Friday, 16 November 2007

imf: bric account for 50% of world's growth

How China is eating the world

China’s remarkable economic growth is powering the
global economy, but can the world afford to keep on
supplying its ever-growing demands for food and raw

By Sean O’Grady

09 November 2007

Economists are notorious for being unable to reach an easy consensus on many issues, but talk to any of them about the outlook for the global economy and before long the word « China » always starts to dominate the conversation. And it is true that the robustness of Chinese economic growth – around 10 per cent forecast for 2008, barely changed on recent trends – is picking up the pace being lost by faltering Western economies. Trouble is, they’re also eating the world – literally, in the case of food supplies.
According to the IMF, about half of the world’s economic growth this year will be accounted for by Brazil, Russia, India and China – the BRICs. India, staggeringly, is contributing more growth to the world economy than the United States, but China is by far the most powerful engine of growth – more so than the US, the eurozone and Japan combined. So, « China saves the world » – or at least helps to maintain global economic growth around the 5 per cent mark. Were it not for China and these other emerging economies, the world might well be staring a recession in the face.
Yet this phenomenon is not an unalloyed economic good. As yesterday’s news about Rio Tinto and BHP demonstrates, the commodities price boom has led to huge valuations for companies in this field; great for their shareholders, but another signal that the insatiable Chinese demand for oil, copper, zinc, nickel and all the other raw materials of industrialisation is pushing the prices of those commodities to ever-higher peaks. The International Energy Agency warned yesterday that Chinese and Indian crude oil imports will almost quadruple by 2030, creating a supply « crunch » as soon as 2015. Research from ING suggests that marginal Chinese demand for oil, as a percentage of the growth in total consumption, rose to around 72 per cent in 2006, from 10 per cent in the 1980s. This marginal demand could grow to close to 100 per cent of total consumption growth in 2007.
Such an appetite brings with it its own dangers, both to China and the rest of the world. As China pushes the price of oil higher, for example, we in the UK are threatened with « slowflation » – where a slowing economy coexists with higher prices of fuel – and food. Were the British economy to slow to a stop –just possible in say a year – we would see the return of stagnant output plus inflation – the « stagflation » last experienced in the UK in the early 1980s. This is all developing because commodity inflation is spreading into a second phase covering the so-called « soft commodities », as China’s burgeoning middle classes develop a taste for a more Western style of eating, enjoying foods such as milk, pork and beef that were once scarce. Like other peoples suddenly able to expunge the memories of socialist starvation, the Chinese are overcompensating for their malnourished past. Thus they have become a net food importer, probably for the first time in their very long history (socialist-inspired famines apart). There’s also an aspect of culture; as China embraces the West so its young people are more given to hanging around the branches of Starbucks, McDonald’s and KFC that have popped up all over the prosperous east of the nation. The rice bowl is giving way to the burger and shake. The world is seeing some dairy prices up 200 per cent, the cost of wheat doubling and pork up 50 per cent.
In the past decade alone, meat consumption in China has been rising at an average of 2kg per capita per year, a pattern mirrored elsewhere. Over the past few decades, consumption of meat in developing countries has grown at a rate of 5 to 6 per cent a year; consumption of dairy products at 4 per cent. Meat consumption is growing 10 times faster in newly industrialised countries than in, say, bacon-loving Britain. Poultry is the fastest growing sector worldwide; it represented 13 per cent of meat production in the 1960s, compared with 28 per cent now. Poultry is the most efficient means of converting grain into animal protein; the less palatable truth is that it is more effective to eat the grain directly.
Agricultural inflation – « agflation » in another of these modish phrases – is not entirely down to the Chinese. There are other factors. Freakish weather conditions across the world haven’t helped: hurricanes in Florida and floods in England affect the cost of the orange juice and brussels sprouts on your dining table. (Then again, China’s breakneck rush for coal-powered growth, and our own profligacy, have caused the global warming that may have intensified these storms.)
Then there’s the switch to biofuels which has pushed grain prices higher. So called « phase one » biofuels –bioethanol (a petrol substitute or additive) from grain and biodiesel from palm oil – have met with opposition from environmentalists. Palm oil production has encroached on the remaining rainforest in Indonesia. We are only at the start of the process. Credit Suisse’s economist Andrew Garthwaite points out that biofuels make up 3.5 per cent of US gasoline consumption. In January, President George Bush pledged a biofuel target of 20 per cent of US fuel consumption within 10 years. This means more of America’s corn harvest being put into the tanks of cars rather than the bellies of Mexicans, with upward effects on the price of grain: « The 35 billion gallons of ethanol required to meet the 20 per cent target will account for 40 per cent of the US corn crop by 2017, » Mr Garthwaite says. Worldwide, « the combined impact of these targets commits 238 million acres or 12 per cent of global arable and permanent cropland to biofuel production ». Crucially, though, « second generation » biofuels will use waste material and be a more unequivocally green and economical option; the stalks of grain crops rather than their seeds; surplus cellulose from paper mills; grass cuttings from your lawn.
The big picture, according to Credit Suisse, is that, globally, demand for food and biofuels will grow at about 3.3 per cent per annum – compared with the historic average of 2.3 per cent. Can supply – of food and other commodities – keep pace with a step change in demand?
It was Thomas Malthus who predicted, way back in 1798 as the West was undergoing the transformation China and India are now, that the tendency for populations to rise at a geometric rate while agricultural production rises at an arithmetic rate would constrain population growth through periodic famines. Malthus was wrong, because he failed to foresee the rapid growth in agricultural productivity – crop rotation, selective breeding and mechanisation. Agronomists are scarcely less imaginative today, yet there are political, environmental and physical obstacles which make the business of extracting more crops for fuel and food tricky. Genetic modification, for example, is viewed with deep suspicion by some shoppers, and politicians have shown themselves unwilling to take on the voters’ prejudices. Ditto the supermarkets, at least in the UK.
Apart from China, Brazil, Indonesia and Argentina have the greatest potential for increased acreage and urbanisation, but the environmental cost – itself an economic burden that will have to be shouldered –ought to restrict incursion on pristine environments. When it comes to productivity – the factor that saved the world from a Malthusian nightmare 200 years ago –things are looking a little grim. In the case of cereals, productivity has grown at only 1.3 per cent in the past 20 years.
So the outlook is for agricultural, commodity and oil prices to carry on rising. The $100 barrel of oil could be just the start. Bad news for Britain and the West – but worse for poorer peoples. Countries such as Bangladesh with large and growing populations but who are net importers of food will feel the effects badly (on top of dealing with rising sea levels in the Ganges delta). The less developed the economy, the greater the share of food prices in the shopping basket, and thus the bigger the impact on standards of living. In the West, food accounted for about 18 per cent of headline inflation in 2007; in eastern Europe it was 33 per cent, and in the Middle East 52 per cent. Everywhere, and especially in the least-developed regions, there will be a regressive redistribution of income, from the very poorest to the relatively well off, as food accounts for such an overwhelming proportion of the living costs of those at the bottom of the heap. In China that means the rural poor, already a source of anxiety of Beijing as it seeks « balanced » growth. Everywhere, pressure on water supplies and migration will inevitably follow.
We may grumble about another few pence on the price of a loaf and the £1 litre of petrol, but we should also be aware that those nations emerging from poverty –
China, India, Brazil – are exacting a heavy price on those left behind.

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