Wednesday, January 05, 2011

Teeter totter

England swings like a pendulum do,
Bobbies on bicycles, two by two,
Westminster Abbey the tower of Big Ben,
The rosy red cheeks of the little children.

-- Roger Miller

The rise and fall of nations is an old tale. And if history is any guide to the future, will continue to be the pendulum by which England, China, Russia, France, Spain, Japan, Greece, Persia, India and the USA also swing. And others yet to come.

The pendulum, as does a teeter-totter, passes through an equilibrium before careening on to a point of return. Sort of like the economic/business cycle.

Guambat has been wondering of late if the USA is approaching its point of equilibrium after having reached a high point of return?

At the risk of being tarred and feathered as Malthusian, he bases this worry on demographics. Is it any coincidence that the longest/strongest bull run in USA history coincides with the maturing of the baby boomers? Is the great bull run simply an unprecedented healthy and wealthy population bulge that turbo charged the consumer-driven economy? If not, then might the pendulum swing the other way with the aging of them? Think Japan (see, Getting a bit long in the ha), a population hit by the ray gun in "Honey, I Shrunk the Kids".

Adding to this worry are two stories in the Financial Times this weekend:

In the grip of a great convergence By Martin Wolf
Convergent incomes and divergent growth – that is the economic story of our times. We are witnessing the reversal of the 19th and early 20th century era of divergent incomes. In that epoch, the peoples of western Europe and their most successful former colonies achieved a huge economic advantage over the rest of humanity. Now it is being reversed more quickly than it emerged.

What is unprecedented this time is not convergence, but the scale. Suppose China were to follow Japan’s path during the 1950s and 1960s. Then it would still have 20 years of very fast growth in front of it, reaching some 70 per cent of US output per head by 2030. At that point, its economy would be a little less than three times as large as that of the US, at PPP, and larger than that of the US and western Europe combined.

China is today where Japan was in 1950, relative to US levels at that time. But its output per head is far higher in absolute terms, since US levels have themselves risen threefold. Today, China’s real GDP per head is roughly where Japan’s was in the mid-1960s and South Korea’s in the mid-1980s. India’s are where Japan was in the early 1950s and South Korea in the early 1970s.

In short, today’s divergent rates of growth between successful emerging economies and the high-income economies reflects the speed of the convergence of incomes between them. This divergence in growth is staggering.

The great convergence is a world-transforming event. Today, the west – defined to include western Europe and its “colonial offshoots” (the US, Canada, Australia and New Zealand) – contains 11 per cent of the world’s population. But China and India contain 37 per cent. The present position of the former group of countries will not be sustained. It is a product of the great divergence. It will end with the great convergence.
Asia: the rise of the middle class By David Pilling, Kathrin Hille and Amy Kazmin
Until recently, many economists were openly sceptical about the idea that China, or any other emerging Asian economy, could spirit a sizeable consuming class from the mass of poverty at the base of the social pyramid. But that scepticism is beginning to fade.

This year could be the one when talk of Asia’s export-led development begins to give way to a realisation that much of the region’s future growth will be self-generated. That could even begin to address the global imbalances resulting from Asia’s export-led model that have been at the heart of the global financial crisis.

Not only in China but in countries including India, the world’s second most populous; Indonesia, a fast-growing nation of 240m; and Vietnam, 85m-strong and following in China’s developmental footsteps, the consuming class is beginning to grow. Even in less obviously successful economies such as the Philippines, which has a population of nearly 95m, years of steady if sub-optimal growth are creating pockets of broader affluence.

The emergence of a middle class in Asia beyond the prosperity that already exists in Japan, South Korea, Taiwan, Singapore and Hong Kong will have far-reaching consequences. With growth likely to be anaemic in Europe and possibly America for many years to come, businesses from food to insurance are desperate for new consumers with money to spend. Many may find the opportunity they need in Asia.

In truth, it is not so much a worry as a wonder. A wonder of what that world will look like. A wonder of what its consequence might be for Mrs and Mr Guambat, and their kids and generations. A wonder more filled with a yearning to participate than a fear of loss, but not devoid of the latter, either.

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