The Gold Standard  

Jeff Rubin’s new book, ‘Why your world is about to get a whole lot smaller?” (blogged here at the Economix blog page of New York Times) sounds quite interesting and its central thesis is highly plausible. High oil prices can reverse globalization and it could hasten the return of manufacturing to North America and Britain, etc.  But, for that to happen, prices have to adjust first a lot more than what oil price alone can accomplish. Exchange rates have to do their job first, vis-a-vis Asian currencies. That is yet to happen. My guess is that it would.

That would only pressure (East) Asia to move towards domestic growth dynamics. Easier said than done. Less manufacturing and more services depends on sophistication and maturity of institutions. Something that even the West has discovered that it lacks. Or, more precisely, it could not sustain. Corrupting influences are universal. Prosperity causes moral decay and the lessons do not seem to be absorbed yet. But, I am digressing here.

For East Asia, competing on price for market share in manufactures is a lot easier than to compete on quality of service.  Viewed in this dimension alone, India sounds like it is on a stronger wicket. But, it has to do a lot more in areas that could sustain its service sector orientation and even strengthen it. Its manufacturing has a large domestic demand base and hence the ’shrinking of the manufacturing trade in a world of rising transportation costs’ should not hurt much, in theory. But, practice is different.

There are opportunities here – in different dimensions – for Asia (not just East). But, they also come with pitfalls. East Asia is not culturally attuned (at least not in recent memory) to creating a diverse service sector base. It requires mindset change in many areas. For India, the challenges are different. It requires a revolution in education – both vocational and higher.

Hence, de-coupling is not a given. But, the opportunity and the compulsion are becoming clearer. Asset prices are getting ahead of themselves on this.