Thursday, December 17, 2009

Geopolitical & economic shift eastbound: underlying trends fueling long term growth in an economy

Since joining the Ras al Khaimah free zone in the UAE I have been delivering presentations in which I illustrate the benefits, services and features of the free zone. But it was only recently that I started introducing some slides about key macroeconomic variables that, in my opinion, are behind the free trade zones’ existence in the first place.

Over the course of my professional career, I have been lucky enough to have the opportunity to operate in a wide variety of locations internationally, from the fast paced Silicon Valley to New York City and Toronto, passing through Europe on a variety of assignments, to finally settle here in the UAE, where I have taken on international projects connecting the Middle East, Indian subcontinent and Asia.

Such an array of countries and realities has allowed me to experience, firsthand, the global changes that I am about to briefly touch upon in this article.
The process, whereby emerging markets have gained weight in the global economy, started a long time ago, but a few unrelated events contributed to the considerable acceleration of this process:
- September 11, 2001
- Peak of the latest commodity cycle
- The rise of China as an economic power

The first created a world where the USA, all of a sudden, became a less accessible country; the second one generated a windfall of liquidity across the oil producing countries, who – for the first time – decided to invest in building their own infrastructures instead of in foreign financial instruments; and the last one shifted the global supply side balance, by providing goods at competitive prices in almost all economic sectors.
Out of this combination of events and long term trends, new alliances have been forged, ties have been formed, and a new Silk Road has arisen.
The new order is settling in, but not without trauma, as every change of this magnitude requires a number of shocks to define a new workable equilibrium among the parties at play; and the latest financial crisis is, in fact, one of these traumas.
Nevertheless, these trends are here to stay, because at the core, economies are sustained by people.

People are the nucleus of the economic system; this is a fact that is often overlooked by politicians and analysts too focused on the near term election or the latest crisis to look at the horizon. Demographic trends are, therefore, an essential element driving the long term development of a country. People spend, invest, consume and save. The rate at which we all do these things changes our ability to sustain a pattern of economic growth or economic regression.


With this in mind, we need to recognize the following:
Demographic trends point to a slow but irreversible decline in all the economies that have led the world during the past 100 years: UK, Germany, Italy, Spain, France and also the US & Canada, with the difference among them being that these last two countries seem to have a better prospect in the long run due to their relatively better ability to absorb immigration and turn immigrants into tax payers.
Europe instead, will be the first and most deeply affected by a set of negative trends: the combination of adverse demographics and an expensive welfare system will short-circuit European economies and lead to long term economic and political decline.


In the USA, the baby boomers starting to retire in the middle of the worst financial crisis in history doesn’t spell sustainable consumer spending, as the following generations just don’t have the sheer numbers to sustain the economy at the same pace as previous generations.
The only hope for countries, like the USA and Canada, which traditionally have been immigration friendly, is to – as fast as possible – integrate new immigrants, who will contribute to renewing “the American dream” and, more importantly, pay taxes. In Europe so far, the integration of new workforce in combination with a rigid and overregulated economic system has failed to produce a new generation of tax payers in high enough numbers to counteract the depletion of the workforce currently in place.


If we fast forward time to 2050, we will see a very different world from that of today. The geopolitical and economic balance of the world is shifting eastward, where a new Silk Road has formed – one that extends from China, across Southeast Asia and India and reaches the continents of Europe & North America but looks more and more to West Africa as a new land of opportunity.
Of particular interest in this context, is the role that India is going to take over the next 2-3 decades. In fact, long term demographic projections (beyond 2040) show trends even more favorable than China, of which we have become accustomed to say: “it will become old before becoming rich”. India shows great fundamentals with a consistently developing internal market.
It is with these irreversible trends in mind that I tour across Europe, the Indian subcontinent and Asia and place the free trade zone as their natural outcome.


The free trade zone (or Special Economic Zones as they are sometimes called), therefore, becomes the answer to two powerful needs:
- The UAE’s need to diversify its economy, in light of the new policy of developing sustainable infrastructure;
- The natural global need for an investor friendly hub that is able to bridge multiple continents: Far East, Middle East/North Africa, Europe.
Investors of all origins cannot ignore the opportunities presented, regardless of their motivations.
Some will be motivated by the need to protect their hard earned assets from their countries’ irreversible need for more taxes and additional fiscal pressure to fund the failing welfare systems.
Some will want to take advantage of the new world order to set up a strategic presence in a global hub.
As I said, regardless of the motivation, the years ahead are bearing the challenges and uncertainties of a paradigm shift. For many, new opportunities will arise, and for others, it will be a different destiny. For us here in the UAE, it is clear: we have embraced the challenge. RAK FTZ is here to move ahead and represent the facilitator and partner needed to sail past the uncertainties and seize the opportunities arising from this newly forming global order.Additional note: By design, my analysis doesn’t touch upon the distribution of wealth among the citizens of each country and doesn’t touch upon quality of life variables, which influence the desirability to live in one country or another; rather, it focuses on the absolute economic relevance of a country within the global landscape.


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