Posted at January 15, 2015, by Raleigh Addington, Comments Off on BRICS economist Jim O’Neill outlines three good reasons to be bullish on China in 2015
Writing for Bloomberg View, Jim O’Neill, the former chairman of Goldman Sachs Asset Management International, has argued that it is “ridiculous” to be bearish on China in 2015, commenting that there is a big year ahead for the economy.
In comparison to his earlier predictions of the BRIC countries – Brazil, Russia, India and China – it is the latter economy that has met Jim’s expectations five years on. He explains that “assuming that China’s soon-to-be-published fourth-quarter gross domestic product number will come in at or close to 7.3 percent, as many experts assume, then from 2011 to 2014, China will have averaged real GDP growth of just less than 8 percent.”
Jim offers three basic reasons to be bullish on China:
First, the collapse of crude oil prices will boost consumers’ real incomes, helping them play a larger role in the economy.
Second, even though property prices have recently stalled and begun to fall, China will probably avoid a serious credit crunch, partly because Chinese policy makers have been more serious about restraining prices before they can collapse.
A third reason to be optimistic is the subdued nature of inflation in China. This allows for more accommodative monetary policy going forward.
Jim notes that taken together, “these factors will make it easier for China to rebalance its economy — by raising wages, increasing property-ownership rights for urban migrants and reforming pension systems.”
Posted at July 8, 2014, by Raleigh Addington, Comments Off on Ian Bremmer, a leading speaker on global risk, reviews lessons learnt from emerging markets
Ian Bremmer, an acclaimed author, speaker and expert on global risk, discussed the “rise of the rest” in the New Statesmen, asking what emerging markets can tell us about the world today.
Ian describes how emerging markets have become a lifeline for the global economy, as they are expected to continue to emerge, providing much-needed global growth and leadership. However, Ian notes that “they are struggling through severe growing pains, and for many of them the pain outweighs the gain.”
“Not so long ago, Brazil and Turkey were considered best-in-class developing countries. Russia’s interventions in Ukraine have driven its economy into a tailspin, but Mexico, despite slowing growth, continues its march towards developed-world status. Finally, China’s uncertain future provides the world’s most important question mark.”
So why did these countries rise together, and why are they now heading in such different directions? Ian believes that “given that developing countries face vastly different challenges with vastly different capacities to respond, we must stop thinking of them as members of a single club.” He goes on to look closely at the stories of Brazil, Russia, India, Mexico, Turkey and China, to elucidate why some economies are faltering in “the rise of the rest.”
The beguiling idea of “convergence” still lives. But it shouldn’t. The basic notion of convergence is that incomes in poor nations will rapidly catch up—or converge—with those in rich nations. This argument gained a popular following over the past decade when emerging economies were growing three times faster than the world’s leading economy, the U.S. However, after the average annual GDP growth rate in emerging nations peaked at 8.7% in 2007, it tumbled to roughly 4% in 2013. Yet to many observers, that pace still appears fast enough for these countries to catch up to the U.S., now growing at an annual pace of just over 2%.
Look closer, however, and the picture changes dramatically. Once you exclude China, GDP growth over the past two years has been no higher in emerging nations than in the U.S. Convergence has halted across a broad front, and after losing ground for much of the last decade, the U.S. share of global GDP has stabilized since 2011 at 23%, while the share held by emerging markets excluding China has stabilized at 19%.
Some of the biggest emerging market stars of the last decade, including Brazil, Russia and South Africa, are now growing at a pace that is slower than that of the U.S. This trend is unlikely to change in the foreseeable future. These countries are in fact “deconverging.” Even China’s reported 2013 growth rate of 7.7% looks increasingly unsustainable given the amount of debt it is taking on to hit this ambitious target.
None of this should be surprising because economic history shows convergence is largely a myth. The tailwinds that stir up periods of rapid convergence—including easy money and booming commodity prices during the past decade—never last. Emerging economies rarely grow fast and long enough to rise into the developed world. There were at least as many nations losing ground as catching up in every decade but one since 1960. The exception was the past decade. Between 2005 and 2010, only three countries did not increase their GDP per capita relative to the U.S.: Niger, Eritria and Jamaica.
The tailwinds that produced this rare mass convergence are now gone, and the emerging world is returning to its normal state, with just a few nations on a rapid convergence path. The current stars include countries such as the Philippines, Colombia and Peru. But these catch-up stories are unlikely to last indefinitely, because hot growth streaks rarely run for more than a decade. Often, rapid expansions have ended in a crisis or contraction, wiping out much of the gains made during the boom.
Catch-up is hard to sustain, and one popular answer for this difficulty is the middle-income trap. This theory has it that a poor nation can grow at catch-up speed through simple improvements such as paved roads, but will find it difficult to continue at catch-up speed when it hits the middle-income level and needs to develop advanced industries. Today, there is much speculation that emerging markets—including Brazil, South Africa and Russia—are losing catch-up momentum simply because they are in or approaching the middle-income level.
New research, however, shows that “development traps” can knock countries off the catch-up path at any income level. The challenges of developing industry—backed by better banks, schools and regulators—do not accumulate and confront an economy all at once. They continue to harass an aspiring nation every step up the development ladder. In a September 2013 paper, World Bank researchers found many examples of economies that have suffered setbacks at the threshold of every per capita GDP level, from lower to middle to upper incomes. Their analysis of these transitions found “little support for the idea of a middle income trap.”
In some cases, development traps can drag newly rich countries back to the middle-income ranks, as has happened to Argentina and Venezuela in the past century. Since the late 1950s, many nations have also slid back from the middle to the lower-income class, including the Philippines in the 1950s, and Russia, South Africa and Iran in the 1980s and 1990s. Every decade tosses up new convergence stars—from Iraq in the 1950s to Iran in the 1960s and Malta in the 1970s—that flame out in the next decade.
Nonetheless, boom periods are often misread as a sign that developing nations are successfully working their way up the development ladder. Many emerging markets rely heavily on commodities for the bulk of their exports, and they grow at catch-up speeds—at a rate faster than the world’s leading economy—only when commodity prices are rising.
Commodity prices rose 160% in the 1970s, and the number of nations that were rapidly catching up to the West rose to 28, compared with the average of 22 in the typical decade. In the 1980s and 1990s, when commodity prices stagnated, the number of rapidly converging nations fell to just 11. Commodity prices then doubled in the 2000s, another golden age for convergence, with 37 nations catching up at a rapid pace.
But commodity-driven economies such as Russia and Brazil tend to stop catching up as soon as commodity prices spiral downward. According to the World Bank, of the 101 middle-income economies in 1960, only 13 had become and still remained high-income by 2008: Equatorial Guinea, Greece, Hong Kong, Singapore, Ireland, Israel, Japan, Mauritius, Portugal, Spain, Puerto Rico, South Korea and Taiwan. Of those 13, only Equatorial Guinea is a commodity-dominated economy.
Last decade’s mass convergence was a freak event that caught the world’s imagination. However, it never pays to extrapolate from the recent past into the distant future. That is particularly true in the emerging world, where economic growth is characterized by sharp but short booms, often fueled by unstable commodity prices. Don’t assume all emerging markets are destined to grow faster than the U.S.—or that some mythical force called “convergence” will carry every emerging nation on a straight path to prosperity.
Posted at July 24, 2013, by Raleigh Addington, Comments Off on Curtis S. Chin puts difficult questions to Pakistan
Former US Ambassador to, and Board Member of, the Asian Development Bank (ADB) Curtis S. Chin has written an interesting piece on Pakistan which follows up from his last visit to the country two years ago.
On his previous trip Curtis investigated development projects in Pakistan and he now reassesses the successes and failures of these, bearing in mind their extremely high costs to the country and its donor nations and partners. These questions are particularly pertinent now the Pakistani election year posturing is over.
Curtis looks at the most recent data, revealing that although the lives of the people are often improved, the overall success rate of these projects is not high. He highlights the example of the ADB who have spent $17 billion in loans to Pakistan since 1966, yet only 32% of their work in the 2000s was deemed “successful”. He states: “Clearly, it will be up to the people of Pakistan to shape their own future.”
There are four questions which Curtis now raises as important for the nation’s development partners ad leaders to consider:
Is Pakistan’s government bureaucracy hindering or fostering economic growth?
How are regulations impacting job creation?
When is government intervention appropriate?
What more can be done to root out corruption?
Curtis concludes his article noting that at the heart of these questions is his view that the “new ‘bric’ walls being built of bureaucracy, regulation, interventionism and corruption” should be broken down. Division and discord must be replaced by a focus on “innovation, infrastructure improvements and a policy environment that will foster the job growth necessary to drive the economy forward.”
Posted at July 2, 2013, by Raleigh Addington, Comments Off on “This is not the end of BRIC growth” contends economist Jim O’Neill
Writing in the Telegraph, Jim O’Neill suggests the growing fears of dark future for BRIC economies might be overplayed. Whilst a change in US monetary policy might create tension in the short term, the long view is still good for emerging economies.
“Ultimately, their growth will depend on what they do in terms of their demographics and productivity; the Fed’s monetary policy will have very little impact.”
A fresh perspective as the situation unfolds. Click here to read on.
Posted at May 28, 2013, by Raleigh Addington, Comments Off on Jim O’Neill’s opinion column for Bloomberg
Former Goldman Sach’s Chief Economist, Jim O’Neill has recently starting writing a monthly blog for Bloomberg. His first opinion column on May 23rd “At last, Germany Secures Total Dominance of Europe” draws interesting parallels between Germany’s football and economy.