As Asian miracle wanes, U.S. may wax: James Saft

September 11, 2012

Sept 11 (Reuters) – Asia’s economic miracle may be waning
just as the foundations for an eventual resurgence in the U.S.
are being laid.

Asia, China in particular, may be bumping up against the
limits of a capital-intensive growth model predicated on cheap
labor. To counteract this, countries like China may have to
adapt legal, political and even academic practices which could
up-end existing power relationships.

At the same time, technology, geology and new manufacturing
techniques may in combination give U.S. growth an energy and
innovation boost.

“To pose the question about the Asian miracle is not to
doubt China’s and Asia’s economic potential and significance,
but to throw down the gauntlet to the conventional thinking that
extrapolates Asia’s past economic performance into the
indefinite future, and assumes that the competitive challenge
from the U.S. and other Western countries and companies is now a
spent force,” George Magnus, an economic consultant to UBS
writes Monday in a note to clients titled “Asia: is the miracle
over?”

To be sure, Asian growth rates won’t dip below those of the
U.S., other than under the most extraordinary scenarios. There
is, however, real potential for rates in China, India and
elsewhere to disappoint the sorts of forecasts now common, and
for the U.S. to stage a meaningful, and surprising, rally.

China’s fantastic multi-decade record of economic growth
owes much to better use of labor, as workers were redeployed
from less productive rural work into the country’s
urban-centered export machine. That, supported by an
extraordinary investment in physical capital drove high rates of
growth and productivity, but at the expense of a domestic
consumer economy.

That particular set of tactics are now showing diminishing
returns. Wage differentials are narrowing while, at least for
the near term, Europe and the U.S. will show less appetite for
exports. Magnus argues that the next step upward will have to be
founded on greater efficiency and innovation, both of which in
turn depend on political and institutional reform. In a
one-party state like China this is both difficult to do and
difficult to forecast.

Intellectual property rights may well become better guarded,
and what Magnus calls a system which favors incremental over
radical change may be remolded too, but the evidence on the
ground thus far is thin.

U.S. POTENTIAL

None of this does much to change the real hurdles faced by
the U.S. It labors under too much debt, has a nasty problem with
the long-term costs of health-care and, crucially, as the owner
of the world’s leading reserve currency is given the latitude
and even encouragement to not make hard decisions but simply
solve issues of debt and consumption with still more debt and
consumption.

That said, the U.S. has a lot going for it over the next
decade. Advances in technology and lucky breaks in geology means
that the U.S. is beginning to enjoy a shale gas revolution which
will create jobs and investment and give it the sort of energy
independence unimaginable a decade ago. UBS estimates this may
boost growth by about a half a percentage point in coming years
- only about a third of the impact of the technology boom – but
a very meaningful amount in a low-growth environment.

At the same time, so-called 3D manufacturing shows really
stunning, if yet unproven, potential to re-shape the way the
world makes things, and to do so in a way which largely favors
the U.S. over not just China but Japan and Germany as well. The
process, in which highly customizable products are literally
sprayed into existence using something not too dissimilar from
an ink-jet printer, as opposed to the old style of banging
things out of materials, plays really well to U.S. strengths.

While used now mostly to make prototypes, the spread of 3D
should make it cheaper and more advantageous to put factories
close to their markets. That’s a huge contrast from the existing
global supply chain, in which achieving small per-piece price
advantages is so important that we site parts plants for a
single product all over the globe.

The U.S. has not just shown itself to be leading in
innovation, as 3D rises a higher percentage of the value of a
manufacturing operation will be in intellectual capital – the
designing of the program which makes the product, rather than
the massive factory in China or the Ruhr. Why site your factory
half a world away from your market and take a risk of losing
your intellectual property? Shipping costs too will play a
bigger role if labor inputs into the cost of making something
are smaller.

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