Strategy + Business | December 2009
By Ayesha Khanna and Parag Khanna
"Western Dominanance in Decline"
Ben Simpfendorfer The New Silk Road: How a Rising Arab World Is Turning Away from the West and Rediscovering China (Palgrave Macmillan, 2009)
Nandan Nilekani Imagining India: The Idea of a Renewed Nation (Penguin Press, 2009)
Nirmalya Kumar, with Pradipta K. Mohapatra and Suj Chandrasekhar India’s Global Powerhouses: How They Are Taking On the World (Harvard Business Press, 2009)
Ian Bremmer and Preston Keat The Fat Tail: The Power of Political Knowledge for Strategic Investing (Oxford University Press, 2009)
Robert P. Smith, with Peter Zheutlin Riches among the Ruins: Adventures in the Dark Corners of the Global Economy (AMACOM, 2009)
The best books on globalization this year offer insights into three directional trends that are changing the topology of global trade and influence: the deepening of regional ties across emerging markets; the continuing rise of powerful new global players; and, finally, the intractability of risk factors inherent in emerging markets and regional networks, and how best to analyze them. Indeed, as the United States loses its hegemony as the primary engine of global growth, the new drivers of growth deserve intense examination.
New Ties That Bind
Traditionally, the West has myopically viewed globalization from the perspective of how its influence has spread eastward, but globalization also entails the deepening of economic, political, and demographic ties between any two regions, not just between the countries in the Organisation for Economic Co-operation and Development (OECD) and the rest of the world. The simultaneous rise of the economies of China and the Persian Gulf region, for example, is no coincidence. They are intimately connected and contributors to one another’s rising prosperity, as skillfully described in this year’s best book on globalization, Ben Simpfendorfer’s The New Silk Road: How a Rising Arab World Is Turning Away from the West and Rediscovering China.
Simpfendorfer, a Royal Bank of Scotland economist based in Hong Kong, has the unique vantage point of having worked in Damascus and Dubai, as well as in many countries in East Asia. He uses the southern Chinese city of Yiwu as a microcosm for the reopening of the Silk Road. Until recently an out-of-the-way village, Yiwu is a revealing node because its residents make their fortunes selling cheap “made in China” goods to the developing world, not to the U.S. and Europe.
Yiwu’s rise as a trade center — its annual trade fair drew 3 million visitors in 2007 — and the repaving of the Silk Road are due in part to the United States’ harsh response to the attacks of September 11, 2001. Difficulties getting U.S. visas forced Arabs to take their business elsewhere at the very time they were amassing capital from high oil prices. The growing demand for oil from India and China provided a natural alternative, and Gulf-Asia trade burgeoned. Saudi Arabia’s oil exports to China hit US$31 billion in 2008, and China’s exports to the Arab world pulled even with those of the U.S. at about $50 billion, a trend embodied in the sprawling Dragon Mart on Dubai’s outskirts (the largest trading hub for Chinese goods outside the Chinese mainland) and Chinese car dealerships in Damascus.
This new Silk Road is not only slicked with oil, it is technologically enhanced through multilingual B2B websites such as Alibaba.com, which have dramatically lowered the costs of trade between the Persian Gulf and China. And it is reinforced by the migration of labor; at least 10,000 Chinese work on building oil terminals in Saudi Arabia on the coast of the Red Sea. This also means that 10,000 potentially idle young Saudi men are not working at oil terminals, something for which China may eventually suffer political blowback. But for now, China’s baggage in the Arab world remains very light, unlike the Gulf region’s conflicted relationships with the U.S. and other Western nations.
Shifts in trade are usually followed by shifts in finance, and here the evidence Simpfendorfer offers is equally revealing. Arab and Chinese businesses continue to court one another’s sovereign wealth funds, looking for capital infusions and building trust, while many U.S. companies and markets look more and more like dry holes. Even before the economic crisis struck in 2008, Gulf countries had begun a gradual shift of foreign exchange reserve holdings to euros, and the European Union is in the final stages of free-trade negotiations with the Gulf Cooperation Council. China has also telegraphed its desire to diversify investments and currency reserves away from the U.S. dollar, in essence signaling a certain ideological unity with its new Arab partners.
The political ties on the new Silk Road are evident in the frequent reciprocal summits to which Saudi Arabia’s King Abdullah and China’s President Hu Jintao bring planes full of executives eager to sign deals. Oil trading, foreign investment, arms deals, and the rhetoric of diplomatic alignment are all part of the mutual reinforcing.
In using the Silk Road as a metaphor, Simpfendorfer reminds us that the trade networks between the Middle East and Asia date back centuries, illustrating how globalization is not an entirely new phenomenon either. He also points out that the Silk Road was in fact plural; it was many routes in multiple directions. Much like the new world order, it had no single center.
The New Silk Road is a window into the deepening commercial and cultural ties that define globalization outside the Western domain. English may be the necessary global language, but it’s insufficient to understand and capitalize on today’s multidirectional globalization. Simpfendorfer’s first-person observations plausibly sketch the many individual threads that will likely be woven together to create tomorrow’s geopolitical alliances.
India’s Bid for Economic Leadership
It is remarkable how in the past few years the analytical perspective on globalization has shifted from Westernization to the rise of two Asian giants. The literature on Asian globalization has also matured; the overly simplistic language of “Chindia” is gone, with each nation now being treated as a confident competitor in its own right — and it is India that has gained ground, at least in publishing-volume terms, over the past year.
After several years of almost outlandishly unrealistic portraits of India’s rise that glossed over its crumbling infrastructure, fractious politics, and impoverished masses, in Nandan Nilekani’s Imagining India: The Idea of a Renewed Nation, we finally have an inspiring yet balanced account that takes these challenges head on. Nilekani, the hero of Thomas Friedman’s The World Is Flat: A Brief History of the Twenty-first Century (Farrar, Straus and Giroux, 2005), a former co-chairman of IT giant Infosys and now a cabinet minister in the Indian government, knows that for India to achieve global respectability, the success of firms like Infosys must spread to companies throughout India. As a CEO and statesman, he elegantly glides between national history, entrepreneurial autobiography, trend forecasting, and public policy — taking the attitude that “what’s good for India is good for Infosys” and focusing on how to improve access for all Indians to health, education, jobs, and infrastructure. (Also see Nilekani’s “India’s Demographic Moment,” s+b, Autumn 2009.)
Although so much of the talk about the Indian market opportunity revolves around the “bottom of the pyramid,” Nilekani wants to shrink the pyramid’s base by growing the middle class while also ensuring a dignified and sustainable life for those who are worse off. The twin foundations of this strategy are IT and the promotion of English-language education above all else. Exuding a confidence that rivals China’s pronouncements about its economic future, Nilekani states, “We can, first of all, reasonably assume that within a few years we should be able to have ubiquitous connectivity to cover every Indian home, hamlet and town.” Such ambition is coupled with a detailed strategy for harnessing an emerging demographic dividend created through the combination of economic growth and a boom in the number of working-age people. This will create tremendous business opportunities for foreign firms and Indian entrepreneurs alike, particularly in products such as low-cost computers and PDAs.
To realize this vision, Nilekani says, universities must be stripped of ideological dogmas and produce more experts in health care and alternative energy; informal and non-unionized labor must be empowered as service distributors; and more states must follow the business-friendly model of the state of Andhra Pradesh, which features India’s best highway system and emphasizes competition instead of subsidies.
The recent electoral victory of the Congress Party–led alliance ought to mean greater support for and confidence in India’s ability to establish more such zones of innovation. The India of the past, where entrepreneurs were considered “devious capitalists” and computers referred to as “job-eating machines,” is beginning to look like the U.S. of the 1990s, whereas Nilekani’s India of electronic ID cards and e-governance is proving to be a progressive experiment worthy of investors’ attention. After the book’s publication, Nilekani left Infosys to become chairman of the Unique Identification Authority of India, a $6 billion smart-card project aimed at providing Indians with personal ID cards.
Where Nilekani champions India as a market destination, Nirmalya Kumar, Pradipta K. Mohapatra, and Suj Chandrasekhar focus on the nation’s growing status as a player in the global arena and the effect this will have on the next phase of globalization. Their book, India’s Global Powerhouses: How They Are Taking On the World, offers a deeper look at the way India’s major multinationals are pursuing globalization on their own terms. Kumar, a marketing professor at the London Business School, and his coauthors argue that these firms, which include the Birla and Tata groups, can leverage vast assets and tolerate high debt-to-equity ratios to complete international deals, such as Tata Steel’s 2006 acquisition of Anglo-Dutch steelmaker Corus and the 2007 merger that created ArcelorMittal, the world’s leading steelmaker.
Based on extensive interviews with deal makers in major Indian firms, the authors’ case for eventually seeing more Indian companies (as opposed to Chinese companies) among the top multinationals rests on arguments similar to those of Nilekani — namely that Indians’ command of the English language and comfort with diverse, multiethnic workforces result in relatively frictionless outbound acquisitions. The fact that outbound investment surpassed inbound investment for the first time in 2006, a major turning point for “Brand India,” lends credence to this reasoning. Further, they expect to see Indian companies competing globally in a greater variety of industries. Indeed, this well-selected set of cases, which includes Hindalco’s global aluminum empire and Suzlon’s international windpower supply chain, demonstrates that India has already branched out beyond IT and manufacturing, with biotech and other sectors certainly on the near horizon.
Both Imagining India and Global Powerhouses see India as a rival to China in the global arena, competitive thanks to its younger demographic profile, English proficiency, and higher-value finished goods. The fact that Indian companies have proven that they can pull off multibillion-dollar acquisitions overseas gives them an additional advantage. Many questions remain, however: Will India’s publicly traded companies be allowed to hold high levels of debt? What will happen when the country’s dominant family-owned model is confronted with international management practices — and scandals on the magnitude of Ramalinga Raju’s billion-dollar fraud at Satyam Computer Services? India has reached well beyond its borders, but a turbulent global economy means that there is no guarantee of smooth progress.
Risk and Reward in New Markets
Major Western firms, such as Coca-Cola and GM, have reported greater profits overseas than at home for almost a decade now, and global expansion into faster-growing economies seems essential to all First World companies that can afford it. But even though emerging and frontier markets, such as Sri Lanka and Romania, are undoubtedly the next major globalization story, they are volatile and unpredictable. Yet few companies take political risk seriously. Most either rely on experts and “insider advice” or simply ignore the subject as too complex and intangible to integrate with day-to-day strategy.
In this sense, Ian Bremmer and Preston Keat’s The Fat Tail: The Power of Political Knowledge for Strategic Investing is long overdue. The authors, both at the prestigious consulting firm Eurasia Group, draw on years of top-level advisory experience to provide the first accessible and rigorous treatment of political risk for business executives. “Fat tail” is a statistical term that refers to a bump at the end of a distribution curve where there is added risk, but the likelihood that a particular event will occur “appears so catastrophically damaging, unlikely to happen, and difficult to predict, that many of us choose to simply ignore it. Until it happens.” The authors’ main point: Black swans, as Nassim Nicholas Taleb calls them, can be political as well as financial.
Such is the volume’s tone as it takes the reader through a wide variety of events that wreaked havoc in capital markets, including the Russian ruble devaluation of 1998, the 2003 PDVSA oil strikes in Venezuela, the 9/11 terrorist attacks, and the passage of the U.S. Sarbanes-Oxley legislation in 2002. Indeed, as shown by the critical firestorm that forced state-owned China National Offshore Oil Company to withdraw its bid to acquire Unocal in the U.S. in 2005, local political sensitivities impact investments everywhere, even in the United States.
Bremmer and Keat turn the amorphous notion of risk into a catalog of former secretary of defense Donald Rumsfeld’s oft-quoted “known unknowns” and “unknown unknowns,” covering warfare, energy supply disruptions, terrorist attacks, coups and civil wars, expropriation and breaches of contract, currency controls and defaults, global warming and demographics, and, of course, corruption. Along the way they offer sensible resilience mechanisms to prepare for such events (e.g., risk mapping, data collection, scenario analysis), ensure continued operations (e.g., personnel location), and hedge strategic bets (e.g., joint ventures). But lest we begin to believe that political risk is fully manageable, Robert P. Smith’s Riches among the Ruins: Adventures in the Dark Corners of the Global Economy (written with Peter Zheutlin) provides a stark reminder that “frontier markets” can be a euphemism for the chaotic Third World. Smith, the founder and managing director of the Turan Corporation, which specializes in emerging-market sovereign debt, takes us on a tour of places where he says you have to “hold on to your wallet and your life”: El Salvador, Guatemala, Iraq, Nigeria, Russia, Turkey, and Vietnam.
In the 1970s and ’80s, before dollarization and Bloomberg terminals, sovereign debt–trading middlemen like Smith relied on chutzpah and instinct to determine bond prices and find trusted money changers. For such financial swashbucklers, understanding people was as important as, if not more important than, understanding markets. Clearly, improvisation was Smith’s greatest gift: He carried large volumes of cash internationally, set up local holding companies to collect debts, and sent alias-named proxy lawyers to scout for contacts and information — anything to get the job done.
Even as the sovereign debt trade has grown into a $1.7 trillion industry conducted by multinational banks and investment firms, Smith’s characters are alive and well today, just dressed better and using BlackBerrys instead of rotary-dial telephones. After reading this book, one wonders how Arab and Chinese investors described by Simpfendorfer will treat the frontier markets of Uzbekistan, Afghanistan, and Pakistan that lie between them on the New Silk Road.
Smith witnessed every incident in The Fat Tail taxonomy, from arbitrary currency controls to coups to expropriations. His implicit reminder is that emerging markets are a long-term investment. It’s a reminder that would have been worth hearing in late 2008, when the worldwide flight of capital to safety caused foreign direct investment in the developing world to plummet. Many analysts threw the baby out with the bathwater, and the U.S. became the default market of choice even at near zero percent yield on Treasury securities. But, in fact, by April 2009, the Wall Street Journal was already reporting a surge in emerging market indexes. Growth had not gone negative, and foreign exchange reserves and high savings rates combined to restore stability.
This isn’t to say that recoveries are permanent. Smith’s description of Russia in 1997, when he and others bought in heavily on the assumption that Russia was too big to fail, inadvertently reminds us of Russia in 2007: too dependent on high oil prices and with weak regulations and enforcement. Just over a decade ago, the Russian stock market lost 75 percent of its value; in 2009, it has lost at least 60 percent. Emerging markets can always submerge again.
In the evolution from Smith’s boots-on-the-ground adventures to Bremmer and Keat’s more detached, methodological approach, an interesting mutual appreciation appears: Smith thinks that his adventurous tactics are no longer relevant in a world of real-time, electronic information, yet Bremmer and Keat argue that local political knowledge is still essential to staying ahead of the curve. In other words, paying more attention to data is not enough — good instincts are also essential to figuring out all the unknowns.
A Warning to Established Players
An unmistakable conclusion that we share with all the books featured in this essay is the assertion that the U.S. has lost its status as the preeminent driver of globalization. Thus, we predict that two trends will typify the next phase of globalization: First, stronger regionalism in terms of deepening economic integration in areas such as East Asia, Latin America, and the Arab world will be driven by local powers such as China, Brazil, and Saudi Arabia. Second, the global playing field for firms, capital, and strategies will become much more level as Western companies lose the automatic edge they once held in trust and credibility. (See “Capturing the Asian Opportunity,” by Andrew Cainey, Suvojoy Sengupta, and Steven Veldhoen, s+b, Winter 2009.) Companies in emerging and frontier markets may not become global leaders in their own right, but they will surely be powerful players in their own domains and beyond.
Ayesha Khanna is managing director of Hybrid Realities, a research and strategy consulting firm, and author of Straight Through Processing for Financial Services: The Complete Guide (Elsevier, 2008). Parag Khanna is a senior research fellow at the New America Foundation and author of The Second World: How Emerging Powers Are Redefining Global Competition in the Twenty-first Century (Random House, 2009).