Growth tends to slow when GDP per head reaches a certain threshold. China is getting close

BRIC wall

Apr 14th 2011 | from the print edition

THE economic crisis may have been debilitating for the rich world but for emerging markets it has been closer to a triumph. In 2010 China overtook a limping Japan as the world’s second-largest economy. It looks sets to catch America within a decade or two. India and Brazil are growing rapidly. The past few years have reinforced the suspicion of many that the story of the century will be the inexorable rise of emerging economies. If projections of future growth look rosy for emerging markets, however, history counsels caution. The post-war period is rich in examples of blistering catch-up growth. But at some point growth starts to disappoint. Gaining ground on the leaders is far easier than overtaking them.

Rapid growth is initially easy because the leader has already trodden a clear path. Developing countries can borrow existing technologies from countries that have already become rich. Advanced economies may be stuck with obsolete infrastructure; laggards can skip right to the shiniest and best. Labour productivity soars as poor economies shift workers from agriculture to a growing manufacturing sector. And rapid income growth among young workers boosts savings and fuels investment.

But the more an emerging economy resembles the leaders, the harder it is to sustain the pace. As the stock of borrowable ideas runs low, the developing economy must begin innovating for itself. The supply of cheap agricultural labour dries up and a rising number of workers take jobs in the service sector, where productivity improvements are more difficult to achieve. The moment of convergence with the leaders, which once seemed within easy reach, retreats into the future. Growth rates may slow, as they did in the case of western Europe and the Asian tigers, or they may falter, as in Latin America in the 1990s.

The world’s reliance on emerging markets as engines of growth lends urgency to the question of just when this “middle-income trap” is sprung. In a new paper* Barry Eichengreen of the University of California, Berkeley, Donghyun Park of the Asian Development Bank and Kwanho Shin of Korea University examine the economic record since 1957 in an attempt to identify potential warning-signs. The authors focus on countries whose GDP per head on a purchasing-power-parity (PPP) basis grew by more than 3.5% a year for seven years, and then suffered a sharp slowdown in which growth dipped by two percentage points or more. They ignore slowdowns that occur when GDP per head is still below $10,000 on a PPP basis, limiting the sample to countries enjoying sustained catch-up growth. What emerges is an estimate of a critical threshold: on average, growth slowdowns occur when per-head GDP reaches around $16,740 at PPP. The average growth rate then drops from 5.6% a year to 2.1%.

This estimate passes the smell test of history (see chart). In the 1970s growth rates in western Europe and Japan cooled off at approximately the $16,740 threshold. Singapore’s early-1980s slowdown matches the model, as does the experience of South Korea and Taiwan in the late 1990s. As these examples indicate, a deceleration need not precipitate disaster. Growth often continues and may accelerate again; the authors identify a number of cases in which a slowdown proceeds in steps. Japan’s initial boom lost steam in the early 1970s, but its economy continued to grow faster than other rich nations until its 1990s blow-up.

In the right circumstances the good times may be prolonged, allowing an economy to reach a higher income level before the inevitable slowdown. When America passed the threshold it was the world leader and was able to keep growing rapidly so long as its own innovative prowess allowed. Britain’s experience indicates economic liberalisation or a fortunate turn of the business cycle may also prevent the threshold from binding at once.

Openness to trade appears to be a potent stimulant: the authors attribute the outperformance of Hong Kong and Singapore to this effect. Lifting consumption to just over 60% of GDP is useful, as is a low and stable rate of inflation. Neither financial openness nor changes of political regime seem to matter much, but a large ratio of workers to dependents reduces the odds of a slowdown. An undervalued exchange rate, on the other hand, appears to contribute to a higher probability of a slowdown. The reason for this is not clear but the authors suggest that undervaluation could lead countries to neglect their innovative capacity, or may contribute to imbalances that choke off a boom.

Middle Kingdom, middle income

The authors are careful to say that there is no iron law of slowdowns. Even so, their analysis is unlikely to cheer the leadership in Beijing. China’s torrid growth puts it on course to hit the $16,740 GDP-per-head threshold by 2015, well ahead of the likes of Brazil and India. Given the Chinese economy’s long list of risk factors—including an older population, low levels of consumption and a substantially undervalued currency—the authors suggest that the odds of a slowdown are over 70%.

It is hazardous to extend any analysis to a country as unique as China. The authors acknowledge that rapid development could shift inland, where millions of workers have yet to move into manufacturing, while the coastal cities nurture an ability to innovate. The IMF forecasts real GDP growth rates above 9% through to 2016; a slowdown to 7-8% does not sound that scary. But past experience indicates that slowdowns are frequently accompanied by crises. In East Asia in the late 1990s it became clear that investments which made sense at growth rates of 7%, say, did not at expansion rates of 5%. Political systems may prove similarly vulnerable: it has been many years since China has to deal with an annual growth rate below 7%. Structural reforms can help to cushion the effects of a slowdown. It would be wise for China to pursue such reforms during fat years rather than the leaner ones that will, eventually, come.

* “When Fast Growing Economies Slow Down: International Evidence and Implications for China”. NBER working paper, March 2011

Boom vs Doom: is Nouriel Roubini right on China?

April 21, 2011 7:00 am by Jamil Anderlini

It probably comes as no surprise that Nouriel Roubini – also known as Dr Doom – is bearish on China and its current growth model. Based on “two trips” to China recently the good doctor has come up with a devastating prognosis.

So is the man famous for predicting the downfall of the US housing market and subsequent global credit crisis about to notch up a second nostradamus award?

Here’s a taste of his views on China, as first published on Project Syndicate:

“China is rife with overinvestment in physical capital, infrastructure and property. To a visitor, this is evident in sleek but empty airports and bullet trains (which will reduce the need for the 45 planned airports), highways to nowhere, thousands of colossal new central and provincial government buildings, ghost towns and brand-new aluminium smelters kept closed to prevent global prices from plunging.”

“Eventually, most likely after 2013, China will suffer a hard landing. All historical episodes of excessive investment – including East Asia in the 1990s – have ended with a financial crisis and/or a long period of slow growth.”

Mr Roubini is a brave soul to put a date on the great China collapse. Many have tried and failed miserably to do the same thing over the last two decades. He cleverly leaves the exact timing open and if you rephrased his comments they would actually say he thinks China will not suffer a hard landing in the next two years.

Some people counter his grim analysis by pointing out China has been over-building and over-investing for well over a decade and every time it looks like there is too much investment or infrastructure, growth catches up and spare capacity disappears. There are a lot of people in China after all.

Others might also argue that the poor quality of much of the construction also means that within a decade or two all the old infrastructure will have to be torn down and rebuilt.

But Mr Roubini may well be right and makes a convincing argument that China’s addiction to over-investment will eventually cause massive waste and much slower growth down the road.

“No country can be productive enough to reinvest half of GDP in new capital stock without eventually facing immense overcapacity and a staggering non-performing loan problem.”

“Continuing down the investment-led growth path will exacerbate the visible glut of capacity in manufacturing, property and infrastructure, and thus will intensify the coming economic slowdown once further fixed-investment growth becomes impossible. Until the change of political leadership in 2012-13, China’s policymakers may be able to maintain high growth rates, but at a very high foreseeable cost.”

His assessment of the government’s latest five-year plan (2011-2015) is equally gloomy.

He points out, correctly, that the latest five-year plan looks remarkably similar to the last one, with its rhetoric on rebalancing the economy and increasing the share of consumption in GDP, both goals where the government failed miserably.

Mr Roubini is also right when he says the plan’s details reveal continued reliance on investment, especially public housing to boost growth.

His prescription is a mix of reforms including: faster currency appreciation, substantial fiscal transfers to households, taxation and/or privatisation of state-owned enterprises, liberalisation of the household registration, or hukou, system, and an easing of financial repression.

The Mandarins in Beijing are certainly aware of and probably agree with many of the points Mr Roubini is making, but because of the difficulties in implementing any of these reforms they are unlikely to pay much attention to his advice.

Related reading:
China’s Bad Growth Bet, Nouriel Roubini on Project Syndicate
Why Roubini is wrong on China, Shaun Rein on
China: booming with a frown, beyondbrics
Copper imports: tea leaves for reading China’s growth?, beyondbrics
China: the end of cheap, Foxconn edition, beyondbrics


Crisis for the Rich, Via Crucis for the Poor

World map showing countries by nominal GDP per...

Crisis de los ricos, via crucis de los pobres

Crisis for the Rich, Via Crucis for the Poor

Theories of evolution after Darwin assume a dynamic of divergences. Two species can derive from one in common; every now and then, these variations can disappear gradually or abruptly, but two species never end up flowing together into one. There is no mixing except within a given species. In the long view, a hen and a man are distant relatives, descendants of some reptile, and each one represents a successful response by life in its struggle for survival.

In other words, diversity is the form in which life expands and adapts to diverse environments and conditions. Diversity and life are synonymous for the biosphere. Vital processes tend toward diversity but at the same time they are the expression of a unity, the biosphere, Gaia, the exuberance of life in permanent struggle for the survival of its own miracle in hostile surroundings.

For the same reason, cultural diversity is a condition for the life of humanity. That is to say, and even though it might be motive enough in itself, diversity is not limited merely to avoiding the boredom of monotony but instead is, besides, part of our vital survival as humanity.

Nevertheless, we humans are the only species that has replaced the natural and discrete loss of species with an artificial and threatening extermination, with industrial depredation and with the pollution of consumerism. Those of us who insist on a possible though not inevitable “progress of history” based on knowledge and the exercise of equal-liberty, can see that humanity, so often placing itself in danger of extinction, has achieved some advances that have allowed it to survive and abide its growing muscular power. And even so, we have added nothing good to the rest of nature. In many respects, perhaps in that natural process of trial and error, we have regressed or our errors have become exponentially more dangerous.

Consumerism is one of those errors. That insatiable appetite has little or nothing to do with progress toward a possible and yet improbable post-scarcity, hunger-free era, and everything to do with the more primitive era of greed and gluttony. Let’s not say with an animal instinct, because not even lions monopolize the savanna or practice systematic extermination of their victims, and because even pigs are sated sometimes.

The culture of consumerism has erred in several ways. First, it has contradicted the aforementioned condition, passing over cultural diversities, substituting them for its universal trinkets or creating a pseudo-diversity where a Japanese laborer or German office worker can enjoy for two days a piece of traditional Peruvian craftwork made in China, or for five days the most beautiful Venetian curtains imported from Taiwan, before they fall apart from use. Second, because it also has threatened the ecological balance with its unlimited extractions and its returns in the form of immortal garbage.

We can observe concrete examples all around us. We might say that it is good fortune that a worker could enjoy commodities that previously were reserved only for the upper classes, the unproductive classes, the consumer classes. Nonetheless, that consumption – induced by cultural and ideological pressure – often has been turned into the very purpose of the worker and an instrument of the economy. Which logically means that the individual-as-tool has been turned into a means of the economy as individual-as-consumer.

In almost all of the developed countries, or those following that “model of development,” the furniture that invades the markets is intended to last only a few years. Or a few months. The furniture items are pretty, they look good just like almost everything in the culture of consumption, but if we look closely they are scratched, missing a screw or our out of square. That preoccupation of my family of carpenters with improving the design of a chair so that it might last a hundred years turns out to be exotic now. But the new disposable furniture does not worry us too much because we know that it costs little and that, in two or three years we are going to buy some more new stuff, which happens to provide more interest and variation in the decoration of our homes and offices and above all stimulates the world economy. According to the current theory, what we throw away here aids the industrial development of some poor country. Thus we are good, because we are consumers.

And yet, those furniture items, even the cheapest ones, have consumed trees and burned up fuel in their long journey from China or from Malaysia. The logic of “dispose of it after use,” which is most reasonable for a plastic syringe, becomes a necessary law for stimulating the economy and maintaining the perpetual growth of GDP, with its respective crises and phobias whenever its fall provokes a recession of two percent. In order to escape the recession one must increase the dosage of the drug. The United States alone, for example, dedicates billions of dollars so that its residents might continue to consume, to spend, in order to escape the madness of the recession and thus allow the world to continue to turn, consuming and discarding.

But those discards, as cheap as they may be – consumerism is based on cheap, disposable merchandise that makes the recycling of durable products almost inaccessible – possess bits of wood, plastic, batteries, steel pipe, screws, glass and more plastic. In the United States all of that and more goes into the garbage – even in this time of what is called “great crisis” for the wrong reasons – and in the poor countries, the poor go out looking for that garbage. Over the long term, the one who ends up consuming all the garbage is nature, while humanity continues to suspend its changes of habit in order to get out of the recession first and in order to sustain the growth of the economy later.

But what is the meaning of “growth of the economy,” that two or three per cent with which the whole world is obsessed, from North to South and East to West?

The world is convinced that it finds itself in a terrible crisis. But the world was already in crisis. Now the crisis is defined as worldwide because 1) it proceeds from and affects the economy of the wealthiest; 2) the simplified paradigm of development has radiated its hysteria out to the rest of the world, undermining its legitimacy. But in the United States people are still flooding the stores and restaurants and their cut backs never involve hunger, even in the gravest cases of the millions of workers without jobs. In our peripheral countries a crisis means children begging in the streets. In the United States it tends to mean consumers consuming a little less while they await the next government check.

In order to get out of that “crisis,” the experts squeeze their brains and the solution is always the same: increase consumption. Ironically, increasing consumption by lending regular people their own money through the big private banks that receive rescue aid from the government. It’s not only a matter of saving a few banks, but, above all, of saving an ideology and culture that cannot survive on their own without frequent ad hoc injections: financial stimulus, wars that promote industry and control popular participation, drugs and entertainment that stimulate, tranquilize and anaesthetize in the name of the common good.

Will we have really emerged from the crisis when the world returns to a five percent growth rate through the stimulation of consumption in the wealthy countries? Will we not be laying the ground for the next crisis, a real – human and ecological – crisis and not an artificial crisis like the one we have now? Will we truly realize that this one is not truly a crisis but just a warning, which is to say, an opportunity for changing our habits?

Every day is a crisis because every day we choose a road. But there are crises that are a long via crucis and others that are critical because, for oppressed and oppressors alike, it means a double possibility: the confirmation of a system or its annihilation. So far it has been the first because of a lack of alternatives to the second. But one must never underestimate history. Nobody could have ever foreseen an alternative to medieval feudalism or to the system of slavery. Or almost nobody. The history of the most recent millennia demonstrates that utopians usually foresee the future with an exaggerated precision. But like today, the utopians have always had a bad reputation. Because mockery and disrepute are the form that every dominant system has always used to avoid the proliferation of people with too much imagination.

Dr. Jorge Majfud

Febrero, 2009

Lincoln University

Political Affairs (USA)

Translated by Dr. Bruce Campbell. St. John’s University