China and India make comeback

WHAT was the world like in the 19th century? It was very different. Yet, in economic terms, there were some remarkable similarities that help us understand what is happening to the world today.

Let me highlight four economic lessons we should heed from back then. First, history teaches us not to be surprised by China and India's reemergence as economic powers. In the early 19th century, China and India accounted for more than 45% of global GDP. Yes, almost half the world economy!

Standard Chartered Bank, which is 150 years old this year, opened its first two branches in Shanghai and in Calcutta. China and India were the world's big economies. Their huge populations gave them both a great advantage, just as they do now.

Both countries were prosperous and peaceful and benefited from effective government, good communications and increased trade - features from which they are benefiting once more.

Unfortunately for India and China, both countries missed out on industrial advances and were overtaken. However, even by 1866 Britain was only producing the same amount of steel from blast furnaces as China had produced 800 years earlier.

Through the 19th century, China shunned progress and closed its economy to the outside world, distrustful of foreign traders. Wars later in that century added to China's woes.

Now, it is catch-up time. We are witnessing the rebirth of these two great economies. Able to attract investment, they are growing strongly and there is more to come.

Western firms are moving factories to China and call centres to India. The three words probably read the most around the world at the moment are Made In China.

History gives some insight into the potential that is being released. Soon China and India will pass us all.

A second lesson from the past concerns deflation, where prices actually fall. In recent months there have been fears that the world is about to suffer deflation again. These fears may be overdone, but even if they are not, need it be such a bad thing?

The latter half of the 19th century witnessed deflation. From 1870 until the start of World War I, prices fell across much of the world. Yet there were periods of strong economic growth and prosperity. The world did well. People had ample spending power.

The lesson is that as prices fall, money can buy more and people in work do well. But those with high debts suffer.

Third, can you believe that at the end of the 19th century one of the big debates in the City of London was which was the better country in which to invest - Argentina or the US?

Both had huge potential, only one delivered. Today, too, there are big debates as to which is the best country in which to invest - India or China.

Making the right choice can offer huge returns. And picking the right country is particularly important for savers and investors when we consider the final lesson from the past.

The fourth comparison-with 150 years ago can be found in the Bank of England, outside the committee room where interest rate decisions are now made.

There, on the wall, is a fantastic oil painting entitled Dividend Day at the Bank of England. It depicts the scene when people came to collect their dividends.

Then as now, inflation and interest rates were low. Yet, in a good year, the dividend might reach 0.5%, sometimes 1%.

This may sound meagre, but in a low-inflation world people had to save more and were realistic about what to expect as a return.

History repeats itself. Or so it seems. One hundred and fifty years is a long time, but not too long to learn some insights for today.

One key lesson is not to be surprised by the reemergence of India and China.

Dr Gerard Lyons is Chief Economist at Standard Chartered Bank.