I just chided the others for making too many non-euro posts but whatever

I want to make sure Edward doesn’t miss this.

Josh Marshall quotes from a Fortune interview with Peter Drucker:

“FORTUNE: You sound fairly sanguine about the state of the U.S. economy. Do you see any danger signs?
DRUCKER: Oh, yes. The biggest problem I see is our total dependence on foreign money to cover our government debt. Never before has a major debtor country owed its debt in its own currency. It is unprecedented in economic history. Japan, by contrast, owes all its foreign debt in dollars. Now if you devalue the dollar, the Japanese economy benefits, because their imports become much cheaper. And the value of their debt goes down also. The individual Japanese companies that invest in dollars would lose, but the overall Japanese economy gains. But we have no experience about what will happen here when we owe so much debt in our own currency and we’re forced to devalue the dollar. Sooner or later, we’re going to find out.

What’s more, there is an enormous amount of surplus capital in the world for which there is no productive investment. The supply greatly exceeds the demand. So there is a very jittery body of excess money that is desperately in need of returns, and it could become panic-prone. We have no economic theory or model for this.

FORTUNE: Does the U.S. still set the tone for the world economy?

DRUCKER: The dominance of the U.S. is already over. What is emerging is a world economy of blocs represented by NAFTA, the European Union, ASEAN. There’s no one center in this world economy. India is becoming a powerhouse very fast. The medical school in New Delhi is now perhaps the best in the world. And the technical graduates of the Institute of Technology in Bangalore are as good as any in the world. Also, India has 150 million people for whom English is their main language. So India is indeed becoming a knowledge center.

In contrast, the greatest weakness of China is its incredibly small proportion of educated people. China has only 1.5 million college students, out of a total population of over 1.3 billion. If they had the American proportion, they’d have 12 million or more in college. Those who are educated are well trained, but there are so few of them. And then there is the enormous undeveloped hinterland with excess rural population. Yes, that means there is enormous manufacturing potential. In China, however, the likelihood of the absorption of rural workers into the cities without upheaval seems very dubious. You don’t have that problem in India because they have already done an amazing job of absorbing excess rural population into the cities–its rural population has gone from 90% to 54% without any upheaval.

Everybody says China has 8% growth and India only 3%, but that is a total misconception. We don’t really know. I think India’s progress is far more impressive than China’s.”

Drucker makes two very interesting points that I haven’t seen disussed anywhere else

Comments?

13 thoughts on “I just chided the others for making too many non-euro posts but whatever

  1. Off hand, without doing the slightest fact-checking, it all seems a little strange.

    Japan’s foreign debt might be denominated in dollars, but that seems a bit irrelevant given Japn has a huge foreign surplus. If the dollar is devalued Japan’s net position will presumably worsen (in yen terms).

    Also he seems to believe that only 1% of americans are in further education. Surely it is higher than this?

  2. As many as “150 million [indians] for whom English is their main language.” is hard to believe, as is only 1, 5 million chinese college students. Should google some numbers.

  3. Yes, the numbers look rather implausible. I think the points are still valid, though; the point about America’s debt is crucial, and has been getting more and more coverage of late.

  4. Also implausible are China’s official economic growth statistics, or at least that seems to be the consensus among China-watchers.

  5. Uff, a lot of issues here.

    Firstly thanks David for the kind mention.

    Funnily enough I have been posting about this very same topic earlier today on Living in India:

    http://www.livinginindia.com/archives/000112.html

    I’m writing a series of posts around India’s future, which I’m calling An Area of Darkness after the Naipaul book, although the darkness I have in mind is a little different from Naipaul’s: it is to do with our lack of clarity about what exactly is going to happen next.

    In general I am sympathetic to Drucker’s argument. I do think India will be the new ‘brainy’ superpower, and that China will become the manufacturing hub, but not the global leader. Day to day contact with young bloggers in each of these two fascinating countries makes me even more convinced.

    Druker, however, does seem to have an incredible amount of difficulty with detail.

    Matthew is cleary right about Japan, they mainly stand to lose by a continuing dollar slide, as do many of the world’s central banks including the ECB.Also a massive devaluation in the dollar, by making US debts worth a lot less,could be positive for the debt, although perhaps not so much so for the US standard of living.

    In fact Drucker doesn’t seem to understand much economics.

    He is also rather weak on fact. The number of 150 million for competent English speakers is clearly ridiculous. No-one really seems to know for sure, but mother tongue English Indians talk of between 5 and 10 million. Of course many many more understand English, so if you move up the value chain into things like biotech and software development, and away from call centres, which could easily move out to Bangladesh, Pakistan etc as Indian costs rise, then speaking a clear version of the queens English may not be so important.

    He is also off target with his numbers for rural India, which are normally put at 700 million or around 70% and possibly rising as the birth rate in the cities declines. He even gets it wrong on IITs: Bangalore is one of the places where there isn’t an Indian Institute of Technology, although, there is an Indian Institute of Science there.

    So when you look at it, it may be hard to find a single fact which you can corroborate here.

    Having said all that, I still broadly agree with his point.

  6. I think Drucker does get it broadly correct. But India has a lot of problems too. Agreed IITs churn out excellent minds, but the majority of Indians do not go to the IITs. The presence of heartless politicians and mindless voters who get influenced by the pro-hindu or anti- or pro-lower castes (dalits) campaigns is a major cause of worry. India is, in a sense, hanging by a thread.

    Majority of the middle class people have reached the level of upper-middle class through their sons and daughters in U.S and through their own savings (the interest rates used to be extremely high before the tech boom hit India).

    English is a major unifying factor and I believe that will still remain so for years to come. Given that majority of the schools teach english in one form or the other, India will have an advantage in possessing a large number of citizens capable of understanding english.

    The people to watch out for are the those who belong to the ‘middle class’. I think many people are rising above poverty levels and now joining the bulging category called the ‘middle class’.

  7. Off hand, without doing the slightest fact-checking, it all seems a little strange.

    Japan?s foreign debt might be denominated in dollars, but that seems a bit irrelevant given Japn has a huge foreign surplus. If the dollar is devalued Japan?s net position will presumably worsen (in yen terms).

    Also he seems to believe that only 1% of americans are in further education. Surely it is higher than this?

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