Western Markets are improving….

The economic situations in the United States and Europe is improving while the economic growth in the emerging markets and the BRIC countries is slowing down. The OECD, a group of more than 30 advanced and developing economies, said in its Interim Economic Assessment, published in September 2013, that momentum in the global economy was starting to shift towards the rich world, and away from emerging markets. This view is supported by positive economic data, surveys of business enterprises and improving consumer confidence. All indicators suggest stronger economic performance than at any time since the bounce back from the 2008 recession. The annualized momentum of industrial production in G7 economies was about 5% during the summer of 2013, compared with an average of 0% in the BRIC countries. Turning to GDP, it looks as though advanced economies will provide a third of global growth in 2014, up from a fifth in 2012-13.

Current and Predicted Progress

The UK GDP expected to rise by 1.5% in 2014 and by 2.3% in 2015. Germany is doing well, and other European countries will also have positive growth in 2014 as the intensity of austerity lessens.

In the United States, the private sector economic activity has been doing fairly well, employment has been slowly expanding, and labor and capital are gradually being reallocated to advanced energy and manufacturing technologies, boosting US competitiveness.

Meanwhile, in emerging markets….

China’s 10 per cent growth spurt is over, and it is now dependent on rapid credit creation to deliver even the 7.5 per cent expansion rate, which the government hopes will be the new “normal.” China’s growth slowdown may, in fact, only be half over, as it ratchets down to about 4-4.5 per cent over the next decade. Brazil’s growth spurt has faltered despite strong credit growth amid concerns about inadequate investment, infrastructure building and official trust in the private sector. India is now growing at little more than 4% under the weight of bureaucracy, lack of adequate infrastructure, corruption, high deficits, and a hostile attitude to foreign investment. Russia, still mostly an energy giant, suffers from a lack of political competition, a weak legal and regulatory framework, corruption, poor investment incentives and a small manufacturing base. Russia’s involvement in Ukraine is risking its competitive position in the global market due to a threat of sanctions imposed by Western democracies.

Others emerging markets such as Malaysia, Indonesia, Thailand, Mexico, Chile, Turkey and South Africa, are finding the global economy to be a tough place to be in terms of exportability and trade regulations.

The World Bank showed in a report last year that of 101 countries or territories that were classified as middle income in 1960, only 13 succeeded in getting out of the trap. Some small states or oil producers such as Hong Kong, Singapore, Israel, Mauritius, Equatorial Guinea, and Puerto Rico did well. Spain, Portugal, Greece and Ireland were part of the European recovery story.

It is China’s time for reform….

It is too early to say whether China has become trapped because it has only been a middle-income country since 2001, when income per head passed $1,000. Now it is about $6,500 but we may not know until the 2020s whether or not China was able to jump the “BRIC” wall.

Most of China’s leaders know that their economic model has to change. Twenty years of unconstrained, turbo charged growth has left the economy chronically unbalanced. Typical examples include the dominance of the state over the private sector, rule by law over the rule of law, investment over consumption, manufacturing over services, and growth over the environment and social cohesion. Liberal thinkers in China allege that the dominance of the state is stifling competition,
distorting markets and the prices of everything from water to raw materials and energy, encouraging corruption, and leading to the abuse of power, rising income inequality and social fragmentation. Moreover, many of these issues have been obscured by rapid credit creation and debt accumulation. China is developing its own real estate bubble, and bad debt problems in local governments, state-owned enterprises and banks.

China’s improvement as well as influence

This would produce a very different China from the one we know today. It would grow more slowly, perhaps at 4% rather than at 8%. But the fruits of growth would accrue largely to households, not the state, and China’s significance in the global economy would go far beyond the over-stated attribute of being the biggest economy in the world. It might bring China into the lower echelons of the rich world by the 2030s.

This begs the question as to how China’s institutions can change and adapt, allowing economic freedom and initiative to flourish. China leaders need to push incrementally the boundaries of economic reform, and relinquish their control of the economy. Here lies the middle income trap that Chinese leaders know they want to avoid.