Honestly, Nobody Still Has A Clue

By John Richardson

JUST as the West was lucky, so was China. The Chinese economy was also buoyed by the Babyboomers, and by its 2001 admission to the World Trade Organisation that enabled it to greatly increase its role as the workshop of the world.

This came at the cost of impoverished factory workers, environmental degradation, overcapacity across many industries and a potentially economically-crippling bad-debt problem.

Now China seems to be running short of luck as the economy slows. We think that this is, in part, why there has been a great deal of commentary about the supposed weaknesses of its new set of political leaders since last week’s handover took place.

The truth, however, is likely to be far more nuanced, more complex – and, quite, frankly, at this stage, as was the case back in September, nobody has a clue over how the new leaders will perform because of the opacity of the political system.

As a result, nobody, if they were being honest, equally has a clue about how China will look in 5-10 years. Will it continue to thrive or will it fail to escape the “middle-income trap”?

 

20120331_WOC698.png“The forces of economic convergence are powerful, but not all powerful,” writes The Economist blog.

“Poor countries tend to grow faster than rich ones, largely because immitation is easier than invention. But this does not mean that every poor country of five decades ago has caught up (see the above chart from the Febuary 2012 World Bank report on China).

“The chart plots each country’s income per person (adjusted for purchasing power) relative to that of America, both in 1960 and 2008.

“If every country had caught up, they would be all found in the top row. In fact, most of the countries that were middle income in 1960 remained so in 2008 (the middle cell of the chart). Only 13 countries escaped this middle-income trap, becoming high income countries in 2008 (top-middle).”

And, ironically, as you can see, one of the countries that did escape the trap was Greece.

The only thing that is clear is that old certainties have gone in China, and they have also disappeared in Europe and the US.

As Mark Garrett, CEO of Borealis, said last week on Europe: “I believe Europe has entered a 10-year stagnation period, just like the Japanese have suffered, and we can’t expect [Mario] Draghi at the European Central Bank to fly in like Superman and rescue all of the politicians who aren’t prepared to make any fiscal or structural changes to the economy.

“The impact of each additional monetary measure is that each time Mario Draghi prints more money, the bang for his buck goes down, so until we get to a situation where we’re prepared to make the fiscal and structural changes, that will continue”.

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