How fragile is China’s economy?

September 13, 2011

The dinosaur was probably the most “successful” creature ever to inhabit the world.  Its adaptation to the environment was so perfect that it was able, effortlessly, to dominate land and sea and sky.  For more than a hundred and fifty million years, it left no niche unoccupied; none in which a competitor species could prosper. 

But the perfection of its adaptation was at once a strength and a weakness.  So long as the environ­ment was constant, its position was unchallenged.  But, when things did change, it became vulnerable.  The mammal, though less well-adapted to the old environment, was less badly-adapted to the new one.  It survived; the dinosaur didn’t.

Does palaeontology have a message for economics?   Are countries that have been enriched by one environment likely to be impoverished by the change to another?   Possibly so.

Argentina has much in common with the dinosaur.  For a while, it was the most successful economy in the world.  Its per capita GDP in the early years of the twentieth century was significantly higher than that of any other country. 

Its wealth was agriculturally based.  The country could produce wheat and beef very efficiently:  unit costs were just 80% of America’s; 60 % of Eu­rope’s.  Unsurprisingly, those who own­ed the land became millionaires; those who worked it, well paid.

But Argentina’s success depended on its access to foreign markets.  In the nineteenth cen­­tury, largely perhaps because of Britain’s commitment to free trade, Argentina enjoyed that access.  And, early in the twentieth century, it continued to do so.

But the depression of the thirties changed everything.  Levels of demand collapsed; levels of supply didn’t.  Everywhere in the world, there was excess capacity.  Production had to be cut back, and workers laid off. 

In such circumstances, free trade came to be regarded as an expensive indulgence.  In the US Congress, in the early thirties, tempers ran high.  Argentine shipments of wheat and beef (high in quality and low in price) were said to be intensifying American farmers’ problems.  Protectionism was thought to be the answer.  There weren’t many who disagreed.

Europe, also vulnerable to Argentine competitiveness, came to the same conclusion.  France was particularly keen to protect its farmers.  It banned most imports.  And Britain, persuaded to re­serve its markets for Com­mon­wealth producers, banned some.

Argentina’s competitiveness in the thirties was not an advantage, but a disadvantage.  It was the rationalisation for discrimination.  Exports fell, incomes plung­ed, and unemployment soared.

The country did not react well to adversity.  In politics, stability gave way to instability.  The populist Peron came to power.  And his eccentric policies probably made a bad situation worse.

Per capita GDP suffered substantially:  the highest in the world in 1929; it wasn’t in the top twenty in 1939.  And, remarkably, it didn’t recover much when the outbreak of war lifted demand.  Nor did it do so when the post-war settlement brought a return to free trade.

So!   Might there be another dinosaur roaming the world today?   Which country is most vulner­able to changes in the economics environment?    

The obvious candidate is China.  It’s as devastatingly competitive in manufacturing now as Argentina was in agriculture then.  But competitiveness is nothing without free trade.

Will it persist?   Or will the US and EU and Japan be tempted by protectionist policies?   Nobody knows.  But the risks are not insignificant.

Governments always claim to be virtuous, but rarely are.  Their principal objective is to stay in power.  If that means bending the rules a little, most are willing to do so. 

In the thirties, it was depression that drove Governments to reject free trade.  It might be depression that does so again in the current decade.  The outlook for the world economy is currently very dreary.  The business cycle is about to peak and a recession is likely in 2012.

But it could get a good deal worse.  If consumers, disenchanted with debt, were to seek to pay it down, the economics weakness would persist.  If, concurrently, central bankers were to raise interest rates (as they did in 1929), the negative momentum would become protracted.

In such circumstances, populist politicians would probably be quick to climb on the protectionist bandwagon.  It’s be one thing to surrender a rising share of the home market to foreign producers when aggregate sales are growing; it’s be quite another when they’re falling.  Europe has always been predisposed to direct action on this front.  It wouldn’t need much of an excuse to prompt renewed measures.

If the wind did seem to be blowing in that direction, how would China respond?   Pedantically or pragmatically?   With confrontation or compromise?   With revolution or militarism?  

Nobody knows, of course.  But, in the past, China’s leaders have tended to play the “long game.”  They’ve recognised there’s no point in winning a battle only to lose the war.  If the good times are to be exploited, the bad ones have to be survived.

Accommodation might, therefore, become the order of the day:  a voluntary programme of export restraint in key areas (but largely unrestricted access in others); a huge reva­lu­ation of the yuan; and a massive increase in foreign aid.

Near term, China is certainly vulnerable.  Its economy could crash and its politics dissolve into anarchy.  But there’s a better than evens chance that it’ll ride the storm; tossed by the waves, but not sunken by them.   In such circumstances, the long-term future could still be Chi­na’s:  the wheel having turned full circle—its virtuosity two millennia ago, reborn in the decades ahead.

Global Recession Likely

September 6, 2011

Global recession in 2012 is “65 to 75 percent certain” and could deteriorate into a lengthy depression.

The peak rate of growth for the world’s economy occurred more than 12 months ago and “it carries on going down,” Nightingale said. “We are probably going into negative territory around spring of next year; it is not for certain, but that is the most likely scenario. I would say the recession is 65 percent, 75 percent certain.”

The economist warned that should recession kick in, the global economy might be too weak to generate any GDP growth for years, or even decades.

“When the downturn ends, and when the upturn begins, will it be powerful enough to take us into some sort of growth again? Or are we going to find ourselves in a protracted depression-type scenario?” he wondered.

“Seven years would be a very short depression; depressions last a lot longer than that. I would be extremely pleased if it were to only last seven years. In Japan’s case, it lasted 20 years,” he said.

Nightingale added that the US economy has “some big pluses”, but was uncertain it was strong enough to steer the world out of a recession.

“America is very competitive at the moment, and she has a lot of advantages in finance, agriculture and many other areas. There are some big pluses in the American situation, and they are causing some growth. Whether they are going to be big enough to keep the thing going, and to bail out the rest of the world, is another issue,” he said.

But Nightingale said that Europe is in, “absolutely desperate trouble”. He warned that BRIC nations China and India might be heading in a “somewhat similar way”.

The strategist also raised concerns about the German ‘strong man of Europe’, saying its industrial production figures would plummet with Japan’s recovery from the tsunami.

“Germany is the major beneficiary of the Japanese tsunami, and as the Japanese come back on stream and production increases again, they will take their markets back from the Germans,” Nightingale said.

“Watch out very carefully for industrial production numbers falling quite significantly, perhaps from autumn of this year through to spring of next year,” he added.

 

Recession Likely

September 6, 2011

CNBC Television

30 August 2011

We have been seeing growth coming down for some time already. We are probably going into negative territory around spring of next year; it is not for certain, but that is the most likely scenario.

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