True and faithful
Ambrose Evans-Pritchard has written a doozy of a column for the Telegraph – if interested, here’s the link to it:
http://www.telegraph.co.uk/finance/comment/ambroseevans_pritchard/9717728/The-worlds-commodity-supercycle-is-far-from-dead.html
Here’s a summary of what he’s talking about.
Ambrose quotes from a couple of reports: one from the World Bank and one from Citigroup’s Ed Morse (not the local Honda dealership owner). The two reports combine to form a concept that affects the U.S., China, iron ore supplier Australia and frankly the rest of the world. What’s up with that?
As the title indicates, the World Bank has written about commodity “supercycles” that last 10 or more years, followed by a prolonged drop in commodity pricing. The run-up in oil prices from 2003 to 2008 was exceptional, however the overall trend is still the same. Ed Morse’s report for Citigroup addresses the oil question, indicating current pricing of between $80 and $90 a barrel is what we should expect to see for the next 20 years or so. This lends credence to what the World Bank is saying in their report.
But the analysis is the thing: of course. And here’s the analysis, which comes from a combination of sources that clever Ambrose utilizes to make his point:
Point 1: what is the only engine driving what little upward lift exists for the world economy?
China
The bulk of the world’s commodities have been purchased by and shipped to China since 2009. China used all these raw materials to build dams, skyscrapers, roads and apartment buildings. Where? In the factory towns in the east. Why? To support the mass migration of the population moving from the rural areas to the cities in the east to work in the factories. Factories? All that stuff you bought for the past 10 years at WalMart? Those factories made that stuff.
This worked very well until 2012.
Then what happened?
Quite intentionally, to ward off inflationary bubbles that were beginning to form, the Chinese government
clamped down on the country’s economy, particularly in real estate, by limiting the supply of money. The clamp worked so well, that this sole world driver slowed down, causing the rest of economic traffic behind it (Europe, Latin America, the US) to slow down – in the case of Europe & Great Britain into recession. Okay, so then what happened?
Not so fast – let’s take a few steps back. While those of us on the ground might see this as simply short term changes that will be resolved over time, the World Bank’s report sees the situation in light of their analysis of over 200 years’ worth of data. What they suggest is that China – like most all countries that have come before it – has reached the end of its “supercycle”. This supercycle allowed them to see unprecedented growth over the past 12 years or so.
But according to the World Bank, they have just about extracted all they can from the plan developed by Deng Zhao Ping in the 80’s: transforming a poor, rural economy into a manufacturing powerhouse by utilizing cheap labor and underbidding the rest of the world. But you know all about that, eh?
Back to the World Bank. What will follow will be 20 or more years of growth at what the rest of the world considers “normal” rates, but is considered totally unacceptable in China: anywhere from 3.5% to 7%.
Now this is where politics rears its ugly head. The Chinese change their heads of government every 10 years or so, and the old guard’s 10 years is up. The ‘new’ guard just took over. China watchers expected there to be a mix of thinkers in the new government: traditional and progressive. But instead, what came to pass was mostly a younger version of the old guard.
So why should we care? Ahh…that’s where we get to the title of my piece (thank you for your patience in getting this far). Continuing to follow the same policies will inevitably lead to what is known as the ‘middle income trap’. What is that?
A couple paragraphs from Wikipedia say it best:
Avoiding the middle income trap
The Middle Income Trap occurs when a country’s growth plateaus and eventually stagnates after reaching middle income levels. The problem usually arises when developing economies find themselves stuck in the middle, with rising wages and declining cost competitiveness, unable to compete with advanced economies in high-skill innovations, or with low income, low wage economies in the cheap production of manufactured goods.[3]
Avoiding the Middle Income Trap entails identifying strategies to introduce new processes and find new markets to maintain export growth. Ramping up domestic demand is also important — an expanding middle class can use its increasing purchasing power to buy high-quality, innovative products and help drive growth.[4]
The biggest challenge is moving from resource-driven growth that is dependent on cheap labor and capital to growth based on high productivity and innovation. This requires investments in infrastructure and education. As the Republic of Korea has proven, building a high-quality education system which encourages creativity and supports breakthroughs in science and technology is key.
So Ambrose says this younger version of the old guard – mostly made up of mentees of the old guard – think they can extract at least another 5 years’ worth of high octane growth out of the Chinese economy. The World Bank seems to think not. Depending on who’s right, the result could affect the rest of the world.
That’s why we should be interested. Very few countries have made it out of the middle income trap: Hong Kong SAR (special administrative region), Japan, South Korea and Equatorial Guiana are identified as some that have. Hong Kong is now part of China; Japan is on the decline because of the aging of its population, and South Korea has to worry about North Korea being foolish. So if China languishes in this middle income trap for the foreseeable future, it’s likely we will continue to experience slow growth and continued high unemployment.
Maybe we should send some folks over there to help?
– of course it was awesome, particularly Daniel Day Lewis who disappeared into the man. But the message for today is – where’s that individual who can lead the country through an incredibly bloody civil war, deal with a crazy wife, dead son, angry older son, crazy Abolitionists who stood for purity, regardless of the impact on the country (like the Tealiban), and a recalcitrant Cabinet? That was Lincoln’s plight. Yet, he still managed to get the 13th Amendment passed in record time, knowing full well if he waited until the war ended, there would be no amendment to abolish slavery. And his reward for all his hard work? Shortly after working this miracle, he got himself killed by an assassin. Where are men like that today? Individuals who can see past the petty differences and concern for their own position and presumed power to lead us to a better place, both as a country and a Democratic process? I suppose you only get one of those a century, and we aren’t far enough along in time, or deep enough in trouble yet to find that individual. We can only hope…
