History makes observations regarding consistent economic and cultural growth by being self-reliant. Revisiting those lessons might suggest a way out of the ongoing crisis.

I have the privilege of working very close to the city center and since the city is surrounded by hills, as you move away from the center, the altitude keeps rising. This gives me a chance to see a big 600-year-old church surrounded by long pine trees and celebrated by a huge metal statue of an armed king riding a horse, ready for battle. The view, a few 100 meters away, keeps looking at me from the office window. Matei Corvin the Hungarian king defended the country in 1458-1490 from the Ottoman Empire (1299-1923). The Ottoman Empire is viewed as an offshoot of the Mongol Empire.

During the Renaissance era, the Venetians raised great walls around cities threatened by the Mongol empire. The great wall (Qin 221-260 BC) has played a significant role in the Chinese history and defended the country from the same Ottoman Empire. No other culture seems to have adopted walls as enthusiastically as the Chinese, maybe the reason Chinese could retain four thousand years of continuous economic and cultural history.

Starting 1900’s, the Republic of China (1912), Republic of Turkey (1929), Republic of India (1947), the walls are still there but the strategy of war, expansion, and protection continue to take different forms. Now we have trade policies, currencies, and stock markets. We have a need to grow, to raise payment surplus, to keep inflation lower, and to have a double-digit GDP growth.

August 2005, it was all positive stories about China’s extraordinary ability to mobilize workers and capital, tripling of per capita income in a generation, easing 300 million out of poverty and projection of decades of new growth. It was more of competition, India’s inability against China’s ability. India’s lack of subways and a dearth of expressways compared to China’s high-tech Beijing.

This was followed by cooptetion with comments like “What makes the two giants especially powerful is that they complement each other’s strengths. China will stay dominant in mass manufacturing, building multibillion-dollar electronics and industrial plants. India is a rising power in software, design, services, and precision industry. What if the two nations merge into one giant “Chindia?” America was expected to make room for China and India. What happened? A majority of us did not see the ongoing struggle for survival over competition and cooptetion stories.

If Thomas Malthus could project the 1929 crisis in 1800’s, it was owing to the population curve he devised. Population curve was popularized and fine-tuned by Pierre Verhulst, as the fractal S curve. Barring time, everything has a limit of growth. This suggests that there is a limitation to which even population can work as a growth driver. Conventional thought has the population as a constant input in forecasting models. If population will grow, consumption will and if consumption will increase economic growth will follow. The same population curves can explain long pauses in growth despite a booming population and if indeed we have hit a population ceiling, the respective parameter will cease to cause absolute growth or relative growth. Rather it could become a liability. This means that trend forecasts that by mid-century, China should overtake U.S. owing to global output and large internal consumption might be a myth.

The collapse of US economy would see most emerging markets as relative outperformers. This also means that half a million engineers and scientists a year from China and India, vs. 60,000 in the U.S are just numbers. The brains don’t work in depressions and recessions, the stomach does. The population cannot just be a source of instability, but cause instability, if the government can’t provide education and opportunity, which invariably happens.

Consumerism will become a chapter in Econohistory. The old kings did not comprehend this phenomenon, as life was more self-sustaining and not about going to the mall. Actually, consumerism is nothing but indulgence, like speculation over investment. The current economic times that we live in warrants both consumerism and speculation for profits. This creates larger chaos and larger risks, pushing us again to the self-sustaining past. This is why markets can never be efficient, as it is consumerism and speculation that drive it.

In the process of driving the ‘made in China’ consumerism, the country has seen dropping efficiency and increasing wastefulness. More than half of China’s GDP is plowed into commodity, autos, and construction. Its factories are known to pollute and are highly inefficient compared to global and Indian manufacturers. More than half of China’s listed companies are known to earn below their actual cost of capital. This is not the case in India. There are numerous studies comparing the better averaging Indian company’s return on capital than their Chinese counterparts.

Conventionalism is a philosophy for an up cycle; it fails miserably when the cycle turns as chaos takes over. Time makes the majority look smart at one time and foolish at the other. Dr. Anil K Gupta, author and professor of strategy, University of Maryland said this at a conference in Chicago in May 2007 that “Emergence of China and India is like the emergence of the Internet, here to stay and the only real option for us is to get on board”. The timing to get on board was perfect. The avalanche started after six months.

When a sizeable part of your population is manufacturing oriented, you are in a high-risk sector, only if you understand the volatile nature of consumerism and speculation. China hence has a bigger problem at hand than the Indian policymakers. India’s poor got used to living on $1 a day. Above this, the cumbersome democracy still has internal ways and means to balance itself compared to China, which attempted selective capitalism. While Chinese leaders might be worrying about how to cope with the ongoing joblessness and protests, India is busy in the election. The time has pushed relative performance in the favor of India, as the challenge of China moving from manufacturing to services faster than India resolves its infrastructure bottlenecks ceases to exist. Building basic infrastructure is a stronger economic activity in tougher times compared to creating a vibrant service sector.

I explained the broken BRIC model first time in Dec 2007 and then revisited it in May 2008. In a recently published paper [1] we used timing models comparing BRIC countries performance against Nikkei. We were forecasting relative performance for 2009-2010 and 2012-2015. Our findings reinforced our initial hypothesis that BRIC is more polarized than the Goldman Sachs’ model assumed. Within BRIC also Russia should outperform Brazil and India should outperform China over the next decade. Like we said earlier, barring time everything has a limit. Chinese outperformance against India can never be linear. The next decade should just prove this, especially now that the ‘Great Wall of China’ is not for the invading Genghis Khan but for happy tourists.

[1] Nistor, Pal, "The BRIC Model from a Japanese Perspective - Pre and Post Financial Crisis Review and Forecasts", SSRN, August 2010.