Monday, November 15, 2010

Two Perspectives

Bloomberg

China to Exceed U.S. by 2020, Standard Chartered Says

November 14, 2010, 11:53 PM EST


(Updates with growth, yuan forecasts in sixth, eighth paragraphs.)
By Shamim Adam

Nov. 15 (Bloomberg) -- China will overtake the U.S. to become the world’s largest economy by 2020, helped by faster expansion and an appreciation of its currency, according to Standard Chartered Plc.

“We believe that the world is in a ‘super-cycle’ of sustained high growth,” economists led by Gerard Lyons said in a report published today. “The scale of change over the next 20 years will be enormous.”

China’s economy will be twice as large as the U.S.’s by 2030 and account for 24 percent of global output, up from 9 percent today, Lyons said in the 152-page Super-Cycle Report. India will surpass Japan to be the third-biggest economy in the next decade, according to the report. Goldman Sachs Group Inc. estimates China will overtake the U.S. by 2027.

The world may be experiencing its third “super-cycle,” which is defined as “a period of historically high global growth, lasting a generation or more, driven by increasing trade, high rates of investment, urbanization and technological innovation, characterized by the emergence of large, new economies, first seen in high catch-up growth rates across the emerging world,” Standard Chartered said.

Output in China, the largest maker of mobile phones, computers and vehicles, surpassed Japan for the second straight quarter in the three months through September, Japan’s government said today. The Chinese economy overtook the U.K. as the fourth largest in 2005 and tipped Germany from third place in 2007.

Faster Growth

China has expanded by an average 10.3 percent a year over the past decade compared with an average 1.8 percent for the U.S. Standard Chartered estimates growth will slow to an annual 8 percent pace by the middle of the decade, easing to 5 percent from 2027 to 2030.

The U.S. economy, by contrast, still faces another year or two of “sluggish growth,” forecast at 1.9 percent in 2011, before returning to its long-term trend rate of expansion of 2.5 percent in three to four years, Nicholas Kwan, Hong Kong-based regional head of Asia research at Standard Chartered, said in a telephone interview.

China’s comparatively faster expansion, together with an expected 25 percent appreciation of the yuan, should be enough for its nominal gross domestic product to exceed that of the U.S. by the end of the decade, Kwan said.

Risks, Challenges

Still, the scenario faces risks on both the U.S. and Chinese sides, Kwan said.

“For China we have to consider to what extent the economy can keep growing without serious disruption, while the U.S. is facing different challenges as a mature economy struggling to recover from an unprecedented crisis,” he said.

China could fall ‘abruptly off the fast track’’ as the Soviet Union and Latin America did in the 1970s and Indonesia and Thailand experienced in the 1990s, Standard Chartered’s report said.

The economy is “unbalanced” and faces considerable risks, including a widening of imbalances, asset bubbles, overcapacity and rising bad loans which could lead to a serious decline, the report says. A 10 percent decline in investment in China would make it very difficult to achieve any GDP growth at all, the report estimates.

Stable Currencies

Previous “super-cycles” of growth happened from 1870 to 1913, and after World War II until the early 1970s, Standard Chartered said today. The current cycle began in 2000, it said.

“If we are right about this being another super-cycle, it does not mean that growth is strong and continuous over the whole period,” Standard Chartered said. “The first super- cycle, for instance had bouts of high inflation and of deflation. Much will depend on monetary policies adopted across the globe.”

Previous growth super-cycles were characterized by stable currencies where there were exchange rates linked to gold or silver, monetary unions and the Bretton Woods agreement, Standard Chartered said. Current concerns over “currency wars” highlight the challenges with the present system, the bank said.

“The possibility of some formal move towards currency stability at a global level cannot be ruled out,” according to the report. “However, in the present context, it seems hard to predict. Greater currency intervention may be plausible, and over time, one should expect to see more countries managing their currencies against a basket of currencies of the countries with which they trade. Managed floats and currency baskets may become more of a norm for currency policy.”

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Why is America so rich?

Nov 9th 2010, 13:50 by R.A. | LONDON

ECONOMIC gloom and doom aside, America remains the world's richest large country. It's generally estimated to have a per capita GDP level around $45,000, while the richest European nations manage only a $40,000 or so per capita GDP (setting aside low population, oil-rich states like Norway). Wealth underlies America's sense of itself as a special country, and it's also cited as evidence that America is better than other economies on a range of variables, from economic freedom to optimism to business savvy to work ethic.

But why exactly is America so rich? Karl Smith ventures an explanation:

I am going to go pretty conventional on this one and say a combination of three big factors

  1. The Common Law
  2. Massive Immigration
  3. The Great Scientific Exodus during WWII

You’ll notice that four of the top five countries in the Human Development Index have the Common Law and the top, Norway, is a awash in oil. Without the petro-kronors they probably wouldn’t be so hot.

You’ll also notice that 3 of the top 4, again with Norway the odd man out, are immigrant nations. The founder effect here should be clear.

The bonus from the great exodus is definitely waning. Most of our hey-day German and Jewish scientists are dying off, but its still given us a boost that lingers to this day. There is no fundamental reason why the US should be the center of the scientific world but for a time it was the only place in the world safe for many scientists.

It's a difficult question to tackle because there's so very much to it. America jumped to a huge productivity lead early last century by developing a resource- and capital-intense, high-throughput style of manufacturing producing mass market goods. The fractious, class-riven European continent struggled to copy this technology, and while adoption of these methods eventually led to a period of rapid catch-up growth, the process of catch-up was never quite completed. And so that's one gap to explore.

There's also the question of what exactly one is comparing. What if we take similar European and American metropolitan areas and adjust for human capital and hours worked? On that basis, the difference between America and northern Europe looks relatively small. One might then focus on the ways in which America's more integrated domestic market leads to a lower level of within-continent inequality, even though national inequality levels in Europe compare favourably with America's.

The size of the market may be more important than we imagine. As Mr Smith notes, four of the top five HDI countries share the Common Law. They also speak English. In a world in which national and cultural barriers still bite, America's wealth could be chalked up to the fact that it's a uniquely large and uniform nation. Common rules, culture, language, and so on facilitate high levels of trade and mobility. National and cultural barriers within Europe, by contrast, work to limit the extent to which the economic potential of the continent can be reached.

Mr Smith also gets at something important in discussing immigration and talent. The economic geography of the world is lumpy, and talent likes to clump together into centres of innovation. Through fortune and foresight, America managed to develop world-leading centres of talent in places like Silicon Valley, Boston, and New York. Relatively open immigration rules and the promise of a safe harbour for war refugees, including persecuted Jews, helped build these knowledge centres. When one combines that innovative capacity with a system that makes it relatively easy to develop ideas and relatively lucrative to exploit them economically, the potential is there for rapid and sustained growth.

America does seem to be special in important ways, but it's not always clear what those ways are. A liberal economic order and geographically mobile population are important, but so is the level of education, the promise of social mobility, and the openness of America's borders. It's worth keeping all of that in mind as the country's leaders think about the ways economic policy should change in the wake of the Great Recession.

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