Creative Reinvention: The Way To Survive The Chindian Challenge

Small to medium sized Asian economies such as Malaysia, Thailand and other emerging economies which do not have the benefit of China's vast population as a source of domestic demand nor India's head start in information technology have to innovate their ways out of their caught-in-the-middle economic dilemmas.

If these smaller countries do not manage to build a new competitive edge, they face the danger of being peripheral nations whose business cycles depend on China and India's economic engines. Where will the next generation of jobs and domestic economic growth come from? If they can't compete in the manufacturing sector, then they have to compete in services, which is high quality human capital intensive rather than low skilled labour intensive.

The next growth areas in Asia will come from innovation and high-end services such as education, financial services, health care and consumer branding. To generate the next generation of thinkers, innovators and leaders, the education system of Asia needs to be refocused towards creative thinking. Joseph Schumpeter's idea of creative destruction is the answer to Asia's tendency to build a symbiotic relationship with the US. If this traditional relationship continues, the economic decline of the US will bring these Asian economies down with it. Conversely, desperate attempts to ride on the Chinese dragon or the Indian elephant can also backfire.

In fact, China's fledgling attempts to diversify out of the U.S. export market and build up its own domestic demand market have yet to bear fruit. The robust growth of 2009-2010 will continue to be driven by infrastructure spending, which has strong spill-over effects on consumer incomes but which is not sustainable over the long-term. So China, too, has to innovate its way out of its unbalanced relationship with a deleveraging and over-indebted US consumer.

The Chindian challenge is this: if Asia follows China's economic structure, they will be competed away because they can't catch up with China's leap into producing engineering talent. If they follow the Indian model, they also need to start from scratch not to speak of the lack of an English proficiency advantage.

So what can Asia do to stand out of the shadow of the two emerging economic giants? The dependence of the global economy on the vibrant health of emerging countries is both a blessing and a source of future economic trouble. Blessing because if Asia stands up to the challenge of innovation and creative reinvention, it will be able to rebalance the current global imbalances which depend on the developed nations's ability to rescue themselves from rising debt levels. If it fails in the latter, then continued dependence on developed nations' weakening appetite for consumer goods coupled with the potential of sovereign default of developed nation's debt suggests a more polarised and protectionist economic world.