Hyderabad, May 8, 2006 AEST (ABN Newswire) - A HUGE shift is taking place in the balance of economic and political power, the Institutional Investors' Roundtable heard at the at Asian Development Bank's (ASX: ATB) 39th Annual Meeting of the Board of Governors in Hyderabad at the weekend.
Investors, bankers, government officials, and policymakers gathered for the roundtable on Saturday at the Hyderabad International Convention Center to discuss the roles of India and the People's Republic of China (PRC) vis-a-vis the changes that need to occur in the rules of globalization to correct the world's widening economic imbalances and the impact or influence that this might have on the private equity industries in these countries.
Clyde Prestowitz, President of the Economic Strategy Institute in Washington, DC, and author of the recently published Three Billion New Capitalist: The Shift of Wealth and Power to the East, cautioned that we are facing a historic turning point in which that decisions about the future that we have typically made based on historical events are being brought into question.
In 1950, the PRC and India combined generated 7% of the world's gross domestic product. Today, it is 15% and their collective share is growing at a rate of 10% annually. Prestowitz says that this is going to result in a huge shift in the balance of economic and political power. The assumed development trajectory of emerging countries' abundant cheap labor producing low-tech products and gradually moving up the technology ladder while countries like the United States and Japan move to "higher ground" no longer applies.
Since the fall of the Berlin Wall in 1989, three billion new capitalists have joined the world's economy providing a virtually endless supply of labor, much of it highly skilled, in the PRC and India. This, combined with the negation of time and distance by the Internet and global air delivery, will create a new and challenging competitive environment for countries, companies and individuals, he says. Trade used to be based on comparative advantage for countries in technology, capital, and labor. This no longer holds true as all these elements are crossing national boundaries virtually unstopped.
According to Mr. Prestowitz, the great changes occurring will result in a dwindling role for the US dollar in international finance, which will mean a decline in living standards for Americans. Services, research and development, and basic research are moving to Asia at a breakneck pace. This conjures up possible nightmare scenarios given how inextricably intertwined the world's economies have become.
Indeed, Mr. Prestowitz is predicting a 50-75% devaluation in the value of the dollar. Countries in Asia have grown on the back of policies specifically aimed at accumulating large trade and dollar surpluses as a matter both of stimulating growth from exports and of assuring national economic sovereignty by avoiding dependence on foreign lenders. The US now consumes about $700 billion a year more than it produces thus fueling large and unsustainable trade and current account deficits. All other major economies are net sellers, depending directly or indirectly on US-bound exports for much or all of their growth.
Mr. Prestowitz believes that globalization has evolved into a kind of pyramid scheme. To maintain global growth, the United States must consume and borrow ever more while foreign banks buy ever more US Treasuries so their producers can export ever more. This is not sustainable, he says. The world will have to come up with a whole new model of economic development with new policies and initiatives.
With the conclusion of Mr. Prestowitz's talk, Paul Fletcher, Senior Managing Partner of Actis, an emerging markets private equity fund manager with more than $1 billion in assets under management, acknowledged that changes in the dynamics of trade and return of the PRC and India to the world economy creates both incredible opportunities and challenges for the emerging markets private equity industries.
The investment potential is formidable as private equity investment in the two countries as a proportion of GDP is one tenth that of Europe. Last year, private equity investment in India and the PRC was $2 billion and $5 billion, respectively. If the rate of investment grows 10 times as it did over the last 10 years in Europe, we are looking at $70 billion of private equity investment going into the PRC and India over the same time frame.
Michael Barth, Managing Director at Darby Overseas Investments, noted the dramatic developments in the emerging markets private equity industry. Until recently, the returns over the last 15 years were anemic and investors had become disenchanted. Today, we are seeing more seasoned fund managers and a burgeoning stock flow of good investment opportunities.
Improving regulatory and legal systems and better corporate governance at the portfolio company and fund manager levels have all resulted in improved exit expectations, he said. The caveat, however, is that the industry is still relatively immature and still subject to volatility and unexpected disruptions.
There was agreement, however, among the fund managers that emerging markets private equity was at an inflection point.
Renuka Ramnath, CEO of ICICI Venture Funds Management Company, and Fanglu Wang, Managing Director of Asset Management, compared the differences in private equity investing in India and the PRC, respectively.
In India, the private equity landscape has changed dramatically. The population in general is confident that they can handle change and don't look to history any longer. Investment opportunities are coming from sophisticated and talented managers that start and grow successful businesses in industries including pharmaceuticals, entertainment and media, and outsourcing.
In the PRC, there has been criticism that there is too much money pouring into the country, but Mr. Wang posits that China is such a vast country although still poor. In order for the PRC to sustain its growth, it must transition from an export to consumer driven economy. The emerging middle class in the country is forcing the private sector to focus on the services sector including healthcare, education, and entertainment. The Government, however, will continue to play a significant role in the development of the country's private sector. It will be encouraging investment in agriculture, environmental protection, and the energy sector.
The PRC's challenge lies in the shortage of management talent in key sectors. The most talented management comes from the country's state owned enterprises. Thus, progressive and increasingly investor friendly local governments are creating unique investor opportunities. This is in contrast to the situation in India where there is less government involvement.
The roundtable participants agreed that the private equity industry had an important task to offset negativity often associated with its activities. Fund managers must invest and manage their investments and relationships in such a way that broad societal benefits are realized.
Transparent strategies and stock ownership by employees are needed so that they can share in the wealth created for owners. Fund managers will also need to take into account the possibility of global economic crises over the next 10 years and adjust their investment strategies to weather such disruptions.
Source:
Veronica John - Asian Development Bank Principal Structured Finance Specialist
Contact
Graham Dwyer
Email: gdwyer@adb.org
Tel:+632 632 5253;
+632 898 3413;
+63 915 741 4363
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