Tuesday, September 16, 2014

Is China Enough?

BUENOS AIRES ‒ For many countries in Latin America, demand from China has been essential to maintaining high GDP growth rates over the last decade. But will Chinese demand for commodities be enough to sustain high prices for the region’s exports in the coming years?

During the last two decades, four factors combined to generate a sharp increase in world demand for commodities: rapid growth in global GDP, increasing urbanization in developing countries, a rise in population at a rate of 800 million people per decade, and a significant decrease in poverty. With the exception of global population growth, China has been the most dynamic country in all of these respects.

For example, the number of Chinese living in poverty fell by 650 million over the last two decades. Moreover, China accounts for half of the global increase of 1.5 billion people earning between $2-13 a day in the past 20 years.

But should we expect what happened from 1990 to 2010 to continue in the coming decades? To answer that question, several variables must be taken into account: demand growth, technological change, investment, and the commitment to confront global warming, among others. Bearing in mind such complexity, let’s consider only some determinants of demand that are linked to increased income.

Two factors appear to be the most important: China’s growth rate in the coming years, and whether its growth will be sufficient to maintain high levels of global demand for commodities. Even if it is, the impact is likely to be different for agricultural exporters (the members of Mercosur and some Central American countries) than for exporters of minerals and oil (Mexico and other South American countries).

Moreover, although fiscal and monetary stimulus in China can compensate in the short term for weaker export demand, this will not be enough to sustain demand growth without economic “normalization” in the developed countries. As we know, this is far from assured in Europe; nor is it evident in the United States and Japan – that is, countries that account for roughly 45% of Chinese exports.

In the medium and longer term, the expected and hoped-for increase in China’s domestic consumption should be the most dynamic element of demand, with export growth continuing to slacken and investment remaining – except for brief periods – below 50% of GDP. This is not guaranteed, however, as progress in establishing social insurance – crucial to increasing consumption – has been relatively slow, while monetary transfers to families (such as those that have been implemented in Brazil, Mexico, and elsewhere in Latin America) might not be feasible, given the logic of China’s political system.

Even if China sustains rapid growth, it is unlikely to repeat in the next 20 years the extraordinary decrease in poverty witnessed in recent decades. The reason is simple: of the 400 million people living on two dollars a day in 2008, it is possible that “only” 300 million remain. Moreover, the rate of China’s population growth is close to zero, and will turn negative before 2025. As a result, fewer people will cross the poverty line, although more will see their daily earnings grow from two dollars to five, and from five dollars to ten.

That trend will have a differentiated effect on demand for cereals and soy relative to other products that are more closely linked to higher incomes, such as foods containing higher-quality protein, metals, and oil. In terms of the latter products, China might continue to be decisive for global demand growth.

This is why, in order to maintain food prices in the medium term, other countries or regions will need to start reducing poverty at rates similar to that of China in the recent past. Bearing in mind the differences in their productive structures, sub-Saharan Africa and India appear to be the best candidates, given that they accounted for 1.4 billion of the world’s poor in 2008 and 60% of global population growth.

Will India and sub-Saharan Africa – which grew at annual rates of 7.3% and 5%, respectively, during the last decade – assume the role that China has played in recent years? It seems unlikely, but without them it is difficult to foresee high prices for commodities – and food, in particular – over the next two decades. In that case, there will be less time left for the countries that have not taken advantage of the current bonanza to lay the foundations of sustainable growth.

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