffec-tiveness, in turn, reinforcing the view that they willnever be anything other than talking shop.

Yet the case for a global deal is today stronger thanever. Put simply, 10 years ago America could drive aworld recovery. Perhaps 10 years from now Asian con-sumer spending from its rising middle class will fillthis void. But today, for the first time in decades, nosingle economy can drive the global economy forwardon its own. Without an agreement between the majoreconomic powers, the world economy will thereforeconsistently deliver sub-optimal results. For 150 yearsuntil 2010, the West (America and Europe) dominatedoutput, manufacturing, trade, investment and con-sumption. Now we are in a transition stage with therest of the world out-producing, out-manufacturing,out-trading and out-investing Europe and America –but, significantly, not yet out-consuming them.

Only gradually will patterns of consumer spending– and then the global distribution of income and wealth– start to reflect the balance of population across theworld. The imbalance is such that while the emergingmarkets produce the majority of goods and services,they depend upon selling to Western consumers. Untilthat changes, no continent can succeed without theother. Indeed, in the absence of global coordination theworld is stuck in a rut of its own making, acting out ourown global version of the “Prisoners’ Dilemma.” It is aworld where no major economy can succeed on its ownand yet none trusts any other enough to try a coopera-tive effort through coordination.

Ironically, this interdependence was under-stood very well in the 2009 G20 initiative. The IMFagreed to prepare an exercise called the Mutual As-sured Assessment Program that would display thebenefits of a coordinated push on growth not justfor output but also for employment and the reduc-tion of poverty. Yet by 2010 a global growth objec-tive was a dead letter. Strident voices, alwaysopposed to being precise about a growth objective,resisted the detailed policies and quickly turned in-stead to advocate fiscal consolidation. The familiararguments about exchange rates re-emerged amidbitter allegations about Chinese currency “manipu-lation.’” Prior to the G20 in the autumn of 2010, theKorean government, to its great credit, floated acompromise way forward.

Stubborn national politics drag down the global economy

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