GDP Per Capita

http://www.economist.com/node/18560195

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"You have to think about big things while you are doing small things, so all the small things go in the right direction." (Alvin Toffler)

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So, as we end the semester with Fareed Zakaria's continuing homage to China growth and how the rest of us need to make way for it, "The Economist" comes up with "BRIC Wall" as part of its "Economics focus" section. As even Zakaria has said, anything multiplied by 1.3 billion (China's rounded population number) produces a big number. Ergo, China's GDP in dollars is already number 2 in the world, having passed Japan recently. As Japan has had a rough last 20 years, China's "accomplishment" may say as much about Japan's slide as it does about China's growth.

For anyone who has seen the pictures of China's "Empty Cities" or the Australian news video of the South China Mall (aka, the largest mall in the world), China's actual GDP is suspect.

So, along the lines of giving careful counsel about GDP growth, The Economist suggests that the post WW II period has been rich with examples of "blistering catch-up growth" which inevitably slows because gaining ground on the leaders is far easier than overtaking them.

And here's a critical point: developing countries can borrow existing technologies from countries that have already become rich. Advanced economies may be stuck with obsolete infrastructure - does any of this sound familiar?

But, the more an emerging economy resembles the leaders, the harder it is to sustain the pace: "As the stock of borrowable ideas runs low, the developing economy must begin innovating for itself." (Economist again)

OK, so how about numbers? The Economist refers to a new study that looks for the "middle-income trap" that inevitably slows down rapidly growing economies (Barry Eichengreen @ Berkeley and others). That study examined the worldwide economic record since 1957 in attempt to measure potential warning-signs (of growth slow downs). What emerged was a critical threshold: on average, growth slowdowns occur when per-head GDP reaches (around) $16,740 @ PPP (purchasing power parity). As The Economist points out, this estimate passes the smell test of history (see The Economist bar graphs for South Korea, etc.)

Interestingly, a large ratio of workers to dependents reduces the odds of a slowdown. An undervalued exchange rate, on the other hand, appears to contribute to a higher probability of a slowdown.

China's growth puts it on a course to hit the $16,740 GDP-per-head threshold by 2015. Given the Chinese economy's long list of risk factors (an older population, low levels of consumption and a substantially undervalued currency), the study's team puts the odds of a slowdown in China at 70%. That's a high number.

In China's case, rapid development could shift inland, where millions of workers have yet to move into manufacturing, while the coastal cities nurture an ability to innovate (and the study's authors acknowledge this). The IMF forecasts real GDP growth rates for China above 9% through to 2016. That's OK, but China's own new 5 Year Plan has a GDP growth goal that goes something like 8% for 2011 and 7% for the following 4 years, possibly acknowledging a potential slow down. Of course, China has, for the most part, always beaten its GDP growth goals.

More concerning are the generally accepted correlations between GDP growth percentages in China and unemployment: for every 1% drop in GDP growth below 9%, 22 million people become unemployed. That's a number that we have seen no one challenge lately. So, does that mean China's leaders are planning on a growth goal that implies significant unemployment?

Our guess would be that China's (new) leaders plan to beat their GDP goals, as they have in the past, but they may have to do it by infrastructure spending that has no "multiplier" (empty cities or empty malls imply no continuous spending because there is nothing there beyond the structures themselves).

This has the potential negative implication that aligns with George Friedman's (founder of STRATFOR, and author of "The Next 100 Years") perspective: "What happens when China's economy weakens and standards of living decline overall? For the more than 1 billion Chinese living in abject poverty, even a small contraction in living standards can be catastrophic. That is where China is heading in the very near future - toward a relatively small decline in growth, but one that will pyramid economically and socially, generating resistance to the central government."

Friedman continues: "The problem with China is political. China is held together with money, not ideology. When there is an economic downturn, and the money stops rolling in, not only will the banking system spasm, but the entire fabric of Chinese society will shudder. Loyalty in China is either bought or coerced ... a very real future for China in 2020 is an old nightmare - a country divided among competing regional leaders, foreign powers taking advantage of the situation, and a central government trying to hold it all together, but failing."

So, the GDP per capita "stall point" could be a very real early sign that China's economic growth is in more trouble than it might appear to be.