Tuesday, 19 December 2017

China & India: Twin-Turbo for Global Growth?

The doomsayers will have to wait further for their collapse scenarios on China finally to materialize. The World Bank has just lifted its 2017 forecast for economic growth in China amid rising household incomes and a recovery in global trade[1].
China’s and India’s high growth has boosted global growth in recent years (Figure 1). From 2011 to 2015, China’s relative contribution to global growth was on a par with advanced countries, despite its per capita GDP growth falling from a top rate of 13.6 % in 2007 to 6.1 % in 2016. India’s contribution to global growth has also risen since the early 2000s, on the back of a per capita income growth rate oscillating between 8.8 % in 2010 and 5.9% in 2016. However, China has contributed almost 30% to global growth in recent years, approximately 20 percentage points more than India. As India is still considerably poorer than China, it cannot yet offset the impact of China’s slowdown on global growth and trade.

Figure 1: Contribution to global growth, 1991-2015, by areas (%)

Meanwhile, India has taken the lead over China in terms of GDP growth (but not per capita), with favorable demographics that encourage domestic savings and investment. In the future decades, Shifting Wealth may well benefit from a twin-turbo, China and India. Twin-turbo refers to the turbocharger configuration in which two identical turbochargers function simultaneously, splitting the turbocharging duties equally. Each turbocharger is driven by half of the engine's spent exhaust energy. A twin-turbocharger relying on China and India would be good news for convergence and for the world economy, counteracting the backlash emanating from populism and protectionism in the US and Europe.
Ever since the 1990s, there has been much talk about China´s growth slowing down. But China´s slowdown has been overhyped in Western media recently, while India has been celebrated as the new top-growth country. In per capita terms, however, China still leads India.  China´s growth has been coming down from unsustainable levels, while India´s growth has been rising, erratically so due to her exposure to weather conditions. In recent years, growth in both Asian giants has comfortably settled above 5 percent per annum.

Figure 2: GDP real per capita growth (annual %), 1990 - 2016

The June 2017 issue of the World Bank´s Global Economic Prospects predicts real GDP growth at 6.3 percent for both 2018 and 2019; India´s growth is forecast to reach 7.5 and 7.7 percent, respectively, in the two forthcoming years. Current annual population growth is 0.5 percent in China and 1.2 percent in India. So in real terms, per capita income growth is forecast to be superior in India than in China, albeit just by roughly half a percentage point.

Table 1: Percent of real global GDP Growth, forecast 2017 – 2019

Even so, Table 1 suggests that India is still far from contributing to global GDP growth on equal terms with China. Mind you, India is forecast to contribute 8.6% to global growth (based on the cited World Bank numbers), and that exceeds the EU contribution. Meanwhile, China will support more than a third of world economic growth during the end of the current decade. 

Figure 3: Convergence to US GDP/cap, 1990-2016
Source: https://www.imf.org/external/pubs/ft/weo/2017/02/weodata/weoselgr.aspx

For the moment, the world economy doesn´t enjoy a twin-turbo China-India quite yet. India is still too poor to meaningfully contribute: its GDP/capita relative to the USA stood at 11.6 percent in 2016. China´s per capita income stood at 26.7 percent of US mean per capita income (Figure3). Compared to the US, among the five BRICS countries only China and India have converged to US per capita income levels since 1990 and 2016.

Figure 4: Trade (% of GDP)

Another concern is that trade shares (% of GDP) have been dropping in India from 56 percent in 2012 to below 40 percent in 2016. India´s weak export performance reflects her dependence on commodity exports and a poorly diversified export basket[2].
To be sure, China´s trade shares have been dropping even more but this was a welcome outcome of rebalancing the country toward more consumption. In any case, the drop in trade shares observed in both Asian (Figure 3) giants translates domestic GDP growth mechanically into lower contribution to global growth. The twin-turbo support to the world economy in turn relies on an open trade system. With the US retreat from multilateralism under Trump, the twin-turbo engine is likely to stutter for a while.

[1] World Bank lifts China’s 2017 growth outlook, Financial Times, 19th December 2017.

[2] Understanding India’s export collapse, The Hindu Business Line, 21st November 2016.

Sunday, 3 December 2017

Trump´s tax cuts mean ´we´ won´t beat global poverty

The US Senate’s approval on Saturday, 2nd December 2017, of big corporate tax cuts (from currently 35 to ca 20%) paves the way for a rehearsal of Reagonomics, in worse:
·         a ballooning US budget deficit (despite spending cuts for the American poor), according to the Congressional Budget Office and the Joint Tax Committee;
·         a further sugar high for stock markets and, possibly, short term growth;
·         a tighter US monetary policy to limit short-term diabetis (inflation pressures, bubbles);
·         rising US interest rates and a stronger US dollar;
·         depressing raw material prices in dollar-denominated markets.
Unlike Reagan, Trump is unashamedly protectionist, limiting any beneficial effects of the US tax cuts on US imports. Trade protectionism and the level of economic activity are important for developing countries, since they affect their exports and terms of trade. High real interest rates will dramatically increase the debt service burden of indebted developing countries; the appreciation of the US dollar will depressed commodity prices; developing-country terms of trade will mostly drop, implying an implicit income transfer away from commodity-dependent countries to commodity importers.

Table: Likely Impact of Trumps Tax Cuts on Africa
Net Foreign Assets/
Commodity Trade
High debt/tax ratio
Low debt/ tax ratio
Net FX reserves

The burden on the world´s poor will not be uniform. The table, inspired by van Wijnbergen´s (1985) analysis[1] provides a quick balance-sheet analysis of the impact of rising interest rates, a rising US dollar, and of falling commodity prices on some emerging countries. Ghana is an example of a country possibly worst hit by the US Tax cuts as it is a net oil exporter and carries a high net debt load. India and China should be much less affected in comparison by the US tax cuts as they are net importers of fossil energy and minerals, while they are less affected by a rise in interest rates. Whether they will benefit from any US expansion fueled by the tax cuts, is quite doubtful. First, it is quite unlikely that the US tax cuts will lead to a sustained; the Senate tax plan would merely cause faster economic growth -- about 0.8 percent more over the next decade, the Joint Committee on Taxation has found. Second, any important pass-through of US growth benefits abroad will be inhibited by Trump´s protectionism. With Trump, “we” can´t beat world poverty.

[1] Sweder van Wijnbergen (1985), “Interdependence Revisited: A Developing Countries Perspective on Macroeconomic Management and Trade Policy in the Industrial World”, Economic Policy, Vol. 1, No. 1 (Nov., 1985), pp. 82-137. http://www.jstor.org/stable/1344613