Oh! You Pretty Things

Story Highlights:

• A lot of folks think China will be the dominant economic superpower within a decade.
• India has a severe labor shortage, threatening its rapid development.
• China and India are similar, so India's problems may be a warning sign for China.
• India and China's growth may slow, but a globally diversified portfolio lets you capitalize on global development while mitigating country-specific risk.

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The Summer Olympics are approaching, and all eyes are on China. The Games are her coming out party, the culmination of a makeover many years running: industrialization, creeping capitalism, urban expansion. Folks anticipate this debutante will zoom straight from cotillion to queen of the international economic scene.

You Have Seven Years to Learn Mandarin
By Geoff Colvin, Fortune
https://money.cnn.com/2008/04/29/magazines/fortune/seven_years_learn_chinese.fortune/index.htm

Yep, rumors of impending Chinese economic hegemony abound. But events in other developing countries suggest it's premature to predict Chinese supremacy. India and China have been on similar economic development paths: Both are rapidly morphing from rural, agrarian societies to industrialized, urban economies. But now India has a labor shortage, possibly threatening its infrastructure build-out. Given their similar demographics, China could find itself in the same boat before long.

Shortage of Laborers Plagues India
By Eric Bellman and Jackie Range, The Wall Street Journal
https://online.wsj.com/article/SB120960668797158277.html?mod=hps_asia_pageone

You might ask: How does a country with over a billion people have a labor shortage? One large reason is India's education system doesn't train the vast majority of the population very well. We see an abundance of Indian software engineers and assume their education system must be tremendous, but in reality it focuses on a narrow slice of cultural elites. The majority of the population has less education and formal skills training; therefore, skilled labor is a small percentage of the population. The split between the haves and have nots is still huge.

There's another factor: India actually is a great source of labor… for other countries! Persian Gulf states like the United Arab Emirates are also expanding, importing workers from India to enable their own building booms. Instead of building stadiums for the new Indian Premier Cricket League, Indian workers constructed sky-high tennis courts in Dubai.

Indian workers didn't just decide to move abroad on a whim—they followed the money. The Persian Gulf pays premium wages, offering Indians better opportunities than they'd get at home. We've heard of the "brain drain," where doctors and engineers from developing countries emigrate for higher pay—this is labor's version.

This works because globalization created an international labor market, increasing competition for workers. To attract workers, Indian companies must compete according to global standards: increased wages, better hours, better working conditions… and better toilets!

In this respect, workers are the real winners of globalization. Those remaining in India enjoy increased clout—and they're evolving from proletariat to bourgeoisie. Now skilled laborers are entrepreneurs, circumventing traditional street-corner labor markets and fielding multiple job offers via cell phone. Even better, they own cell phones! Wealth is trickling down. As Austin Powers might say, "Smashing! Groovy! Yay, Capitalism!"

Of course, this doesn't solve India's near-term construction delays. And since China is basically India with a state-controlled economy and no private property rights, we can assume Indo-Chinese world domination is farther off than folks think—giving you longer than seven years to master Mandarin. In fact, any Chinese labor shortage would likely be exacerbated by China's rapidly aging workforce, thanks to the one child policy. Nearer-term, if firms can't attract workers, growth in India and China could slacken—rapid expansion requires infrastructure, and you can't build stuff without people to build it… unless you have robots!

Don't get us wrong—we still believe aggregate economic expansion and outperformance of Emerging Markets will continue. But the labor uncertainties are a great example of the region's risks: Unless growth is adequately supported by labor, it's hard to sustain in the long run. And in many developing countries, labor supply can be seriously impacted by government regulation. As if emerging markets don't have enough to grapple with, their stupid government policies are often riskier than developed countries' stupid governments. This is why, though Emerging Markets are outperforming, it's important to take measured risks there. Even more important, overexposure to any single country is risky. Remember—debutantes look great, but they're still jailbait. They have a lot of growing up to do before they're marriage material.