The Cycle of Deflation has taken another lurch forward. The reason was India’s decision to veto last year’s Bali deal to streamline customs procedures. Almost certainly, this will prove the dying effort of the World Trade Organisation, which sponsored the proposal.
The blog is particularly sad at this outcome. It has always believed that free trade provides the best possible basis for improving global living standards.
The problem, of course, is that compromise becomes increasingly difficult as the economic outlook worsens:
Thus WTO’s ‘Doha Round’ began in 2001 in Doha, and has since gone nowhere.
It was hoped in Bali that a small deal, allowing everyone to benefit from easier customs procedures, might restore momentum. But India refused to agree this without guarantees that it could continue with its food subsidies.
This of course, is an unrelated issue. But it is very important to the new Modi government, anxious to be seen as champions of the poor. Thus India’s Trade Minister argued:
“We cannot wait endlessly in a state of uncertainty while the WTO engages in an academic debate on the subject of food security. Issues of development and food security are critical to a vast swath of humanity and cannot be sacrificed to mercantilist considerations”.
Other major global trade deals look equally unlikely to deliver real progress:
The reason is simple – politicians are failing to spell out potential benefits and are instead leading from behind.
Thus as the blog warned back in February, protectionism is gaining ground around the world. As the chart suggests, we have moved through the period of devaluation and have now arrived at the period of competitive devaluation, where everyone tries to out-compete their rivals.
This process began more than a decade ago, when companies and policymakers failed to recognise that demand would inevitably slow as global populations aged, and the Boomers joined the New Old 55+ generation. Even today, major expansions are underway in many industries, regardless of the fact that demand growth is already very weak.
Once the money is spent, countries will close their borders to protect jobs. Only then, when too late, will we all look back and wonder what we could have done differently.
There is never a shortage of growth opportunities. But too often companies choose not to access them. Hopefully that won’t happen with the opportunity to supply millions of tonnes of polymer to meet India’s desperate need for toilets.
As the blog wrote recently, 600 million Indians currently defecate in fields – as shown above in the photo – because their homes have no toilets. They represent nearly 10% of the world’s population. And as the New York Times notes:
“Human waste surrounds parks and lines roads and train tracks. Women in rural areas wait until dark to relieve themselves outside, leaving them vulnerable to rape. In the darkness, some say they sometimes set down young children in others’ waste or step in it themselves….And rapid population growth has meant that most Indians are being exposed to more human waste than ever before.”
So the blog would like to challenge chemical and polymer companies to do something about this, and make money.
There would be enormous social, economic and developmental benefits from solving this problem. The provision of toilets is the basic need for a society – even more basic than drinking water. The reason is that you can’t have pure drinking water without a sewage system. The water, as in India today, simply becomes contaminated with disease.
The problem is also urgent. New research has highlighted how even well-fed children can be literally stunted for life due to open-field defecation:
“Children are exposed to a bacterial brew that often sickens them, leaving them unable to attain a healthy body weight no matter how much food they eat. “These children’s bodies divert energy and nutrients away from growth and brain development to prioritize infection-fighting survival,” said Jean Humphrey, a professor of human nutrition at Johns Hopkins Bloomberg School of Public Health. “When this happens during the first two years of life, children become stunted. What’s particularly disturbing is that the lost height and intelligence are permanent.”
Thus health officials suggest that “India’s stunting problem represents the largest loss of human potential in any country in history, and it affects 20 times more people in India alone than H.I.V./AIDS does around the world.”
The numbers impacted are indeed huge. The Economist suggests up to half of all Indian children are affected.
The good news is that we know the answer to the problem:
- Today’s increased life expectancy in developed nations is based on the major advances in sanitation that took place a century ago
- They were the building block upon which later advances such as vaccines and antibiotics were able to build
It should also be a profitable opportunity. Some top-of-the-head calculations suggest that:
- India needs at least 100m toilets to be built – each requiring at least $50 of polymer
- All of these toilets need connecting to sewage works – probably needing another $5bn of PVC or PE piping
So that is a minimum $10bn opportunity on its own, even before we add in all the other parts of the system, plus maintenance and upkeep. It also carries little technical risk, as the technology is well known. And it could easily become a stepping stone to other major opportunities.
- For example, once the toilets are installed, it would be comparatively easy to create a village biogas system that would provide electricity for the village
- In addition, sanitation is clearly key to leveraging India’s economic potential. 48% of Indians currently defecate outside, compared to only 1% of Chinese, according to latest WHO/UNICEF data.
Of course, there are plenty of reasons that companies can dream up to explain why this opportunity is not for them. They will be the losers as we move into the New Normal, as their focus is always to find reasons NOT to do something.
Blog readers, however, are people who like to discover new opportunities, especially when they are both profitable and clearly ‘the right thing to do’. Installing toilets is also the declared policy priority of the new Modi government:
“By 2022, no Indian should be without a home, without clean water, without electricity and without a toilet”.
Equally important, as we highlight in chapter 8 of Boom, Gloom and the New Normal, is that there should be plenty of funding available to kick-start this development.
Please think about whether your company might want to become involved. And contact me at email@example.com if you would like to discuss further.
As the blog discussed last week, it seems that a new type of leader is starting to emerge in some of the world’s major countries. Premier Narendra Modi in India, like President Xi Jinping in China, seems to be focused on achieving change – and not just on staying in power for its own sake.
His vision is simple and very powerful:
“By 2022, no Indian should be without a home, without clean water, without electricity and without a toilet”.
This could be very good news for India, which is set to have the world’s largest population within 20 years, due to having higher fertility rates than China. As the chart above shows, however, it only has a limited time period in which to benefit from this Demographic Dividend:
- Its fertility rate has already fallen 60% since 1950, from around 6 babies/woman to just 2 babies/woman today (green shading)
- This is below the replacement level of 2.1 babies/woman, and means India’s population will start to decline if this trend continues
- Life expectancy has increased 80% over the same period, from 36 years in 1950 to 65 years today
- This means that India will follow China into becoming an ageing society in due course
India is, of course, also one of the world’s poorest countries. Its GDP/capita of just $1500 puts it in 140th place in the world. By comparison, China is 83rd with GDP/capita of $6700. So Modi’s focus has to be relevant to its economic wealth, if it is to achieve anything meaningful.
The blog’s colleague, John Richardson, has written an excellent summary of the challenges and opportunities facing Modi in India. He rightly argues that “a war on poverty – especially extreme poverty” must be the key target.
“This would mean many more children would be healthy-enough to attend school on a regular basis. In parallel major improvements in the education system must also take place.
“Key to alleviating poverty will be improving access to safe drinking water, sanitation and safe and plentiful supplies of food. This is where the chemicals industry can play a critical role in making this happen. If more and more children are able to attend good schools, they will grow up to be a little richer than their parents. This would translate into much greater domestically-derived growth, which will happen regardless of India’s success or failure in export markets.”
He is clearly right. Simple metrics are what is needed to focus activity in the right direction. The fact that half of India’s population currently have no access to a toilet, and instead have to defecate in fields, is one such target that anyone can appreciate.
The numbers speak for themselves:
- 600 million Indians currently have to defecate in the fields, or wherever they can find an available place.
- They total 60% of the world total of residents who have to live without toilets
- The previous government spent just 0.1% of GDP on water and sanitation provision, less even than Bangladesh
This is why Indian villages are thought to be among the unhealthiest communities in the world. The rewards would be immense, as Bloomberg notes:
“At stake is $54bn a year in economic costs in India, equivalent to about 3% of GDP in Asia’s third-biggest economy and a quarter of global losses from poor sanitation. Open defecation contaminates ground water, spreads disease and exposes women to sexual assaults, including two girls in India who were raped and hanged from a tree last month after squatting in a field near their homes.”
Change is, of course, difficult to achieve. As the great Italian writer Nicolo Machiavelli wrote in his most famous work,’ The Prince’
“There is nothing more difficult to take in hand, more perilous to conduct, or more uncertain in its success, than to take the lead in the introduction of a new order of things. Because the innovator has for enemies all those who have done well under the old conditions, and lukewarm defenders in those who may do well under the new.
“This coolness arises partly from fear of the opponents, who have the laws on their side, and partly from the incredulity of men, who do not readily believe in new things until they have had a long experience of them. Thus it happens that whenever those who are hostile have the opportunity to attack they do it like partisans, whilst the others defend lukewarmly.”
We will know whether Modi is serious about reform, once today’s honeymoon period ends, if we start to find that he is being seriously attacked by people who have done well under the old conditions.
The fact that something is difficult, does not mean it should not be attempted. Companies who focus on the opportunities in India, from the provision of safe drinking water and sewage, or better food packaging, are likely to be the Winners for the future.
A new type of leader seem to be starting to emerge in China and India. President Xi Jinping in China, and premier Narendra Modi in India, are not spending much time studying the output of focus groups or investment bank analysts. Nor do they have ‘spin-doctors’ worrying about every phrase on the 24-hour news channels.
Instead, they have ideas about what they want to do, and clear implementation plans to achieve them.
It is easy, of course, to be cynical about their ambitions. But let us suppose for a moment that:
- They really do want to use their power for a purpose, as leaders such as Gandhi did in the past
- They are serious about tackling the key issues – and the pervasive corruption that stops reform taking place
Companies and investors need to study this potential scenario very seriously, as it is a long way from the current ‘business as usual’ model.
We can see this by trying to understand what they might want to achieve with their power. Today and tomorrow, the blog looks at Xi Jinping, and next week it will look at Narendra Modi.
Author Robert Lawrence Kuhn has helpfully spelt out Xi Jinping’s China Dream, which the blog has highlighted in the chart above. Kuhn has long been a strategic advisor on China, and his summary has been endorsed by Xi himself.
In Xi’s dream there is nothing about creating a wealth effect via further stimulus of the property bubble. This was a policy of the ‘lost decade’ under the previous regime. It allowed corruption to flourish, as it was easy for officials to profit personally from land seizures, whilst building ‘ghost cities’ to meet their GDP targets and local tax income needs.
Xi’s position was made clear 3 months ago, when Cement Shen’s property business went bankrupt in Fenghua. It is well worth re-reading the policy statement in state-owned China Daily at that time, which set out very clearly what would, and would not, be part of the government’s programme for the next few years.
The headline itself highlights the overall direction: ‘No pain, No gain, for China reformers’.
“A thorough cure means it could take a long time for the patient to feel better. Judging from the immense task China faces, it’s going to be another two years, at least, before change can be quantified in the central government’s statistical reports. Some assets, valuable just a few years ago, will become useless. The money that was spent on them, and their contribution to GDP, likewise will vanish. Those assets will include costly building projects in cities that never find a niche and industrial facilities unable to compete in the world.”
THE GOVERNMENT ROLE
Xi’s dream therefore has very practical elements, focused on the role of government:
- It requires a Civilised society with equal opportunity and one law for all
- In addition, it needs Stable government, with consistent policies
- And it requires a Harmonious society with goodwill between different ethnic groups and classes
Will this be easy to achieve? Of course not. Will there be major challenges along the way? Of course there will. The China Daily article sets out several of the major ones, such as:
“If, as some business commentators propose, the country is to eliminate up to half of its industrial base to make way for business based on the mobile Internet, it will have to keep the credit line really tight for local development projects.”
The key point is that Xi and premier Li have 4 years before the leadership is due to be reappointed for its second 5-year term in March 2018. And thus it makes total sense for them to tackle the key issues now, over the next 2 years, so that by 2017/18 they can point to signs of progress
Tomorrow, the blog will look at the likely Winners and Losers from the end of China’s current growth model, as the property bubble is burst.