Another very good video from PunkFT. As the Chinese economy starts to slowdown by its standards (even at 6% growth) the Chinese are sending their money overseas in search of safer investments. In doing this they are often violating currency controls which are there to keep money inside China. The housing market in many countries have been driven up by the flood of cash from China – Vancover, Sydney, Hong Kong, New York and Auckland. Chinese spent almost $30 billion on U.S. homes in 2015.
How will authorities stop the outflow? One way is to increase domestic interest rates to encourage people to deposit their money in local banks. However this impacts those Chinese companies that borrow money and could prompt some debt-laden companies into deleveraging. Worth a look and great animations.
Useful new video from the FT showing the increase in China’s wages and how they are catching up with those in the developed world. China’s labour force as a whole, hourly wage is around 70 per cent of the level in weaker eurozone countries, according to data from Euromonitor International. Has China reached the Lewis Point where the abundance of cheap labour has dried up as workers return to the rural areas? Could be used for the A2 Developing Economies topic.
When you look at figures regarding international migration, the movement of people from developing to developed countries is most talked about and is the most common of the four types. Figures issued by the McKinsey Global Institute estimate that 120m people have made this move – see graphic below:
The second largest move is from developing to developing countries with just under 80m. This flow has been a popular option as people leave a poor country for a somewhat less poor country in search of higher wages. For instance the World bank estimated that 1.5m migrants from Bukino Faso live in the Ivory Coast which is proportionately larger than Indians in the UK, Turks in Germany and Mexicans in the US. The Ivory Coast is a poor country but not as poor as Burkina Faso and with wages double what they are in Burkina Faso migration is an attractive proposition. The World Bank estimates that $343m in remittances flowed from Ivory Coast to Burkina Faso in 2015 and accounts for 87% of all remittances.
Another example of movement from a developing to developing country is India and Bangladesh with an estimate of 20m Bangladeshis living in India. The World Bank estimates that more money is remitted to Bangladesh from India than from any other country – $4.5bn in 2015.
Why is developing to developing becoming more prominent?
- Neighbouring countries tend to share currencies meaning money can be moved more easily in ways that officials do not notice.
- Poorer people cannot afford travel to the West or the Gulf
- The poorer people are the shorter the distance they can travel so neighboring countries might be attractive
- Neighboring countries often share a language
- Tribes often span borders of developing countries
- In developed countries most jobs require legal documentation and authorisation. In the developing world informal work is seen as the norm.
- More less-skilled work is available in developing countries.
- The West does not have enough jobs for those from developing countries – African, Asian countries may offer more opportunity.
Sources: McKinsey Global Institute, The Economist.
Commodities have been the engine of growth for many sub-Saharan countries. Oil rich nations such as Nigeria, South Africa and Angola have accounted for over 50% of the region’s GDP whilst other resource-intensive countries such as Zambia, Ghana and Tanzania to a lesser extent.
I have mentioned the ‘resource curse’ in many postings since starting this blog. It affects economies like in sub-Sahara Africa which have a lot of natural resources – energy and minerals. The curse comes in two forms:
- With high revenues from the sale of a resource, governments try and seek to control the assets and use the money to maintain a political monopoly.
- This is where you find that from the sale of your important natural resource there is greater demand for your currency which in turn pushes up its value. This makes other exports less competitive so that when the natural resource runs out the economy has no other good/service to fall back on.
However it is the fall in commodity prices that is now hitting these countries that have, in the past, been plagued by the resource curse. As a lot of commodities tend to be inelastic in demand so a drop in price means a fall in total revenue since the the proportionate drop in price is greater than the proportionate increase in quantity demanded.
The regional growth rate for 2016 is approximately 1.4% but it is not looking good for commodity driven economies:
- Nigeria – oil – 2016 GDP = -2%
- Angola – oil – 2016 GDP = 0%
- South Africa – gold – 2016 GDP = 0%
In 2016 resource rich countries will only grow by 0.3% and commodity exporting countries have seen their exports to China fall by around 50% in 2015. Furthermore, public debt is mounting and exchange rates are falling adding to the cost of imports. With less export revenue the level of domestic consumption has also decreased.
It is a different story for the non-resource countries of sub-Sahara. It is estimated by the IMF that they will grow at 5.6%. By contrast they have been helped by falling oil prices which has reduced their import bill and public infrastructure spending which has increased consumption.
As is pointed out by The Economist numbers should be read wearily as GDP figures are only ever a best guess, and the large informal economy in most African states makes the calculation even harder. Africa may have enormous natural reserves of resources, but so far most Africans haven’t felt the benefit. In Nigeria, for instance, what’s seen as a failure to spread the country’s oil wealth to the country’s poorest people has led to violent unrest. However, this economic paradox known as the resource curse has been paramount in Africa’s inability to benefit from resources. There is a gravitation towards the petroleum industry which drains other sectors of the economy, including agriculture and traditional industries, as well as increasing its reliance on imports. What is needed is diversification.
Remittances come up in the CIE A2 Economics Syllabus under Developing Economies. The Economist in their ‘Economic and Financial Indicators’ sections has an informative graph and commentary of 2015 remittances. Key points for 2015:
- Migrants from developing countries sent home $439bn
- 25% of GDP in Haiti is made up of remittances
- Flows into Europe and central Asia fell by 23% in 2015 mainly due to the weak Russian economy
- India received $69bn in remittances – the most of any country.
The figures quoted might even be higher as it is a lot harder to track transactions from smaller money shops. Below are some examples of the importance of remittances in some developing countries:
- Sri Lanka – remittances > tea exports receipts
- Nepal – remittances > tourism receipts
- Morocco – remittances > tourism receipts
- Egypt – remittances > revenue from the Suez Canal
Advantages of Remittances
- money goes directly to the people it is intend for which means is less opportunity for waste or corruption
- money can be spent by the individual on areas like education and healthcare which may not be possible with official aid
- the consumer has considerably more sovereignty
- the sender is confident that the money will be used effectively which might not be the case with official aid.
Limitations of Remittances
- the development of infrastructure projects need sizeable funds which individual remittances cannot provide. For instance schools, hospitals, roads, bridges etc. need concentrated funds.
- relying on remittances may mean that you lose some of your skilled labour force, although money does flow into the economy. However, some suggest that this should motivate others into the same job.
- they tend not to target those who are desperately in need – both countries and individuals.
some countries are too isolated for their population to go and find work and ultimately they earn very little from remittances. To them foreign aid is essential.
Although remittances do generate substantial income they will never replace aid as some poorer countries will always require assistance from their developed counterparts. A challenge to those countries that receive remittances is to guide this flow of money into projects that will benefit their country as whole rather than just the individual.
Jeffrey Sachs wrote a very good piece in the Boston Globe regarding the way forward for the US economy. Some interesting data:
- 1.4% GDP between 2009-2015 when it was projected at 2.7%
- 81% of Americans experienced flat or falling incomes between 2005-2014
- 1980 – top 1% earn 10% of income
- 2015 – top 1% earn 22% of income
- 10% unemployment in October 2009 – dropped to 4.9% today. Mainly caused by those of working age leaving the labour force entirely.
- Employment relative to working age (25-54) in 2000 was 81.5%. In 2015 it was 77.2%
- US Treasury debt owed:
- – 2007 = 35% of GDP
- – 2015 = 75% of GDP
- – 2026 = 86% of GDP – forecast
- – 2036 = 110% of GDP – forecast
Issues with the US Economy
US manufacturing jobs have shifted overseas – remember NAFTA. Northern Mexico saw a huge influx of US companies as they took advantage of cheaper labour costs.
Automation – the advent of smart machines seems to be shifting income from workers to capital, driving down wages and leading to frustration of low wage workers.
As well as debt sustainability the US economy needs to shift its reliance on carbon-based energy to non carbon energy sources – hydro, wind, solar etc. Some have argued that the US has simply run out of big new inventions to sustain growth levels but ultimately the world has got to change its model as resources will eventually run out. We can’t keep relying on people buying more and more stuff to maintain growth or the Chinese building more cities and blowing up and rebuilding bridges.
Jeffrey Sachs argues that sustainable development works best when it focuses simultaneously on 3 big issues:
- Promoting economic growth and decent jobs
- Promoting fairness to women, the poor, and minority groups
- Promoting environmental sustainability.
US growth has tended to focus on economic growth and neglect inequality and environmental issues. Future growth needs to focus less on current consumption but investment in future knowledge, education, skills, health, infrastructure and environmental protection. Furthermore if the investment is carried out efficiently the economy can growth in an environmentally safe as well as being fair. Good investment requires two things:
- Planning – need to overcome complex challenges for our future – e.g. energy
- Public investment – replacement of a crumbling infrastructure – roads, bridges, water systems, seaports etc
Jeffrey Sachs recent research measured how 150 countries performed with regard to sustainable development and the progress that countries will need to make to achieve the recently adopted SDGs – see image below. The Scandinavian countries came in top – Sweden, Denmark, Norway – the US was 22nd out of the 34 high-income countries whilst Canada was 11th.
Click the link below for an article on income inequality from the Boston Globe by Jeffrey Sachs