09 August 2012

Where Did All the Global Growth Go, Long Time Passing?

A year ago, economic analysts were giddy with optimism about the prospects for economic growth in the developing world. In contrast to the United States and Europe, where the growth outlook looked weak at best, emerging markets were expected to sustain their strong performance from the decade preceding the global financial crisis, and thus become the engine of the global economy.

Economists at Citigroup, for example, boldly concluded that circumstances had never been this conducive to broad, sustained growth around the world, and projected rapidly rising global output until 2050, led by developing countries in Asia and Africa. The accounting and consulting firm PwC predicted that per capita GDP growth in China, India, and Nigeria would exceed 4.5% well into the middle of the century. The consulting firm McKinsey & Company christened Africa, long synonymous with economic failure, the land of “lions on the move.”

Today, such talk has been displaced by concern about what The Economist calls “the great slowdown.” Recent economic data in China, India, Brazil, and Turkey point to the weakest growth performance in these countries in years. Optimism has given way to doubt.

...Consider India, which demonstrates the limitations of relying on services rather than industry in the early stages of development. The country has developed remarkable strengths in IT services, such as software and call centers. But the bulk of the Indian labor force lacks the skills and education to be absorbed into such sectors. In East Asia, unskilled workers were put to work in urban factories, making several times what they earned in the countryside. In India, they remain on the land or move to petty services where their productivity is not much higher. _Source

A lot can change in a year's time. Europe and the US are headed toward recession. Australia and Canada are looking at assorted financial bubbles in danger of bursting. And the emerging nations are threatening to catch pneumonia from the more developed world's cold virus.

Has China's rise peaked? If one were to pose this question a few years ago, he would probably be laughed out of the room. The conventional wisdom then was that China's rise was certain to continue. But today, this question is very much on everyone's mind.

... For awhile, Beijing's ability to keep its economic growth high was lauded around the world as a sign of its strong leadership and resilience. Little did we know that China paid a huge price for a misguided and wasteful stimulus program. The bulk of its stimulus package, roughly $1.5 trillion (with two-thirds in the form of loans from state-owned banks), was squandered on fixed-asset investments, such as infrastructure, factories, and commercial real estate. As a result, many of these projects are not economically viable and will saddle the banking system with a mountain of non-performing loans. The real estate bubble has maintained its froth. The macroeconomic imbalance between investment and household consumption has barely improved. Today, Chinese economic policy-makers are hamstrung in trying to revive economic growth. The combination of local government indebtedness, massive bad loans hidden in the banking system, anemic external demand, and diminishing returns from investments has made it all but impossible for Beijing to use the same old economic playbook to fire up the economy.

Short-term difficulties are not the least of Beijing's worries. In the coming decade, many of the favorable structural factors that have helped power China's double-digit growth in the past two decades are going to disappear. Topping the list is the demographics. The proportion of the Chinese population of working age peaked in 2011 and has started decreasing in 2012, according to a RAND study. At the same time, the share of the elderly in the population is beginning to rise rapidly. In 2010, 8.6 percent of the population was 65 and older. By 2025, the figure will likely be 14.3 percent. An aging population will increase labor costs, reduce savings and investments, inflate healthcare and pension costs — and slow down growth.

Another difficult obstacle ahead is environmental degradation. Beijing has neglected environmental protection for the sake of rapid growth. But the costs of environmental degradation have become unbearable, both economically and politically. Water and air pollution today cause 750,000 premature deaths and around 8 percent of GDP. China's long-suffering population has finally begun to fight vigorously for their environmental rights. This year alone, large-scale protests forced the government to cancel plans to build plants that would threaten the health and livelihoods of the residents in two Chinese cities. In the decade ahead, the combination of environmental degradation and the effects of global warming will further drag down Chinese growth. _Diplomat
More at the article linked above.

China is in danger of many other types of near to intermediate-term degradation than mere environmental degradation. Degradation of poorly constructed infrastructure is inevitable, as is degradation of social and national cohesion.

More: Can Global Growth be Saved?

The true picture for most of the developed and emerging worlds, is actually much worse than can be contained in the phrases "slow growth," "no growth," or "negative growth." The true picture can best be described by the phrase "on the brink of disaster."

But since a combination of wise, selfless, and heroic leadership would be required to overhaul the government systems of developed world nations as well as the BRICS and the third world, don't hold your breath.

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“During times of universal deceit, telling the truth becomes a revolutionary act” _George Orwell

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