South Korea’s potential would be spectacular if it were as large as one of the BRIC countries, but its population of less than 50 million is tiny by comparison. However, if Korea were to ever unify so that the North harnessed the forces that have driven South Korea, the potential of the unified nation would be ultimately rather strong, despite the enormous adjustment challenges.
What could the other BRIC countries learn from South Korea’s productivity advances? The lessons fall into three different categories.
Firstly, South Korea scores well in terms of education. To varying degrees, each of the BRIC countries could follow suit, India especially. It could be argued that repeating South Korea’s success in education for populations the size of those of the BRIC countries is a much tougher challenge, but, according to the Organisation for Economic Co-operation and Development (OECD), Shanghai has probably the best secondary education standards in the world today.7 So it is not an impossible challenge.
Secondly, South Korea has achieved superb results in the introduction and adoption of modern technologies such as mobile telephones and computers and in its broadband Internet access and use. South Korea actually scores the best of any of the 180 countries in the rankings on this front. The remarkable progress of Samsung in global markets is a vivid example of this technological prowess: it is a leading-edge technology company. Technological know-how benefits all sectors of Korean society, in both visible and less visible ways. Each of the BRIC countries, to varying degrees, could benefit dramatically from the nationwide spread of modern technologies. India has the greatest need to change, and would get the greatest potential benefit from catching up.
The third area relates to the rule of law, especially with regard to business. South Korea is not up to the highest of those standards achieved by some developed economies, but it has improved considerably since the 1997–98 Asian crisis, and the vulnerabilities that revealed. The propriety of connections between business and government and a credibly enforced rule of law are vitally important for sustained growth. The alternative – cronyism, uncertainty about the regulatory and legal environment, and even the risk of expropriation of assets – means lower investment and slower growth.
All the BRIC countries, especially India, could benefit from better governance. Their growth performance will be inhibited if they do not address some important domestic governance shortcomings. Even with such changes, their growth will not be as spectacular as it has been in the recent past. But, for at least the rest of this decade, they will be driving world growth.
The long-predicted shift in global economic power has now happened; in the West, we have not yet made the necessary mental adjustment and continue to talk about this as a transition that still lies ahead. Yet the BRIC countries and other fast-growing emerging economies account for about 30% of world GDP and for about 70% of all world growth in GDP since 2000. This means that we will need to look to the BRIC countries and other emerging Growth Markets for economic dynamism, and I will turn to that future in later chapters. First, though, it is important to understand the absolutely key role China has played in transforming the economic map of the world.
Chapter 2
The Chinese century
The previous chapter highlighted the astonishing degree of change in the world economy. It is essential to understand that China is at the heart of this story. As noted in Chapter 1, in 2011 the GDP of the BRIC economies increased by $2.3 trillion, adding the equivalent of another Italy to the world economy. Of this increase, nearly $1.4 trillion was due to China’s growth. David Cameron seems to have understood the implication; at the Conservative Party Conference in October 2012, he pointed out that the previous year China had created the economic equivalent of another Greece every thirteen weeks. However, many people seemed unaware of the relative importance of China’s growth; everywhere I travelled (including China) during 2011 and 2012, the only subject people wanted to discuss was Greece. I developed a stock answer: that it is a lovely country but, in the context of the world economy, just not very important.
The Chinese themselves do not always appreciate their relative importance in the global economy. They often still see themselves as merely an emerging economy with many impoverished people and little global relevance. As recently as July 2013, on a brief trip to Beijing, I gave a presentation to an audience of over 300 distinguished business people long involved in Sino–British trade, the ‘Icebreakers’ of the 48 Group Club, and even there, based on the reactions to my comments, they had little awareness of their huge impact on the world.
To drive home the point, consider that, at the end of 2012, China’s nominal GDP had increased to $8.2 trillion, another $900 billion increase compared with the end of 2011. That followed a $1.4 trillion increase the previous year. Even within the BRIC context, these figures are remarkable. Understandably, people often compare China and India, not least because they are the only nations with more than a billion people. But China’s GDP is now more than three times the size of India’s, and China’s growth is currently creating another India (or indeed another Russia) every two years. China is now the same size as the other three BRIC economies put together, and even though China’s growth rate is slowing, it is still contributing a lot more to world GDP growth than the other BRIC countries.
Two further statistics demonstrate China’s remarkable scale, and the scale of the mental adjustment we need to make to grasp this essential feature of the global economic landscape. First, the 7.5% real GDP growth I am predicting for China this decade, although slower than its growth rate in the previous three decades, is the equivalent of 4% annual real growth in the American economy. To find a similar performance in the United States you have to go back many years to when it was a far smaller economy. Second, this 7.5% growth means that China will contribute as much to world nominal GDP as the United States and the eurozone put together. This is utterly transforming world trade and the balance of economic power on a scale not widely appreciated.
A new China?
If China’s economic growth does attain that figure of 7.5% on average during the decade 2011–20, then (depending on the value of its currency against the US dollar) the size of the Chinese economy will be nearly the same as that of the US economy. Goldman Sachs has been predicting that China will overtake the United States in nominal terms by 2027. Not only do many of us struggle to comprehend the speed and scale of China’s ascent so far, but the fact that China’s growth is decelerating compared with the previous thirty years is further complicating the story. Some observers have suggested that this slowdown may be the beginning of the end of the China story. But in doing so they fail to recognize that one of the main reasons China is slowing is because the authorities there believe that a better quality of growth is necessary now, and that the medium-term sustainability of growth will be enhanced by slowing down from past rates of expansion.
Why has China decided that ‘less is more’? There are a number of important structural reasons, and also one shorter-term cyclical reason. Following the 2008 global credit crisis, which at its most severe in late 2008 threatened the collapse of the financing of world trade, Beijing unleashed a huge monetary and fiscal expansion to offset the slowdown in Chinese exports and to stimulate growth. The expansionary policies were oriented towards boosting infrastructure investment. Where necessary, direct state-backed investment was stepped up. The policy worked all too well because by late 2009 real GDP growth was already surprisingly strong, and it quickly became apparent that such aggressive counter-cyclical policies were increasing inflationary pressures and exacerbating some deep-seated structural problems in the economy. For example, as early as September 2009 Chinese policymakers were worried about a property market bubble developing, and they began to introduce a series of steps aimed at limiting excessive speculative purchases in China’s cities. Beyond the specific challenges of the property market, policymakers also grew understandably worried about signs of an unwelcome surge in inflation. The dramatic escalation of the European economic and financial crisis dominated the attention of Western analysts and policymakers in 2010. But in China, where the financial crisis is known as the ‘North Atlantic crisis’, getting inflation back down to 3–4% from