Three Billion New Capitalists —Review by Gaetan Lion

Wanna read a fascinating review ... a little dated but somewhat profound.

He was wrong about Japan. He will be wrong about China too., June 11, 2005

By	Gaetan Lion - See all my reviews

Back in 1988, Prestowitz wrote "Trading Places" which was about Japan taking over the world. It sure looked that way at the time, Japan had the highest savings and investment rate, it was catching up and leapfrogging past us in many technologies. It had a huge current account surplus. However, shortly after Prestowitz published his book Japan experienced a chronic recession for the next 20 years. It's stock market level has not recovered from the peak of the late 80s.

Now, Prestowits is crying wolf about China and India for a different set of well known reasons. They have an abundant, cheap, and increasingly educated labor force that will accelerate the gutting out of both our manufacturing and research-service sectors.

Everything Prestowitz states is true, well researched, and insightful. Thus, why was he so wrong nearly 20 years ago about the prognostic of Japan vs the U.S.? And, is he likely to be wrong about China and India?

There is a simple reason why Prestowitz is likely to be wrong again. He focuses only on the most positive sides of our international competitors, and the worst ones of ours. Thus, his arguments are highly unbalanced. China and India are formidable competitors, and to some degree they should take over the world. This is just so that the living standards of their citizen reaches something beyond a poor third world level. However, both China and India face extremely challenging hurdles. China is absolutely clueless about efficient allocation of capital. Credit allocation through their banking system is one of the poorest and most corrupt in the world. The percentage of bad loans within these same banks is causing the entire banking sector to be essentially insolvent. India on the other hand suffers from an incredibly high illiteracy rate which exceeds 50% of the population. It has also one of the most byzantine and inefficient government regulatory apparatus. Ordering a new residential phone line in India is more cumbersome and time consuming then starting a whole new business in the U.S. These weak spots of China and India are complete blind spots in Prestowitz arguments. Thus, he reaches dramatic and likely wrong conclusions. Just like he did when he wrote about Japan back in 1988.

The truth of the matter is that a "catastrophic" type framework sells a lot more books than a more nuanced, and balanced one. But, reality is typically much more complex than such unidirectional lopsided arguments. This is especially true when one attempts to predict complex international competitiveness outcome over the next half a century.

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