Time we woke up to power shift to East

 
18 September 2012
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Douglas McWilliams, in the first of his lectures as Gresham College’s Professor of Economics, argued last week that the impact of the shift in power from West to East was still greatly underestimated by the West.

He pointed out that because Asia had developed so fast, its population had not adjusted to the growth in prosperity by taking its foot off the throttle the way we have in the West — opting for more leisure and higher levels of public spending. Their peoples still worked as hard as they did when they were poor, he said.

The average Briton works 1625 hours a year — a 35-hour week with four weeks’ holiday plus bank holidays. This compares with 2307 hours in Singapore and 2287 in Hong Kong. In economic terms, this means the Singaporean is working the equivalent of four months a year more than we do.

Add that the top rate of income tax in Singapore is 20% and in Hong Kong 15%, and the net effect is that per capita GDP in Singapore is 30% higher than in the UK, and in Hong Kong it is 50% higher. The gap is widening as people there show little sign of slackening off. They already live longer, too.

McWilliams’ message is that the changes in the West to compete with this blast of competition will have to be more fundamental and far-reaching then anything our politicians have yet dared suggest. The West has allowed its cost base to become bloated. Unless this is tackled, the future looks bleak, he says, with many other countries going the way of Greece through stagnation to economic near-collapse.

But the way populations are already reacting to austerity and the lack of growth in their economies across the eurozone, and the TUC’s debate last week on whether it should take strike action to resist public spending cuts, show all too clearly that there is no cross-party agreement on the best way out of this mess.

Coincidentally Hermes, the pension fund manager, said yesterday that for the first time in two generations it was beginning to worry as an investor about political risk in the West. The changing nature of world power, the disparity of wealth between and within nations, and pressures from demography, particularly the ageing of populations in the West, are giving rise to a new populism and a disturbing surge in nationalism. The cosy assumption that “we are all friends in the West” could no longer easily be taken for granted.

Domestic politics is now a major issue across all asset classes, says the paper’s author Saker Nusseibeh, chief executive of Hermes Fund Managers.

In equities, unpredictable fiscal and regulatory regimes can affect a company’s long-term investment decisions.In bonds, high unemployment, austerity measures and slow economic growth can impact sovereign credit ratings. In alternative investments, oil-producing nations are under pressure to keep prices high in order to balance their budgets.

A generation of fund managers has grown up in the cosy world where reversion to the mean and the efficient markets hypothesis were the only two concepts they needed to grasp. The volatility of recent years has put both to the test. Add political uncertainty to this already difficult mix, and many fund managers and indeed mainstream investors will struggle.

Break-up may be better bet for BAE

A letter to the Financial Times has just accused BAE Systems, Britain’s biggest defence manufacturer, of “thriving on a culture of procrastination, underperformance and cost overruns on its major projects, repeatedly holding the UK Government to ransom on jobs while executing an unimaginative stream of closures and meaningless reorganisations”.

The stagnation that last week prompted it to seek to be taken over by Eads, the European defence contractor, is nothing to do with the cutbacks in defence spending in the US and elsewhere, says this analysis. Rather, it is a woeful failure of corporate strategy, in particular the failure to diversify away from defence when the company had the chance, to the extent that it even sold its 20% stake in Airbus. The civil aircraft business is now one of the main activities underpinning Eads. The writer adds that there is no reason to believe a further massive merger will solve the company’s problems.

Instead, he says it should be broken up into its four operating units each focused on a different area of defence — naval, military aircraft, land vehicles and weapons systems. These are each good lean businesses, the writer claims, made bad by “a bloated, unproductive and costly tier of middle managers that hinder smooth delivery of projects and make competing for commercial work utterly unrealistic”.

The proposed deal with Eads, massively important though it is, has failed so far to capture the imagination of either the financial markets or the public. Perhaps the letter provides the reason why. The company is short of credibility. Too many people don’t really believe it knows what it is doing — a verdict that is a bit tough on the current management, perhaps, but an understandable reaction to some of the things which have gone on in the past.

Accordingly, they are unconvinced that another merger is actually a better solution than the proposed four-way demerger.

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