In the first part of "The Party's
Over" (above), first broadcast in December 2011, Robert Peston, the BBC business editor,
visits Shanghai, the fastest growing city in China and home to 23m people. Here,
he meets some of the city's workers prepared to earn less than their UK
counterparts to help fuel the Chinese economic boom.
However, the woes of the West
struggling with high debt, ageing populations and the end of the American Dream
and its equivalent for other developed nations, will not mean that emerging
economies face a long period of plain sailings. Headwinds are evident
everywhere.
The United States has an
unexpected silver lining compared with just a short time ago.
The United States will become
increasingly energy independent in the next three decades as it boosts its
production of oil, natural gas and renewable power such as solar and wind.
Meanwhile, US crude oil production averaged almost 6.5m barrels per day in
September 2012, the highest volume in nearly 15 years. The last time the United
States produced 6.5m barrels per day or more of crude oil was in January 1998.
Since September 2011, US production has increased by more than 900,000 barrels
per day. Most of that increase is due to production from oil-bearing rocks with
very low permeability through the use of horizontal drilling combined with
hydraulic fracturing (fracking). The states with the largest increases are Texas
and North Dakota.
The US Energy Information Administration this month issued its Annual
Energy Outlook 2013 (AEO2013), which highlights growth in total US energy production that exceeds growth in total US energy
consumption through 2040.
The BBC says that in the teeth of the worst financial crisis in living memory, Robert Peston
examines how the world got to this point and how the colossal imbalances in the
global economy have left the UK in need of a radical economic overhaul.
In this first of two programmes Peston examines how, thirty years ago, momentous
decisions were taken which shaped the world we live in today. In China, Deng
Xiao Ping opened up the country to foreign capitalists; in Britain and America,
the free market revolution was unleashed by Margaret Thatcher and Ronald Reagan.
"The Party's Over" compares the lives of workers in a Chinese company with their
co-workers in Britain.
Robert Peston interviews bankers, politicians and economists, and concludes that
the boom we enjoyed before the crash was based on an illusion, and that the
world's economy is now so unbalanced that in the West we face a sobering wake-up
call.
Part 2
Not all plain sailing
The demographic outlook for the BRICs (Brazil, Russia, India and China) varies
greatly. The differences in the projected change in the working-age population
are very significant in both absolute and relative terms. This will impact not
only economic growth prospects, but also savings and investment behaviour and
potentially financial market growth prospects. Brazil and India are
demographically in a substantially more favourable position than China and
Russia. With the exception of India, demographic developments in the BRICs are
becoming, or will soon become, a net negative in terms of per-capita growth. The
working-age population in India will increase by a stunning 240m (equivalent to
four times the total population of the UK) over the next 20 years, compared with
10m in China. However in the big country league, only in Brazil, India, the UK
and the US will the potential labour force be tangibly larger in 2030 than
today.
China should double its GDP (gross domestic product) by 2020
President
Hu said in a speech at the opening of the Communist Party’s 18th congress last
month. Hu who handed over the position of party general secretary to Vice
President Xi Jinping a week later, also called for “deepened reform of the
financial system” and more local-level democracy. China was ranked 121st in
gross national per capita income for 2010 by the World Bank, at $4,260, close to
Jordan and Thailand and less than 1/10 of the US’s $47,140. However, on a
purchasing power parity (PPP - - The rate at which the currency of one country
would have to be converted into that of another country to buy the same amount
of goods and services in each country) basis during Hu's presidency, GDP per
capita more than tripled from $2,800 in 2002 to a forecast $9,100 in 2012
according to the International Monetary Fund.
ChinaRealTime, a Wall Street Journal blog, says that rising incomes pushed China
into the middle-income bracket of emerging nations. With few signs of
democratisation, China also defied expectations that rising wealth would lead to
political reform.
Ten years of rapid growth is an impressive record. But much of the credit must
go to Hu’s predecessor Jiang Zemin, who shepherded far reaching reforms that
laid the foundations of the decade’s growth. The boost from those reforms is now
running its course.
China’s entry into the World Trade Organisation in 2001 ushered in an export
boom, with exports averaging nearly 30% annual growth from 2002-07. But as China
has grown to be the world’s largest exporter, with more than 10% of the global
market, the room for further expansion is limited. Rising wages, and a stronger
yuan, have also taken a toll on export competitiveness.
Ruchir Sharma, head of emerging market equities
and global macro at Morgan Stanley Investment Management, which has about
$25bn in emerging market assets, and is the biggest investment rival of Goldman
Sach's, says in a recent issue of 'Foreign
Affairs,' that the recent slowdown in growth in emerging economies should not be surprising, because it
is hard to sustain rapid growth for more than a decade. The unusual
circumstances of the last decade made it look easy: coming off the crisis-ridden
1990s and fueled by a global flood of easy money, the emerging markets took off
in a mass upward swing that made virtually every economy a winner. By 2007, when
only three countries in the world suffered negative growth, recessions had all
but disappeared from the international scene. But now, there is a lot less
foreign money flowing into emerging markets. The global economy is returning to
its normal state of churn, with many laggards and just a few winners rising in
unexpected places. The implications of this shift are striking, because economic
momentum is power, and thus the flow of money to rising stars will reshape the
global balance of power.
Sharma who is the author of the book, 'Breakout
Nations: In Pursuit of the Next Economic Miracles,' says that the
notion of wide-ranging convergence between the developing and the developed
worlds is a myth. Of the roughly 180 countries in the world tracked by the
International Monetary Fund, only 35 are developed. The markets of the rest are
emerging-and most of them have been emerging for many decades and will continue
to do so for many more. He says that Dani Rodrik, the Harvard economist captures
this reality well. He has shown that before 2000, the performance of the
emerging markets as a whole did not converge with that of the developed world at
all. In fact, the per capita
income gap between the advanced and the developing economies steadily widened
from 1950 until 2000. There were
a few pockets of countries that did catch up with the West, but they were
limited to oil states in the Gulf, the nations of southern Europe after World
War II, and the economic "tigers" of East Asia. It was only after 2000 that the
emerging markets as a whole started to catch up; nevertheless, as of 2011, the
difference in per capita incomes between the rich and the developing nations was
back to where it was in the 1950s.
Excerpt from 'Breakout Nations':
As playwright Arthur Miller once observed, "An era
can be said to end when its basic illusions are exhausted." Most of the
illusions that defined the last decade -- the notion that global growth had
moved to a permanently higher plane, the hope that the Fed (or any central bank)
could iron out the highs and lows of the business cycle -- are indeed spent. Yet
one idea still has the power to capture the imagination of the markets: that the
inexorable rise of China and other big developing economies will continue to
drive a "commodity supercycle," a prolonged upward rise in the prices of
commodities ranging from oil to copper and silver, to textiles, to corn and
soybeans. This conviction is the main reason for the optimism about the
prospects of the many countries that live off commodity exports, from Brazil to
Argentina, and Australia to Canada.
I call this illusion commodity.com, for it is
strikingly similar in some ways to the mania for technology stocks that gripped
the world in the late 1990s. At the height of the dotcom era, tech stocks
comprised 30% of all the money invested in global markets. When the bubble
finally burst, commodity stocks -- energy and materials -- rose to replace tech
stocks as the investment of choice, and by early 2011 they accounted for 30% of
the global stock markets. No bubble is a good bubble, and all leave some level
of misery in their wakes. But the commodity.com era has had a larger and more
negative impact on the global economy than the tech boom did.
The hype has created a new industry that turns
commodities into financial products that can be traded like stocks. Oil, wheat,
and platinum used to be sold primarily as raw materials, and now they are sold
largely as speculative investments. Copper is piling up in bonded warehouses not
because the owners plan to use it to make wire, but because speculators are
sitting on it, like gold, figuring that they can sell it one day for a huge
profit. Daily trading in oil now dwarfs daily consumption of oil, running up
prices. While rising prices for stocks--tech ones included--generally boost the
economy, high prices for staples like oil impose unavoidable costs on businesses
and consumers and act as a profound drag on the economy.
That is how average citizens experience
commodity.com, as an anchor weighing down their every move, not the exciting
froth of the hot new thing. The dotcom sensation broke the bounds of the
financial world and seized the popular imagination, attracting thrilled media
hype around the world and enticing cubicle jockeys to become day traders. There
was the dream of great riches, yes, but also a boundless optimism and faith in
human progress, a sense that the innovations flowing out of Silicon Valley would
soon reshape the world for the better.
Tech CEOs became rock stars because they promised a
life of rising productivity, falling prices, and high salaries for generating
ideas in the hip office pods of the knowledge economy, or for trading tech
stocks from a laptop in the living room. It was impossible in those days to get
investors interested in anything that did not involve technology and the United
States, so some of us started talking up emerging markets as "e-merging
markets," while analysts spent a lot of time searching for the new Silicon
Valley, which they dutifully but often implausibly discovered hiding in loft
offices everywhere from Prague to Kuala Lumpur.
A decade later the chatter was all about the big
emerging markets and oil, but with a darker mood. Commodity.com is driven by
fear and a total lack of faith in human progress: fear of a rising phalanx of
emerging nations with an insatiable demand led by China, of predictions that the
world is running out of oil and farmland, coupled with a lack of faith in the
human capacity to devise answers, to find alternatives to oil or ways to make
agricultural land more productive. It's a Malthusian vision of struggle and
scarcity: of prices driven up by failing supplies and wages pushed down by
foreign competition.
Excitement about rising commodity prices exists only
among the investors, financiers, and speculators who can gain from it.
Commodity.com has inspired many an Indian and Chinese entrepreneur to go
trekking across Africa in search of coal mines, yet it has no positive
manifestation in the public mind at all. At the height of the tech bubble
millions of American high school students aspired to become Stanford MBAs bound
for Silicon Valley; today the growing number of oil, gas, and energy-management
programs represents a small niche inside the MBA world. The only popular
manifestations of commodity.com are complaints about rising gasoline prices and
outbreaks of unrest over rising food prices in emerging markets.
It is well-justified unrest. If anything, the
negative impact of sky-high commodity prices on the larger economy is
underestimated. The price of oil rose sharply before ten of the eleven postwar
recessions in the United States, including a spike of nearly 60% in the twelve
months before the Great Recession of 2008 and more than 60% before the economy
lost momentum in mid-2011. When the price of oil trips up the United States, it
takes emerging markets down with it. In 2008 and 2009 the average economic
growth rate dropped by 8%age points in both the developed and the emerging
world, from its peak pace to the recession trough.
The strongest common thread connecting the dotcom
and commodity.com eras is the fundamental driver of all manias: the invention of
"new paradigms" to justify irrationally high prices. We heard all sorts of
exotic rationales at the height of the dotcom boom, when analysts offered gushy
explanations for why a company with no profits, a sketchy business plan, and a
cute name should trade at astronomical prices. It was all about the future,
about understanding why prices in a digitally networked economy "want to be
free," while the "monetization" problem (how to make money on the Internet)
would solve itself down the line. The dotcom mania, while it lasted, was
powerful enough to make Bill Clinton -- who campaigned as the first U.S.
president to fully embrace the "new economy" -- a living emblem of American
revival, just as the commodity price boom played a role in making Vladimir Putin
a symbol of Russian resurgence and Inácio Lula da Silva the face of a Brazilian
recovery. When the rapture is over, the nations and companies that have been
living high off commodities will also share the sinking feeling that followed
the dotcom boom.
Excerpted from Breakout
Nations: In Pursuit of the Next Economic Miracles, W.W. Norton &
Company. Copyright © 2012 by Ruchir Sharma.
