Chinese economıc growth wıll be very
hıgh in next decade because of theır production and demostric growth. most of
the developed country and the country of European Union are set a policy that
ıs reducin expenditure only while Chines policy ıs to increase the the economic
growth.
The super-long view inspires some of
the most influential forecasts of our time, which
look
back to the
overwhelming economic might of China
and India in
the seventeenth
century as evidence that they will
reemerge as dominant global powers in 2030 or 2050.
In 1600 China accounted for more than
one-fourth of global GDP , and India accounted for
just under a fourth. Though their shares have fallen dramatically since then,
the super-
long
view skips past
the messy recent
centuries. The reasoning
seems to be
that
seventeenth-century performance
offers some guarantee
of future results.
Sweeping
extrapolation has
become a staple
argument for the many
companies, politicians, and
high-profile public intellectuals who
believe we are entering a Pacific Century or even an
African Century. I recently received
a report from a major consulting firm forecasting that
Nigeria could be one of the top-ten
economies in the world by 2050. Well, yes, but almost
anything could happen by 2050.
The
total amount of
funds flowing into emerging-market stocks
grew by 92
percent between 2000
and 2005, and
by a staggering 478
percent between 2005
and 2010. Apparently,
for many investors, it is
inspiring to imagine that their
investments are well grounded in the remote past and the
distant future, but
in the real world
it is not practical for
investors or companies to tell
clients to come back and check their
returns in forty years. Forecasts are valuable, indeed
unavoidable for
planning purposes, but it doesn’t make much sense
to talk about
thefuture beyond five years, maybe ten at the most.
Today we are at a very revealing
moment. For the last half century, the early years of
each decade saw a major turning point
in the world economy and markets. Each began
with a global mania for some big
idea, some new change agent that reshaped the world
economy and generated huge profits.
In 1970 the mania was for the top U.S. companies
like Disney, which had been the “go-go stocks” of the 1960s.
In 1980 the hot play was
natural resources,
from gold to
oil. In 1990
it was Japan,
and in 2000
it was Silicon
Valley. There were always a few doubters shouting from
the wings, warning that other
changes were overtaking the
change agent—that spiking oil prices will self-destruct by
strangling the world economy, that a
patch of Tokyo real estate can’t be worth more than
the entire state of California, that
tech start-ups with zero earnings can’t possibly justify
stock prices in the four figures. But
by this point in the mania, there were so many billions
of
dollars invested in
the hot new
thing that few
people wanted to
listen to the
Cassandras.
The Miracle Year of 2003, The
emerging-market mania began with China, which for two decades starting in 1978
grew rapidly, but erratically, anywhere from 4 to 12 percent a year . Then in
1998 China began an unbroken run of growth at 8 percent or more each year ,
almost
as if the lucky Chinese number 8 had
also become an iron rule of Chinese economics.
Starting in the year 2003, an
underappreciated turning point in the course of the world,
this good fortune suddenly spread to virtually all emerging nations, a
class that can be
defined a number of different ways
but here broadly means countries with a per capita
income of less than $25,000. Between
2003 and 2007, the average GDP growth rate in
these countries almost doubled, from
3.6 percent in the prior two decades to 7.2 percent,
and
almost no developing
nation was left
behind. In the
peak year of
2007, the
economies of all but 3 of the world’s 183 countries grew, and they expanded at better
than 5 percent in 114 countries, up
from an average of about 50 countries in the prior two
decades. The three outliers were Fiji
and the chronic basket cases of Zimbabwe and the
Republic of Congo, all exceptions
that proved the rule. The rising tide lifted nation after
nation through a series of normally
difficult development stages: Russia, to cite the most
dramatic example,
saw its average
annual income soar
effortlessly from $1,500
to
$13,000 in the course of the decade.
The number of nations that beat
inflation—containing the
annual rate of price increases
to less than 5
percent—rose from 16 in 1980 to 103
in 2006. This was the same high-growth and low-
inflation “Goldilocks economy” that
America enjoyed in the 1990s, only with much faster
growth and expanded to a planetary
scale, including much of the West. It was a chorus of
all nations, singing
a story of
stable high-speed success, and many
observers watched
with
undiscriminating optimism. The
emerging nations were
all Chinas now,
or so it
seemed.
Former president George W. Bush tells
a story about Vladimir Putin that illustrates howcompletely the global economy
had been turned on its head. In mid-2011 at a conference
in
the Bahamas, I moderated
a discussion featuring
President Bush, who told
us that
when he first met
the Russian leader in 2000, Russia was struggling
to recover from a
massive currency
crisis and Putin was
obsessed with its national
debt. By early
2008,
Russia’s economy was booming, its
budget was deep in the black, and the first thing Putin
wanted to talk about was the value of
U.S. mortgage-backed securities, which would soon
collapse in
the debt crisis.
Putin’s focus had
shifted 180 degrees,
from cutting Russian
debt
to enquiring about
the risk of
holding American debt,
and he was growing
cocky
about Russia’s economic expansion.
The Russian leader , who had met Bush’s little terrier ,
Barney, on an earlier visit to Washington, introduced his black Lab to Bush
later in the
decade with the remark, “See, bigger,
stronger, faster than Barney.”
The
easy money that set
the stage for
the Great Recession of
2008, by fueling
the
American housing bubble, still flows
freely, now dispensed by central banks attempting to
engineer a recovery to the growth
rates of the last decade, which were not
sustainable
anyway. What is apparent now is
that while central banks can print all
the money they
want, they can’t dictate where it
goes. This time around, much of that money has flown
into
speculative oil futures,
luxury real estate
in major financial
capitals, and other
nonproductive investments,
leading to an
inflation problem in
the emerging world and
undermining the purchasing power of
consumers across the globe. As speculation drives
up oil prices, consumers now spend a
record amount of their income on energy needs.
The easy money flows from a sea
change in the way the United States sees hard times.
The old view was that recessions were
a natural phase in the business cycle, unpleasant
but unavoidable. A new view started
to emerge in the Goldilocks economy of the 1990s,
when after many straight years of solid growth, people started
to say that
the Federal
Reserve had beaten back the business
cycle. Under Alan Greenspan and his
successor ,
Ben Bernanke, the Fed shifted focus
from fighting inflation and smoothing the business
cycle to engineering growth. Low U.S.
interest rates and rising debt increasingly became
the bedrock of American growth, and
the increases in total U.S. debt started to dwarf the
increases in total U.S. GDP: in the
1970s it took $1.00 of debt to generate $1.00 of U.S.
GDP growth, in the 1980s and 1990s it
took $3.00, and by the last decade it took $5.00.
American borrowing
was getting less
and less productive,
focused more on
financialengineering and conspicuous consumption.
U.S. debt became the
increasingly shaky pillar of the
global boom. Low interest rates
were driving growth in the
United States, pressuring central banks around
the world to
lower their rates as well, while
fueling an explosion in U.S. consumer spending that drove
up emerging-market exports. It was no
coincidence that the emerging markets began to
levitate in mid-2003, after
aggressive U.S. interest-rate
cuts—aimed at sustaining
a
recovery after
the tech bubble
burst two years
earlier—started the
worldwide flood of
easy money, much of which poured into emerging markets. The flow of private money
into emerging markets accounted for 2 percent of emerging-market GDP in the 1990s—
and jumped to 9 percent of a far
higher GDP in 2007.
Now the credit house of cards has
collapsed—a casualty of the Great Recession. There
is
much talk in
the West of
a “new normal, ”
defined by slower
growth as the
big
economies struggle
to pay down
huge debts. Real
GDP growth in
the rich nations
is
expected to fall this decade by
nearly a full percentage point, to about 2 to 2.5 percent in
the United States and 1 to 1.5 percent in Europe and
Japan. What observers have not
realized, however , is
that emerging markets also face a
“new normal, ” even if they are
not
ready to accept that
reality. As growth slows in rich nations
they will buy less from
countries with export-driven
economies, such as Mexico, Taiwan, and Malaysia. During
the boom the
average trade balance in
emerging markets nearly
tripled as a
share of
GDP ,
inspiring a new round of hype
about the benefits of globalization,
but since 2008
trade
has fallen back
to the old
share of under
2 percent. Export-driven
emerging
markets, which is to say most of
them, will have to find a new way to grow at a strong
pace.
This
is not just
a seasonal shift.
It is a
fundamental change in
the dynamic that
has
driven the rise of emerging markets
for several decades now. The basic laws of economic
gravity are already pulling China,
Russia, Brazil, and other big emerging markets back to
earth. The first is the law of large
numbers, which says that the richer a country is, the
harder it is to grow national wealth
at a rapid pace.
China
and many other big
emerging markets are following
an export-driven growth
model similar to those adopted by
Japan, South Korea, and Taiwan after World War II. All
these
boom economies began
to slow from
9 or 10
percent growth to
around 5 or 6
percent when their
per capita incomes
reached upper middle-income levels, which
the
World Bank defines as a country with
a per capita income of $4,000 or
more in current
dollar terms. Japan hit that wall in
the mid-1970s; Taiwan and South Korea hit it over the
subsequent two decades. Note that
these are the greatest success stories in the historyof economic development,
so they represent the best-case scenario.
Chınese fiscal polıcy was to
ıncreasıng theır petr capıta ıncome by ıncreasıng the wages. And they succed ın
2010 when theır per capta ıncome was $4000 whıch ıs near about the middle level
economıc country.
For a start, these nations are all
over the development map. Russia, Brazil, Mexico, and
Turkey, with average annual incomes
above $10,000, have much slower growth potential
than India, Indonesia, or the
Philippines, whose average incomes are well under $5,000.
But high incomes do not necessarily translate
into technological strength:
Hungary is in
the same income class as Brazil and
Mexico, but 90 percent of Hungarians have access to
mobile communications, compared with
only 40 percent of Brazilians and Mexicans.
The debt loads of emerging markets
vary widely—even recent success stories like China
and South Korea carry as heavy a
burden of personal and business loans, relative to GDP ,
as many troubled
developed countries. The
typical South Korean
has more than three
credit cards and carries debts larger
than the average annual income, while
fewer than
one in three Brazilians has even one
card.
Not All Trees Grow to the Sky
There
has also been
a halt to
the reforms that
set many developing countries
on the
“emerging” path in
the first place. After Deng
Xiaoping began experimenting with free-
market reform in the early 1980s,
China went on to launch a “big bang” reform every four
to five years, and each new
opening—first to private farming, then to private businesses,
then
to foreign businesses—set off a new
spurt of growth.
But that cycle
has run its
course.
Since 1950, on average only one-third
ofemerging markets have been able to grow at an annual rate of 5 percent or
more. Less than one-fourth have
kept that pace
up for two
decades, and one-tenth
for three decades. Just
six countries (Malaysia,
Singapore, South Korea,
Taiwan, Thailand, and Hong Kong) have maintained this rate of
growth for four decades, and two (South Korea and Taiwan) have done so for five
decades. Indeed, in the last decade, except for China and India, all the other
countries that managed to keep up a 5 percent growth rate, from Angola to
Tanzania and Armenia to Tajikistan, are
new to
this class. In many ways the
“mortality rate” of countries is as high as that of stocks. Only four
companies—Proctor & Gamble, General Electric, AT&T, and DuPont—have
survived on the Dow Jones index of the top-thirty U.S. industrial
stocks since the 1960s. Few front-runners stay in the lead fora decade, much
less many decades, and
identifying those few is an
art rather than a
science.
The
subsequent decades saw growth
that was either
unusually weak or
unusually strong: In
the 1980s and
1990s, growth in emerging markets averaged only 3.5 percent, weighed
down by the collapse of the Soviet Union and serial financial crises in
countries ranging from Mexico to Thailand to Russia. That was followed by the
liquidity-fueled, turbocharged boom of the last decade, which is
now unraveling as
the cost of
funding growth rises.
Once a financial
soufflé collapses, it can only rise again once memories of the collapse
fade. Given the depths of the Great Recession of 2008, however , another debt
binge is extremely unlikely in the
next decade.The return
of emerging-market growth
rates similar to
those in the
1960s does not imply
a revival of
the image of
the “Third World, ”
consisting of uniformly
dark and
backward nations at the bottom of
the heap and destined to
stay that way. During the
1950s
and 1960s the
biggest emerging markets—China and
India—were struggling to
grow at all. Nations like Iran, Iraq,
and Yemen put together long strings of strong growth,
but those runs came to a violent halt
with the outbreak of war , and these countries are
now more closely
associated with conflict
than finance. The
chaos overshadowed the
takeoff in places like South Korea
and Taiwan, both of which were largely unrecognized in
their
early years. While there
are no reliable
growth data on
emerging markets from
before 1950, the available evidence
suggests that never have so many nations grown so
fast for so long as they did in the
last decade. Yet today analysts are still looking for this
miracle of mass convergence to happen all over the globe.
Meanwhile, scores of “emerging”
nations have been emerging for many
decades now.
They have failed to gain any momentum
for sustained growth or their progress has begun
to stall since they became
middle-income countries. Malaysia and Thailand appeared to
be on course to emerge as
rich nations until the crony
capitalism at the heart of those
systems caused a financial meltdown
in the crisis of 1998. Their growth has disappointed
ever since. In the
1960s, the Philippines, Sri Lanka, and
Burma were billed as the next
East Asian tigers, only to see their
growth falter badly, well before they could reach the
“middle-class” average income of
about $4,000. Failure to sustain growth is the general
rule, and that rule is likely to
reassert itself in the coming decade.
sustain rapid
growth, beating or at least matching high
expectations and the
average
growth rates of
their income class;
for a nation like the Czech Republic, in
the income
class of $20,000 and more, breaking
out will mean 3 to 4 percent growth in GDP , while
for China, in the class of $5,000 and
less, anything less than 6 to 7 percent will feel like arecession.One of
the great economic
stories of the
century is largely
overlookbecause the European
Union is widely spoofed as an
“open-air museum” and in late 2011
is in the throes of a severe debt crisis. But the
EU is also a stabilizing model and still an inspiration for some
new members, particularly Poland
and the Czech Republic, which are
in that rare class
of nations poised
to break through
and join the
ranks of the
rich elite. Not every little EU
member is a Greece.
The main rule for identifying
breakout nations is to understand that economic regimes—
the
factors driving growth in any
given country at any given time—are in constant
flux.
Different operating
rules apply in
different nations, depending
on rapidly changing
circumstances. Economic regimes are
like markets. When they are on a
good run
they
tend to overshoot and create the
conditions for their own demise. Popular understanding
tends to lag well behind the reality:
by the time a regime’s rules have been codified by
experts and
hashed over in the media,
it is likely
already in decline.
That dynamic
underpins Goodhart’s law (a cousin of Murphy’s law), coined by former Bank of England
adviser Charles
Goodhart: once an
economic indicator gets
too popular , it
loses its
predictive value.
In a period of impending change, like
this one, with the painful ending of a golden age
of easy money and easy growth, it is
typical for people to cling to dated ideas and rules
for too long, particularly notions
that minimize or explain away potential risks. The most
dramatic recent example is the idea
that the basic tools of economic stimulus—lowering
interest rates
and raising public
spending—can end a
business cycle, not
only in the
United States but also in the
developing world. In the emerging markets, there has long
been a disturbing tendency among
leaders to take credit for boom times and blame bad
times
on the West: that
phenomenon was widespread in late
2011, as many leaders
attributed any slowdown in emerging
markets to contagion from Europe, forgetting that
lending from European banks was a key
driver of the boom in the first place.
Another dated
idea is the
rise of demographic
analysis as a
financial-consulting
industry. Because China’s boom was
driven in part by a particularly large generation of
young people entering the workforce,
there is now a small army of consultants who scour
census data
looking for similar
population boomlets as
an indicator of
the next big
economic miracle. These forecasts
often assume that these workers have the necessary
education and skills to be
employable, and that governments will find gainful employment
for them. In a world where a rising
tide was lifting all economies, this made brief sense,
but economic conditions will change.
One way or another all the rules flow
from understanding the current economic regime—recognizing the
pace of change;
determining whether it
is moving in
productive or
destructive directions, and whether
it is creating balanced growth across income classes,
ethnic groups, and regions, or precarious imbalances.
It’s also not just a nasty shock for European
tourists that everything from a Bellini (a peachy champagne brunch cocktail) to a
taxi ride feels like it costs a fortune in Rio: it’s a symptom of
the overpriced Brazilian currency,
the real, and of the
general rule that a
cheap currency is a sign of competitive strength. Brazil’s economy has gotten a
bit fat and slow, even as hot money-flows rendered the real overpriced and
uncompetitive. So that expensive
Bellini is not
only a sign
of weakness for
Brazil, it’s a
sign of strength
for competitors, even of
potential revival in
Detroit, as the
United States regains competitiveness against major
emerging markets. After falling in value by a
third since 2001 versus the currencies of its major trading partners, by
mid-2011 the U.S. dollar was at its cheapest inflation-adjusted rate since the
early 1970s.
Over
the last decade
several major emerging-market currencies have
risen against the
dollar—none more than the
Brazilian real— which is the
main reason why the
long-term decline in the U.S. share of global exports bottomed
out in 2008 at 8 percent and has since
been inching higher . U.S. dependence on
foreign energy has steadily fallen from 30 percent a decade ago to 22 percent
today, owing to new discoveries of oil
and gas trapped in
shale rock and the development of new technologies
to extract it.
The United States
has now overtaken
Russia as the number one producer of natural gas, and
could reemerge as a major energy exporter in the next
five years. Basic
American strengths—including rapid
innovation in a
highly competitive market—are
producing the revival
of its energy
industry and extending
its lead in technology;
all the hot
new things from
social networking to
cloud computing seem to
be emerging once
again from Silicon
Valley or from
rising tech hotspots
like Austin, Texas. As some
of the big
emerging markets lose
their luster over
the next sdecade, the United
States could appear quite resilient in comparison.
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