SINGAPORE (Feb 11): If you use social media at all, you cannot have missed the rash of #10yearchallenge photos that consumed the internet for the better part of January. For a while, it was impossible to log on to Instagram or Facebook without being assaulted by decade-old photos of friends and acquaintances. Those hairstyles! That photo quality! Was it only 10 years ago that iPhone 3Gs were considered cutting-edge?
A lot can change in 10 years, and it is worthwhile taking a step back to appreciate how quickly the world has evolved. To start off the year, then, here is the #10yearchallenge for the world economy — my pick of the most important structural changes over the past decade. The trends are well known, but you might be surprised by their magnitude and speed of change. This has important implications for the next 10 years.
The rise of China
What is the largest economy in the world? Most people would say the US, of course. But to the International Monetary Fund, China is already the largest economy — and its lead is only expected to grow.
It all depends how we measure each country’s GDP. If we use market exchange rates, then the US continues to dominate, although the gap is narrowing (see Chart 1a). On the other hand, GDP can also be compared using purchasing power parity (PPP) terms, which is a fancy way of saying how much in terms of goods and services the output of the country can buy.
Because the cost of living is lower in China, its GDP in PPP terms is much higher, and has been larger than the US since 2013 (see Chart 1b). More importantly, China has more headroom for growth and four times the population of the US, which bodes ill for US economic dominance.
As it grows, further tensions between the US and China will arise as China continues to challenge US economic hegemony. In the near term, tariffs have brought enough pain to China that it seems willing to negotiate (without compromising its long-term prospects). Within the next 10 years, though, further conflict is almost inevitable and may even spill into armed conflict.
From historical experience, the rise of a challenger to a geopolitical incumbent has always been a time of conflict — the so-called Thucydides trap. It is not clear that this can be avoided even if the US presidency changed hands, or if China was made to “play fair” with regard to its intellectual property practices. What is clear is that a two-power world will be inherently more unstable than a one-power world.
The rise of the machines
Ten years ago, there was only one tech company among the 10 largest companies in the world by market cap — Microsoft (see Chart 2). Now, tech companies make up seven out of the 10 largest companies in the world. The top five are American, with Chinese companies Tencent Holdings and Alibaba Group Holding holding the sixth and eighth spots. Now, given the volatility of individual stocks and currencies, this is obviously a list that will change depending on the specific day and month we are using to make this measurement. But the larger point about the rise of tech giants is clear, to an extent that no one could have predicted in 2008. Today’s brightest graduates no longer want to work at investment banks or consulting firms, instead preferring Facebook, Google or Tencent.
Nor is the change merely in the growth of the megacap tech sector. Machine learning, artificial intelligence and automation combined are diffusing into and fundamentally reshaping every sector of the economy, at a rate of change faster than any other time in history. To see how many business models have been or are being disrupted, you merely need to glance at your smartphone apps. Transport, media, payment, telecommunications — the list is growing by the day.
Structurally, the most important implications are for the labour market. What will truck drivers and taxi drivers do in the age of autonomous vehicles? Or call centre operators with the advent of chatbots? Not everyone can, or wants to, be retrained to become a software engineer, and in any case, far fewer of those are required in the new economy. How societies deal with this issue will in large part determine the trajectory of world history in the coming years.
The rise of populism
Ten years ago, on Jan 20, 2009, Barack Obama was sworn in as the 44th US president amid the most severe financial crisis the country had experienced since the Great Depression. Over his two terms, he stabilised the economy, brought the country out of crisis, ended the war in Iraq, signed the Dodd-Frank Act and instituted universal healthcare. Yet 10 years later, a man that is in many ways his antithesis sits in the White House.
What happened? Certainly, there are areas where Obama could have done better. Taxpayers never got the sense that the financial industry was appropriately punished for its role in the 2008 crisis. Obama’s use of executive powers struck many as elitist and undemocratic.
But the genesis of populist sentiment goes deeper than one man and his policies, and is in many ways related to the other two megatrends discussed above. Globalisation and tech disruption benefited capital owners and tech hubs but devastated middle America — the farmers, miners, factory workers — leading to widespread disillusionment and disenfranchisement.
Furthermore, these forces are not limited to the US alone but have impacted all countries, especially developed economies. This is why populism is not only an American problem but also a British problem, an Italian problem, and yes — even a Singaporean problem if we are not careful.
What are we to make of all of this? We should expect the first two megatrends to continue, with tech disruption probably accelerating. This will put ever greater pressure on established economic structures and institutions that have governed international cooperation for the past few decades — pressure that could be released in sudden bursts of geopolitical instability that will seem surprising to those who have not been watching carefully.
Although this sounds gloomy, the next 10 years will not necessarily be bad for equity returns. Tech adoption and China’s rise are merely structural shifts in growth from one part of the world economy to another. Geopolitical instability and populism will depress returns somewhat, if they affect long-term trade and economic growth. But if we believe the world economy will continue to grow overall, there is no reason to believe that stocks will not continue to rise, albeit with greater volatility, in the next 10 years and beyond. Disruption means opportunity if one is nimble.
More generally, the real #10yearchallenge for societies is figuring out how to redistribute the gains from globalisation and innovation to support those that have been disrupted by them. As global citizens, it is our responsibility to be sensitive to these changes and their impact on global inequality. Even if we are not policymakers, we all have a voice, now more so than ever through social media. This voice can be used to unite or divide. In the next 10 years, will you be part of the solution or the problem?
Herbert Lian is a financial adviser representative at IPP Financial Advisers Pte Ltd. The views expressed here are solely those of the author in his private capacity. This article should not be regarded as professional investment advice or as a recommendation regarding any particular investment.
This story appears in The Edge Singapore (Issue 868, week of Feb the11) which is on sale now. Subscribe here
