End of the road?

There is no better example of all that is wrong in the shape of the world economy and, perhaps, the shape of trade to come, than the Tata Nano, argues Cynicus Economicus.

The world economy is unbalanced and that imbalance, one way or another, must be resolved. The underlying problem is that the world economy is directed towards satisfying consumption in Western economies, yet that consumption has grown so big that it can only be financed with an endless growth in debt.

This creates a fundamental problem in the structure of the world economy: too many companies are built around making the wrong products for the wrong place. One simple example lays it all bare.

While the US and, to a lesser extent, Europe are seeing catastrophic contractions in their car markets, the Tata Nano has a massive waiting list among Indian car buyers, keen to upgrade from two wheels to four. The contrast between the old industry, perhaps best exemplified by General Motors, and this innovative upstart illustrates the new shape of the real-world economy.

The important point about the Tata Nano is that it is meeting a new demand from a rising middle class in emerging economies. In the interim, the credit-fuelled demand for SUVs, the mainstay of US car industry profits (until recently), is collapsing. On the one side there is a car that rests upon an unsustainable credit-fuelled consumption boom, a car that flattered the aspirations of the indebted and, on the other, there is a car that meets the rising aspirations of the world’s new wealth generators.

The point is that SUVs represent a concentration of car-owning wealth in the hands of the few, and the Nano is the shift of that car-owning wealth into the hands of the many. It is representative of the underlying shift in real wealth, which is redistributing towards the East, and levelling down the West in the process.

If we imagine what this shift means more widely, we can have a sense of how misshapen the world economy has actually become. While the real output of wealth creation moves to the East, the West is left with the legacy of a service economy to support its debt-fuelled consumption.

At the same time, the East structured its economies to service that same Western consumption. Both East and West are pointing in the wrong direction, and the eventual direction is, perhaps, best illustrated by the Tata Nano. In this example, we can see the future and the way that the global economy must move. It is an economy in which the products that succeed for the mass market will be products that are aimed at lower middle-income consumers.

This is not to say that luxury brands, such as Lexus or Jaguar, will disappear. It is not to say that the world market will all move to the middle. It is, however, a market in which the middle is in a different place, and at a different level. From this major shift there will be other shifts. The growth for luxury car brands will be in the East, with a commensurate decline in the West. The car market in the West will increasingly be found in smaller and more economical cars.

If this perspective proves to be correct, it raises major questions about the underlying policy of Western governments. At the heart of the bailouts and stimuli is an attempt to become the borrower of last resort, to replace the borrowing of the consumer with the borrowing of government. In doing so they are seeking to support a structure that is inherently flawed, where much of the economy is pointing at a market that no longer exists.

In essence, they are trying to deny the underlying economic reality. Wealth generation has moved towards the East, but governments still imagine that nothing has changed.

This article was written by Cynicus Economicus, a former trade specialist based in China. He blogs at cynicuseconomicus.blogspot.com and can be contacted by emailing cynicuseconomicus@yahoo.com.