Globally, the world is steamrolling towards a higher standard of living. It is estimated that roughly 2 billion Indian and Chinese peoples are moving into what we would consider the Middle class. Unsurprisingly, as people gain disposable income, they all yearn for the same things; electricity, indoor plumbing, a car if they can get one, more meat, and labor saving appliances. All these new necessities have one thing in common; they are hugely commodity driven, and relatively low tech. The next ten years and more will be driven by a commodity demand never seen before in the history of man, and new global businesses that will make the world smaller, more efficient, innovative, and threaten the political, cultural and economical status quo.
Economic History
China GDP from U.S. Energy Information Commission
To give some perspective, perhaps 80 million people in North America, Europe, and Japan crawled out of the dregs of the Second World War during the ‘golden economic years’ through say, 1965, to form a new middle class that has since driven the world economy. Today, 80 million people are achieving middle class society every two years. This incredibly wonderful tsunami of burgeoning wealth, if uninterrupted by global war (which is declining, regardless of the War on Terrorism in Iraq and Afghanistan and Pakistan), significant retrenchment in protectionism, or some other calamity, will only increase.
To have so many of the world’s population move out of subsistence living is nothing short of stupendous. It is really the story of our age, made all the more incredible by the fact that relatively few people are talking about it. It frames almost every other economic discussion, including monetary policy. It is enough to hearten our sometimes anemic attempts by both politics and business to open the world to development and generally ‘help others.’
Causes of Global Wealth
India GDP from U.S. Energy Information Commission
The circumstances for such an incredible story are not a secret either, although they are also seldom cause for investigation or reporting. The Fall of the Socialist Iron and Bamboo Curtains were essential requirements, as were a reduction of world income taxes and deregulation of many inter-region and country trade agreements. As it turns out, reducing government control and encouraging investment across the board actually frees capital to do what it is best at; find ROI.
Any traveler to the Iron curtain will see not only the devastation left behind by decades of socialism, but the new activity and prosperity driven by small scale capitalism, even if it is hampered by foundational state and corporate corruption.
Demographic Inferences and Trends
- Unprecedented commodity demand. Regardless of short term increases or decreases in the stock market, commodity prices must increase.
- The last couple decades have seen deflation in commodity prices, supporting western living standards but making increases now harder to fathom.
- Management of commodity producing companies have themselves not yet internalized the reality of this new demand curve. Many commodity companies were still shorting prices in early 2008. That is in effect shorting their own profits.
- Smart money has already privatized many public commodity companies. Relatively few commodity plays remain available to the public.
- Many of the world’s commodities are controlled by dictators like Chavez, or located in countries with volatile political environments, both of which threaten supply stability.
- Western governments, especially USA, exacerbate supply problems by refusing to allow domestic production while markets search out alternatives. This will drive up prices and make the situation worse.
- Rising commodity prices are highly regressive, not only within a country, but the Third World.
- New business playing field. New companies supplied by new wealth with local access to talent and resources will compete across the world.
- Regardless of local country political posturing, this new reality is already happening. There is no way to stop it. The key is to see it as a good thing and how to adapt, rather than as a mistake that must be stopped.
- Growing markets allow room for new entrants. Some will not only survive, but prosper and drive further innovation which will find markets elsewhere. As a simple example, I have seen a faucet above a toilet, where ‘used’ water collects in the tank to be used for flushing. I have also seen window based heating systems that also heat water for washing. None of these are western inventions.
- Since they come from a ‘poor man’ perspective, many of these innovations may well sell more appropriately in the the Third World. Already we are seeing these new companies making deals there.
Demographic Implications of Rising Global Wealth
- Regardless of local country reactions, the trend will continue and become self-sustaining. Although China relies heavily on exports, India has already built a burgeoning economy surprisingly dependent on local demand.
- These new businesses may do more for Third World development than traditional western government foreign aid programs, since they will actually put people to work and create value, rather than acting as ‘social welfare’ programs that often destroy local markets.
- As the world economy grows richer, western governments and businesses project less influence as a percentage of global GDP and therefore global voice, law and ethics (both religion and culture).
- Commodity prices will rise for the next decade as supply (traditional and alternative) strains to catches up.
- Technology allows an ever smaller entrepreneur to take advantage of global upstarts and forge new and beneficial business and personal relationships. As an example, it is now common for American marketers, Indian programmers, and Canadian answering services to seamlessly provide world class services on a global scale, yet remain indistinguishable from a large corporate office in Chicago with its attendant overhead.
- Local country governments will react badly. Already we see American political speeches suggesting protectionism, windfall profit taxes on commodity companies (despite the fact that their profits could have been higher if they had not shorted their own supply, and profits on commodities are lower than other branded industries), higher taxes, etc. Changes reward oversimplified, fear induced reaction. These reactions will generally make local economies worse.
Summary
Real changes in the global economy are afoot. They are fantastic improvements as the world grows richer. They will also have real and practical affects on your life:
- Commodity prices will rise over the next decade due to unprecedented demand, constrained supply, and comparatively slow development of alternatives.
- New companies will enter both established and burgeoning niche markets.
- Technology allows global alliances even for small entrepreneurs who will compete with large companies in all but capital intensive landscapes.
- Large, staid companies will find themselves beleaguered on virtually every front as their profits margins are squeezed by new foreign firms, small alliances, and organizations that are nimble and innovative.
Organizations are encouraged to review their competitive landscapes for opportunities and concerns, and act accordingly.
Additional Resources:
 | Globality: Competing with Everyone from Everywhere for Everything |
Interesting title by Boston Consulting Group members, plotting demographics and the rise of new global companies. Notice this premise (the world is small) is different than “The World is Flat,” which is not true.
 | The Post-American World |
Industrious title, don’t you think? Newsweek writer Zakaria has written a couple books describing world events from a surprisingly American concentric viewpoint. What he really means is that as the world gets richer, USA makes up a less significant portion of it. As long as the pie keeps getting bigger (and it does), we are all better off.
Both books are worth reading.
Globalization increases Wealth | Interesting video by a Swedish fellow.
