Friday, 4 May 2012

China’s Global Development Impact: From Initial Entry to Sustained Growth Effects

Time is increasingly ripe to better disentangle the global development impact of SW I from SW II:
·         SW I means Shifting Wealth phase I, the initial opening of China and India to world markets which really became felt from the 1990s – a ‘one-off’ event that integrated 2 bn people or 40% of global labour force in the global market economy;
·         SW II stands for Shifting Wealth phase II, a long-term process of sustained and superior growth in populous emerging countries that keep accumulating skills, capital and modern technology, build a middle-income class, switch from investment-led growth toward more consumption and export increasingly sophisticated stuff and services.
(This post will remain basic and cryptic as I do not want ‘sell’ that brainstorming prematurely).

The commodities-manufactures terms of trade (1949-2008)
                                     Source: Kaplinski (2011)

The graph depicts one aspect of SW1: the initial entry of China into the world markets, especially from when it joined the WTO, has been supportive of raw material prices relative to manufactures, especially manufatures that embody basic skills only. That Stolper-Samuelson effect had led to widespread concerns of China de-industrialising other developing countries, concerns that were confirmed in some semi-industrialised countries such as Mexico, Thailand and South Africa while the majority of low- and middle-icome enjoyed higher growth thanks to China’s growth engine. Are we close to a turning point, from when the terms of trade will start to rise in favour of basic-skill manufactures and to the detriment of high-skill manufactures and commodities? This is what can be gradually expected as China accumulates skills and increasingly starts to export them through goods while the space for low-income supplies starts shrinkings as large emerging markets start to get rich.

China’s Global Development Impact: From Initial Entry to Sustained Growth Effects
Impact Channel
SW I:Entry Effects
SW I Impact on LICs + MICs
SW II: Ongoing Process
SW II Impact on LICs + MICs
Growth Engine
From G7 to China
Higher growth in LIC and MIC,
oil and non-oil
Partial rebalancing of growth engine
Higher trade client diversity, while initial specialisation effects weaken
Agg Demand
Stimulated imports of commodities and skill-intensive
Higher consumption share, less investment
Stimulates low-skill imports, skill imports neutral, structural impact on commodity demand (iron ore, copper suffer; food crop prices stagnant/rising)
Factor Supply
Land-labour ratio lower;
Skills-labour ratio lower
Better ToT for commodities and skill-intensive;
Lower ToT for low-skill manufactures
Skills-labour ratio gradually rising;
Land-labour ratio stagnant
Better ToT for low-skill manufactures with new supply/demand balance;
Skill- and tech-intensive manufactures face lower ToTs.

The shrinking share of investment  in China’s GDP and  the rising middle class in emerging countries will favour goods and services with high income elasticities, such as tourism, cars and green energy. (Engel’s Law tells us that the absolute spending on goods with low income elasticity must not fall, just their share in overall spending). The new demand patterns in turn determine the future price developments of commodities: aluminium and palladium, heavily used in cars and power infrastructure, will fare better than copper, iron ore and zinc, the metals most leveraged to construction and fixed asset investment.
Like raw materials, clusters of countries will be differently affected to the extent that we move from SWI to SWII. Incidentally, Mexico’s economy  grew faster than Brazil’s last year. As the growth differential China-US shrinks, Chinese wage unit cost rise and commodity prices stop rising, Brazil will feel a bit more Chinese headwind, while Mexico will benefit from stronger backwinds.

Barclays (2012), “China’s commodity intensity: the dragon’s appetite is changing”, Cross Currents/25 April (not online).
Chamon, M. amd M. Kremer (2009), “Economic transformation, population growth and the long-run world income distribution”, Journal of International Economics, Vol. 79, pp.20 – 30.
Damina, B., E. Ianchovichina, and W. Martin (2009), “How will growth in China and India affect the world economy?”, Review of World Economics, Vol. 145, pp. 551 – 571.
Garroway, C, B. Hacibedel, H. Reisen, and E. Turkisch (2011), “The renminbi and poor-country growth”, The World Economy, Vol. 35.3, pp. 273 – 294.
Levy Yeyati, E. (2009), “On emerging markets decoupling and growth convergence”, www,, 7 November.
Conference, 5 - 6 December 2011, University of Bristol.
Wood, A. and J. Mayer, “Has China de-industrialized other developing countries?”, Review of World Economics, Vol. 147, pp.325 - 350.

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