China’s OBOR Creates “Win, Win” Demographic Solutions…

China, Company Strategy, Economics, Environment, Sustainability, Technology, US

…and in the process, it could radically reshape global geopolitics, economic growth patterns and chemicals trade flows

OBORDemographics

By John Richardson

THE above map, from this excellent FT Beyondbricks blog post by Paul Hodges and Daniël de Blocq van Scheltinga, illustrates why demographics always drive economic growth. If you don’t follow and understand demographics, you won’t understand economics.

Countries on the route of China’s One Belt, One Road (OBOR) fall into two major categories – those with a potential economic deficit of an ageing population, and those with a potential economic dividend of a youthful population.

The key for each OBOR country is to of course either avoid economic damage from too many old people, or avoid wasting the economic opportunities presented by a youthful population.

For example, China’s median age is 37 today but will be at 43 by 2030. Its population is rapidly ageing, which often happens as an economy develops. But the One Child Policy has brought ageing forward, creating the risk that China becomes an old country before it is rich in the Western sense of being rich.

Tanzania is, as you can see, at the other end of the scale with a median age of just 17 – and at the other end of the scale of economic development. In 2016, China’s per capita GDP was ranked as being the 75th highest country in the world by the World Bank at $8,260. Meanwhile, Tanzania was 158th at just $960

This is reflected in chemicals and polymers consumption. In 2016, for instance, high-density PE consumption (HDPE) was less than 1kg per person in Tanzania, whereas in China it was 13.9kg, according to the ICIS Consulting Supply & Demand database.

The east African country has the potential to benefit from outsourcing of low- value Chinese manufacturing that can no longer stay in China because of rising Chinese labour costs. Higher labour costs are a result of China’s ageing population.

First things first, though. As of 2015, only around 20% of Tanzania’s roads were paved, and as the FT writes: “Tanzania’s main roads are pretty good. But deep in the countryside the roads become narrow, turn to mud or disappear altogether.”

This is where China can help through investments in better road and rail links, enabling its uncompetitive manufacturing to be outsourced to Tanzania.

And/or the focus might be on agriculture. As the same FT article points out, poor roads and lack of access to refrigeration mean that food produced in Tanzania often rots before it gets to markets.

China can also provide plastic irrigation pipes to Tanzania, made from polyethylene (PE) resin which will be either made in new plants in China or in new plants in the Middle East (all of the Middle East is in the OBOR region), where there are of course cheap feedstocks to make PE. Today, nearly all the irrigation in Tanzania is by rainwater only.

If China supports the Tanzanian economy in the ways described above, it is hard to see why Tanzania would buy its plastic irrigation pipes, and its plastic products in general, from anywhere else other than the OBOR region.

Tanzania has vast potential to grow its agricultural sector, and thus creates lots of jobs for one of the world’s fastest-growing populations.

Meanwhile, China will realistically probably never be able to fully fix it soil-pollution problem, which would today cost $1,000 trillion to solve using existing technologies – more than the entire wealth of the world.

So it has to find safe overseas alternative sources of food. Safer food, air and water are crucial for retaining the middle class educated people that China needs to retain if it is going to escape its middle-income trap.

I plan to work my way around this map, country-by-country, picking out other “win, win” situations for China and fellow OBOR members.

In the process, this will obviously lead to me to more economically important relationships than the one between China and Tanzania. This will be the subject of future blog posts as I build towards a new research paper on how the OBOR could reshape global chemicals trade and global economic growth.

What China is essentially doing is a Marshall Plan on steroids, a replica on a much-bigger scale of the investment that the US poured into Western Europe at the end of the Second World War.

What the US ended up doing was creating vast new markets of its chemicals, its polymers and its manufactured goods.

The Marshall Plan also provided the US with great geopolitical stability and influence, and eventually led to the West’s Cold War victory over the Soviet Union.

The collapse of the Soviet Union then led to big new economic opportunities for Western economies as the Former Soviet Union economies were integrated into the global economy.

Today, though, the US is at risk of withdrawing from, or at least fatally damaging, many of its established geopolitical relationships because of President Trump’s “America First” policy.

In practice, we don’t know how this will play out.

Perhaps Mr Trump’s election campaign promises will moderate to the point where today’s geopolitical order remains in place, with the US staying charge.

Or maybe the US will build a stronger relationship with China through, say, becoming a major participant in the OBOR. In so doing, the US could reshape geopolitics whilst still retaining its prominent role.

But with change comes risk. Every chemicals and polymers company therefore needs to place increased geopolitical risk at the core of their strategic planning.

And one outcome at the end of all this upheaval is China emerging as the dominant global economic and geopolitical superpower.

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