TM, ®, Copyright © 2010 Piero Scaruffi All rights reserved.
- (december 2014)
The looming world crisis.
The beginning of the 21st century was characterized by a lengthy economic
boom in the developing world, largely the by-product of the fall of communism.
The "tigers" of East Asia led the way already in the 1990s, then followed by
Turkey, most of Latin America and sub-Saharan Africa, with four of them in
particular, the BRIC (Brazil, Russia, India, China), being singled out as
the next generation of regional powers.
Most of these countries don't seem to realize that their economic boom has been
a peripheral consequence of tectonic shifts in the largest economy of the world.
The USA adjusted to the fall of communism by rapidly exploiting the
opportunities provided by globalization. On one hand there was a net
export of jobs and capitals to the developing world, and on the other hand
there was a net import of goods and minerals from the developing world.
Both flows benefited the developing world. Both flows were guaranteed by
the "pax americana", by the largest navy ever built that happens to protect
the trading routes of all oceans.
Very few of these developing countries have developed a real economy that could
stand on its own. Russia is the perfect example: it got relatively rich under
Putin by selling oil and gas (i.e., thanks to the commodity boom) but it has
de facto "devolved" into a less industrial country than it was during communist
times, when the Soviet Union ranked as the second largest manufacturing
economy in the world.
Change is coming to these economies due to change in the US economy.
To start with, the USA is now growing again at a faster pace than most of
these economies, resulting in a more competitive stock market. Secondly,
there are expectations of a raise in interest rates, that will make the USA
more appealing for capital flows. Thirdly, automation is bringing back jobs
to the USA because it gets cheaper to make things with machines than to make
things with Chinese or Bangladeshi humanpower. Fourth, thanks to new
technologies, the USA has become again one of the world's leading producers
of oil (in fact, it passed Saudi Arabia in 2014), and therefore less dependent
on imports. In the end this means that three of the four parameters that
triggered the
economic boom in the developing world (job outsourcing, capital flows,
commodity imports) will not be as prominent in the near future as they were
in the near past.
The very digital economy that made it easier to export jobs is now giving
new impulse to manufacturing in the USA (wearable and intelligent devices)
and making Silicon Valley companies much more attractive than investment
in African mines or Bengladeshi textile shops. The digital economy does not
need mineral resources: it needs energy and bandwidth.
Manufacturing jobs are returning to North America in
what the Economist has dubbed the "North American industrial renaissance":
Mexico is now competing with China in attracting US plants
and manufacturing in the USA itself is increasing almost as rapidly (10% within
a decade).
As interest rates go up, a stronger dollar is probable, and that will make
cheap goods from Asia, Latin America and Africa even cheaper, but at the same
time it will make the USA more appealing for world money. The flow of money
may reverse dramatically towards the USA.
Another engine of growth for the developing world has been China, which in turn
largely benefited from US demand. China is slowing down and will probably
revise downwards its own predictions for economic growth. Since China is the
second biggest consumer of commodities in the world, this will compound the
slow-down in developing countries that thrive on commodity exports.
Total indebtedness in China (public plus private) has reached 250%.
The third biggest economy, Japan, remains mired in stagnation; and the fourth
one, Germany, is beginning to get sucked into the general malaise of the
eurozone.
No surprise than that Brazil is entering a recession and that
the Russian government announced its economy will fall into recession in 2015,
partly because of Western sanctions in response to the annexation of Crimea
but partly also because of falling oil prices.
Government borrowing in Africa, mostly from private investors, has created
government deficits of up to 10% of GDP (Ghana) that sooner or later will
come to haunt those countries.
Household disposable income is forecast to decline in many developing countries.
Developing countries and BRIC countries have been living in a dream, thinking
that they had suddenly become full-fledged economies when in reality they were
merely selling cheap goods, cheap minerals and cheap labor to the developing
world and to China.
A 2014 Economist ranking of best countries for business
(see this page)
listed India at 48th place, China 50th and Russia 64th.
There is nothing inherently great about their economies and legislation that
would attract the world's businesses other than their temporary status as
emerging markets.
The economy of the USA is growing at a decent pace (3%) and it is creating more
jobs than at any time in the last decade. Unfortunately, this time the rest of
the world might not benefit much from it, and learn a tough lesson: that its
wealth was really just a blip in a long-term process of optimization which
is mostly about maximizing the profits of US multinationals and investors, and
which only briefly found it convenient to invest abroad.
Meanwhile, the USA will be largely untouched by the world's slowdown because
its economy is mainly an import (not export) economy. Investment money will
flow to the USA when Europe, China and Japan cut their interest rates to
spur growth at home. The dollar will go up making imports cheaper.
Cheap goods from abroad will boost purchasing power in the USA and
trigger a consumption boom just like in the 1990s.
TM, ®, Copyright © 2014 Piero Scaruffi All rights reserved.
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