Trip Report

Life After Karzai

America might not be able to pick a winner in Afghanistan, but at least it can try to block a loser.

Foreign Policy introduces "Trip Report," a new feature that takes readers behind closed doors with some of the world's sharpest minds for an intimate, unfiltered look at subjects ranging from the European economic crisis to the course of the war in Afghanistan. Think of it as a new kind of intelligence -- a backstage pass to rooms you haven't been cleared into before.

Where I went: For all the worries about Afghanistan today, there was something uplifting about many of the conversations I was privileged to be part of on my most recent trip there, in May, with former U.S. Ambassador Ronald Neumann as my travel partner and with the NATO-led International Security Assistance Force (ISAF) as the official sponsor of the trip.

A spirit of hopefulness, more than fear, characterized most people I spoke with in Kabul. The recent signing of the U.S.-Afghanistan Strategic Partnership Agreement (SPA) to guide cooperation after 2014, when the NATO combat mission is set to end, reassures many Afghans that they will not be left to their own darker angels -- or the mercy of their neighbors -- when ISAF's transition is complete. Although implementing protocols and a status of forces agreement for the SPA may prove difficult to negotiate, the accord has definitely given a boost to the strides of many Afghan reformers who continue to work hard for their country's future.

What's new: More than ever before, politics is breaking out in Afghanistan. The 2014 presidential election is still two years away, but new political organizations like the Right and Justice Party are forming under the leadership of people like former Interior Minister Mohammed Hanif Atmar. Reform movements designed to get out the vote and improve the independence and integrity of the electoral process, like the Coalition for Reform and Development, are gaining steam.

And everyone is forming shortlists of the most likely candidates for the race. Among the names one hears are former officials like Atmar and Abdullah Abdullah; U.S. citizens with Afghan ties or ancestry, including former U.S. Ambassador to Afghanistan Zalmay Khalilzad and former Interior Minister Ali Ahmad Jalali; current government officials including Education Minister Ghulam Farooq Wardak, presidential advisor Ashraf Ghani, and perhaps even Gov. Gul Agha Sherzai of Nangarhar province. But not all is well; the shortlists also often include some who give major apprehensions to many foreign officials -- among them a former chief of staff to President Hamid Karzai and some of the president's relatives.

There are other hopeful indicators in Afghanistan on the political front, too. For example, recent Asia Foundation work suggests that the quality of governance at the provincial level in Afghanistan is improving. There are still too many bad actors and too much interference from Kabul in the day-to-day operations of regional governments. But by one itemized system of measurement, at least, the average quality of provincial governance has improved at least 10 percent over the last year.

Much still needs to be done on the political front, of course, before 2014 elections even happen. Electoral watchdog organizations need to be strengthened and made more independent of the presidential palace, and means of possible voting fraud need to be reduced. Otherwise, cheating and scandal could delegitimize the election outcomes and contribute to more ethnic tension.

Beyond these technical improvements, we also need much clearer focus on the big issue: how to use Western leverage to ensure that no warlord or extremely corrupt actor is elected president. This is the 800-pound gorilla that is not yet getting adequate attention, perhaps out of too much political correctness that the international community should not pick winners in a sovereign state's own elections. It is true that the international community should not pick a winner. But it can and must identify a few surefire losers -- before they can build up enough momentum to have a chance to win the presidency.

The takeaway: Often, the Afghanistan policy debate has an oxymoronic feel. We focus on the military transition from ISAF-led operations to Afghan-based security, according to a careful plan worked out first at NATO's Lisbon summit in 2010 and recently reaffirmed at the May 2012 NATO summit in Chicago. This is fine and necessary. But we spend far less time thinking about political transition as Karzai's second term ends and what will happen when he is required to vacate the palace come 2014.

Military strategist Carl von Clausewitz taught us that war is a continuation of politics by other means, implying that a successful end to any war must be politically based. This is even truer in counterinsurgency, where much of the struggle is for the proverbial hearts and minds of citizens who might or might not support the insurgency depending on their views about the legitimacy of their government.

Not all is lost. The international community does focus on specific aspects of Afghan politics. We try to pressure Karzai to fight corruption more assertively. Personnel from the U.S. State Department and U.S. Agency for International Development, along with foreign advisors from other countries, embed with military units in the field to try to help strengthen local Afghan governance. We all chase after the elusive and improbable peace deal with the Taliban. And of course, we try to struggle through our tortured half-partnership and half-rivalry with Pakistan.

But in most NATO capitals, we think far less about the fact that Afghanistan is due to have a presidential election in 2014 -- the results of which could be the single-most important determinant of our prospects for reaching an acceptable outcome and averting defeat in this seemingly interminable war. U.S. Ambassador Ryan Crocker and others on the ground in Kabul are surely aware of the crucial significance of the upcoming election, but it has not yet been grasped in Washington. For example, Crocker and others have, in recent months, helped persuade Karzai to firm up his public pledges that he will not extraconstitutionally seek another term in office. But leverage over the most important Afghan transition of all requires much more than a pledge. We need a strategy to be sure that the next Afghan president is more effective than Karzai -- rather than even more prone to cronyism or even less able to get a handle on corruption and patronage. Right now there is no such strategy, and Afghans can tell.

A snapshot of Afghanistan today: The war in Afghanistan is now a slog, at best. Even those of us supporting the mission there must acknowledge that it has been slower and harder going than expected. With Osama bin Laden dead and other al Qaeda leaders also out of the picture (or out of the region), the original motivation for the effort seems less compelling to many as well.

But there are considerable reasons for hope in Afghanistan. These positive indicators must be kept in mind lest we persuade ourselves incorrectly that the mission has somehow already failed -- an increasingly prevalent view among Western publics, parliaments, and some top officials.

At the same time, for every hopeful indicator, there is a reminder of how far we still have to go. This should not be seen as reason for fatalism, but as a clarion call of just how important the 2014 political transition will be for Afghanistan's future. Reasonably competent and serious leadership -- and there are many in Afghanistan who can provide such qualities for their country -- can build on the positive trends, even if it will take a long time to construct a strong Afghan state. Poor leadership could result in the fragile gains dissipating and the prospects of stronger insurgency, civil conflict, and state collapse increasing.

In terms of encouraging trends, consider the following:

Afghan security forces have almost reached their envisioned full size of 352,000, counting army and police. They are fighting, too. They are now collectively taking at least twice the casualties of NATO forces, participating in at least 90 percent of operations, and leading some 40 percent of operations (albeit usually the simpler ones at this point). They repulsed the April 15 Haqqani network attack on Kabul and other cities largely on their own.

Although the security forces still suffer from political patronage appointments and corruption, the problems are being partially addressed. Some 50 Afghan army leaders in the country's east alone have been replaced over the last year; 70 police officers were just fired recently in the country's west for poor performance; the Defense Ministry has opened a full criminal investigation into the problems that produced corruption and theft at Afghanistan's main military hospital last year. Such efforts could be too little, too late. There are serious corruption problems -- as in the Afghan Air Force. And some of the firings and hirings raise concerns of ethnic bias in the security ministries. But on balance the progress is picking up.

The Afghan Local Police (ALP), a form of armed community watch overseen by NATO troops, is generally proving its mettle. These lightly armed and locally organized forces, which now number some 12,000, are holding their ground in some 80 percent of firefights, even when sometimes outgunned by the Taliban, taking the highest rate of casualties of any part of the Afghan security forces in the process.

There have been a handful of cases of abuse within this program, and a number of illegal militias are falsely adopting the name Afghan Local Police to disguise their true nature (which is sometimes to attack their neighboring tribes or communities). But U.S. Special Forces have monitored and worked with the actual ALP forces effectively and stepped in to address problems when needed. They only allow the formation of ALP units after several months of getting to know an area and working with local elders to try to ensure a reasonable mix of ALP members. The admittedly daunting challenge in coming months and years will be to keep growing the program while also handing oversight gradually to Afghan special-operations forces.

Each of the above areas of progress with the Afghan security forces also underscores the fragility of the situation. While Afghan forces are much bigger and better than before, they are nowhere near good enough, so professionalism and discipline must not only be maintained, but improved. While a large number of incompetent or corrupt leaders within the security forces' ranks have been replaced, many remain -- and under the present government, uniformed leaders and ministers of interior and defense only have so much power to replace poor leaders on their own, given the political interests still at play in many appointments.

The ALP can only be effective in the future if Afghanistan's own special forces are increasingly able to play the oversight role that NATO has provided to date. This clearly assumes a level of competence and integrity within the Afghan special-operations forces that will not survive poor national leadership, should the wrong person wind up in charge after Karzai. The wrong president could also generate ethnic tensions that could fracture the overall security force.

If we examine the other efforts to reduce corruption and the influence of patronage networks within Afghanistan, we reach a similar conclusion -- real and sometimes substantial, but uneven and insufficient, progress that by itself is neither adequate nor self-sustaining. This was apparent in discussions with Task Force-Shafafiyat (a legacy of Gen. David Petraeus and Brig. Gen. H.R. McMaster, as well as Task Force 2010), which seeks to reduce corruption in how NATO administers its contracts with Afghans, as well as with Americans and other foreigners. Again, the importance of future political leadership will be crucial. Consider the magnitude and complexity of the problems:

  • Counternarcotics courts and prosecutors, by contrast, are pretty good. Lots of big fish have been going to jail, including recently the second-biggest drug trafficker in Nimruz province.
  • But the Attorney General's Office and the High Office of Oversight and Anti-Corruption within the Afghan government remain disappointments.
  • Overall the court system in Afghanistan remains poor, with inadequate resources and far too much bribery and favoritism.

More happily, at least one Afghan Supreme Court judge and others are pushing general judicial reform at long last. This is resulting in the firing of 200 to 300 judges a year (which may be a touch worrisome given that only 125 judges are being trained or graduated each year). But on balance the judiciary is still very problematic, weak, and underresourced -- and reforms are making it smaller rather than larger in the short term, due to all the firings, however necessary.

Personnel changes in the Defense Ministry and Interior Ministry are generally encouraging, and the Defense Ministry's inspector general is well regarded. Yet some big problems remain within these organizations, of course -- notably, the Border Police and the Air Force still suffer from the influence of strong criminal patronage networks.

Crucially, NATO is belatedly cleaning up its own act, no longer unwittingly funding nearly as many corrupt actors or insurgent groups as it did before. Task Force 2010, the ISAF organization designed to increase transparency and accountability in how NATO awards contracts for logistics services and related activities in Afghanistan, is finally gaining steam. More than 100 companies or individuals have now been barred from ISAF contracting. Transparency requirements make it easier to check on who is involved in these companies, and lots more intelligence is being devoted to the problem. It often takes a couple of months to develop good intelligence on new companies, so when they reorganize or rename themselves, they can sometimes evade notice for a short time. But overall this set of problems is getting serious attention.

Incredibly, only recently has U.S. legislation been passed that finally allows the United States to break contracts with companies when they are linked directly to the enemy. Until now, the country couldn't do that unless it had other reasons too! Under U.S. law, apparently, it was seen as a worse sin to fill out paperwork wrong than to be a member of the Taliban, until only recently. More than 10 percent cost savings have been achieved to date, normalized for the relevant workload, by the reforms in contracting. More important than simply saving money is that this is a promising indicator of fewer funds being diverted to malevolent actors who skim off the top of contracts.

Unfortunately, there are many areas of the anti-corruption struggle where we are only beginning to scratch the surface at best. For example, no one whom I spoke with on my recent trip claimed progress on land reform -- protecting private property and also regularizing the way public lands are developed. The only good news I heard on that front was one former minister saying that, in general, the blatant expropriations of land for the personal gain of well-placed political actors occur only on public property (though because so many lands in Afghanistan are public, and so many of those are already used by subsistence farmers, this is of little solace). So again, this whole set of efforts clearly still has its major limits even among its most passionate proponents.

The 2014 question: Beyond specific reforms that might be made in the next two years, what was clear from my conversations in Afghanistan this May was that what we need most is a way to influence the 2014 political transition.

The core element of this strategy is to make sure Afghans know, beyond any doubt, that U.S. willingness to support them financially, developmentally, and militarily after 2014 will be a function of the quality of their governance and the character of their leaders. It is inconceivable that the U.S. Congress will sustain up to 20,000 troops in Afghanistan at a cost of perhaps $25 billion a year, and add another $3 billion to $5 billion annually in direct security and economic support to the Afghan government and people, if the next Afghan government is corrupt beyond hope.

If that were to happen, I am confident that the U.S. commitment would be scaled back dramatically -- to levels of assistance perhaps one-third to one-fifth the amounts sketched out above, or even less. That would be regrettable.

Some Afghan reformists want us to state a clear preference soon for who the next president of their country should be and promise to cut off all aid to anyone else who might win the election. Such an approach by the United States and other key foreign countries is highly unlikely, as it would constitute excessive meddling in the internal affairs of a sovereign state. Not only that, we would quite possibly choose wrong. But what is certainly within our means is to signal that good Afghan leadership will inspire much greater outside confidence and related willingness to stay engaged -- whereas the opposite will invalidate the premise for the current hopeful talk about our long-term commitment to Afghanistan. Strategic Partnership Agreement or not, major cooperation and financial help will not be provided to a criminally corrupt or malicious regime. We should probably also be willing to say, by name if necessary, who the unacceptable leaders would be, if they choose to run for president. This could be done privately at first, perhaps, and publicly if necessary.

No formal or binding promise is possible; Americans don't yet even know who will run their own government come 2014, 2015, and beyond. But a coordinated message by current congressional leadership of both parties -- and by President Barack Obama and Republican presidential candidate Mitt Romney -- could help a great deal and achieve much of the desired effect. If it is too soon to generate this kind of coordinated message now, policymakers should think now about doing so soon after America's own November elections. There is still a little time to sort this matter out, though not that much.

Many Afghans think that U.S. interest in their country is so great -- whether for military bases for operations in broader South and Central Asia or some other nefarious purpose -- that the United States would never scale back its commitment to their country. That view is bunk and fails to account for America's war weariness with the Afghanistan conflict as well as its greater hopefulness that, with al Qaeda central on the ropes, the future of Afghanistan is slightly less crucial to U.S. security than it might have seemed a decade ago.

On the other hand, many Afghans think the United States will desert them anyway, regardless of what they do. That view fails to recognize what the country learned by its premature and precipitous withdrawal from the region a quarter-century ago, together with its lingering worries about the possibility that some part of al Qaeda might indeed seek future sanctuary on Afghan territory. After so much investment of American blood and treasure, it is clear that the United States will not simply abandon the effort. And though it favors and hopes for a serious effort at peace talks with at least some elements of the Taliban, it will not desert a future Afghan government simply because such talks might fail.

Finally, some Afghans seem to think that the United States actually enjoys quarreling with Karzai, since it often seems that way. In fact, while U.S. strategy toward the current Afghan government has not been steady or clearheaded at times, the history of the last 10 years underscores two dueling realities: that the United States wants very much to work constructively with Afghan political leadership, but that it is increasingly frustrated by the difficulty of doing so and no longer so confident that success is even possible.

The next Afghan leader has a chance to restore America's faith and the strength of its support. He has the chance to help forge the kind of enduring security partnership that America established over the years, through good times and bad, from Greece and Turkey to Jordan and Egypt to South Korea and Taiwan. America needs to find a way to signal this clearly and thereby persuade Afghans to work cohesively and doggedly to defeat the crooks and warlords who may seek to replace Hamid Karzai in two years and to elect a serious, competent, and non-corrupt new president. The fate of 13 years of effort, blood, sweat, tears, and treasure depends more than anything on how well such an effort can succeed.

ADEK BERRY/AFP/GettyImages

Trip Report

The End of the Asian Miracle

The investment guru who coined the term "emerging markets" returns from Asia, finds that the slowdown is real, and offers five game-changing events that are reshaping the global economy.

Foreign Policy introduces "Trip Report," a new feature that takes readers behind closed doors with some of the world's sharpest minds for an intimate, unfiltered look at subjects ranging from the European economic crisis to the course of the war in Afghanistan. Think of it as a new kind of intelligence -- a backstage pass to rooms you haven't been cleared into before.

Where I went: I recently returned from a two-week trip to Asia, visiting India, Thailand, Hong Kong, China, Taiwan, and South Korea. I've been to these countries many times over the past 25 years in my capacity as chief investment officer and later chairman of Emerging Markets Management and AshmoreEMM. During my trip I met with a number of high-level policymakers, bankers, company executives, investors, think tanks, and scholars. But where there was once almost universal optimism, this time I came away with a very different sense. A few years ago there was a widespread feeling that the developed world had fallen off its pedestal -- that Asia had not only escaped the global financial crisis but that its system was somehow superior. That overconfidence seems gone now. Instead, there is a sense of vulnerability. There is more awareness of the political Achilles' heel of their own path of development and even new economic concerns about challenges to their newly acquired competitive edge.

The takeaway: Confidence about political stability and effectiveness has been shaken in China, India, and other emerging markets. The Arab Spring was a shock wave that not only brought to light misdeeds of autocratic regimes but also created economic uncertainties for the future. In BRICs at two ends of the political spectrum, political stability has turned out to be more fragile than earlier assumed. The Bo Xilai case in China has raised questions about the legitimacy of the whole political succession process. And Prime Minister Manmohan Singh's disappointing performance in India (some business leaders even told me he had "lost it") has created gridlock in New Delhi while emboldening states.

At the height of the financial crisis, local elites and the broader population in India and China viewed indecision, stagnation in policymaking, corruptive power of vested interests, and lack of leadership as major problems in the United States, Europe, and Japan -- but these same people are now concerned that they face similar problems. On the positive side, turmoil from Tunisia to Myanmar has brought hope and a feeling of empowerment. The sudden transformation now under way in Myanmar has re-energized Southeast Asia and the Association of Southeast Asian Nations as a sizable, relevant, and vital economic entity nestled between the two emerging regional superpowers, China and India.

The other big question involves the economic future of the leading emerging market -- China. Who would have thought a decade ago that the United States would lose its unquestioned AAA credit status? Until recently, it would have been equally unthinkable that questions are now being raised about whether China will remain the unquestioned manufacturing champion. Its wages have risen, its currency is more expensive, its labor surplus has evaporated, its population is aging fast, and other emerging markets are emulating its impressive infrastructure. Bangladesh, Vietnam, the Philippines, and Thailand (and one day, perhaps Myanmar) are mentioned more often as places where global manufacturers are looking to set up new plants. Even the United States now is seen as a place that manufacturers are turning to. Slower growth in China and India is becoming accepted as a new reality.

Conventional wisdom debunked: For the past five years or so, the idea had become commonplace that the United States was losing the race for global competitiveness. In my own book, The Emerging Markets Century, I wrote about how the rise of China and India was shifting the competitive edge and how some emerging multinationals (from Samsung Electronics in South Korea to Embraer in Brazil) were becoming world-class companies. All of that remains true; emerging markets remain the place to be for the next decade at least. But, interestingly, the creative, competitive response I had expected seems to be coming even faster than I had thought. In fact, the United States may be doing better than we thought, and China and other rising powers may not be doing quite as well as believed. 

We have all come to assume that the developed world lost its drive or "will to win," ceding manufacturing to emerging markets. China and India built impressive manufacturing platforms or back-office strengths based on a belated unleashing of private-sector initiative, low labor costs, and impressive investment in infrastructure. China and others gained a near monopoly on making cheap goods cheaply. Consumers in the United States began to feel that China had won the battle for shelf space in Walmart. American infrastructure fell way behind in building a 21st-century network of roads, rails, bridges, pipelines, airports, and communications technology. Political antagonism combined with the budget and debt crises had placed the onus on "expense cutting" instead of rebuilding infrastructure to remain export-competitive and promote manufacturing. America's traditional brands had lost some of their luster: No longer was General Motors the pride of global automaking; iPhones were neat, but made in China. Meanwhile, India's Tata Corp. bought iconic brands like Jaguar, Land Rover, and Tetley Tea. China's Geely bought Volvo, while Lenovo purchased IBM's computer division. In South Korea, Samsung and Hyundai became major players; in Taiwan, HTC came from nowhere to be a recognized and respected brand name. To cap it all off, it seemed an irreversible trend: The United States had missed the boat in becoming a "green" leader in a more environmentally conscious world as it ceded ground to mass production in China and innovation in Europe.

But as I saw on my travels, the story is beginning to change. I now believe the despair and fear felt by many in the United States is misplaced. In fact, there are early signs that the United States may be regaining some of its lost competitiveness in manufacturing and that China is losing some ground, especially against other emerging markets. 

Game-changers in the making: As I see it, there are five game-changers now happening in emerging markets:

1.      The shale gas explosion
2.      The erosion of low-cost advantage
3.      The burden of aging populations
4.      The smartphone revolution
5.      The fighting spirit of smarter competition 

These five game-changers constitute nothing short of quiet revolutions, and they will have a huge impact over the next decade, completely reshaping the competitive landscape. You'll soon see the effect in earnings, margins, growth, and foreign direct investment. 

1. The shale gas explosion: The United States is becoming a low-cost producer of energy again, as a result of vast new discoveries of natural gas. The glut has made natural gas prices of $2 to $2.50 per 1 million BTU equivalent to oil at about $12 to $15 per barrel, which is quite an incentive to use more gas for electricity, petrochemicals, industrial applications, trucking, and even cars. In contrast, China and Japan are now forced to import gas at much higher prices of $13 to $17 per 1 million BTU. Supercheap gas is also making the United States a great place to invest again for energy-intensive industries. For example, the Canadian company Methanex* recently moved its production of petrochemicals from Chile to Louisiana, and Orascom Construction in Egypt is building a fertilizer plant in the United States. This will be a true game-changer for the next decade and will help make manufacturing more competitive in the United States.

  • In the future, gas will be king rather than oil. In a decade, gas prices may no longer be set by oil prices, but the other way round.
  • As the United States is winning the lower-carbon energy race, it is becoming more energy independent. In fact, the liquid natural gas facilities built to import gas from Russia and Qatar may be used in a few years to export gas to Asia.
  • China has its own shale gas but the United States has a major head start in geology, technology, and pipelines. It will take China several years to catch up. India's offshore gas production has been disappointing and slow. Thailand will run out of gas in ten years, though Myanmar will bring on line large new supplies. 

2. The erosion of the low-cost advantage: China is no longer the place for manufacturing. Wages in China and India have been rising at 15-20 percent over the past five years. Meanwhile, stagnant wage growth in the United States and the rising Chinese yuan has devalued the dollar on a trade-weighted basis.

  • A large wage gap remains but even narrowing it will have a big impact. In a dinner speech at the Brookings Institution, Jeff Immelt of GE claimed that an American factory worker can be competitive at $15 per hour with a $3 worker in China.
  • Unit labor costs in the United States, according to OECD data, have declined from 100 to 88 since 1995, better than anywhere in the developed world except Sweden (80). For comparison, Spain (135) and Italy (120) are much higher. That's good news for U.S. global competitiveness.
  • According to several manufacturers I met with who have plants in China, China now suffers from a lack of technologically trained manpower. Bangladesh and Vietnam are now lower-cost manufacturing centers than China -- even Thailand, the Philippines, and Mexico are becoming wage competitive.
  • Productivity per manufacturing worker is also better in the United States than widely assumed. Hyundai, for example, has car plants in South Korea, the United States, China, and India and "unit per hour" production is actually highest in Alabama.
  • World-class Indian car axle maker Bharat Forge found that Chinese workers in its plants had only 40 percent of the productivity of other workers. The Pune hub (near Mumbai) has become much more competitive because of trained labor and better transportation (a container trip to the port used to take at least two days but now only four hours and the port is more efficient).
  • Of course, China's enormous competitive advantage is not just in wages but also in its scale for assembly-type production, infrastructure, internal competition, and growing domestic market. These advantages are not going to disappear overnight but are now being questioned. 

3. The burden of aging populations: This is no longer a theoretical problem, but a very real one, especially in China. Demographics will make their power felt this coming decade as they never have before and change the competitive picture. China and South Korea, along with Europe and Japan, are aging fast. India and Africa still have large untapped labor pools, though they need to be better trained. Consider these statistics about China's demographics:

  • There were 26 million births in 1987 but only 15 million today.
  • With a fully employed migrant labor pool there are now increasing labor shortages, with 1.08 job opportunities for each job seeker.
  • The increase in China's working population has shrunk from 10 million to 3 million per year and will be negative by 2018, if not sooner.
  • Within 20 years, its retired (60-plus) population will double from 180 million to 360 million (bigger than the entire U.S. population). A professional family now worries already about having to take care of four elderly parents. The support ratio was 5:1 and will be 2:1 in the not too distant future.
  • The savings rate will drop, and entitlements (now unfunded liabilities) will increase. According to some Chinese economists, the Chinese economy won't be able to grow more than 6 to 7 percent by the end of this decade without collapsing under the burden of these unfunded liabilities.
  • In the meantime, proposals to reform health care and pensions, an urgent necessity, have gathered dust as vested interests and political indecision have delayed action. 

4. The smartphone revolution: The speed with which everyone in the world -- not just the rich, the elites, or developed economies -- embraced mobile phones has been astounding. The same is now beginning to happen with smartphones and tablets as prices rapidly drop to an "affordable" level of $120 (without subsidies) thanks to competition from Chinese clones.

  • Within five years, several billion people will be "addicted" to smartphones -- emailing, browsing, taking photos and videos, making video calls, using myriad apps, streaming, and playing games.
  • The smart-pad will bring high-quality education to the masses around the globe. Taking classes online or being part of an interactive presentation will be as commonplace as Googling today.
  • Bandwidth, good infrastructure, and monthly costs (which are rivaling the cost of food for poor families) will become increasingly important.
  • Interestingly again, in the speedy world of smartphones, China is falling behind in its telecom infrastructure (despite an otherwise great infrastructure). China was already behind in the past generation (3G) of telecom infrastructure because it unsuccessfully tried to sell the world on its own 3G standard, something the Koreans learned to avoid earlier. It will not issue licenses for its newest version of 4G (TD-LTE) until 2014.
  • Moreover, even though the traditional Internet cafes are increasingly being replaced by more than 1 million hot spots, for home Wi-Fi China has only just started to make a major investment.
  • It is interesting to watch that, despite competition from the clones, in the premium-brand sector, Apple's iPhone (assembled by a Taiwanese firm in China with key components from Samsung) has become a status symbol in China and elsewhere, even in Seoul's "Samsung city."

5. The fighting spirit of smarter competition: It seemed for a while that the United States would leave the manufacturing to emerging markets and focus instead on innovation, design, finance, and super-high-value-added manufacturing. It is now widely recognized that this was a losing strategy. As Andy Grove of Intel once observed, for every manufacturing job generated in the United States by the computer industry, 10 are outsourced to emerging markets. For job creation, it is important to realize that there are many more "makers" than "thinkers." While R&D is spreading around the world, a lot of key innovation remains in the United States, Japan, and Europe. Indeed, leading companies there have adjusted to compete in a world with huge markets outside their borders and aggressively competing emerging world class companies. They are competing smarter and are fighting back. For example:

  • Apple, Qualcomm, Google, Amazon, Facebook, YouTube, Twitter, and Bloomberg are just some examples of new "brands" and of companies at the leading edge of innovation which did not exist or were tiny a decade ago. Today's world could not live without their inventions, used by millions around the world and which are constantly imitated.
  • Not only big companies like Caterpillar but many small companies in the United States have adapted to competition from emerging markets by specializing in technologically advanced, higher value, high-precision manufacturing that integrate electronics and use sophisticated automation. American firms hire hundreds of thousands of software engineers in India (and thus from potential Indian competitors). When smartphone baseband chip designer Qualcomm saw that a Taiwanese competitor became the "go to" source for Chinese clones for low-cost processor chips, it dropped its prices and forced it on the defensive. It could do so because it is a price setter with high margins rather than a price taker.
  • With some jealousy it is said these days in Asia that 90 percent of profits go to Apple and 10 percent to China. This gives these companies enormous pricing power and high margins. What most people don't realize is how concentrated the key parts of the smartphone industry are. There are less than a handful of companies that design the most expensive chips in the smartphone (based mostly on ARM architecture), and they are mostly made by two fabrication firms (TSMC and Samsung). China is way behind in this area. There are also only a handful of companies that make the touch screens for smartphones.
  • Infrastructure, especially in the United States, fell way behind but, while this remains a political football, more attention is being paid to the importance of infrastructure as a source of competitiveness. There were less "shovel-ready" infrastructure projects than initially believed for the stimulus but the ultimate return on investment may be higher. The United States has regained a bit of ground in the global infrastructure race as new airports, pipelines, and local projects come on stream and shale gas is being developed. 

No more can we maintain a blind reliance on mega-emerging markets to sustain future global growth. After a decade of 10-plus percent growth in China and a shorter period of 8-10 percent growth in India, the remainder of this decade is likely to bring only 6-7 percent growth, a fact to which the rest of the world will have to adjust reluctantly -- as it struggles with its own problems and growth of less than half that rate. We all took the rapid growth of China and India for granted too easily. This will be a rude awakening for those who like to project past trends forward.

But there is a new reason for optimism. The shift in China to less dependence on exports and less aggressive investment in fixed assets in favor of higher consumption of anything from food, clothing and smartphones to healthcare, travel and education will gradually dissolve the large export surpluses and create a more balanced and sustainable global economy. 

This will be a different era for Asia. Sure, the region's emerging markets proved themselves much more resilient in the global financial crisis and came out of it faster and in better shape. China's fast-acting stimulus, in many ways, was a major turning point and saved the world from deeper problems. But the challenges of the next decade require a more sustained approach: balancing growth with inflation and local consumption with export dependence and relentless investment is critical, particularly if policy makers we want to ensure a smooth path to a future growth model.

*Correction: This article originally identified Methanex as a Chilean company. Methanex is headquartered in Vancouver, Canada, and has operations in Chile. It is moving an idle plant from Chile to Louisiana, not Texas. We regret the errors.

STR/AFP/GettyImages