Global Economics and Management

India's Very Good Year

Things have gone remarkably well for the Indian economy in 2023. For evidence and numbers, I highly recommend the article written by Matthew Thomas, in today's Wall Street Journal. Growth is high, the currency is holding up well against the dollar, relative to other emerging market currencies, and the overall mood is optimistic. Money quote: 

"The economy is on track to grow more than 6% this year, bringing its gross domestic product close to $4 trillion—within reach of Germany’s, the world’s fourth-largest. The International Monetary Fund says India’s economy will be one of the fastest-growing in the world over the next few years."

Wage Convergence?

An important part of labor market dynamics over the last few decades has been the faster wage growth for white collar workers relative to blue collar workers. But this trend has recently reversed, as we discussed in class. In the excellent video below, the WSJ explains why, The answer: supply and demand, of course. Will this reversal prove durable? I have my doubts, because the fundamental forces that caused divergence between low and high pay workers in the last 40 years - technological progress without a commensurate growth in the supply of skills, as we discussed in class - are here to stay. Only time will tell whether something more fundamental is at play.

Where Do We Stand on the Energy Transition?

One of my favorite podcasts is the Ezra Klein Show, over at the New York Times. This week's episode features two scholars who are experts on the energy transition, Jason Bordoff and Meghan O’Sullivan. The podcast provides an opportunity to assess where we stand on the energy transition to renewable, carbon-free energy sources. The bottom line is that the energy transition is an uphill battle. Last year, the world burned more coal than ever before. Previous energy transitions were transitions in relative terms. For instance, when oil became a more important source of energy, a larger share of the world's energy needs was satisfied using oil, while a smaller share was satisfied using coal. However, because the world economy was growing, both the absolute amount of oil and the absolute amount of coal continued to rise.

With global climate change, however, we don't need just a relative transition away from carbon-based energy sources. We need an absolute decline in the use of carbon-based energy. In a fast growing world economy, this is hard to achieve. To wit, below are two telling graphs. The first shows the relative distribution of energy sources from 1800 until today, where energy use is measured in terawatt hours. This graph carries good news, with a relative increase in the share of renewable energy sources, and a relative decline in biomass, oil and coal. The second shows the absolute change in various energy sources over time. This graph carries bad news: all sources show a secular increase, with only a recent stabilization but not a decline for coal and oil. Even biomass burning (wood), the very first major source of energy for humans, has not substantially declined in absolute terms. You can learn more from these graphs by going to the source and changing the format, hovering over the series, etc.

Beyond this reality, the podcast contains other sobering news. It is often argued that the energy transition will have a salutary geopolitical side effect, quite apart from its effect on CO2 releases: it will serve to sever dependence on resources controlled by unstable or unfriendly regimes. But the new energies to which we are transitioning also involve dependence on rare minerals, battery and solar panel production, etc. All these pose their own sets of geopolitical challenges. The guests state for example that, of 50 essential minerals required for the energy transition (things like lithium, nickel, etc.), the US relies 100% on imports for 15 of them. The podcast really shines when it comes to highlighting these sourcing and geopolitical challenges.

China's Growth Slowdown

By many accounts, China in the late 1990s and 2000s experienced the fastest rate of growth of GDP of any economy in the history of mankind. While there are significant doubts on the statistics that underlie this fact, it would hold true even if growth numbers were significantly inflated. And this is a fact that you can witness using alternative measures of economic performance that are less reliant on government statistics, such as nighttime light density.

But since 2010, China started experiencing a growth slowdown, which you can see on the following graph, using World Bank data:

The volatility seen in the last 3 years is attributable to the COVID crisis and China bouncing back from the 2020 slowdown in 2021 - but you can see that the growth decline preceded the COVID crisis by a decade. This is not a story about COVID, but something more fundamental.

For many economists, China is experiencing a common occurrence in middle income countries - known as the middle income trap. Many reasons have been hypothesized for the middle income trap. My view is that in the initial phases of a country's growth take-off, opportunities for catch-up growth are plentiful as the country tries to converge to the world technological frontier. Imitation of existing technologies is easier when you possess few of these technologies, but it becomes harder when more sophisticated technologies need to be acquired - or developed domestically: there are fewer low-hanging fruit. Constraints such as a lack of human capital, limited access to a deep pool of capital, infrastructure bottlenecks, and defective political and legal institutions, become more binding, and growth requires working on these factors more aggressively. China of course has made huge strides in some of these respects, even perhaps over-building infrastructure, but other factors, such as the nature of its institutions and the defects of its banking system, become more salient as it grows. The ongoing process of decoupling with the West is not helping, as it affects the reach of China's exporters and incoming technology transfers. And China's demographic stagnation will not help ensure the dynamism of its economy over the longer run.

Whatever the cause of the middle-income trap, China is in a period of economic slowdown. Bloomberg just came out with a great 8-minute mini-documentary, which I recommend heartily. This short video goes through the immediate causes of the slowdown, featuring prominently the real-estate slowdown and excessive debt. And the Wall Street Journal has an in-depth article on growing deflationary pressures in China: while much of the rest of the world is trying to fight inflation, China is trying to do the opposite by stimulating its economy, but it does not have many levers to do so. The consequences for the Chinese people are stark (witness the rise in youth unemployment), and the consequences for the stability of the Chinese regime are uncertain. I recently accepted a great paper in the journal that I edit (the JEEA), showing that export slowdowns in China are associated with more labor strikes. The future will tell what the broader effects of China's growth slowdown will be, but it is a developing story worthy of your close attention.

Global Trends Readings

Over the last few days, I came across several interesting articles that are highly relevant for the issues we are discussing in Global Trends this summer:

1) Branko Milanovic's article in Foreign Affairs is making the rounds. Until recently, the conventional wisdom among commentators was that there is a generalized increase in inequality around the world. The specifics are nuanced and the data are not easy to parse, but the view that inequality was on the rise was subject to broad agreement. Professor Milanovic says: not so fast... Of course, we will take a deep dive into data on inequality for our discussion on campus on August 6, which will give us a chance to come back to this important article.

2) Over at Bloomberg, the great historian Niall Ferguson muses about the state of democracy around the world, and the role of the US as a champion of democracy. This, or course, relates to the very interesting discussion we had during our last in-person session of Global Trends.

3) In class last time, I mentioned that education was one of America's leading service exports. I said that, therefore, I was an exporter, because of the educational services that I deliver to students who came to America for the purpose of earning an MBA degree. In a Brookings article that is now a bit dated (2017), yet still highly relevant, Professor Dick Startz of UCSB discusses education as a service export - recommended!

4) Relative to Americans, Europeans are becoming poorer. The Wall Street Journal comments. The data on the divergence of fortunes between the two sides of the Atlantic are striking: "The eurozone economy grew about 6% over the past 15 years, measured in dollars, compared with 82% for the U.S., according to International Monetary Fund data". Arguably, European living standards are now falling even in absolute terms, and they may have been falling for a few years already. Europeans will need to adapt to this reality, and the adjustment won't be easy. Over at Bloomberg, Adrian Wooldridge details the example of the UK. The UK compounds the structural problems of the rest of Europe with the specific self-inflicted wound that Brexit represents. And over at Politico, comes a tale of German deindustrialization and malaise. In my view, it would take very significant policy action to change this course - policy action that European electorates are completely unwilling to contemplate. So the most likely scenario for Europe is one of continued stagnation and decline.

Fareed Zakaria on Ezra Klein's Podcast

Last week Ezra Kein of the New York Times welcomed the great Fareed Zakaria on his podcast. The conversation was wide-ranging, and included virtually all of the major global issues of the day, with a particular emphasis on China and India. In sum, the podcast was a perfect introduction to Global Trends, which I am now gearing up to teach one more time this Summer. I recommend this podcast heartily!

The Economist on the De-Growth Movement

The Economist recently covered a conference of de-growthers, held at the European Parliament earlier this month. The least one can say is that the coverage is not favorable - and justifiably so. One may even characterize the article as slightly angry, and there is a reason for this, because the de-growth movement hurts the most vulnerable. 

I am not too worried about this movement succeeding, however. If you wonder why, a recent post of mine on this blog provides some reasons.

The Guardian on Global Poverty

The Guardian recently ran a nice article summarizing a new report from the Center for Global Development, one of my favorite Washington DC think tanks. The report, authored by Charles Kenny, points out the enormous progress that has been made, in recent decades, in the fight against extreme world poverty. It also forecasts that poverty would further come down in the coming decades, with the share of the world population living with less than $2.15 a day falling from 8% currently to about 2% in 2050 (the fall in extreme poverty should not obscure the tremendous growth that has occurred above this very low threshold, in particular with a dramatic increase in the size of the global middle class). The near eradication of extreme poverty in recent decades and its likely continued decline in the years ahead surely must count as one of mankind’s greatest ever achievements, bar none.

This decline is attributable to one and only one cause: growth. The countries that have experienced the greatest decline in poverty in terms of raw numbers are China and India. As we discuss repeatedly in Global Trends, these countries have experienced a surge in aggregate GDP growth since they started their reform process in the late 1970s (China) and early 1990s (India). No other cause comes close to growth as a quantitative explanation for the fall in poverty. Not aid, not micro-interventions, not pure redistribution. Growth - and in particular growth due to better economic management of complex societies, based on a degree of openness (globalization) and the injection of market mechanisms - is the root cause. When growth slows, the fall in poverty stalls. When growth picks up, the decline in poverty accelerates. This is a somewhat inconvenient fact for those, among the bien-pensant class, that believe that aid and redistribution can cure all ills. Aid and redistribution vastly predate the massive fall in poverty experienced in recent decades, and yet this fall only occurred when poor countries started to catch up with rich ones in terms of per capita income. That is, when they started on paths of sustained growth.

The unfortunate reality is that many are blind to this fact. On the contrary, a dangerous school of thought is becoming prevalent among development elites. I would call it the «zero growth» school. These individuals argue that growth is associated with environmental degradation and not necessarily with a fall in inequality. They advocate policies that would stop aggregate GDP growth and instead focus on redistributing existing resources. But the needed transition from carbon and the generalization of transfer schemes is only possible if more resources can be mobilized to achieve these goals. These resources can only come from continued growth. It is both a fallacy and wishful thinking to think that redistribution and de-carbonization can happen without growth. In fact, The Guardian also recently featured the «thinking» of one of the leading proponents of this school of thought: Olivier De Schutter, the UN special rapporteur on extreme poverty and human rights. Yes, you read that right, the UN’s special rapporteur on extreme poverty wants to end growth!

To me, zero-growthers are akin to arsonists. If their policy prescriptions to end growth were to come to fruition, untold misery would result. The slowdown in growth, and concurrent reversal in the downward poverty trend that we experienced during the COVID years, would pale in comparison to the hundred of millions who would fall back into utter misery if growth stopped in countries like India, Bangladesh or Indonesia. In my view, advocates of zero growth policies are grossly irresponsible to the point of criminality.

Thankfully, most elected leaders and enlightened policymakers show no intention of pursuing a zero growth objective. If they did, they would be thrown out of office in a hurry. And if you think that the surge in populism was a concern in the wake of the global financial crisis, wait until we have zero global growth.

An Important Article on Chinese Demographics

Over at the Wall Street Journal, Nick Eberstadt and Ashton Verdery write about some rarely discussed aspects of China's demographic slowdown. Not only does the dramatic fall in fertility experienced by China over the last half-century portend a rapid ageing of the Chinese population, there are also broader social consequences in terms of kinship networks. The central quote of the article is:

"China is now on the cusp of a severe and unavoidable “kin crash,” driven by prolonged subreplacement fertility. The implosion of consanguineous family networks, by our reckoning, means that China’s rising generations will likely have fewer living relatives than ever before in Chinese history.

A “kin famine” will thus unfold unforgivingly over the next 30 years—starting now. As it intensifies, the Chinese family—the most important institution protecting Chinese people against adversity in bad times and helping them seize opportunity in good times—will increasingly falter in both these crucial functions."

The article draws out the likely consequences of this simple fact in various domains: pressures on welfare spending to take care of ageing, family-less individuals, particularly males; difficulties in military recruitment and willingness to sacrifice if the death of an only son means the extinction of a lineage, etc. If you wish to go deeper into this overlooked and important issue, the full report on which the article is based can be found here. Here's a key chart from the report:

 

My Weekend Readings

This weekend I have been catching up on some salient news articles that I did not have the time to digest last week.

1) As we approach the part of Global Trends where we will discuss environmental challenges, a recent Wall Street Journal article reports on the progress made in Indonesia in the fight against deforestation. This could serve as a blueprint for other countries, like Brazil, that face this major challenge. Deforestation is one example where modernization theory (and the Environmental Kuznets Curve) really works: richer countries are better at protecting their forests, and in many of them, forested areas are actually rising. Indeed, we are at a point where many countries, including China and India, are actually seeing gains in forested area. (03-06-2023 Update: Here is the Nature paper using satellite data to measure forest cover, which I mentioned in class today.

2) Also at the WSJ, Henry Kissinger, Eric Schmidt and Daniel Huttenlocher wrote a lengthy essay on the challenges and opportunities offered by AI. The article makes a very important point on the nature of AI, which is the lack of understanding of why an AI engine produces the results that it does. The crucial paragraph is the following:

"Enlightenment science accumulated certainties; the new AI generates cumulative ambiguities. Enlightenment science evolved by making mysteries explicable, delineating the boundaries of human knowledge and understanding as they moved. The two faculties moved in tandem: Hypothesis was understanding ready to become knowledge; induction was knowledge turning into understanding. In the Age of AI, riddles are solved by processes that remain unknown. This disorienting paradox makes mysteries unmysterious but also unexplainable. Inherently, highly complex AI furthers human knowledge but not human understanding—a phenomenon contrary to almost all of post-Enlightenment modernity. Yet at the same time AI, when coupled with human reason, stands to be a more powerful means of discovery than human reason alone."

3) In the last class, I mentioned that the "woke" movement may have reached its peak. Indeed it is quite apparent that it is provoking a pretty broad backlash. Three recent resources document this process. The first is a recent article in the Financial Times. The second is a blog post at Marginal Revolution analyzing data on the use of certain words in the New York Times. The third is a recent WSJ podcast on the backlash against ESG investing. My view is that social and cultural innovations often overshoot, and that it takes time for society to find a new cultural equilibrium in the wake of a cultural innovation. In my view, the woke movement will not disappear, nor will it take over the world. It is a movement that makes good points, but did not always make them in a way that truly served its goals (in other words, it is frequently self-defeating). It is now in a maturation phase, and this is exactly how the social dialectic of a pluralistic society should play out. 

4) The US is trying to reshore microchip production. Last year's bipartisan CHIPS Act provides subsidies for the production of chips in the US. But these subsidies, like the electric vehicle subsidies that we discussed in class last time, come with many strings attached. Therefore, it is not clear that the CHIPS act will work to raise chips production in the US. The Wall Street Journal's excellent Greg Ip provides more details. In my view, it would be better to diversify the global supply chain of chips than to use industrial policy to reshore the production of these crucial components, because industrial policy rarely achieves its goals. The example of iPhone production is telling. It would be costly and futile to produce and assemble iPhones in the US. If industrialized democracies want to insure against geopolitical risk involving China, it would be better to have multiple sources of production around the world. This is what Foxconn seems to have understood, as it gradually raises its footprint in India.