Last week the media headlines were big on the need for the government to get stuck into a growth programme for the
UK economy. Well,
they were up until those photos of Prince Harry appeared anyway!
However there was another growth story that surfaced in the business press and it’s about what is happening in the Chinese economy. We have all marvelled at the Chinese economic miracle and accepted that it was only a matter of time before
became the world’s leading economy. However when looking at the Chinese economy we need to remember that
this growth is both politically and economically driven and is a key part of Chinese
Communist Party’s (CCP) strategy to continue as the only political power in
Over 30 years ago Deng Xiao Ping worked out that you cannot contain the aspirations of billions of Chinese citizens within the confines of an economic backwater and get away with it indefinitely. He concluded that a capitalist economic model that would unleash the full potential of growth for the Chinese economy and deliver prosperity for Chinese citizens was the answer. This required spectacular growth rates if it was going to deliver but so far it appears to have worked.
However too much of a good thing usually carries a sting in the tail. A property and construction boom became a bubble and although the Chinese authorities took measures to deflate this, the effects of their actions are now spilling into the rest of the economy (sounds familiar?). Construction, exports and manufacturing activity are going only one way – down. The original growth strategy based on cheap labour and imported technology cannot carry the country much further and some estimates predict economic growth in China falling to just 6% over the next 5 years. For
China, which is still a relatively
poor country, this is not enough to maintain the prosperity growth the CCP
needs to sustain its political strategy. With exports at a world record of 49%
of GDP the recessions in western economies are making this worse. For some time
has been trying to rebalance the economy in favour of more domestic
consumption. However they have failed to turn a sufficient proportion of their
population into middle class consumers and they may now be running out of time
to do this. Also, within three years the ratio of working age people to
dependants will turn negative and go into sharp decline as a consequence of the
one child policy.
The Chinese authorities have reversed their reform measures and are throwing several kitchen sinks at the problem in the shape of massive new infrastructure investment. However will this produce more young workers or significantly more middle class consumers? It is not surprising that some commentators are saying to investors, but now for completely different reasons, forget about Europe for now and look more closely at Asia.
Growth – bigger or better?
We have our own growth challenge in the
UK, how to
actually achieve any. Whilst the last quarter’s contraction in the economy was
revised to 0.2pc lower than originally estimated (whoopee!), instead of
repaying debt in July the government had to borrow £600m more (whoops!).
We came across some interesting research from Bain last year. It was a repeat of research they had carried out in 2001 and ten years later they found the results to be the same. One of these was that of all the profits generated by 2,000 businesses in their database over 10 years, over 90% were captured by just 20% of the companies. Right now Apple is demonstrating just that in the mobile phone market, which explains why Nokia and Blackberry are having such a hard time getting out of the hole they find themselves in. Those 20% of companies that capture 90% of the profits focus primarily on being better and then getting better still and their growth is an outcome of this process.
I believe this research should prompt us in the
UK to think
about our economic growth strategy differently. First I believe we need to
think about growth more in terms of “better” rather than “bigger”. Second,
based on the better rather than bigger thinking we need to focus the start
point on the reality of where we are and the constraints we are under. We don’t
have the number and size of kitchen sinks to throw at the problem as the
Chinese do and our political context is entirely different
For example on infrastructure this would mean forgetting about HS2 for the time being and focusing on upgrading more of the existing rail network. As I am based in the East Midlands I would of course cite the example of electrification and upgrading of the
to Sheffield line. However this really would
deliver significant economic growth in our area relatively quickly and for much
less investment than HS2. The same goes for Heathrow where expansion there will
clearly deliver growth, better, faster, cheaper than “ ”. Boris Island
It works for business too. The next time you are working on your “growth” strategy try thinking about it in terms of a “making your business better” strategy starting from where you happen to be rather than where you would like to be. You may be surprised how this changes your thinking and the difference this will make to your growth, even in the current no growth environment.
So that was some of the week before this week. We hope you found some of the above thought provoking and useful for you and your business. We trust you had a good weekend and hope you have a great week this week.