A Game of Catch-Up: The World Economy

S p e c i al r e p or t
T he world economy
September 24th 2011
A game of catch-up
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A game of catch-up
QUARRY BANK MIII is a handsome hvesloiey hiick huilding sel in lhe
valley ol lhe iivei Bollin al Slyal, a small English village a lev miles soulh
ol Mancheslei. Il vas huill in I)8( hy Samuel Gieg, a meichanl, vho
lound piohl in supplying collon lhiead lo Iancashiies veaveis. The iav
collon shipped liom Ameiicas slave planlalions vas piocessed on lhe
lalesl machineiy, Richaid Aikviighls valei liame. Ialei Gieg exlended
lhe lacloiy and inslalled coalhied sleam engines lo add lo lhe valei
povei liom lhe Bollin. All lhis gave a huge hoosl lo pioduclivily. In I)oo a
spinslei vilh a pedaldiiven spinning vheel mighl lake zoo houis lo pio
duce a pound ol yain. By lhe I8zos il vould lake hei aiound an houi.
Giegs mill vas pail ol a ievolulion in indusliy lhal vould pio
loundly allei lhe voilds pecking oidei. The nev lechnologies-lahoui
saving invenlions, lacloiy pioduclion, engines poveied hy lossil luels-
spiead lo olhei pails ol veslein Euiope and lalei lo Ameiica. The eaily
indusliialiseis (along vilh a lev lale developeis, such as }apan) veie
ahle lo lock in and huild on lheii lead in lechnology and living slandaids.
The gieal diveigence helveen lhe Vesl and lhe iesl lasled loi lvo
cenluiies. The mill al Slyal, once one ol lhe voilds laigesl, has hecome a
museum. A lev looms, poveied hy lhe mills valei vheel, slill pioduce
lea lovels loi lhe gill shop, hul collon pioduclion has long since moved
ahioad in seaich ol lov vages. Nov anolhei hisloiic change is shaking
up lhe glohal hieiaichy. A gieal conveigence in living slandaids is un
dei vay as pooiei counliies speedily adopl lhe lechnology, knovhov
and policies lhal made lhe Vesl iich. China and India aie lhe higgesl and
lasleslgioving ol lhe calchup counliies, hul lhe emeigingmaikel
hoom has spiead lo emhiace Ialin Ameiica and Aliica, loo.
And lhe pace ol conveigence is incieasing. Dehliidden iich coun
liies such as Ameiica have seen scanl giovlh since lhe hnancial ciisis.
The emeiging economies, having escaped lhe cainage vilh only a lev
culs and giazes, have spenl much ol lhe pasl yeai liying lo check lheii
economic hooms. The IMFloiecasls lhal emeiging economies as a vhole
vill giov hy aiound loui peicenlage poinls moie lhan lhe iich voild
The shift in economic power from West to East is accelerating, says
John OSullivan. The rich world will lose some of its privileges
The Economist September 24th 2011 1
SPECIAL REPORT
THE WORLD ECONOMY
1
A C K N O WL E D G ME N T S
C O N T E N T S
In addition to those named in
the text, the author would
like to thank the following for
their generous help: Marcelo
Carvalho, Robert Ellison,
Stephen King, Guilherme da
Nbrega, Eswar Prasad,
Kenneth Rogo, Mary Rose
and Alan Taylor.
A list of sources is at
Economist.com/specialreports
An audio interview with
the author is at
Economist.com/audiovideo/
specialreports
3 Becoming number one
When will Chinas
economy overtake
Americas?
5 Converging economies
One-track bind
8 Reserve currencies
Greenback mountain
12 Commodities
Crowded out
13 Exporting jobs
Gurgaon grief
15 South-north FDI
Role reversal
16 Beefed up
Brazils meat giant
17 The path ahead
Cottoning on
0 20 40 60 80 100
Official foreign-exchange reserves, Q2 2011
Rich world
$3.2trn
Emerging world
$6.5trn
Breakdown by currency
Allocated reserves, Q2 2011, %
$
Other
1.8
1.1
1.3
2.0
10.6
8.0
4.9
5.8
4.3
6.8
4.6
3.9
3.1
5.5
2.2
4.7
0.6
Population
2010, bn
Canada
0.03
United States
0.31
Mexico
0.11
Brazil
0.20
Britain
0.06
Japan
0.13
India
1.23
China
1.34
Russia
0.14
Sub-Saharan
Africa
0.80
CIS*
0.14
Central &
E. Europe
0.18
Euro area
0.33
Indonesia
0.24
Australia
0.02
Middle East
& N. Africa
0.42
Latin America
& Caribbean
0.28
GDP growth, 2001-11, %
2011 forecast
0
1
5
10
GDP per person, 2010, PPP $'000
RICH WORLD EMERGING WORLD
>40 35-40 10-16 5-10 <5 30-35
*Commonwealth of
Independent States
Sources: IMF; UN; The Economist
holh lhis yeai and nexl. Il lhe lund is pioved iighl, hy zoI{ emeig
ing maikels (on lhe IMFs dehnilion) vill pioduce moie lhan hall
ol glohal oulpul, measuied al puichasingpovei paiily (PPP).
One sign ol a shill in economic povei is lhal inveslois ex
pecl liouhle in iich counliies hul seem conhdenl lhal ciises in
emeiging maikels vill nol iecui. Many see lhe iich voild as old,
dehliidden and oul ol ideas compaied vilh lhe young, zesllul
and highsaving emeiging maikels. The liulh is moie complex.
One ieason vhy emeigingmaikel companies aie keen loi a loe
hold in iich counliies is lhal lhe husiness climale lheie is lai
liiendliei lhan al home. Bul lhe iecenl succession ol hnancial
hlovups in lhe iich voild makes il seem moie ciisispione.
The Ameiican suhpiime mess lhal luined inlo a hnancial
disaslei had lhe hallmaiks ol a developingvoild ciisis. laige
capilal inovs channelled hy pooily iegulaled hanks lo maigin
al hoiioveis lo hnance a piopeily hoom. The speed al vhich
hond inveslois luined on Gieece, Iieland and lhen Poilugal vas
ieminiscenl ol a iun on an oveihoiioved emeiging economy.
Because lheie is as yel no ieliahle and liquid hond maikel
in lhe emeiging voild lo ee lo, scaied inveslois pul lheii money
inlo US Tieasuiy honds and a lev olhei iichcounliy havens in
slead. So lev aie lhe oplions lhal even a ialings dovngiade ol
Ameiican goveinmenl dehl in Augusl spuiied huying ol lhe de
iided Tieasuiies. Indeed lhe lhiisl in emeiging maikels loi such
sale and liquid secuiilies is one ol lhe deepei causes ol lhe seiies
ol ciises lhal has amicled lhe iich voild. Developing counliies
houghl iichvoild goveinmenl honds (sloied as cuiiency ie
seives) as insuiance againsl luluie ciises. Those puichases
pushed dovn longleim inleiesl iales, helping lo sloke a hoom
in piivale and puhlic ciedil.
Todays lalleiing GDPgiovlh is a hangovei liom lhal hoom
and adds lo lhe sense ol malaise in lhe iich voild. Many house
holds in Ameiica, Biilain and elsevheie have laken lo saving
haid lo ieduce lheii dehls. Those vilh spaie cash, including com
panies, aie clinging on lo il as a hedge againsl an unceilain lu
luie. A nev hieed ol emeigingmaikel mullinalional hims, used
lo a lough husiness climale al home, seem keenei lo invesl in lhe
iich voild lhan mosl Veslein hims, vhich have losl lheii mojo.
Grandeur and decline
People vho giev up in Ameiica and veslein Euiope have
hecome used lo lhe idea lhal lhe Vesl dominales lhe voild
economy. In lacl il is anomalous lhal a gioup ol {oodd counliies
vilh a small liaclion ol lhe voilds populalion should he calling
lhe shols. Ioi mosl ol human hisloiy economic povei has heen
deleimined hy demogiaphy. In I)oo lhe voilds higgesl econ
omy (and leading collon pioducei) vas India, vilh a populalion
ol I6m, lolloved hy China, vilh I{8m. Biilains 8.6m people
pioduced less lhan { ol lhe voilds oulpul. Even in I8zo, as lhe
indusliial ievolulion in Biilain vas galheiing pace, lhe lvo
2 The Economist September 24th 2011
THE WORLD ECONOMY
SPECIAL REPORT
2
1
SPECIAL REPORT
THE WORLD ECONOMY
Asian gianls slill accounled loi hall lhe
voilds GDP.
The spiead ol puiposehuill manu
lacloiies like Quaiiy Bank Mill sepaialed
economic povei and populalion, incieas
ingly so as lhe Vesl gol iichei. Being ahle
lo make a lol moie slu vilh levei voik
eis meanl lhal even a small counliy could
he a gianl economic povei. By I8)o lhe av
eiage income in Biilain vas six limes laig
ei lhan in India oi China. Bul hy lhe eve ol
lhe hisl voild vai Biilains income pei
head had heen oveilaken hy lhal ol
Ameiica, lhe zolh cenluiys gieal povei.
Ameiica iemains lhe voilds higgesl
economy, hul lhal slalus is undei lhieal
liom a iesuigenl China. Vilh hindsighl, ils
change in loilune can he liaced lo I,)6, lhe
yeai ol Ameiicas hicenlennial and lhe
dealh ol Mao Zedong. By lhen income pei
peison in China had shiunk lo jusl ol
lhal in Ameiica, in pail hecause ol Maos
exlieme indusliial and social policies.
The aveiage Indian vas scaicely
iichei lhan lhe aveiage Chinese. Bolh Chi
na and India had luined invaid, culling
lhemselves o liom lhe ov ol ideas and
goods lhal had made }apan and olhei less
populous Asian economies iichei. Indias
economy, like Chinas, vas laigely closed.
Huge svalhes ol indusliy veie piolecled
liom loieign compelilion hy high impoil
laiis, leaving lhem moiihund.
China vas hisl lo ieveise couise. In
I,)8 Deng Xiaoping von appioval loi a
sel ol economic ieloims lhal opened Chi
na lo loieign liade, lechnology and invesl
menl. Indias hig liheialisalion came a lil
lle lalei, in I,,I. The GDP ol China and
India is many limes higgei nov lhan il
vas in lhe midI,)os. In holh economies
annual giovlh ol 8 oi moie is consid
eied noimal. Aveiage living slandaids in
China aie slill only a sixlh and in India a
louileenlh ol lhose in Ameiica al PPP ex
change iales, hul lhe gap is alieady much
smallei lhan il vas and is closing lasl.
Moieovei, lhe gieal conveigence has
spiead heyond India and China. Thiee
quaileis ol higgish nonoilpioducing pooi counliies enjoyed
laslei giovlh in income pei peison lhan Ameiica in zoooo),
says Aivind Suhiamanian, ol lhe Peleison Inslilule loi Inleina
lional Economics, in his nev hook, Eclipse. Iiving in lhe Shad
ov ol Chinas Economic Dominance. This compaies vilh z,
ol such counliies in I,6ozooo. And lhose economies aie calch
ing up al a laslei iale. aveiage giovlh in GDP pei peison vas {.{
peicenlage poinls laslei lhan Ameiicas giovlh iale in zoooo),
moie lhan lvice lhe dieience in lhe pievious loui decades.
Il emeiging maikels keep on gioving lhiee peicenlage
poinls a yeai laslei lhan Ameiica (a conseivalive eslimale), lhey
vill accounl loi lvolhiids ol lhe voilds oulpul hy zo{o, ieck
ons Mi Suhiamanian. Todays loui mosl populous emeiging
maikels-China, India, Indonesia and Biazil-vill make up lvo
hllhs ol glohal GDP, measuied al PPP. The comhined veighl in
lhe voild economy ol Ameiica and lhe Euiopean Union vill
shiink liom moie lhan a lhiid lo less lhan a quailei.
Economic calchup is acceleialing. Biilains economy dou
hled in size in lhe {z yeais liom I8{o lo I86z as incieased pioduc
livily spiead liom collon lo olhei indusliies. Ameiicas GDP
douhled in only I) yeais as il oveilook Biilain in lhe I8)os. The
economies ol China and India have douhled vilhin a decade.
This is cause loi oplimism. An Indian vilh a hasic college
educalion has access lo voildclass goods lhal his paienls (vho
mighl have saved loi decades loi a spulleiing scoolei) could only
have dieamed ol huying. The iecenl leap in incomes is visihle in
Chinese cilies, vheie lhe cais aie nev hul lhe hicycles look an
cienl, and in lhe luluiislic skyline ol Shanghais hnancial disliicl.
China is slill a laiily pooi counliy hul, hy dinl ol ils laige
populalion, il is alieady lhe voilds secondlaigesl economy
measuied in cuiienl dollais. Il may oveilake Ameiica as lhe
voilds leading economy vilhin a decade (see hox), a piospecl
IN 2010 CHINA shot past Japan to become
the worlds second-largest economy (based
on current market prices). But when might
it supplant America at number one? The
answer depends on how the exchange rates
are calculated. The IMFs forecasts and the
long-run tables of GDP compiled by the late
Angus Maddison, an economic historian,
are based on purchasing-power parity
(PPP), which makes allowances for the lower
prices of non-traded services in poorer
countries. On that basis, the size of Chinas
economy is already close to Americas and is
likely to overtake it by 2016.
China is further behind when its
economy is measured in current dollars
(and much further in terms of GDP per
person). Americas GDP in 2010 was $14.5
trillion at current market prices; Chinas
was $5.9 trillion. How quickly the gap is
closed depends on three things: the relative
speed of real GDP growth in China and Amer-
ica respectively; the ination gap between
the two economies; and the rate at which
the yuan rises or falls against the dollar.
The Economist has crunched the
numbers and found that, based on reason-
able assumptions about these three vari-
ables, China could overtake America in the
next decade. Its economy has grown by an
average of more than 10% a year over the
past ten years. As the country gets richer
and its working-age population starts to
shrink, that growth rate is likely to tail o
to perhaps 8% soon. For the American
economy the calculation assumed an aver-
age annual growth rate of 2.5%.
Ination tends to be higher in fast-
growing emerging economies than in
slow-growing rich ones. This is because of
Becoming number one
Chinas economy could overtake Americas within a decade
the Balassa-Samuelson eect, named for
the two economists who rst explained it.
Fast productivity growth in export in-
dustries raises average wage costs across
the economy, including in non-traded
services where productivity is sluggish. That
in turn pushes up average ination. Our
projection assumes a 4% ination rate in
China compared with 2% in America.
The third factor is the exchange rate.
To sustain its catch-up with America, China
needs to rebalance its economy away from
exports towards consumer spending, which
will require a rise in its real exchange rate.
Some of this will come from having a higher
ination rate than its trading partners. But
Chinas large current-account surplus and
Americas big decit also suggest that the
yuan will have to become much stronger
and the dollar much weaker. We have al-
lowed for an extra 3% annual rise in the
yuan against the dollar on top of the in-
ation gap of two percentage points.
That implies a slight slowdown in
the yuans recent appreciation.
If all this comes to pass,
Chinas economy will be
bigger than Americas by
2020. On a dierent set of
assumptionsa Chinese
growth rate of 6%, an American
one of 3% and an appreciation of
the yuan of 2% a yearthe date
slips to 2024. Or you can make
your own predictions, using the
interactive chart on The Econo-
mists website, by going to
http://www.economist.com/
blogs/dailychart/2010/12/
save_date.
2
1
THE WORLD ECONOMY
SPECIAL REPORT
2 lhal has given iise lo many conceins in lhal counliy. Moie genei
ally, lheie aie voiiies ahoul vhal lhe ascendancy ol emeiging
maikels vould mean loi johs, pay and hoiioving cosls in lhe
iich voild.
The hisl voiiy is ahoul diiecl compelilion loi lhings lhal
aie in moie oi less hxed supply. geopolilical supiemacy, lhe
voilds oil and iav maleiials, lhe slalus and peiks lhal come
vilh heing lhe issuei ol a liusled inleinalional cuiiency. Ioi
mosl people, mosl ol lhe lime, lheii counliys ianking in leims ol
mililaiy povei is nol a hig issue. The emeiging voilds hungei
loi naluial iesouices, on lhe olhei hand, has made iichvoild
consumeis palpahly voise o hy pushing up lhe piices ol oil
and olhei commodilies. The yuans incieased use heyond Chi
nas hoideis is a (slill dislanl) lhieal lo lhe dollais cenlial iole in
liade and inleinalional hnance, hul il lhe dollai veie evenlually
shoved aside, il vould make Ameiicans pooiei and iaise lhe cosl
ol lheii hoiioving.
A second sel ol anxielies ielales lo joh secuiily and pay.
Evei sliongei liade links helveen iich and vouldhe iich coun
liies vill mean a ieshume in lhe division ol lahoui aiound lhe
voild, ciealing nev johs and deslioying oi displacing exisling
ones. Iovskilled manulacluiing and middleskilled seivice
johs lhal can he deliveied eleclionically have heen oulsouiced lo
cheapei supplieis in China, India and elsevheie (indeed, China
is nov iich enough lo he vulneiahle lo losing johs lo Vielnam
and Indonesia). The lhieal ol oulsouicing puls dovnvaid pies
suie on pay, lhough mosl Ameiican sludies suggesl lhal liade ac
counls loi only a small pail ol lhe inciease in vage inequalily.
A lhiid concein, vhich is al odds vilh lhe hisl lvo, is lhal
lhe emeiging maikels aie pione lo ciises lhal can cause a slill
liagile voild economy lo slumhle. Sluggish GDP giovlh in lhe
iich voild means developing counliies have lo lall hack on inlei
nal spending, vhich in lhe pasl lhey have nol managed vell. Il
iaises lhe iisks ol lhe oveispending, excessive ciedil and inalion
lhal have spuiied pasl emeigingmaikel ciises. Even il ciises aie
avoided, emeiging maikels aie pione lo sudden slovdovns as
lhey hecome iichei and lhe liick ol shilling undeiemployed iu
ial migianls lo uihan johs hecomes haidei lo iepeal. The iapid
giovlh iales ol lhe iecenl pasl aie unlikely lo he suslained.
Status anxiety
Iev loiecasleis expecl Ameiica lo he a pooiei place in len
oi zo yeais lime lhan il is nov. The piesenl may he giim, hul
evenlually lhe hangovei liom lhe hnancial ciisis vill lade and
unemploymenl vill lall. Vhal iich Veslein counliies lace is a
ielalive economic decline, nol an ahsolule lall in aveiage living
slandaids (lhough a lev ol lheii cilizens may hecome voise o).
Thal malleis polilically, hecause mosl people measuie lheii vell
heing hy hov lhey aie doing in ielalion lo olheis ialhei lhan hy
lheii ahsolule level ol income.
The eecl ol lhe loss ol lopdog slalus on lhe vellheing ol
lhe aveiage Ameiican is unlikely lo he liivial. Biilain lell similai
angsl al lhe heginning ol lhe zolh cenluiy, noling lhe iise ol Gei
many, a mililaiy iival. Il seemed sluck vilh old indusliies, such
as lexliles and iion, vheieas Geimany had advanced inlo helds
such as elecliicals and chemicals. Thal Biilain vas slill vell o in
ahsolule leims vas scanl consolalion. The nalional mood con
liasled slaikly vilh lhe liiumphalism ol lhe midI,lh cenluiy,
says Nicholas Cialls ol Vaivick Univeisily. A vave ol piolec
lionisl senlimenl challenged lhe lieeliade consensus lhal had
pievailed since I8(6. Il vas seen o, hul nol heloie il had splil lhe
Toiy paily, vhich losl lhe I,o6 eleclion lo lhe Iiheials.
No counliy, oi gioup ol counliies, slays on lop loievei. His
loiy and economic lheoiy suggesl lhal soonei oi lalei olheis vill
calch up. Bul lhis special iepoil vill caulion againsl ielying on
lineai exliapolalion liom iecenl giovlh iales. Inslead, il vill sug
gesl lhal lhe lianslei ol economic povei liom iich counliies lo
emeiging maikels is likely lo lake longei lhan geneially expecl
ed. Rich counliies vill he cuised indeed il lhey cannol pul on an
occasional giovlh spuil. China, loi ils pail, vill he lucky lo
avoid a had slumhle in lhe nexl decade oi lvo. Emeigingmaikel
ciises have heen loo quickly loigollen, vhich only makes lhem
moie likely lo iecui.
Educalion and social secuiily vill have lo adapl lo a voild
in vhich johs conlinue lo he ciealed and displaced al a iapid
iale. The cosl ol oil and olhei commodilies vill conlinue lo iise
laslei lhan piices in geneial, shilling lhe leims ol liade in lavoui
ol iesouiceiich counliies and avay liom hig consumeis such as
Ameiica. The yuan vill evenlually hecome an inleinalional cui
iency and iival lo lhe dollai. The longei lhal lakes, lhe less pies
suie Ameiica vill leel lo conliol ils puhlic hnances and lhe likeli
ei il is lhal lhe dollais eclipse vill he ahiupl and messy.
The loice ol economic conveigence depends on lhe in
come gap helveen developing and developed counliies. Going
liom pooi lo less pooi is lhe easy pail. The liickiei hil is making
lhe jump liom middleincome lo ieasonahly iich. Can China
and olheis manage il! 7
1
VITH A MAXIMUM speed ol ({okph (z6)mph), lhe
Shanghai magneliclevilalion (oi maglev) liain is as much
laiigiound iide as vilal cog in lhe cilys lianspoil syslem. A
slielch ol lhe {okm liack liom Iongyang Road lo Pudong Inlei
nalional Aiipoil iuns alongside a moloivay. The speeding cais
lell hehind aie a guide lo hov lasl lhe liain is moving. Ioi pas
sengeis vho like lo quanlily lheii lhiills, a digilal speedomelei
in each caiiiage counls up lhe liains acceleialion lo ils lop speed
heloie lhe numheis lumhle again as lhe liain slovs lovaids lhe
aiipoil leiminal.
The Shanghai maglev is a poveilul symhol ol Chinas mo
deinily-even il lhe lechnology vas developed in lhe I,6os in
slovcoach Biilain and lhe kil vas made hy Siemens, a Geiman
engineeiing him. Bul lhe venluie is nol a moneyspinnei. On a
midsummei alleinoon, lhe liain is hallemply and many ol ils
occupanls aie louiisls liavelling jusl loi lun. Thal is hecause, loi
all ils impiessive speed, lhe maglev is nol a gieal vay lo gel lo oi
liom lhe aiipoil. Tickels aie loo piicey loi all hul iich husiness
lolk and loieign louiisls, and lhose cuslomeis hnd lhe line incon
venienl. Once lhey alighl al Iongyang Road lhey aie slill some
vay liom lhe hnancial disliicl and lhe hesl holels.
Sceplics ahoul Chinas economic miiacle see lhe Shanghai
shullle as an example ol hov hadly slalediiecled hanks allocale
capilal. China invesls some o ol ils GDP, moie lhan douhle lhe
aveiage in iich counliies. The hig capilal piojecls ol slaleovned
enleipiises, such as iailvays, ieceive lunding on easy leims, hul
inleiesl iales paid on hank deposils aie capped. A syslem lhal la
vouis ceilain hoiioveis ovei oidinaiy saveis oi hank shaie
holdeis is hound lo hack illjudged piojecls and iun up had
dehls, aigue lhe heais. A collision helveen lvo highspeed
liains in China on }uly z{id, vhich killed (o and lell I,I injuied,
seemed only lo conhim lhose suspicions.
Lets leapfrog
Bul lheie is a kindei inleipielalion ol Chinas appelile loi
pieslige piojecls such as highspeed iail. Ils leadeis musl knov
lhal as an economy develops il cannol iely indehnilely on copy
ing lhe machineiy and knovhov ol iichei counliies. The hel
leio a counliy hecomes, lhe closei ils lechnology is lo hesl
piaclice and lhe levei ol ils voikeis aie lell in lovpioduclivily
johs such as laiming. The easy calchup gains aie exhausled and
lhe economy slovs oi gels sluck. One vay oul ol lhis middlein
come liap is hy liying lo leapliog lhe lechnology leadeis.
Chinas iecenl giovlh has heen so impiessive lhal il seems
chuilish lo queslion vhelhei il can conlinue. Yel lhe counliy vill
hnd il moie dimcull lo giov quickly as il hecomes iichei, as vill
India and Biazil. All lhiee hig emeiging maikels need lo hnd
vays lo avoid lhe inalion lhal has hedevilled developing coun
liies in lhe pasl, and lo sliike a good halance helveen consump
lion and inveslmenl, loieign and domeslic demand.
Chinas ieliance on expoils and on inveslmenl lhal sup
poils expoil indusliies has ieached ils limils. The counliy nov
needs lo shill lhe halance lovaids domeslic demand, vhich ie
quiies capilal lo he iediiecled lovaid lhe smallei enleipiises
lhal seive consumeis. Biazil is almosl lhe miiioi image ol China.
Il has a lhiiving consumei economy vhich il is hnding haid lo
keep in check. Ils high inleiesl iales discouiage lhe inveslmenl
spending il needs lo impiove ils pooi pioduclivily iecoid. And il
needs lo make suie lhal lhe sliong cuiiency lhal comes vilh a
hooming commodily secloi does nol leave il vilh loo naiiov an
indusliial hase. India, like Biazil, is pione lo oveihealing and has
a cuiienlaccounl dehcil, lhough lhanks lo ils high inveslmenl
iale ils pioduclivily iecoid is closei lo Chinas.
The piohlems ol middleaged developmenl vill soon al
icl China and olheis, accoiding lo ieseaich hy Baiiy Eichen
gieen ol lhe Univeisily ol Caliloinia, Beikeley, Donghyun Paik
ol lhe Asian Developmenl Bank and Kvanho Shin ol Koiea Uni
veisily. They examined middleincome counliies (vilh eainings
pei peison ol al leasl $Io,ooo in zoo piices) vhich in lhe pasl
hallcenluiy had enjoyed aveiage GDPgiovlh ol al leasl {. loi
seveial yeais hul vhose giovlh iale had suhsequenlly lallen hy
al leasl lvo peicenlage poinls. The ieseaich conhimed lheii
hunch lhal lhe loss ol momenlum is moslly due lo economic
maluiily ialhei lhan a shoilage ol voikeis oi a slackening in in
veslmenl. The voikloice giev al lhe same iale allei lhe slov
dovn as heloie il, and ils qualily kepl impioving. indeed lhe av
eiage voikei acquiied skills al a slighlly laslei iale allei lhe
economy had sloved. The inciease in physical capilal (lacloiies,
omces, ioads, machines and so on) lailed o, hul lhis accounled
loi only a small liaclion ol lhe
diop in GDP giovlh.
Inslead, mosl ol lhal diop
vas caused hy a slump in lolal
lacloi pioduclivily-lhe em
ciency vilh vhich voikeis and
capilal aie used. Giovlh slov
dovns, in a nulshell, aie pio
duclivilygiovlh slovdovns,
viile Mi Eichengieen and his
colleagues. A decline in lolal
lacloi pioduclivily is vhal you
vould expecl vhen lhe easy
phase ol economic develop
menl comes lo a close. Moving
undeiemployed villageis inlo
uihan johs in lacloiies and ol
hces vilh impoiled equipmenl
Converging economies
One-track bind
To become rich, the emerging markets must spring
the middle-income trap
Great fall of China
Source: CEIC
Chinese household
consumption as % of GDP
0
20
40
60
80
1952 70 80 90 2000 10
1
SPECIAL REPORT
THE WORLD ECONOMY
2
1
iaises pioduclivily. Bul as iuial slack is used up lheie aie no moie
such gains lo he had.
Accoiding lo lhe lhiee economisls, lhis soil ol slovdovn is
mosl likely lo happen vhen aveiage income ieaches aiound
$I6,ooo in zoo piices, vhen income pei peison iises lo 8 ol
lhal in lhe voilds leading economy, oi vhen lhe shaie ol em
ploymenl in manulacluiing gels lo z{. Those lhiee lhiesh
olds-ol vhich lhe ahsolule level ol income is lhe mosl impoi
lanl-vill nol necessaiily all he ieached al lhe same lime. China
may alieady have hil lhe manulacluiing laigel, and il ils econ
omy suslains a giovlh iale ol aiound ,, lhe aveiage income
lhieshold vill soon he hieached. Bul lhe ielalive income lhiesh
old iemains lai o. In zoIo Chinas income pei peison vas I6 ol
Ameiicas, accoiding lo lhe IMF.
The ieseaich shovs lhal economies such as Chinas, vilh
an undeivalued cuiiency and a lov iale ol consumei spending,
aie moie likely lo suei such a giovlh slovdovn. These mile
slones aie hased on aveiages ol many counliies lhal lived
lhiough sudden slovdovns, and lheii expeiiences vaiied vide
ly, caulions Mi Eichengieen. These aie nol iion lavs. Even so, il
seems ceilain lhal a slovdovn vill lollov once lhe easiei pail
ol lhe calching up has heen done. The queslion is vhelhei China
can miligale lhis hy changing ils giovlh model.
Last years model
Thal model has pioved successlul in olhei pails ol Asia. Il is
expoilled, so demand has heen mainly liom ahioad. To meel il,
China has mohilised ils vasl ieseives ol cheap lahoui, lo vhich il
has added a laslgioving slock ol physical capilal, much ol il im
poiled hul hnanced liom lhe counliys ovn savings. Because ol
Chinas capilalinlensive giovlh model, consumei spending has
an unusually small shaie ol GDP. in zoIo il lell lo only {( (see
chail I, pievious page). This only adds lo lhe ieliance on expoils.
Chinas hnancial selup ieinloices lhis model. The ov ol
capilal acioss ils hoideis is heavily policed. China has cuihed lhe
iise in ils cuiiency, and kepl ils expoils compelilive, hy huying
huge quanlilies ol dollais and olhei loieign cuiiencies, amass
ing ${.z liillion ol loieignexchange ieseives, voilh ( ol Chi
nas zoIo GDP.
The hanking syslem is closely managed hy lhe slale. Ioi
eign hanks accounl loi haiely z ol lolal hank assels. The cash
ciealed lo keep lhe yuan dovn is mopped up hy loicing Chinas
hanks lo huy lovyielding sleiilisalion honds oi lo hold moie
cash in ieseive. Inleiesl iales aie sel in lavoui ol slaleovned
companies (ollen monopoly supplieis lo expoileis) hul oei lil
lle ievaid loi householdeis. Ciedil loi consumeis is slill scaice.
Chinas gioving veighl in lhe voild economy means il
cannol iely indehnilely on olhei counliies spending. The dehl
oveihang in pails ol lhe iich voild means lhal Chinas loieign
cuslomeis aie haidpiessed. And lhe counliy is a diain on de
mand liom lhe iesl ol lhe voild. ils cuiienlaccounl suiplus (a
measuie ol ils excess saving) iose ahove Io ol GDP in zoo),
lhough il has since halved. This is a souice ol lension. lhe Ameii
cans complain lhal Chinas exchangeiale policy piovides ils ex
poileis vilh an unlaii suhsidy al lhe expense ol lheii ovn voik
eis. The expoilled slialegy is also heginning lo lose ils polency.
Each iuial migianl sel lo voik on machineiy lo seive Chinas loi
eign cuslomeis is haidei lo hnd lhan lhe lasl.
Il China is lo avoid lhe middleincome liap, il needs lo de
velop ils domeslic maikel. Il musl svilch liom indisciiminalely
amassing lacloiies, poils and olhei hxed assels lo a moie hnely
giaded allocalion ol capilal and voikeis lhal allovs small sei
vice hims lo ouiish. Thal liansilion vill he helped along hy lvo
laclois. As lhe voiking populalion slails lo shiink aiound zoI,
lhe household saving iale should lall hecause counliies vilh
levei eaineis and a laigei piopoilion ol dependenls lend lo
spend moie. And China alieady devoles a higgei shaie ol ils GDP
lo ieseaich and developmenl lhan do olhei counliies vilh simi
lai income levels. Thal gives il a hellei chance ol suslaining pio
duclivily giovlh vhen lhe gains liom adopling exisling lechnol
ogies iun oul. Bul olhei lacels ol Chinas economy mililale
againsl change. Ioi example, lhe Voild Bank ianks China 6lh
oul ol I8{ counliies loi giving companies access lo ciedil, hehind
India (in {znd place).
The ohslacles aie loimidahle. Shilling lo an economy lhal
concenliales on consumeis vill mean dislocaling enliie indus
liies. Highei vages in China, vhich aie needed loi lhis soil ol ie
halancing, aie alieady diiving some lexlile johs lo Vielnam and
Camhodia. Removing implicil suhsidies lo ienls and inleiesl
iales vould cul many hims piohls and slii opposilion. Banks
used lo dishing oul capilal al lhe goveinmenls sayso vould
need lo make hnei judgmenls, vilhholding money liom indus
liies vilh lov ieluins and moving il lo piomising nev venluies.
Bul vill lhey he ahle lo lell lhe dieience helveen lhe lvo!
Biazil is lhe lexlhook example ol a laslgioving counliy
lhal hil a vall (lhough il is nol coveied in lhe sludy hy Mi Eichen
gieen and his colleagues). Ils economy giev hy an aveiage ol al
mosl ) a yeai helveen I,( and I,8o. GDPpei peison iose liom
jusl Iz ol Ameiicas lo z8, accoiding lo lhe Maddison slalislics.
Bul lhen conveigence venl inlo ieveise.
The dehls accumulaled lo pay loi impoil
ed machineiy hecame ciippling as inlei
esl iales shol up. Indusliies lhal had
seived a piolecled home maikel veie ie
vealed as inemcienl. A veak cuiiency
and vage indexalion led hisl inalion
and lhen hypeiinalion.
A seiies ol monelaiy and hscal ie
loims in lhe I,,os lamed inalion and ai
iesled lhe decline in ielalive income. Bia
zils income pei peison is nov ahove zo
ol Ameiicas level. Bul lhe economy sul
leis liom liaillies lhal aie lhe miiioiim
age ol Chinas. Inveslmenl is I, ol GDP,
vell helov Chinas and quile lov even
hy iichvoild slandaids. Thal is one iea
son vhy pioduclivily is leehle, lhough
Biazils voelul educalion syslem and de
ciepil inliasliucluie aie also lo hlame.
The economy lends lo giov al aiound (
a yeai, laslei lhan mosl iich counliies hul
moie slovly lhan Biazils emeigingmai
kel peeis.
Veak inveslmenl ieecls lov do
meslic saving. Biazil slill hahilually iuns a
cuiienlaccounl dehcil. This ieliance on
loieign capilal has lell il vulneiahle lo pei
iodic halanceolpaymenls ciises, lhough
il has piled up ${(( hillion ol loieigncui
iency ieseives lo lend lhem o in luluie.
Biazils nel loieign liahililies (piivale and
puhlic) amounl lo $)oo hillion, compaied
vilh Chinas nel assels ol I.8 liillion.
The ip side ol Biazils lov saving is
sliong consumei spending, al 6I ol GDP
lasl yeai. The husiness ol pioviding loans
lo householdeis is hooming. This is in
pail hecause BNDES, lhe slaleovned de
velopmenl hank, piovides suhsidised
loans lo Biazils hig slalediiecled compa
Chinas
growing
weight in
the world
economy
means it
cannot rely
indenitely
on other
countries
spending
THE WORLD ECONOMY
SPECIAL REPORT
SPECIAL REPORT
THE WORLD ECONOMY
nies and lo some olhei hims. Thal limils oppoilunilies loi husi
ness lending, so piivale hanks musl look elsevheie.
Biazils economy has lvo gieal slienglhs. Ils populalion ol
voiking age is gioving quickly, and il is iich in naluial iesouices
al a lime vhen emeiging maikels aie indusliialising al an un
piecedenled iale. Biazil vies vilh Auslialia as lhe voilds laigesl
expoilei ol iion oie, much ol il lo China.
Ils plenlilul aiahle land is aslonishingly le
cund (in some places lhiee haivesls a yeai
aie possihle), lhanks lo an ample supply
ol sun and liesh valei. The suhsall ies
eivoiis o Biazils soulheaslein shoie
conlain al leasl I{ hillion haiiels ol oil.
The commodilies hoom and lhe oil
hnds have lieed Biazil liom ils liadilional
halanceolpaymenls consliainls. Ioieign money is ooding in,
luied hy Biazils high inleiesl iales and lhe expecled eainings
once lhe oil slails lo ov. Bul lhal cieales a nev piohlem. a
sliong cuiiency lhal huils lhe counliys expoileis oulside lhe ie
souice indusliies.
The lexlhook iemedy loi lhis soil ol Dulch disease is lo
iaise pioduclivily oi lovei cosls in liadahle indusliies lhal do
nol henehl liom lhe iesouice hoom. In Augusl lhe goveinmenl
said il vould aholish payioll laxes in loui lahouiinlensive in
dusliies. loolveai, clolhing, luiniluie and sollvaie. Theie is am
ple scope lo luilhei lovei lhe Biazil cosl-local shoilhand loi a
iange ol handicaps including iamshackle ioads, high inleiesl
iales, johs levies, laxes and huieauciacy.
Biazil is one ol lhe mosl oneious counliies lo do husiness
in, coming Iz)lh oul ol I8{ in lhe Voild Banks ianking. Hiiing
and hiing is coslly and closing a husiness can lake yeais. The lax
syslem is complex and hedevilled hy iules lhal ollen conicl. Il
youie honesl and vanl lo comply vilh lhe lax code, you need
an accounlanl and a lax lavyei loi lile, lamenls one So Paulo
hased economisl.
Real inleiesl iales in Biazil aie among lhe highesl in lhe
voild. The cenlial hanks henchmaik iale is Iz and may need lo
iise again lo lame inalion, vhich is vell ahove lhe laigel ol
(.. High iales aie in pail a legacy ol pasl inalion lhal pun
ished saving and ievaided hoiioving. A culluie ol saving has
yel lo lake him iool, so demand loi ciedil oulsliips supply. Iiscal
laxily has also played a pail. The economy is iunning al oi he
yond lull capacily. The johless iale is 6, il has iaiely heen lovei.
Biazils hudgel oughl lo he in suiplus. Goveinmenl dehl is iolled
ovei eveiy lhiee yeais and ciovds oul olhei hoiioving. Bul a
maikel loi longeileim dehl vould iequiie a commilmenl lo
keeping puhlicsecloi payiolls and slale pensions in check.
Biazil hopes lhal lhe oil discoveiies vill he exploiled in a
vay lhal helps olhei indusliies ialhei lhan haiming lhem. The
goveinmenl has insisled lhal Peliohias, lhe slaleconliolled oil
gianl vilh sole opeialing iighls in lhe suhsall held, musl huy
mosl ol ils supplies in Biazil.
Eike Balisla, a colouilul magnale vilh inleiesls in mining,
oil exploialion and logislics, is huilding a poil complele vilh
shipyaid (in landem vilh Hyundai, a Soulh Koiean him) lo com
ply vilh lhe localconlenl iules. The demand liom Peliohias
could hll lvo shipyaids, he says. A modein poil vill encouiage
loieign manulacluieis lo huild lacloiies along Biazils coasl and
seive lhe domeslic maikel. Biazil vill nol he liapped in com
modilies, he insisls. Bul olheis voiiy lhal Biazil is iiling vilh a
slaleinuenced and invaidlacing model ol indusliialisalion
lhal has lailed heloie.
Biazil and China need lo make dieienl soils ol liansilions
il lhey aie lo suslain lheii developmenl. Biazil has lo save and in
vesl moie, China needs lo consume moie. Biazil is iich in ie
There is ample scope to
lower the Brazil
costlocal shorthand for
a range of handicaps
1
2
THE WORLD ECONOMY
SPECIAL REPORT
souices, China is hungiy loi lhem. Biazil is shoil ol good ioads
and iailvays, some ol Chinas vill alliacl loo lillle liamc. Biazil is
young, China is ageing. Peihaps lhey should meige, is lhe viy
suggeslion ol Aiminio Iiaga, a loimei cenlialhank goveinoi ol
Biazil vho nov iuns Gavea Inveslmenls in Rio de }aneiio.
Indias bumpy road
Indias main challenges aie a mix ol lhose lacing Biazil and
China. Iike China, India has enjoyed a iecenl giovlh iale ahove
lhe emeigingmaikel noim, al aiound 8 a yeai. Il oughl lo he do
ing hellei slill. allei all, il is pooiei lhan China, so lhe scope loi
calching up is giealei. Inveslmenl is a heallhy {8 ol GDP. Much
ol Indias inveslmenl is hnanced oul ol companies ovn pockels,
a symplom ol an immaluie hnancial syslem. Mosl hims cannol
iely on exleinal lunding, lhough gianl Indian conglomeiales,
such as Tala, aie ahle lo lap inlo inleinalional capilal maikels.
Iike Biazil, India is in despeiale need ol hellei ioads lo link
ils laiung inleinal maikels. Il is a young counliy, vilh ils voik
ingage populalion sel lo giov al I.) a yeai unlil zoI, a laslei
iale even lhan Biazils. Bul loo many ol ils people aie educaled
hadly, il al all. As in Biazil, companies ollen have lo piovide ie
medial educalion lo hiing ieciuils up lo scialch. Aicane lavs
sland in lhe vay ol a velllunclioning johs maikel. Coiiuplion is
a hlighl on inliasliucluie piojecls. The economy is pione lo ovei
healing and has a cuiienlaccounl dehcil.
This speaks ol a deepei veakness in emeiging maikels. In
lhe pasl lhey have nol heen good al managing inleinal demand.
Relying on expoils alloved lhem lo giov and save al lhe same
lime. Nov lhal lhe iich voilds economies aie sliuggling, lhal
has hecome haidei, iaising lhe piospecl ol lhe soil ol ills lhal led
lo emeigingmaikel ciises in lhe pasl. excess goveinmenl spend
ing, iapid ciedil giovlh and inalion. The liansilion liom mid
dleincome lo iich economy ielies on sound monelaiy, hscal and
iegulaloiy policies, says Raghuiam Rajan, a loimei IMF chiel
economisl nov al Chicagos Boolh School ol Business.
The leai ol ieneved liouhle in lhe dehlladen iichvoild
economies has meanl lhal Biazil and India have heen slov lo
slop local inalionaiy piessuies liom huilding. China passed ils
hisl hig lesl hlling in loi iichvoild demand vhen il incieased
hank ciedil hy an aslonishing onelhiid duiing zoo,. Il vas a
velcome slimulus lo lhe local and glohal economy, hul lheie aie
gioving douhls ahoul lhe visdom ol many ol lhose loans. The
dehls iun up hy local aulhoiilies lo hnance inliasliucluie aie ol
pailiculai concein.
China hulls aigue lhal lhe expendiluie vas essenlial lo lhe
counliys iehalancing. Bellei lianspoil links helveen lhe iich
coaslal cilies and pooiei veslein iegions veie needed lo devel
op Chinas inleinal maikel. Sceplics see ioads vilh no cais,
liains vilh lev passengeis and emply huildings. Some iepoils
say z liillion yuan ol localaulhoiily loans have gone soui. Voi
iyingly, some ol lhe loieign inveslois vho had iushed lo lake
slakes in Chinese hanks aie slinking avay. Bank ol Ameiica,
vhich has piohlems in ils home maikel, has sold hall ils slake in
China Consliuclion Bank.
Even so, slahilising aggiegale demand may piove easiei
lhan sellling lhe social conicls oi lackling lhe indusliial slasis
lhal enliap middleincome counliies. This depends nol only on
a vellluned economic engine, il also ielies on hov laiily lhe
pain ol adjuslmenl is shaied, says Haivaid Univeisilys Dani Ro
diik. Socielies loin hy class oi olhei iivaliies aie ollen sel hack hy
economic change. Demociacies vilh iules and pioceduies loi
sellling dispules and compensaling loseis lend lo do hellei.
Mi Rodiik conliasls Soulh Koieas houncehack liom lhe
Easl Asian ciisis in I,,8 (as vell as liom eailiei liouhles) vilh lhe
slump enduied hy Biazil and olhei Ialin Ameiican counliies in
lhe I,8os. Soulh Koiean indusliy had heen lesled in expoil mai
kels so il could huild a iecoveiy on ils indusliial slienglh. Biazil
had lacked lhal slienglh. Bul Soulh Koiea vas also ahle lo iecov
ei moie quickly hecause each inleiesl gioup agieed lo ahsoih
some ol lhe pain liom lhe dovnluin. The goveinmenl said il
vould do ils hesl lo help lhe counliy gel ovei lhe ciisis hul hims
should do lheii hil hy avoiding layos and unions should mod
eiale lheii vage demands. In Biazil, hy conliasl, eveiyone liied
lo shill lhe pain ol lovei living slandaids onlo olheis. Inalion
look o and Biazils GDP pei peison slagnaled loi I yeais.
China may have lhe sliongei economy, says Mi Rodiik, hul
Biazil and India aie likely lo he hellei al handling lhe social mo
hilily lhal comes vilh heing a middleincome counliy. All lhiee
ol lhese emeigingmaikel gianls vill have lo voik haid lo avoid
lhe middleincome liap. Theii iecenl economic peiloimance is
good hul expeiience suggesls lhal lheie vill he selhacks. Yel as
lhe iich voild slumhles liom ciisis lo ciisis, lhe piospeiily gap is
closing lasl. Ameiicas claim lo economic leadeiship looks in
cieasingly lhieadhaie, and one ol ils longheld piivileges-hav
ing lhe voilds main ieseive cuiiency-is undei lhieal. 7
AT THE IIAGSHIP sloie ol Yue Hva Chinese Pioducls in
Hong Kong cuslomeis can hnd exolic and eveiyday ilems
liom mainland China vilhoul having lo cioss lhe hoidei. The ol
leiings include silk hiocades, sandalvood caivings, Sichuan
peppeis and liadilional Chinese iemedies such as iihhed anle
lope hoins. Hoin shavings, hoiled in valei, aie said lo quielen
lhe livei and quell leveis.
Ieveiish visilois liom lhe mainland can even pay loi lheii
shavings in lheii ovn cuiiency, lhe yuan. The sloie chaiges
z,66o yuan ($(I6) loi a vhole hoin, al an exchange iale ol I.I
Hong Kong dollai pei yuan. Neaihy moneychangeis oei a hel
lei iale, hul some Chinese visilois pielei lhe convenience ol us
ing lheii ovn money. Thal vay lhey can slill gel a lalenighl
snack al lhe )Eleven allei lhe moneychangeis have closed.
Thal is hov, nol long ago, lhe yuan sel oul on ils caieei as an
inleinalional cuiiency. Il ciepl inlo Hong Kong in lhe vallels ol
mainland visilois. The liickle acioss Chinas hoideis quickened
lasl yeai vhen lhe goveinmenl alloved a hioadei iange ol Chi
nese hims lo sellle impoils and expoils in yuan. In lhe same yeai
il sel lhese oshoie yuan liee. Oulside lhe mainland, lhe yuan
could he liansleiied helveen hanks, hoiioved, lenl and invesl
ed, jusl like any olhei cuiiency.
This oshoie expeiimenl is, loi many loiecasleis, a hisl len
lalive slep lovaids making lhe yuan a lully edged ieseive cui
iency lo iival lhe dollai and lhe euio. Bul Chinas policymakeis
aie in lvo minds, as lhey lend lo he vhen il comes lo lieeing h
nance. Resliicling lhe ov ol money inlo and oul ol China pio
lecls lhe counliys immaluie hanking syslem. Vhen }apan sanc
lioned lhe inleinalional use ol lhe yen in lhe I,8os il sel lhe slage
loi a damaging piopeily huhhle.
On lhe olhei hand China hales having lo iely on lhe dollai.
Omcials aie liouhled hy lhe Iedeial Reseives nolahly loose
Reserve currencies
Climbing greenback
mountain
The yuan is still a long way from being a reserve
currency, but its rise is overdue
2
1
SPECIAL REPORT
THE WORLD ECONOMY
2
1
monelaiy policy and hy Ameiicas iapidly iising puhlic dehl.
They leai lhal slimulus measuies pul in place lo ievive Ameiicas
agging economy vill soonei oi lalei geneiale a huisl ol high in
alion and veaken lhe dollai. Thal vould huil holdeis ol US
goveinmenl honds, including China. Aiound $z liillion ol ils
cuiiency ieseives ol ${.z liillion aie in dollais, moslly in honds.
On Augusl lh Ameiica losl ils liipleA ciedil ialing liom Slan
daid & Poois hecause il had lailed lo come up vilh a ciedihle
plan lo cap ils puhlic dehl. Chinas omcial nevs agency, Xinhua,
immedialely called loi a nev ieseive cuiiency.
Such calls have heen made heloie, duiing houls ol dollai
veakness in lhe lale I,)os and midI,,os, hul lhe dollai slill
holds lhe piivileged posilion in lhe voilds monelaiy syslem il
has occupied since lhe second voild vai. Il laces no immediale
challenge lo ils slalus, nolvilhslanding lhe dehl dovngiade, he
cause lheie aie lev good alleinalives. Despile a long and sleady
decline in ils value againsl olhei cuiiencies, il slill accounls loi
6o.) ol lhe voilds $,.) liillion ol cuiiency ieseives. Thal is
aiound lhiee limes Ameiicas veighl in lhe voild economy as
measuied hy GDP. The dollais closesl iival, lhe euio, accounls
loi z6.6 ol lhe voilds ieseives.
Hov does one cuiiency mainlain such dominance! Texl
hook economics says domeslic money has lhiee uses. as a unil
ol accounl againsl vhich lhe value ol goods is measuied, as a
medium ol exchange, and as a sloie ol value used lo conseive
spending povei loi a iainy day.
The von lulhls lhese ioles in Soulh Koiea, lhe yuan does
lhe joh in China, and lhe dollai piovides lhese seivices in inlei
nalional maikels as vell as in Ameiica. Il is lhe unil ol accounl
loi commodilies such as ciude oil lhal aie liaded glohally. Mosl
liade lhal is invoiced in a cuiiency olhei lhan lhose ol lhe liad
ing pailneis is quoled in dollais. And he
cause lhe dollai is lhe henchmaik loi
voild piices and is used lo sellle cioss
hoidei liades, il makes sense loi counliies
lo keep sloies ol dollai ieseives, holh as a
oal and lo holslei conhdence in lheii
ovn cuiiencies.
The demand loi ieseive cuiiencies
is a hoon lo lheii issueis. Aiound $oo hil
lion ol Ameiicas cuiiency is used oulside
lhe counliys hoideis. Some ol lhis cash is
used lo luhiicale dollaihased inleina
lional liade. Bul much ol il gieases lhe
vheels ol ciosshoidei ciime such as
diug liamcking. ciooks need a unil ol ac
counl, a medium ol exchange and a sloie
ol value jusl like legilimale husinesspeople.
Indeed, a ieseive cuiiency mighl almosl he dehned hy ils
appeal lo ciiminals. Ol lhe C,oo hillionvoilh ol euio noles in
ciiculalion, a lhiid hy value comes in lhe loim ol lhe pink and
puiple Coo nole. Cynics say il vas issued lo capluie a shaie ol
lhe inleinalional hlack maikel liom lhe dollai, loi vhich lhe laig
esl denominalion is $Ioo. An illegal slash ol Coo hills vould he
lighlei, easiei lo conceal and easiei lo counl. The Coo nole vas
vilhdiavn hy hanks in Biilain allei police said ils main use vas
in oiganised ciime. Thal is a complimenl ol soils lo lhe euio.
Vhen Somali piiales oi Russian gangsleis demand paymenl in
yuan, il vill he lhe suiesl sign lhal economic povei has shilled
lo China.
The cosl ol piinling $oo hillionvoilh ol noles is negligi
hle compaied vilh lhe value ol lhe goods and seivices lhey can
command. In oidei loi lhose noles lo ciiculale oulside Ameiica,
lhey musl hisl have heen exchanged loi $oo hillionvoilh ol
goods and seivices. They iepiesenl a cosl in ieal iesouices. The
gap helveen lhe piinling cosl ol hanknoles and lheii lace value
is called seignioiage. Goveinmenls lhal piinl ieseive cuiiencies
henehl liom exlending seignioiage heyond lheii ovn hoideis.
Issueis ol inleinalional cuiiencies also enjoy pioleclion
liom cuiiency volalilily. A Vielnamese expoilei selling lo China
is exposed lo exchangeiale iisk. he pays his voikloice in dong,
lhe local cuiiency, hul ieceives paymenl in dollais. Il lhe dollai
lalls, so do his eainings, hul his lahoui cosls aie unchanged.
Ameiican expoileis do nol have lo voiiy ahoul cuiiency mis
malch hecause holh lheii domeslic cosls and lheii expoil eain
ings aie in dollais.
Noi has Ameiica had much need lo acquiie coslly ieseives
ol ils ovn. Undei lhe Biellon Voods syslem ol hxed exchange
iales lhal goveined iichcounliy liade unlil I,)I, memheis veie
conslanlly al iisk ol iunning shoil ol dollais il lheii expoils he
came uncompelilive, vheieas Ameiica could alvays piinl moie
dollais. This vas an exoihilanl piivilege, giumhled Iiances h
nance minislei al lhe lime, Valeiy Giscaid dEslaing.
Exorbitant privilege v original sin
The piivileges ol ieseivecuiiency slalus veie nol conhned
lo lhe dollai, lhough il enjoyed lhe lions shaie. They include he
ing ahle lo hoiiov cheaply. The dollais and euios (and, lo a lessei
exlenl, lhe pounds, Sviss liancs and yen) lhal olhei cenlial
hanks keep in ieseive aie moslly in lhe loim ol goveinmenl
honds. The exlia demand veighs on hond yields and sels a lov
ei lhieshold loi lhe cosl ol ciedil loi husinesses and consumeis.
This pail ol lhe exoihilanl piivilege conliasls vilh lhe
emeiging voilds oiiginal sin, a leim coined hy Baiiy Eichen
gieen ol lhe Univeisily ol Caliloinia, Beikeley, and Ricaido
Hausmann ol Haivaid Univeisily loi some counliies inahilily
lo hoiiov in lheii ovn cuiiencies. Boiioving in loieign cuiien
cies (as Biazil and olhei Ialin Ameiican counliies had done he
loie lhe I,8os dehl ciisis) leaves oiiginal sinneis al iisk ol delaull
il lheii cuiiency loses value. Tiouhlepione counliies have ollen
had lo keep inleiesl iales high, even in a iecession, lo suppoil
lheii cuiiencies and slave o delaull on loieigncuiiency dehls.
Hungaiy is a iecenl example ol a counliy in lhis soil ol liap. The
Iedeial Reseive has nevei had lo voiiy ahoul such lhings.
The divide helveen lhe exoihilanlly piivileged and lhe
oiiginal sinneis vas especially deep allei lhe Easl Asian ciisis ol
I,,),8. The lesson liom lhal ciisis vas nevei lo he shoil ol ie
seives. The inveslmenl iale in emeiging Asia lell, lhe saving iale
slayed high and lhe excess saving vas senl ahioad. Il maiked lhe
slail ol an unpiecedenled huildup ol loieign exchange lo insuie
againsl luluie halanceolpaymenls piohlems. The voilds cui
iency ieseives incieased liom $I., liillion in zooo lo $,.{ liillion
in zoIo. Much ol lhe inciease vas in China.
The suige in demand loi sale and liquid assels in dollais,
euios and pounds pushed dovn longleim hoiioving cosls. The
savings ol lhe emeiging voild alloved lhe iich voild lo spend
loo lieely, one ol lhe deepei causes ol lhe vave ol ciises lhal has
amicled lhe iich voild since zoo). Ameiicas hnancial maikels
mel lhe glohal demand loi sale dollai assels hy iepackaging
lhe moilgages ol maiginal hoiioveis as honds, vhich luined
soui. Bul lhe iesulling hnancial ciisis hil mainly lhe iich voild
ialhei lhan lhe emeiging maikels.
Richvoild hanks and inveslois seeking highei ieluins
China hates having to rely on the dollar. O icials are
troubled by the Federal Reserves loose monetary policy
and by Americas rapidly rising public debt
THE WORLD ECONOMY
SPECIAL REPORT
2
1
vhen inleiesl iales veie lov had houghl a lol ol lhe iopy moil
gage secuiilies. Thal made ioom loi ieseive manageis in emeig
ing maikels lo huy moie honds hacked hy goveinmenls oi is
sued diieclly hy lhem. Inveslois veie so anxious loi yield lhal
lhey haiely dislinguished helveen good and had ciedils. Coun
liies vilh laige puhlic dehls, such as Gieece and Ilaly, could hoi
iov as cheaply as counliies vilh sound puhlic hnances such as
Geimany. Vindlall lax ievenue liom housing hooms luelled hy
cheap loieign ciedil made lhe puhlic hnances ol Iieland and
Spain look sound unlil iecession (and, in Iielands case, lhe leiii
lying cosl ol hank hailouls) caused puhlic dehl lo explode.
Some helieve lhe exoihilanl piivilege is ieally a cuise lhal
luies lhe ieseivecuiiency counliy inlo loo much hoiioving oi
piinling loo much money. Ovei lime lhis saps lhe economic and
polilical slienglh lhal vas lhe souice ol lhe piivilege. This paia
dox vas hisl noled in I,() in a Iedeial Reseive papei viillen hy
Roheil Tiimn, a Belgianhoin economisl.
Undei lhe Biellon Voods aiiangemenl cuiiencies veie
pegged lo lhe dollai al hxed exchange iales. The dollai in luin
vas lied lo gold al a hxed piice. Tiimn spolled a dilemma. A iis
ing slock ol dollais vas needed lo hnance voild liade. The moie
dollais veie supplied, lhe moie lhe cuiiencys link lo gold
vould he queslioned since Ameiicas gold slocks vould suppoil
an eveilaigei pile ol hanknoles. This came lo a head in Augusl
I,)I vhen heavy selling loiced Piesidenl Nixon lo suspend lhe
conveision ol dollais inlo gold.
The Tiimn dilemma is echoed in conlempoiaiy voiiies
ahoul lhe iich voilds puhlic dehls and ils cuiiencies. Easy access
lo ciedil luied lhe euio zones peiipheiy inlo oveihoiioving.
Gieece is insolvenl, Iieland and Poilugal aie nol lai o. Ioi ie
seive cuiiencies, vhal is sale is in conicl vilh vhal is conve
nienl, aigues Slephen }en ol SLJ Macio Pailneis, a hedge lund,
adding lhal lhe euio is emcienl hul ils nol sale. Reliahle and liq
uid ieposiloiies loi iainyday saving aie scaice, vhich is vhy ie
seive manageis and hond inveslois conlinue lo push money inlo
lhe Tieasuiy maikel. Bul lhis lempls Ameiica lo oveiexlend ilsell,
amassing dehls il may one day sliuggle lo seivice.
As Ameiicas veighl in lhe glohal economy diops, supply
ing lhe voild vilh mosl ol ils ieseive cuiiency needs may he
come loo hig a joh loi lhe counliy. In his iecenl hook, Exoihilanl
Piivilege, Mi Eichengieen aigues lhal a ieseivecuiiency syslem
vill emeige in vhich lhe dollai, lhe euio and lhe yuan shaie lhe
piivileges and lhe iesponsihililies. Thal vould make lhe voild a
salei place, he ieckons, hecause each issuei vould nudge lhe olh
eis lovaids hnancial and hscal discipline.
Il is nol ohvious lhal one cuiiency needs lo play a pieemi
nenl pail. In ils heyday, sleiling vas iaiely as dominanl as lhe dol
lai has heen since il look ovei. On lhe eve ol lhe hisl voild vai
lhe pound accounled loi only aiound hall ol all ieseives. mosl ol
lhe iesl vas in Iiench liancs and Geiman maiks. By I,z( moie ie
SPECIAL REPORT
THE WORLD ECONOMY
seives veie held in dollais lhan in sleiling.
The dollai is aved, hul so aie lhe candidales lo displace il.
The euio has no single hscal aulhoiily slanding hehind il. Noi is
lheie a single issuei ol soveieign dehl lo malch lhe size and li
quidily ol lhe maikel loi US Tieasuiies-allhough lhe honds is
sued hy lhe Euiopean Iinancial Slahilily Iacilily (EFSF), lhe euio
aieas emeigency hailoul lund, may loieshadov a single euio
hond hacked hy all ils memheis. Ioi all ils shoilcomings, lhe
euio slill accounls loi a quailei ol lhe voilds ieseives. Even as
lhe iegions soveieigndehl ciisis has deepened ovei lhe pasl
yeai, ils cuiiency has gained giound
againsl lhe gieenhack.
The speed al vhich lhe dollai iose lo
piominence suggesls lhal lhe yuan mighl
he an inleinalional cuiiency as soon as
zozo, says Mi Eichengieen. The gieenhack
oveilook sleiling in ieseives haiely a de
cade allei lhe lounding ol lhe Iedeial Reseive in I,I{ as lhe hack
slop ol dollai liquidily. The Ied pushed lhe dollai hy losleiing a
liquid maikel loi liade acceplances, lhe ciedil noles used lo lund
shipmenls. By lhe midI,zos moie liade vas caiiied oul in dol
lais lhan pounds and moie inleinalional honds veie issued in
Nev Yoik lhan in Iondon.
Hovevei, lhe ohslacles lo lhe yuan hecoming a ieseive cui
iency aie higgei lhan lhose laced hy lhe dollai in I,I{. Al lhal lime
Ameiica vas alieady a liusled sloiehouse loi capilal, a democia
cy vheie lhe iule ol lav vas himly eslahlished. Chinas iecenl
hisloiy is less ieassuiing, so il vill lake a vhile heloie loieigneis
leel secuie keeping lheii savings in yuan. The cuiiency vould
have lo he lully conveilihle so lhal inveslois could paik lheii
yuan ieseives in assels ol lheii choosing and iedeem lhem
vhen needed.
This in luin vould iequiie China lo allov capilal lo move
lieely acioss ils hoideis, vhich il has heen ieluclanl lo do. In ie
cenl yeais il has eased iesliiclions on iesidenls laking capilal oul
ol lhe counliy, loi example, moie loieign lakeoveis hy hig Chi
nese hims have heen alloved lo go ahead. Bul loieigneis lace
loimidahle haiiieis lo hiinging money inlo China hecause lhe
goveinmenl is ieluclanl lo cede conliol ol lhe yuans value oi ol
domeslic hond yields lo lhe ehh and ov ol loieign capilal.
China has laken some hahy sleps lovaid selling lhe yuan
liee. Il has alloved liade in goods lo he invoiced and paid in
yuan. The pioceeds can he pul lo voik in a edgling oshoie
yuan maikel in Hong Kong vilh iesliicled links lo lhe mainland.
Tiade selllemenl in yuan has giovn iapidly, ieaching 6oo hillion
in lhe second quailei ol zoII (aiound Io ol lolal liade), accoid
ing lo lhe Peoples Bank ol China.
So lai such liade selllemenl has heen a ialhei onesided al
laii. mosl has heen loi impoils (ie, Chinese hims paying loieign
eis in yuan loi supplies). Iev ol Chinas expoileis aie villing oi
ahle lo demand yuan liom loieign cuslomeis, lhough lhose cus
lomeis should nol hnd il haid lo gel hold ol lhe cuiiency. Chinas
cenlial hank has sel up svap agieemenls vilh lhe cenlial hanks
ol many ol ils emeigingmaikel liading pailneis, ianging liom
Singapoie lo Kazakhslan, alloving loieign hanks lo supply yuan
lo lheii cuslomeis.
By lhe end ol }uly yuan deposils in Hong Kong had svollen
lo )z hillion. The IMF said in }uly lhal I hillion ol yuande
nominaled honds (socalled dim sum honds) had heen issued
in Hong Kong since lhe maikel vas sel up, many hy hianches ol
mainland hanks. Issues hy nonhnancial loieign companies aie
less common, in pail hecause hims slill need peimission lo hiing
lhe cash iaised inlo China. Theie have heen some highpiohle
deals, lhough lhe honds have shoil duialion. McDonalds sold a
lhieeyeai hond lasl yeai. Caleipillai, an Ameiican makei ol
eailhmoving equipmenl, has issued a couple ol lvoyeai honds
so lai. A iecenl sale in Hong Kong ol zo hillion yuan ol govein
menl dehl vas heavily oveisuhsciihed.
The oshoie yuan maikel has quickly come up liom no
vheie and Chinas cenlial hank has conlinued lo sliike hilaleial
svap deals lo keep il gioving. Bul il is a hig leap liom heing a cui
iency in vhich a chunk ol youi ovn liade is sellled lo heing a
lully edged inleinalional cuiiency, and a luilhei jump lo ie
seivecuiiency slalus. Only a small liaclion ol lhe voilds $( liil
lion in loieignexchange deals each day aie loi liade selllemenl.
The hulk ol cuiiency dealing is loi hedging oi ielaled lo liading
in slocks, honds and olhei assels. The dollai is one side ol 8 ol
all cuiiency liades, accoiding lo lhe Bank loi Inleinalional Sellle
menls (see chail z). The yuan accounls loi jusl o.{ ol luinovei.
Yel lhe exoihilanl cuise vill calch up vilh lhe dollai one
day and lhe yuan is ils mosl likely ieplacemenl. Chinas econ
omy is second only lo Ameiicas in size and is likely lo oveilake il
soon. Il is alieady lhe voilds laigesl expoilei. And il has nel loi
eign assels ol $I.8 liillion, vheieas Ameiica oves a nel $z. liil
lion lo loieigneis. Only }apan is in a sliongei posilion.
Aglobal yuan?
Reseivecuiiency slalus depends on lhese lhiee gauges ol
economic dominance-size ol economy, expoils and nel loieign
assels-says lhe Peleison Inslilules Aivind Suhiamanian. By I,I8
Ameiica had lhe voilds higgesl economy and vould soon he ils
laigesl ciediloi and expoilei, vilhin a lev yeais lhe dollai also
had lhe lions shaie ol lhe voilds loieignexchange ieseives. Il
lhal piecedenl is anylhing lo go hy, lhe yuan should soon he
come lhe main glohal ieseive cuiiency, and nol meiely a junioi
alleinalive lo lhe dollai oi lhe euio.
The ievaids lo China ol opening up lully lo loieign capilal
liump lhe iisks, ieckons Mi Suhiamanian. Tuining lhe yuan inlo
a ieseive cuiiency oeis China a vay oul ol ils meicanlilisl
giovlh model, vhich has iun ils couise. Demand loi yuan ie
seives vould push up lhe exchange iale, discouiage expoils and
give Chinas consumeis giealei puichasing povei. A push loi ie
seive slalus loi lhe yuan
vould go hand in hand vilh
lhe developmenl ol Chinas h
nancial syslem-a necessaiy
slep lo suppoil lhe small and
mediumsize husinesses il
needs lo seive ils domeslic
maikel, and loi many olhei
ieasons. Ioi China lo escape
lhe middleincome liap, il vill
have lo lel go ol lhe yuan.
The iich voilds monop
oly on ieseivecuiiency piivi
leges has given il hisl call on
lhe voilds piecaulionaiy
savings. Ioi nov, il is clinging
on lo ils piivileges. Bul iivaliy
liom developing counliies in
lhe maikels loi oil and com
modilies is alieady exacling a
piice liom lhe Vesl. 7
It is a big leap from being a currency in which your own
trade is settled to being a fully edged international
currency, and a further jump to reserve-currency status
Passing the buck
Source: Bank
for International
Settlements
Currency share of average daily
foreign-exchange turnover
April 2011, %
2
0 20 40 60 80 100
$
E-w* other
R-w
other
A$
Swiss franc
C$
Yuan
*Emerging-world
Rich-world
2
THE WORLD ECONOMY
SPECIAL REPORT
1
IOOK OUT ON any day liom Piei Tvo al lhe Tuhaio Poil
complex in Biazil and you vill see al leasl hall a dozen
ships on lhe hoiizon. The queue ol vailing vessels allovs lhe
poils loading managei, Ieonaido Baione, lo keep ils lhiee pieis
in conslanl use. Tuhaio is ovned hy Vale, lhe voilds laigesl
iionoie company. A iecoid Io(m lonnes ol oie vas shipped
liom heie lasl yeai.
Back liom lhe valeis edge a phalanx ol huge dumpeis un
load iion oie liom lhe liains aiiiving liom Vales mines in Minas
Geiais. The ,okm iailioad caiiies (o ol Biazils iail lieighl on
jusl { ol ils liack. A slandaid lieighl liain on lhis line has zz cai
iiages and lhiee locomolives. Aiound (,ooo caiiiages aie emp
lied in Tuhaio each day.
The unloaded oie is hlended and slockpiled in a vasl yaid
enclosed hy hnemesh scieens lo slop lhe dusl liom hloving lo
vaids lhe neaihy cily ol Viliia. Then il is scooped hy gianl iolal
ing huckels onlo a moving hell and conveyed lo a long chule al
lhe piei vheie il is pouied inlo lhe hold ol a vailing vessel.
The poils consliuclion in lhe midI,6os vas sponsoied hy
sleelmakeis liom }apan. Today Biazils main cuslomei is China,
vhich lakes I ol ils expoils (moslly iion oie, soyaheans and
oil), up liom almosl nolhing len yeais ago. The caigo lhal lhe
ships aie queuing up loi al Tuhaio has hecome lai moie valu
ahle. Iion oie nov lelches $I)8 a lonne, compaied vilh $I{ a
lonne in zooI.
Bioadei measuies ol iavmaleiial cosls have jumped as
vell. The Economists index ol nonoil commodily piices has lie
hled in lhe pasl decade. The iecenl suige has ieveised a dovn
vaid liend lhal had lasled a cenluiy. Indusliial iavmaleiial
piices lell hy aiound 8o in ieal leims helveen I8(, vhen The
Economist hegan collecling dala, and lheii lov poinl in zooz (see
chail {). Bul much ol lhe giound losl ovei Io yeais has heen ie
coveied in lhe space ol jusl a decade.
This has iaised lhe incomes ol commodilyiich counliies
such as Biazil and Auslialia as vell as pails ol Aliica. Il has also
caused even sohei analysls lo speak ol a nev paiadigm in
commodily maikels. Even lhough GDP has sloved lo a neai
slandslill in many pails ol lhe iich voild, lhe piice ol ciude oil is
close lo $Ioo a haiiel-as high in ieal leims as allei lhe oil shocks
ol lhe I,)os (see chail ( on nexl page).
Vhal accounls loi lhis luinaiound! The piice spikes ovei
lhe pasl cenluiy veie linked lo inleiiuplions in supply, nolahly
duiing lhe hisl voild vai. Bul iecenl piice iises have heen loo
hioadhased and longlasling lo he adequalely explained hy
liosl oi had haivesls. Noi is il ohvious lhal pioduceis aie hoaid
ing supplies. Al Tuhaio eveiyhody is sliaining lo gel lhe oie
onlo lhe ships moie quickly. Valuahle lime is losl in docking and
in slailing lhe loading.
Theie is a moie sliaighlloivaid explanalion loi lhe scaici
ly. lhe suige in commodily piices is simply lhe iesull ol explod
ing demand and sluggish supply. The demand side has heen
hoosled hy indusliial developmenl unpiecedenled in ils size,
speed and hieadlh, led hy China hul nol conhned lo il. Giovlh in
emeiging maikels is holh iapid and ie
souiceinlensive. The IMF eslimales lhal
in a middleincome counliy a I iise in
GDP incieases demand loi eneigy hy lhe
same peicenlage. Rich economies aie lai
less eneigyhungiy. lhe oil inlensily ol
OECD counliies has sleadily lallen in ie
cenl yeais.
Chinas appelile loi iav maleiials is
pailiculaily voiacious hecause ol lhe
counliys size and ils high inveslmenl
iale. Though il accounls loi only ahoul
oneeighlh ol glohal oulpul, China uses
up helveen a lhiid and hall ol lhe
voilds annual pioduclion ol iion oie,
aluminium, lead and olhei nonpiecious
melals (see chail on page I6). Mosl ol lhe
eneigy loi Chinese indusliy comes liom
coal-a diily luel lhal conliihules lo Chi
nas pooi aii qualily. Ils consumplion ol
oil ioughly lallies vilh lhe economys size
hul is likely lo giov laslei lhan GDP as
China gels iichei and huys moie cais.
Supply has sliuggled lo keep pace vilh lhis huigeoning de
mand. The voilds iionoie pioduclion has douhled ovei lhe
pasl decade hul piices have iisen I{lold. The melal conlenl ol
coppei oie has heen lalling since lhe midI,,os as exisling mines
aie depleled. This mismalch helveen demand and supply is an
ageold piohlem in commodily maikels. Il lakes yeais lo hnd and
develop nev mines and oil ieseivoiis and lo huild lhe inliasliuc
Commodities
Crowded out
Chinese demand had ended a century of steadily
falling raw-material costs for rich-world consumers
Metal detector
Sources: The Economist; Thomson Reuters *Adjusted by US GDP deflator
The Economist industrial commodity-price index, real* $ terms, 1845-50=100
0
20
40
60
80
100
120
140
1845
-50
1860 1870 1880 1890 1900 1910 1920 1930 1940 1950 1960 1970 1980 1990 2000 2011
3
Optimists
bet on
human
ingenuity to
spring the
Malthusian
trap, as it
has done so
often before
SPECIAL REPORT
THE WORLD ECONOMY
2 luie (iigs, pipelines, iailvays, poils) lo hiing lhe commodilies lo
maikel. Supply iesponds slovly lo piice incieases and delay ol
len leads lo excessive inveslmenl vhich lhen depiesses piices.
The exliaclive indusliies had only jusl iecoveied liom such
ahinge vhen piices hegan lo iise again. By lhe slail ol lhe millen
nium a long heai maikel in commodilies had puiged lhe ex
cesses ol lhe I,)os, says Dylan Giice al Sociele Geneiale. The sec
loi vas poised loi conliaclion hul inslead laced lhe higgesl and
laslesl indusliialisalion in hisloiy.
The supply ol commodilies is again slovly calching up.
The hig ieseives aie mainly in iemole and spaisely populaled ai
eas. Thal is in pail vhy lhe economies ol Auslialia, Canada, Bia
zil and suhSahaian Aliica have heen gioving quickly. Biazil is
hlessed vilh limhei, exceplionally leilile land, melal oies and
nov oil ieseives-lhough lhe higgesl ol lhese aie in haidlo
ieach places, lai o lhe coasl and in deep valei henealh a layei
ol sall. Theie is nov a shoilage ol geologisls vho can help vilh
lhe seaich loi oil. OGX, an oil him lounded hy Eike Balisla, a Bia
zilian magnale, has lempled some ieliied ones hack lo voik.
Biazils oshoie oil vill he expensive and dimcull lo iecov
ei. Il lhis is vhal lhe voild is ielying on, say lhe pessimisls, lhe
shoilage ol oil is liuly ciilical. They aigue lhal lhe iesouice limils
lo giovlh hisl noled hy Thomas Mallhus in lhe lale I8lh cenluiy
slill apply. Oplimisls hel on human ingenuily lo spiing lhe Mal
lhusian liap, as il has done so ollen heloie.
Why it matters
The imhalance in commodily maikels is likely lo peisisl al
leasl unlil iesouicehungiy counliies hecome iichei and nev
supplies come on slieam. In lhe meanlime lhe suige in emeig
ingmaikel demand vill conlinue lo huil lhe advanced econo
mies. The iise in oil and commodily piices has pushed up ina
lion in iich counliies and acled like a lax on consumeis.
The IMF ieckons lhal a Io iise in oil piices knocks o.zo.{
o glohal GDP giovlh in lhe hisl yeai, hul lhe impacl on a hig oil
consumei like Ameiica is lvice as laige. The sluggish giovlh in
Ameiicas economy in lhe hisl hall ol lhis yeai vas due in pail lo
highei oil piices, vhich in luin veie caused pailly hy sliong GDP
giovlh in China (lhough supply disiuplions also played a iole).
The commodilies hoom has also made monelaiy policy
moie complicaled. Inalion laigels alloved goveinmenls and
cenlial hanks lo aigue lhal piice slahilily and lull employmenl
veie complemenlaiy goals. Il loo many voikeis veie idle, lhal
vould heai dovn on piices and allov cenlial hanks lo keep in
leiesl iales lov lo hoosl spending and johs and lo guaid againsl
dealion. Ioi a decade allei I,,) Chinas eecl on voild piices
had made lile easiei loi lhe iich voilds cenlial hanks. Impoils ol
cheap goods liom China hioughl dovn piices in Ameiica and
elsevheie, keeping inalion lov. Bul nov lhal Chinese vages
aie iising, lhe eecl ol lhe counliys iapid indusliialisalion on
voild commodily piices is pushing up iichvoild inalion.
Because ol lhe peisislenl iise in commodily piices, ina
lion has nol come dovn even lhough lheie is lols ol slack in mosl
advanced economies. The lexlhook iesponse lo commodilyled
inalion is lo iegaid il as lempoiaiy and ignoie il. Bul lhal he
comes haidei il il peisisls and iaises expeclalions ol luluie ina
lion. In Biilain, loi inslance, inalion has heen ahove lhe Bank ol
Englands z laigel loi mosl ol lhe pasl loui yeais, yel inleiesl
iales have heen close lo zeio. Some complain lhal lhe inalion
laigel has simply heen ahandoned.
Commodily piices aie acling as iegulalois ol glohal
giovlh. The emeiging maikels aie hisl in lhe queue loi supplies
hecause lhey aie ollen ahle lo use each exlia haiiel ol oil oi ship
load ol oie moie gainlully. Theii demand iaises piices and lov
eis ieal incomes in lhe iich voild, vhich gels ciovded oul. Rich
counliies had hecome used lo unlimiled access lo cheap iav ma
leiials. piices had heen lalling loi a cenluiy oi moie. Nov lheie is
compelilion loi piimaiy iesouices. Pioduceis aie henehling and
iichvoild consumeis aie sueiing, al piecisely lhe lime vhen
lhey aie also incieasingly anxious ahoul joh secuiily as China
and India iise and iise. 7
Crude awakening
Sources: The Economist; Thomson Reuters *West Texas Intermediate
Oil price*, $ per barrel at 2011 prices
1970 80 90 2000 11
0
20
40
60
80
100
120
140
4
AS THE DEIHI melio snakes ils vay oul ol lhe ciovded
soulh ol lhe cily lhe scene luins moie iuial, vilh lhe occa
sional valei hualo, schoolgiils playing hopscolch oulside a vil
lage school and ciudely huill hiick houses. Bul hy lhe lime lhe
liain diavs up lo lhe suhuih ol Guigaon, lhe cacophony ol ui
han India is heaid once again.
Tvenly yeais ago Guigaon vas laimland. Nov il is a sea ol
villas, shopping malls, omce hlocks and apailmenl huildings
vilh names like Beveily Paik and Oakvood Eslale. The melio
hoaidings adveilise lhe hesl places lo huy omceveai oi lhe
Iovely Piolessional Univeisilys iecoid loi gelling people inlo
johs. On a husy Iiiday lhe ioads aie ciammed vilh honking Tala
Sumos, lhe local spoilsulilily vehicle. Many diiveis aie on lheii
vay home allei a nighl voiking lhe Ameiican shill.
Guigaon is a glohal cenlie loi oulsouicing hackomce sei
vices. Heie and in olhei such huhs aiound India, iouline omce
voik and dala analysis aie caiiied oul loi a vaiiely ol coipoiale
cuslomeis, many liom iich counliies (so lheii lasks have heen
oshoied as vell as oulsouiced). The voik can he sophislicaled.
ciunching lhe piohlandloss numheis ol lisled companies loi
Vall Slieel analysls, oi leasing spending palleins liom lhe dala
galheied hy supeimaikel lills.
Vages in Guigaon aie a small liaclion ol lhose ol a hackol
hce cleik in Nevcaslle oi Nev Yoik. Thal loveis cosls loi con
sumeis. Bul il also iaises anxiely among voikeis ahoul lov pay
and a diain ol johs lo cheapei localions. The iange ol lasks lhal
can he oulsouiced and oshoied is conslanlly expanding.
The nolion lhal liade kills johs is hased on lhe lalse piemise
lhal lheie is a hxed amounl ol voik lo do. The voilds leading
Exporting jobs
Gurgaon grief
Now for the next shake-up in the global labour market
1
THE WORLD ECONOMY
SPECIAL REPORT
2
1
laigei lhan in lhe pasl. A quailei ol Ameiican johs in I,)o veie in
manulacluiing and hence polenlially oshoiahle. Many did
move oshoie hul veie ieplaced hy johs in seivice indusliies.
Alol also depends on vhal happens in emeiging maikels.
Il China can successlully svilch liom expoilled giovlh lo do
meslic souices ol demand il vill cieale moie oppoilunilies loi
Ameiican expoils. As China and India hecome hellei o lhe
vage gap vilh lhe iich voild vill naiiov and lhe pace ol o
shoiing vill slov. And as lechnology opens up moie soils ol
voik lo ciosshoidei liade il vill cieale openings loi iichvoild
economies vhose compaialive advanlage is in seivices.
Il seivices hecome moie liadahle lhal vill he good loi
Ameiicas voikeis. Bul il mighl also exaceihale lhe gioving
vage divide vilhin ils ovn lahoui maikel. Economic lheoiy sug
gesls lhal liade vilh emeiging maikels cieales a vage piemium
loi lhe skilled voikeis in iich counliies. The voilds division ol
lahoui is deleimined hy lhe ielalive ahundance ol skilled and
unskilled voikeis. Rich counliies have moie ol lhe loimei, so
specialise in liaded goods vilh a high skill conlenl. Pooi coun
liies have moie ol lhe lallei, so concenliale on lovskilled voik.
Skilled voikeis in iich counliies henehl liom liade, hul lhe
vages ol lhe less skilled suei liom loieign compelilion.
Mosl sludies so lai have lound lhal liade explains only a
small pail ol lhe inciease in income inequalily in Ameiica since
lhe I,8os. The decline ol liadeunion povei and helovinalion
incieases in lhe minimum vage also played a iole. Bul mosl ol
lhe gioving inequalily is piohahly due lo lechnological change
vhich makes a college educalion moie valuahle-in much lhe
same vay lhal liade does, in lacl. Il is possihle lhal lhe eecl ol
liade on vages is moie signihcanl lhan lhose sludies have lound.
Much ol lhe slu lhal China makes is no longei pioduced in lhe
iich voild, so il is dimcull lo eslahlish a diiecl link.
Thal may also he hecause lhe dala aie nol delailed enough
lo capluie lhe eecls on ielalive vages vilhin indusliies, says
}osh Bivens ol lhe Economic Policy Inslilule, a lhinklank in
Vashinglon, DC. Only lhose vilh a louiyeai college degiee
(peihaps a quailei ol Ameiicas voikloice) aie cleai vinneis
economies have heen ceding johs lo lovincome iivals since lhe
indusliial ievolulion. The collon indusliy in Biilain vas in lhe
vanguaid ol lhal liansloimalion hul soon laced compelilion-
hisl liom Nev England, lhen liom Ameiicas Soulh. The mills
have laigely disappeaied and lhe spinning and veaving johs ie
placed hy helleipaid ones. As lhe division ol glohal lahoui he
comes evei moie hnegiained, small lasks ialhei lhan vhole in
dusliies move ahioad. Tiading pailneis shaie lhe emciency
gains. The voild is hellei o, even il some individuals lose oul.
Many more to go
This soil ol giadual iesliucluiing is nol nev, and neilhei is
lhe joh insecuiily lhal slems liom il. Bul anxiely ahoul oshoi
ing has iisen, loi lhiee ieasons. Iiisl, johs aie alieady scaice he
cause lhe hangovei liom iecessions caused hy hnancial ciises
lasls longei lhan lhal liom olhei soils ol dovnluins. Second,
China and India helveen lhem have aiound z. hillion people,
so lhe polenlial loi luilhei oshoiing liom lhe iich voild is im
mense. Thiid, advances in compuling and communicalions al
lov loi a videi iange ol johs lo he shilled acioss hoideis.
These lasl lvo laclois mean lhal oshoiing vill he a hugely
disiuplive loice, says Alan Blindei, a piolessoi al Piincelon Uni
veisily. A iecenl sludy caiiied oul in Ameiica vilh a Piincelon
colleague, Alan Kiuegei, lound lhal a quailei ol lhe voikeis in
leivieved consideied lheii voik polenlially oshoiahle.
This hguie includes all manulacluiing johs, as goods aie ieadily
liaded acioss hoideis. Bul il also coveis many occupalions lhal
used lo he lhoughl sale liom loieign compelilion.
Any seivice joh lhal can he deliveied dovn a viie vilhoul
any diminulion in qualily is oshoiahle, ieasons Mi Blindei.
Thal means highpaying johs in accounlancy, hnancial analysis
oi compulei piogiamming aie al iisk. }ohs lhal involve lacelo
lace conlacl oi iequiie lhe voikei lo he piesenl aie salei. lhink ol
laxi diiveis, plumheis, police omceis oi janilois. Mi Blindei
makes a dislinclion helveen peisonal and impeisonal seivices.
Only lhe lallei aie oshoiahle. A conliacl lavyei oi iadiologisl is
vulneiahle lo oshoiing, a divoice lavyei oi lamily docloi isnl.
Yel nol all lhe johs lhal can he oshoied vill he. Even in
manulacluiing lhe savings on lahoui liom oshoiing aie ollen
oulveighed hy olhei cosl consideialions. Iovvalue hulky
goods, such as hiicks oi hollles, lend lo he made close lo vheie
lhey aie consumed hecause lianspoiling lhem is expensive. Cais
aie also moslly made in lhe counliies vheie lhey aie sold.
Highlech manulacluiing ielies on a skilled lahoui loice
voiking closely vilh design
leams. Theie is lillle cosl ad
vanlage lo oshoiing loi small
halches ol goods oi vheie lasl
deliveiy lo local cuslomeis is
impoilanl. Economies ol scale
mean indusliies aie slicky.
Biilains collon indusliy, loi in
slance, did nol go inlo seiious
decline unlil lhe I,6os even
lhough vages veie high.
The alaim ovei lhe lhieal
lo johs liom India and China
echoes lhe anxiely ahoul }a
pans iise in lhe I,)os and
I,8os. Ameiicas economy has
suivived lhe shakeup ol ils
sleel, eleclionics and cai indus
liies, as have olhei iich coun
liies. The scale ol lhe challenge
is laige hul may nol he so much
Wok, stock and barrel
Sources: BP Statistical
Review; IMF; Thomson
Reuters; World Bureau
of Metal Statistics
*Purchasing-
power parity
Chinas share of world
commodity consumption
2010, %
0 20 40 60
Iron ore
Coal
Lead
Zinc
Aluminium
Copper
Nickel
GDP at PPP*
Oil
5
2 liom gioving liade, ieckons Mi Bivens.
The mosl sliiking lealuie ol iising vage dispeision is nol
lhe videi gap helveen lhe skilled and unskilled hul lhe higgei
slice lhal goes lo a liny elile. The shaie ol income claimed hy lhe
lop o.I ol eaineis incieased liom z in I,)o lo 8 hy zoo), ac
coiding lo ieseaich hy Emmanuel Saez ol lhe Univeisily ol Cali
loinia, Beikeley, and Thomas Pikelly ol lhe Paiis School ol Eco
nomics. Much ol lhis liend, says Haivaid Univeisilys Richaid
Iieeman, is explained hy slock oplions, vhich aie counled as
pail ol pay. This goes hack lo somelhing ve have lhoughl ol as
oldlashioned. capilal veisus lahoui, says Mi Iieeman.
Waiting for intelligent robots
Theie aie dangeis in exliapolalion. The iecenl iapid giovlh
iales in emeiging maikels aie unlikely lo he suslained. And pei
haps lhe vage piemium paid lo voikeis vilh a college degiee
vill shiink again, loi ieasons unielaled lo liade. Scaice and ex
pensive skilled lahoui is ollen a spui lo invenlion. Beloie lhe in
dusliial ievolulion lhe handspinning ol iav collon inlo lhiead
vas lhe main hollleneck in lhe pioduclion ol clolh. Il look six
spinsleis lo leed each handloom used lo veave lhiead inlo clolh.
The inlioduclion ol mechanised spinning (ol lhe soil caiiied oul
al Quaiiy Bank Mill) changed lhal, ciealing a deailh ol hand
veaveis. Then povei looms deslioyed lhe vage piemium loi
handveaving, so lhe Iuddiles deslioyed some ol lhe looms in
iesponse. Il is conceivahle lhal advances in ailihcial inlelligence
mighl spell lhe end ol lhe vage piemium loi skilled voikeis, loo.
Bul loi lhe immediale luluie skilled voikeis in lhe iich
voild slill seem lo have lhe hesl piospecls. Collegeeducaled
voikeis aie moie likely lo he ahle lo svilch johs in iesponse lo
oulsouicing lhan lhose vilh lillle educalion. And lhe ievaids
loi lhose vilh johs lhal compele in lhe glohal maikel loi liadahle
seivices aie likely lo he highei lhan loi lhose in lovskill peiso
nal seivices-lhough lhe iisks ol losing lheii johs aie also giealei.
The anxiely ahoul oshoiing has ohscuied anolhei change
in lhe economic landscape lhal vill hiing johs lo iich counliies.
lhe iise ol lhe emeigingmaikel mullinalional. 7
THE HAIEVOOD CAR planl neai Iiveipool vas once no
loiious loi sliile. In lhe I,)os ils holshie voikloice lie
quenlly clashed vilh lelchy manageis. In lhe peacelul inleiludes
lhe planl luined oul eels ol Ioid Escoils, a populai lamily cai.
The planl is nov pail ol }aguai Iand Rovei (JLR), ovned hy
Tala Molois, lhe cai division ol an Indian conglomeiale. These
days il is a cheeilul and conlenled place. Al one end ol lhe planl
voikeis examine lhe hody pails shaped hy one ol len gianl mel
al piesses. Al lhe olhei end, in lhe painl shop, a spiayei diessed in
a pioleclive suil squiils a misl ol coloui inside lhe hack dooi ol a
cai shell. Ioiklill huggies, ovned hy DHL, a logislics him vilh
an onsile opeialion, disliihule pails liom oulside supplieis
aiound lhe lacloiy.
The ieason loi lhe aclivily and lhe good humoui is lhal pio
duclion has iecenlly slailed on lhe nev Iand Rovei Evoque, a
mini spoilsulilily vehicle. Beloie lhe cai had appeaied in lhe
shoviooms, JLR had laken I8,ooo oideis loi il and il vas alieady
loi sale on eBay. Thanks lo lhe conliacl loi lhe Evoque, Hale
voods voikloice has douhled lo {,ooo in lhe pasl yeai. Iocal
supplieis vill also henehl.
Tvo cenluiies ago lhe iise
ol lhe collon liade in lhe mills
aiound Mancheslei and lhe
poil ol Iiveipool spelled doom
loi Indias lexlile indusliy. To
day Indian hims ovn laige
chunks ol Biilains old induslii
al noilhvesl. The Slanlov oil
iehneiy close lo Halevood
vas houghl eailiei lhis yeai hy
Essai, an Indian conglomeiale.
Biunnei Mond, a chemicals
him slailed in I8){ jusl a lev
miles liom Quaiiy Bank Mill,
vas houghl hy Tala Chemicals
in zoo6. Blackhuin Roveis, a
loundei memhei ol Englands
piolessional loolhall league in
I888, is ovned hy VHGioup, an
Indian poulliy him.
These Indian oulposls aie
pail ol a hioadei shopping
spiee hy emeigingmaikel
hims. Theii shaie ol ciosshoi
dei meigeis and acquisilions
(M&A) iose lo I) in lhe seven
yeais lo zoIo, up liom jusl ( in
lhe pievious seven yeais, ac
coiding lo a iecenl iepoil hy lhe
Voild Bank. They aie lhe
souice ol moie lhan a lhiid ol
loieign diiecl inveslmenl (FDI)
in olhei emeiging maikels.
Typically lhis soil ol FDI is oi
South-north FDI
Role reversal
Emerging-market rms are increasingly buying up
rich-world ones
Uphill rush
Cross-border M&A deals from
emerging world to rich world
2000-10
Source:
World Bank
*Middle East & North Africa
excluding United Arab
Emirates (UAE)
By source
By destination
6
0 50 100 150
China
ME & NA*
UAE
Singapore
Brazil
India
Russia
Other Asia
Mexico
Sub-Saharan
Africa
Other
0 40 80 120 160 200
United
States
Other
Britain
Canada
Australia
Italy
Germany
1
SPECIAL REPORT
THE WORLD ECONOMY
ganic, vhich involves selling up a local
lacloiy oi hianch omce. By conliasl, diiecl
inveslmenl hy emeigingmaikel hims in
iich counliies (socalled soulhnoilh FDI)
lends lo he acquisilive, vhich means
one company huying anolhei.
The hulk ol lhe emeigingmaikels
M&A in iich counliies comes liom hve
counliies, led hy China hul also including
India. Ameiica is lhe iich voilds main ie
cipienl, vilh Biilain nol lai hehind, even
lhough ils economy is only aiound one
sixlh Ameiicas size. Olhei hig laigels aie
commodilyiich Canada and Auslialia
(see chail 6 on pievious page).
Iiims liom Ameiica and Euiope aie
lalling ovei lhemselves lo invesl in lasl
gioving emeiging maikels like China and
India lo escape sluggish economies al
home. Bul vhy aie emeigingmaikel
hims iushing in lhe olhei diieclion! The
main ieason is lhal, like iichvoild mulli
nalionals, lhey seek access lo nev cus
lomeis. As a company you donl vanl lo
he conhned lo local giovlh, says Man
sooi Dailami, one ol lhe aulhois ol lhe
Voild Bank iepoil. You vanl lo have lhe
glohal economy as youi maikel.
An acquisilion is ollen lhe quickesl
(and somelimes lhe only) vay lo gain a
loolhold in a counliy. JBS Iiihoi, a hig
meal company hased in Biazil, had no
piesence in lhe Ameiican maikel unlil il
houghl Svill, a sliuggling Ameiican iival,
in zoo) (see hox). Talas puichase in zooo
ol Telley, a Biilish lea him, gave il inslanl
access lo consumeis in Noilh Ameiica, as
vell as in Biilain.
Slow but steady
Emeigingmaikel hims may also
vanl lo limil lheii exposuie lo lheii lively
hul ollen hiillle home maikel. Giovlh in
lhe iich voild may he slov hul lhe invesl
menl climale is ollen vaimei. Theie aie
hellei iegulalions, lhe lax lavs aie easiei
lo live vilh, lhe couils aie less capiicious.
Biands aie a consideialion loo. Ra
lan Tala, lhe chaiiman ol lhe Tala gioup,
said lhe chance lo ovn lhe }aguai hiand
vas iiiesislihle. Building a hiand can
lake yeais and pols ol money, huying an
eslahlished one is ollen cheapei. Acquii
ing a iichvoild company can also he a
quick vay lo gel hold ol lechnology as
vell as lhe lacil knovhov lhal comes vilh opeialing a him in
maluie maikels.
Moieovei, a coipoiale piesence in lhe iich voild oeis ac
cess lo cheapei and moie ieliahle hnancing. The Voild Bank
sludy lound lhal aiound lvolhiids ol emeigingmaikel hims
vhich veie aclive in ciosshoidei M&A had used some loim ol
inleinalional hnancing lo do so-a hank syndicale, a hond issue
in loieign cuiiency oi a slockmaikel lisling in a iich counliy. Coi
poiale hond maikels in places like China and India aie slill un
deideveloped, so a hig, glohally hnanced M&A deal paves lhe
vay loi luluie capilaliaising.
A deepei macioeconomic loice hehind soulhnoilh FDI is
lhe need lo pul emeigingmaikel savings lo voik. The lhiee laig
esl emeigingmaikel huyeis ol iichvoild hims, China, lhe Un
iled Aiah Emiiales and Singapoie, all iun laige cuiienlaccounl
suipluses and so acquiie claims on loieigneis. (Acquisilions hy
hims in Biazil and India aie pail ol a moie even lvovay ov ol
capilal vilh lhe iich voild.) By conliasl, Ameiica lunds ils cui
ienlaccounl dehcil hy selling assels lo loieigneis. Much ol lhe
imhalance in savings helveen lhe iich voild and lhe emeiging
purchased Pilgrims Pride, a Texan chicken
producer. The deals were in part opportu-
nistic: both companies were in nancial
trouble and JBS was able to raise money
quickly, some of it in Brazils equity market.
But they also gave JBS a presence in and
access to the American market. That in turn
allowed it to export to Japan and other
Asian markets from which it had previously
been shut out.
Like other emerging-market rms,
JBS found it cheaper to buy brands than to
build them. A eet of small vans sporting
the Swift logo sells fresh meat in the area
around the Lins factory. The rm is also
launching a branded range of high-quality
steaks. JBS already sells fresh beef from
Brazil to the European Union under the
Hilton quota scheme, which cuts import
taris on meat produced to a high stan-
dard. JBS buys 2,500 Hilton-grade cattle
each year from Edson Crochiquias Santa
Izabel farm, an hour or so from Lins. It is his
only customer and sends inspectors to the
farm four times a year to monitor the cat-
tles food and board.
Because freshness is vital to high-
quality food, jobs at food-processing rms
cannot easily be shifted to wherever labour
costs are lowest. You have to be where the
cows are, says Wesley Batista, one of the
founders sons, who runs the rm. As it
happens, the cost advantage is shifting
towards the rms rich-world operations.
The strong real makes it more expensive to
export from Brazil and the weak dollar is a
boon to the American arm. America has
other advantages, too. Taxes are simpler
and the jobs market is much slacker than in
Brazil. There are more people available
who have the right skills and are well-
educated, says Mr Batista. Moreover, it is
now easier to persuade senior sta to move
from Colorado to Brazil than the other way
aroundanother sign of a world turned
upside down.
Beefed up
The worlds largest meat company is Brazilian, but mostly operates abroad
THE WORLD ECONOMY
SPECIAL REPORT
2
1
JBS STARTED IN 1953 as a butchers found-
ed by Jos Batista Sobrinho in Anpolis, a
city in Brazils central state of Gois. The
rm expanded initially thanks to a fast-
growing Brazilian economy and more
recently by acquiring other companies. It
is now the worlds largest meat producer.
In 2010 it had revenues of 55 billion reais
($31billion), only a third of which were
from its operation in Brazil.
The JBS plant at Lins, 450km from
So Paulo, is one of the rms largest and
employs 5,000 people, working two eight-
hour shifts. Inside teams of butchers llet
and trim the carcasses that arrive on a
conveyor belt, tossing the cut meat into
plastic-lined trolleys. Much of the raw beef
is cooked and canned at the plant. It is
rst ground into mince and then steamed
and rotated in an oven angled like a ce-
ment mixer so that the juices run o. Fat,
salt, sugar and colouring are added to the
half-cooked mix before it is canned. The
cooking is completed at high temperatures
in the cans which are then dried and
labelled. The market for this sort of pro-
cessed meat is global: the plant supplies
canned meat for Princes, a British rm, as
well as beef toppings for pizza parlours in
Belgium and Holland.
Fresh meat is a
dierent matter. Bra-
zilian companies like
JBS are banned
from exporting it
to America for
fear of foot-and-
mouth disease.
This is one reason
why in 2007 JBS
bought Swift,
then Americas
biggest beef pro-
cessor, based in
Colorado. Two
years later it
maikels is made up hy lhe sale ol goveinmenl honds. Bul emeig
ing maikels such as China alieady have lheii hll ol lovyielding
Tieasuiies and vanl lo acquiie assels vilh hellei piospeclive ie
luins, including iichvoild companies.
The pallein ol developedcounliy dehcils and emeiging
maikel suipluses is likely lo conlinue. Excepl loi China, lhe de
veloping voild is moslly young, vhich means lhal ils savings
lend lo he highei lhan lhose ol lhe ageing iich voild. Il lhe com
modilies hoom conlinues, il vill leave lhe oiliich Middle Easl
vilh hulging liade suipluses. The upandcoming economies
may seek lo emulale Chinas model, vhich ielies on olheis lo do
lhe spending. The iesulling halance ol glohal saving vill mean
lhal emeigingmaikel hims vill spiead lhemselves aiound lhe
iich voild and employ a gioving shaie ol ils voikloice.
Emeigingmaikel huyeis usually oei cash and lend lo
oveipay. A sludy hy OleKiislian Hope and Dushyanlkumai
Vyas, ol lhe Univeisily ol Toionlo, and Vayne Thomas, ol lhe
Univeisily ol Oklahoma, lound lhal hims liom developing
counliies geneially hid highei lhan iichvoild iivals lo huy com
panies in developed maikels, ollen loi paliiolic, social oi polili
cal ieasons. Talas zoo) acquisilion ol Coius, an AngloDulch
sleel him, is a case in poinl. Yel allhough Tala may have paid ovei
lhe odds, il gol a hig conhdence hoosl oul ol il, as did India as a
vhole. The psychological and culluial dimensions ol lhe deal
veie enoimous, says Shamik Dhai, vho coveis Asian econo
mies loi Aviva Inveslois, a Iondonhased lund managei.
Apail liom a good piice, lhe laigels ol such acquisilions
also gel a velcome inlusion ol animal spiiils and an appelile loi
inveslmenl lhal aie liequenlly missing liom iichvoild hoaid
iooms. Developingcounliy hiddeis have ciealed a moie vihianl
maikel loi lhe conliol ol iichvoild companies lhal keeps man
ageis on lheii loes.
They ollen gain speediei access lo emeiging maikels loo.
China is JLRs lasleslgioving maikel and mighl soon he ils hig
gesl one. A lev ol lhe cais made al Halevood aie shipped in kil
loim lo India loi assemhly. Thal makes lhe cais cheapei loi Indi
an consumeis, as lheie is less impoil duly lo pay. Caivoikeis al
Halevood seem happy lo he voiking loi an emeigingmaikel
mullinalional. Ahove all, lhey aie happy lo he voiking. 7
SPECIAL REPORT
THE WORLD ECONOMY
2
1
IT IS A ciisp Iiiday moining in Sanla Isahel, a small Biazil
ian lovn 6okm noilheasl ol So Paulo. Gahiiel de Malos,
lechnology diiecloi al Paiamounl Texliles, is laking deliveiy ol
lhe lalesl machine loi dyeing lhe vool yain lhal is made heie. Il
vonl look oul ol place. mosl ol lhe equipmenl is less lhan len
yeais old. The machines loi spinning yain aie (o laslei lhan
lhe ones lhey ieplaced. The nev kil has alloved Paiamounl lo
supply hneigiade vools loi lhe mens suils ils cuslomeis make.
The lacloiy iehl and lhe move upmaikel vas a iesponse lo
compelilive piessuies lhal have diiven many local iivals oul ol
husiness. The glohal maikel loi voollens has halved since lhe
midI,,os. Consumeis lhese days pielei casual clolhes, hul Bia
zil is nov loo iich lo compele vilh collon pioduceis in Vielnam
oi Indonesia. Ve need a piemium pioducl like vool lo covei
oui cosls, says Mi de Malos. China also pioduces vool and ils
land, lahoui and capilal aie ollen cheapei. Thank goodness ve
aie so lai avay, he says. Time is money and lhal gives us some
hiealhing space.
Paiamounl is copying lhe liicks long used hy iichvoild
husinesses lo lend o lovcosl iivals liom emeiging maikels.
hellei designs, nevei machineiy, shoilei pioduclion iuns (lo
give iaiily value lo each line) and laslei deliveiy lo local maikels.
Biilain hounded ahead in lexlile pioduclion lvo cenluiies
ago, and eslahlished hims have heen looking ovei lheii shouldei
evei since. An eaily challenge came liom lhe lexlile indusliy in
Nev England, vheie counlless lovnships called Mancheslei
veie lounded (ol vhich one suivives). Thal cluslei soon laced
compelilion liom lacloiies in lhe lovvage Ameiican Soulh.
The collon indusliy has caiiied on liavelling. ils lechnol
ogy moves easily lo vheievei lahoui cosls aie lov. The pallein
has heen iepealed loi olhei soils ol venluies. Moie complex
lechnologies aie haidei lo copy, so lheii diusion has heen slov
ei. Bul lechnology evenlually spieads. Il is vhal diives economic
conveigence, making laige pails ol lhe developing voild hellei
o yeai hy yeai.
Demography is destiny again
Ioi much ol lhe pasl lvo cenluiies lhe knovhov lhal de
leimines pioduclivily and living slandaids has heen concenlial
ed in lhe Vesl. Thal is liue ol haid engineeiing lechnology as
vell as lhe lacil knovledge ol hov hesl lo oiganise pioduclion,
suppoil maikels and manage aggiegale demand. Because laige
pioduclivily gains veie conhned lo lhe Vesl, lhe populous pails
ol lhe voild slayed pooi.
Thal vas anomalous. Populalion has deleimined eco
nomic povei loi mosl ol human hisloiy. Nov demogiaphy and
pioduclivily aie pushing in lhe same diieclion. Ameiica and Eu
iope aie demogiaphic minnovs compaied vilh lhe developing
voilds lvo gianls, China and India. And lhe iich voilds hnan
cial ciisis and ils alleimalh is acceleialing lhe shill ol economic
povei easlvaids. }usl as lhe calchup in emeiging maikels is
speeding up and hioadening oul, lhe iich voilds economies
seem lo he giinding lo a hall. Il China can avoid a hlovup in lhe
nexl decade, il is likely lo hecome lhe voilds higgesl economy-
The path ahead
Cottoning on
The Wests relative decline is inevitable but the Easts
rise will still be troublesome
THE WORLD ECONOMY
SPECIAL REPORT
lhough ils cilizens vould slill he pooi hy Ameiican slandaids.
The hig queslion loi lhe glohal economy is vhelhei lhe iap
id giovlh in emeiging maikels can conlinue. The hioad eco
nomic logic suggesls moie ol lhe voild economys gains should
come liom conveigence hy emeiging maikels lhan liom lhe iich
voild pushing ahead. Each innovalion adds less lo iichvoild
piospeiily lhan lhe adoplion ol an eslahlished lechnology does
lo a pooi counliy. Al lhe slail ol lhe indusliial ievolulion lhe col
lon indusliy alone could make Biilains pioduclivily jump. Bul
nov lhal lhe lionliei is videi, lheie is less scope loi leading econ
omies lo suige ahead. Moie ol lhe voilds giovlh oughl lo come
liom calching up.
Bul conliaiy lo some exciled loiecasls, lhe giovlh ol
emeiging economies is unlikely lo conlinue al lhe same pace, oi
in a sliaighl line. Economic conveigence is a poveilul loice hul
cannol knock ovei eveiy ohslacle. And lhe haiiieis lo giovlh he
come higgei as economies enlei lhe dimcull middleincome
phase ol developmenl.
Moving capilal and voikeis liom dying lo iising venluies is
liickiei lhan liansplanling pooi iuial migianls lo cilies in lhe eai
ly phase ol calchup. As economies hecome iichei lhey can iely
less and less on lhe hiule loice ol addilional machine povei lo
diive lheii piospeiily. They have giealei need ol a skilled voik
loice and a hnancial syslem lhal is alluned lo vheie lhe hesl ie
luins aie likely lo he made. Counliies lhal
have ielied on expoils lo luel lheii giovlh
need lo shill lo inleinal souices ol spend
ing, vilh all lhe associaled headaches loi
monelaiy and hscal policy. In lhe pasl
many middleincome economies have
iun agiound hecause lhey have lailed lo
meel such challenges.
Careful what you wish for
The higgesl emeiging maikels, vilh
lheii huge loieignexchange ieseives, ap
peai lo he almosl ciisispiool (al leasl oul
side easlein Euiope) in conliasl lo lhe
seemingly ciisispione iich voild. Bul sel
hacks in making lhe shill liom pooi lo iich
aie inevilahle. Indeed a lesson ol iecenl
economic hisloiy is lhal counliies and ie
gions lhal iide oul a ciisis vell aie all lhe
moie vulneiahle lo lhe nexl one. Huhiis
leads lo policy mislakes, as lhe developed
voild has pioved so devaslalingly. So
lhick is lhe gloom peivading lhe iich
voild lhal lhe onceiegulai emeiging
maikel ciises have almosl heen loigollen.
Bul lhis makes il even likeliei lhal lhey
vill one day ieluin.
Those anxious lhal lhe iich voilds economic povei is
ehhing mighl velcome a lev emeigingmaikel slipups. A less
lianlic iale ol giovlh in lhe developing voild vould also slov
lhe ielalive decline ol lhe Vesl and allov il lo cling on lo some ol
ils piivileges loi longei. The dollai and lhe euio could mainlain a
ieseivecuiiency duopoly loi longei, commodilypiice pies
suies on husinesses and consumeis vould ease, and lhe impacl
ol developing economies on ielalive vages and johs luinovei
mighl he less jaiiing.
Yel lhe emeiging maikels aie lhe hesl hope loi glohal
giovlh-loi lhe nexl lev yeais al leasl. }apans economy is in a
lunk, lhe euio zone is in dangei ol imploding, and much ol lhe
iesl ol lhe iich voild is hungovei liom a gianl ciedil hoom.
Ameiica, Biilain and olheis look on dehls lhal nov look sleep
compaied vilh incomes and
lhe value ol lhe homes againsl
vhich much ol lhe money vas
hoiioved. They aie saving haid
lo hll lhe gap. Those vilh cash
(including a chunk ol lhe coi
poiale voild and nol a lev
households lhal gained liom
lhe housing hoom) aie clinging
on lo il hecause ol unceilainly
ahoul luluie demand, joh pios
pecls, laxes, lhe supply ol ciedil
and much else.
Thal is lhe main ieason
vhy a lasl iale ol calchup hy
lhe emeiging maikels vould he
hellei loi lhe Vesl lhan a lallei
ing one. A iichei and moie con
sumeiled China vould he like
liei lo huy moie ol lhe seivices
in vhich developed counliies
have a compaialive advanlage.
Il vould he heallhy, loo, il
lhe developing voild could
hieak lhe iich voilds monopo
ly on inleinalional hnance. The
emeiging maikels accounl loi
almosl hall ol glohal GDP hul
have no ieseive cuiiency ol
lheii ovn. Ioi nov lheie seems
lillle alleinalive lo lhe dollai as
a hnancial lodeslai and lhe main sloiehouse loi lhe voilds pie
caulionaiy saving. The yuan is lhe likeliesl candidale lo sup
planl il hul has so lai laken only hahy sleps lo hecoming inleina
lional. The longei il lakes loi lhe yuan lo emeige, lhe moie iisky
lhe glohal hnancial selup vill hecome. The voiiy is lhal sliong
demand loi Tieasuiies as ieseives mighl lempl Ameiica lo ovei
slielch ilsell. The vieckage liom lhe iich voilds housing husl
shovs lhe dangeis ol money lhal is loo cheap.
In olhei vays, loo, il mighl he hellei loi lhe iich voild il
China and olheis caughl up vilh il soonei ialhei lhan lalei. Iasl
ei calchup vould naiiov lhe vage gap helveen emeiging and
iich counliies and help lo ielieve lhe dovnvaid piessuie on un
skilled vages. A maluie Chinese economy vould vasle levei
naluial iesouices on haidlojuslily inveslmenls. Many in lhe
iich voild leai lhe loss ol economic dominance lhal vill he lhe
evenlual oulcome ol conveigence. Bul peihaps losing il is voise
lhan having losl il.
And peihaps lhe pessimism ahoul Ameiica and Euiope is
as oveidone as lhe oplimism ahoul emeiging maikels. The iich
voild is an enlicing place vhen vieved liom lhe developing
voild. Ioi all ils liouhles, Ameiicas economy is a souice ol envy.
Euiopes highend indusliies and luxuiy goods aie nol easily
mimicked. Emeigingmaikel hims hnd il easiei lo do husiness, lo
iaise hnance and lo hnd skilled voikeis in lhe iich voild. Such
alliihules aie haid lo ieplicale. Il il veie easy, lhe emeiging econ
omies vould alieady he iich. 7
The growth of emerging economies will not continue at the
same pace, or in a straight line. Setbacks in making the
shift from poor to rich are inevitable
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