Tuesday, September 29, 2015

Perspectives on World Growth

As you know I like JD and I like data. Taken together, they can produce an interesting evening. The challenge with data is that while there is sometimes a wonderful story among the dollar signs and dots, finding it and then explaining it can be an excruciating process. Even if candidates didn’t say idiotic things about international policy, there is plenty of fun rooting through the numbers published about our trading partners. Our friend Mr Trump is going to do unmentionable things to China as he teaches them a lesson or two. I am not sure that Mr Trump understands much about China or he wouldn’t say such things. But this little exercise today is not really about China or Mr Trump. It is about what happened to our world lately and our place in the future.

That’s a lot to promise so let me slim today’s goal down a little. I looked at one economic indicator for 200+ countries. I expect you to memorize those numbers for a 40 year time time period stretching from 1973 to 2013. My calculator says that is about 8,000 data points. Ha ha. Just kidding. After looking at all that data I chose 22 countries and looked at growth during two six year time periods – 2001 to 2007 and from 2007 to 2013. The data comes from the United Nations and unfortunately does not extend into 2014 and 2015. But you gotta do what you gotta do. Right?

I chose to focus on GDP per capita in dollars. Those numbers are pretty simple and straightforward.  Per capita means that we are looking at national output per person. The UN uses standard market exchange rates to convert all foreign GDPs to dollars. These are nominal GDP figures so they have not been adjusted for inflation. You can find several similar versions of GDP to make these kinds of comparisons. I won’t go into all that and admit my results may be influenced by my choices for countries, time periods, exchange rates, price deflator, and of course the color of my wallpaper. My results are not surprising so I will stick with my choice. I invite readers to explain how my choices might have biased my results.

There are a couple of perspectives that come from doing this exercise. First is that emerging markets are very different from their richer trading partners. Much of what we are seeing in 2015 and will see in coming years stems from these differences. China is a prime example. China might have a really big economy today, but the per capita figures show it is the 20th richest (from among the 22 countries I chose) in terms of output produced per person. In GDP per capita China ranks just above Vietnam and India but below Cuba. Its $6,626 output per person in 2013 is a far cry from the US citizen who earned almost $53,000.

Okay – I hear my friends saying that emerging markets have not matured and much of what gets produced is outside young markets and gets traded in black markets. Thus much of what they produce never gets measured by the UN. But even if that is true, it surely does not explain the huge difference between China and the USA. China has a big GDP because it has 1.4 billion citizens. When you average production over all those people – urban and rural – they are much poorer than Greeks, Argentinians, Russians, Venezuelans, Brazilians, Turks and Mexicans.  So when a politician expects China or any number of developing countries to behave just like the richer countries, they are comparing apples and apple brandy.

As I show below, China has had very dramatic economic growth. Like many other emerging or developing nations, China remains relatively poor but is catching up. They are catching up to the richer countries because they have transformed their economic systems away from inefficient centrally planned and/or autocratically controlled closed systems – to more open and more market-oriented ones. As you can see below, this has worked to produce amazing growth. As you can also see they still have a long way to go to match the income of people in the wealthier nations.

I once used the terminology “low hanging fruit”. Low hanging fruit means that it is sometimes easy to get started and to make gains – but as you move higher up the tree it gets harder and harder. That is the experience of most of these countries. China’s problems today illustrate the low hanging fruit point. For one thing mathematics shows that rapid growth is simply the result of having growth relative to a very low starting point (ie the denominator of a division). A $100 increase in GDP looks huge if your GDP was once $10. It doesn’t look so great if your GDP was $1,000. For another thing it is simply harder to move up the ladder of transformation. If people are used to getting government subsidized bread for 10 cents a loaf – they resist politically when the government removes the subsidy. China has much to change to be truly market-oriented -- but there is great resistance now for every step they take. 

I could go on and one but let’s try to keep you awake with the numbers I promised.

First comes size.
Two countries earned less than $2k per person in 2013 – Vietnam and India. Cuba.
S. Africa and China were under $10k
In 2013 US and Canada led the group of richer countries with around $53k per person. Germany, UK, and France were in the $40ks and Japan, HK and Italy were in the $30ks.

I chose two comparison periods of five years length – 2001 to 2007 and 2007 to 2013.For these two periods I looked at total percent change – not the average annual change.
The early period showed strong growth for most countries. Russia's GDP per person grew by 331%. With triple digit growth in order behind Russia were Turkey, China, Greece, Brazil, India, S. Africa, Spain, Vietnam and S. Korea. 
Mexico, the US, Hong Kong, and Japan grew by less than 40% in those five years.
Argentina contracted by 2%,
Only three of the twenty-two countries picked up the growth pace in the 2007 to 2013 period: Japan, Vietnam, and Argentina. Japan’s growth went from 4% to 13%. Neither number is very impressive. Argentina grew by 7% after decreasing by 2%. Vietnam grew faster than 100% in both time periods.
China grew faster than 150% in both time periods! But then China has made major news since 2013 by growing much slower.
Most countries had slower growth in the past six years compared to the former.  Four countries had negative rates in the latter period – Greece, UK, Spain, and Italy. France grew by only 2% over these six years. The US, Germany, South Africa, South Korea, Mexico, Japan grew by 10-15%. For these latter countries the growth in the second period was at most a third of the growth in the first one. Remember, these are growth rates for the whole period -- not per year. 10-15% nominal GDP growth over five years is not good. 

That’s a lot of food for thought. But the numbers clearly show a few things. First, emerging markets once led the growth parade. Second, they have a very long way to go to catch-up to the richer nations in terms of income. Third, growth in all countries was pretty much smashed by the last global recession. Fourth, voters and citizens around the world feel imperiled by recent economic events and will put a lot of emphasis on growth. This leaves a lot of room for policy mistakes. 

Table Country Comparisons: GDP Percapita
Level in 2013 and Growth Rates 2001-2007 and 
2007 to 2013

2013 01 to 07 07 to13 Country
14,760 -2 75 Argentina
11,199 130 56 Brazil
52,270 87 18 Canada
6,626 157 152 China
38,039 24 25 Hong Kong 
6,985 83 35 Cuba
42,339 84 2 France
45,091 76 10 Germany
21,768 133 -24 Greece
1,548 128 49 India
35,243 82 -5 Italy
38,528 4 13 Japan
10,293 39 12 Mexico
26,482 105 12 Republic of Korea
14,680 331 62 Russian Federation
6,936 126 15 South Africa
29,685 116 -10 Spain
10,972 205 18 Turkey
42,423 88 -13 United Kingdom
52,392 29 10 United States
12,213 69 47 Venezuela
1,868 105 128 Viet Nam


  1. Not much to comment on. Good chart It is what it is. One big glaring number is excluded and that is the size of the middle class using the country's cost of living in terms of US $D. China has approximately 4M middle class who are the rising consumers to generate a consume based economy. The US has less than 70M and dropping middle class. The market in China therefore is much more fertile but getting products made in US and Canada to sell there is not quite a reality due mostly to the high cost of products and services made in the US...to combat this US companies set up branches so they can make the product cost match up with the ability to buy. The question I have is what do they do with the profit ...which in US dollars is 1/5 of what it would be in the US. ..invest in more branch offices?

    1. Thanks Jim. US firms cannot compete against Chinese firms here or in China -- if they focus on what China does best -- medium to low quality products. US firms can compete anywhere on what we do best. Of course they have to deal with the Chinese authorities and that is another hurdle. As for profits -- if we had a more reasonable approach to worldwide profits in the US tax code we might see more of that money flowing back to the US.

  2. While none of this changes your point, especially the growth rates, the CIA Factbook lists data through 2014. It reports PPP adjusted GDP per capita:

    For China

    2014: 12,900
    2013: 12,000
    2012: 11,100

    For the US:

    2014: 54,600
    2013: 53,300
    2012: 52,200

    China may someday come within half of the US but we are unlikely to see it.

    1. Thanks Captain! Looks like the PPP adjustment didn't do much to change the US numbers but it made a major change in China. It suggests that China's exchange rate is highly undervalued if I understand these things. Hmm.