It’s Not the Size of the Dog in the Fight

Michael McTague |

NYSE Wall Street“It’s not the size of the dog in the fight; it’s the size of the fight in the dog,” said Mark Twain. This statement by America’s greatest novelist carries significant business sense as well as wit. As 2013 opens, the major economies, the big dogs, face sluggish times. The slow gait derives from a variety of slow moving economic forces: high unemployment; the financial woes of the euro; slumping demand; slow growth of investments.

It appears that the GDP leaders are slower than many of the small fry. The US is widely seen as doing a little better than some other giants. Even so, US growth in 2013 is only projected to be about 2.1% (according to the IMF). Europe overall is expected to hit +.8% and Japan +1.2%. Germany and France will be under +1.0% while Italy, Spain and Greece look toward  negative territory. Part of these weak numbers relates to Germany’s efforts to stimulate the sluggish euro zone.

So, which economies are growing rapidly? According to Business Insider, the top three dogs with gritted teeth and hair standing up are Sao Tome and Principe; South Sudan and Guinea. Mongolia and Iraq are also near the top of their list. Located in the Gulf of Guinea, Sao Tome and Principe has about 182,000 people. However, it holds significant oil reserves. South Sudan has about ten million people. So, these two economic growth leaders are pretty small dogs indeed, perhaps in the Chihuahua category. (No insult intended.) The small countries may actually have an edge comparing themselves to the giant mastiffs and their great appetites.

The Day of the Small Dog

These smaller countries are moving their economies far more rapidly than the world’s financial giants, by selling the right products at the right time. As myth busters, we need to ask whether it is really such a great thing for an economy to grow rapidly. Here are three sensible reasons why an economy should grow rapidly. First, a fast growing economy does not have  to dig so deeply to provide the services people expect. This is particularly so in the larger, advanced economies that depend so greatly on a variety of public services – military, medical, education, transportation, etc. In the US, tax revenue for these “essential” services has dried up in some cases. Faster economic growth would ease the pain.

A second compelling reason in support of rapid economic growth can be found in the greater perception of wealth. Things change rapidly. People have more money to buy what they want. People move from the country to the city. They begin to fund retirement packages. They buy cars and new homes with modern appliances. Each year looks better than the one before. Of course, the advanced economies, the mastiffs and St. Bernards, already enjoy these benefits, but the rapid movement of the small, fast growing economies provides a public mood of success and confidence. Such a positive mood is hard to find in the US, Japan and the euro zone.

A third reason is the most obvious – fast economic growth means more money permeates the economy. People purchase more, save more; employment rises or remains high. More wealth is visible everywhere. In the smaller economies, the growth is spectacular as has been the case with China (small by virtue of its lower per capita income). The large economies enjoy the growth of wealth also. So, fast growth is a good thing.

How Do the Small Dogs Gain an Edge?

How exactly do the Chihuahuas do it and why can’t the mastiffs duplicate their success? There appear to be three patterns of the current speed demons. First, they manufacture or sell products in demand. Russia with its vast store of oil and gas understands this as well as Sao Tome and Principe and South Sudan. Oil brings revenue as do various other universally popular products.

A second pattern finds the fast-moving country enacting aggressive policies that spur growth. The best example is China grabbing hold of the world’s manufacturing base. Even though much of the profit has been squeezed out of manufacturing over recent decades, China has sought out opportunities to serve the world as the low-cost provider in the sizable manufacturing arena. By pursuing these policies so aggressively, their GDP has skyrocketed bringing considerable wealth to the nation and to many of its people.

Pattern three finds countries rebounding from economic woes. Iraq (number 6 on the Business Insider list) and several nations in Africa are following their military troubles with rapidly growing economies. And when you have oil, the movement is rapid indeed.

Can the Big Dogs Pick Up The Pace?

With all this said, why can’t the big countries grow rapidly even in a sour economic period? The US has tried long-standing Keynesian principles, especially direct government involvement in a sagging economy and providing liquidity. However, a free economy driven by a profit motive does not respond so well to measures designed to end the Great Depression. In the euro zone, Germany has become the general financier and public advocate for austerity, sapping some of its internal resources. In both countries, speed remains elusive. For the smaller economies, if they can find the right formula, they will show more fight than the larger species of dog.

So, it appears Mark Twain was right. Small can be beautiful and makes economic sense. This year, please watch all species of dogs for signs that this myth remains true.

Next month another myth will be busted. Please comment on this myth and let us know which myths need exposure.

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Michael McTague, Ph.D. is Executive Senior Vice President at Able Global Partners in New York.

DISCLOSURE: The views and opinions expressed in this article are those of the authors, and do not represent the views of equities.com. Readers should not consider statements made by the author as formal recommendations and should consult their financial advisor before making any investment decisions. To read our full disclosure, please go to: http://www.equities.com/disclaimer

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