The Hindu Business Line : Learning from Washington's economic woes

Recently released OECD figures show that the US is no longer the No. 1 destination for foreign direct investment. Its apparent disregard for both economic and diplomatic fundamentals, and blithe glossing over of gigantic deficits and huge underfunded liabilities put it at grave risk from economic threats that are scarier than a terrorist attack. Clearly, the US will henceforward have to fight hard for its piece of the global investment pie, says K. P. Prabhakaran Nair.

THE Americans have given Mr George W. Bush another four years as President. While the voters contemplated on their choices, the world's leading investors were voting with their money — and the prospects do not look good for the US.

Very recently, the Paris-based Organisation for Economic Cooperation and Development (OECD) released figures showing that last year, for the first time, China became the number one destination for foreign direct investment (FDI) pushing out the US from the top spot.

FDI is money that goes into factories, equipment, real estate or existing companies. And disturbing though for the US the number two position went to France.

Though other major economies also suffered a drop-off, the US suffered the biggest setback. The FDI numbers may fluctuate, but one thing is now clear: In this century the US will have to fight hard for its piece of the global investment pie — money that translates into new jobs and industries.

Clearly, the world economy is shifting around the US and its place atop is seriously being challenged. The OECD report included another revealing statistic: Investment flow into emerging economies soared between 2002 and 2003 with investors pumping more than six times as much into developing markets as they did in the previous year — nearly $200 billion.

The OECD analysts concluded that the main reason for this redirection in the FDI was not because countries such as China offered cheap labour, as is commonly believed, rather, it was the promise of a large market in the future.

This is a big deal, because, even when low wages in these countries go up, which means increased buying power, the attractive labour market of today will graduate into a very attractive consumer market tomorrow. At the same time, the image the US is presenting to global investors is increasingly tainted by its apparent disregard for both economic and diplomatic fundamentals.

The message that the Bush administration has conveyed in recent years is that the US is not confronted with any economic problem — from gigantic deficits to huge underfunded liabilities — which future generations will be burdened with.

So, it is not surprising that other important measures of investor interest have also taken a dramatic turn for the worse in recent months.

For instance, purchase of foreign treasury bonds and other government securities are up, because, the way the government finances higher budget deficits is by selling more paper. But the percentage of those foreign purchases made by private investors — people with confidence in the US economy — is falling sharply.

Instead, foreign governments, which bought only 47 per cent of such securities in the first quarter of 2003, have bought 86 per cent in the first quarter of 2004.

Almost all the government buyers were Asian and the real effect of their purchases was to prop up the value of the dollar and make US exports less competitive than foreign products.

Given their motivation and America's growing dependence on such investors, this is an ominous turn of events. The US faces today some of the worst economic threats that are scarier than a terrorist attack. There is the record-breaking budget deficit that is likely to amount to $5 trillion over the next decade and a burgeoning trade deficit.

Then there is the $72 trillion in unfunded future retirement and health care obligations to the citizens. And a record low savings rate, which suggests that the country would need even more help with retirement funding. And the haemorrhaging of manufacturing jobs and the cost of fixing the dysfunctional health and energy systems.

Every one of these is a gigantic problem on its own and, taken together, they represent a series of bombs placed at the foundations of the American society and are capable of exploding in ways that would touch more Americans than anything even the most sophisticated terrorists could devise.

The US today faces more global economic threats than at any time before. First and foremost is the erosion of the US economic leadership and consequent disaffection of important classes of international investors. Yet, the US depends on those investors. The addiction to foreign oil is a continuing legacy of the past.

Even more important is the growing tension between developed and emerging nations, as a billion new workers from the emerging world compete for their place in the global economy.

Emerging economies depend on change. Advanced markets are comforted by the status quo. This is the bipolar reality that has replaced the cold war.

What are the lessons India must learn from these facts, faced by the "invincible" economy of the world, as most people perceive?

It simply shows that contrary to what the world, at large, perceives, the US economy has become very vulnerable. India in this context has lessons to learn. Take the example of Singapore, an island-state, facing almost similar small-scale versions of the problems beset by the US economy. It has to compete with much cheaper labour and much larger markets available in the Asian neighbourhood.

Once in two years, Singapore government officials proactively seek the advice of private leaders and other experts and come up with a National Economic Strategy that reorients public policy — tax laws, worker training, industry regulation — to strengthen competitive industries and shore up weak aspects of the economy.

The results of this approach are obvious. Singapore's economy is growing at an annualised rate of 11 per cent (about three times that of the US and twice of India's), a remarkable pace for an economy that is already advanced.

The US has no such formal strategy nor any systematic process for devising one and this is a mistake. As for India, less said, the better. The country has elephantine five-year plans, and a Nehruvian legacy — something India is unable to shake off.

Every five years the government changes, and whatever is planned or implemented is thrown out of the window once the new dispensation settles in. Like the US, India also has a National Security Agenda. But there is little point in producing a national security strategy if India ignores the wellsprings of that security — the economic strength that must underlie the military strength.

Consider, for example, the almost non-existent public health care system. In the US, at General Motors, the cost of employee health care now exceeds the cost of steel. That kind of health care, which will tell upon labour cost, may drive away foreign investors, but the point is, the system values labour welfare.

The Indian Government, by contrast, is yet to realise the crucial importance of employee health as central to economic security. This is a cold hard reality. And every minute India ignores the problem or fails to view it in strategic terms it is losing ground.

In this light, health care should become a top priority in a thoughtful National Security Strategy, as should investments in education and infrastructure.

Addressing these issues would mean creating jobs, and that is a much more positive, proactive approach to protecting the workforce, than reactive, punitive trade strategies that produce tensions with trading partners. Meanwhile, India will have to do a lot more to successfully promote its investments abroad.

There are agencies in the agricultural sector that promote exports, but, none to promote foreign investment on Indian soil. There are agencies that help insure and support Indian companies investing overseas, but none to do a similar job for foreign investing companies here. Most foreign countries do. For them investment promotion is a top international economic priority. Why should India lose ground to them?

It is high time that New Delhi establishes a central authority to make certain that all available tools are used to enhance the investment climate.

Recognising threats or just devising strategies does not always translate into better results. But one thing is for sure. Unimpeachable leadership and steely political will greatly lend a helping hand. One really wonders whether this country has enough of it at the moment.

(The author is a former National Science Foundation Professor, Royal Society, Belgium. He can be reached at Nair_KPP@yahoo.com)