Stephen King: How big a threat to West is growth of China?

'The West massively over-consumes on energy relative to countries elsewhere in the world'
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The Independent Online

When it comes to economics, you'll always get both optimists and pessimists. On the whole, the optimists seem to have the upper hand. Western society has become a lot richer over the last 100 years. Many Asian countries have done a whole lot better over the last 50 years. The former communist countries of central and eastern Europe have flourished over the last 10 years (after some initial very unpleasant growing pains.) And China and India have moved into the fast lane of economic growth, even though their per capita incomes are still very depressed.

Elsewhere in the world, though, nothing very much has changed. Much of Africa is still engulfed in poverty. Disease and malnutrition still destroy both the lives and livelihoods of billions of people. The majority of people live in conditions that we in the West would see as unacceptably poor. Yet we don't do very much about it, perhaps because we secretly fear that better living conditions for them might mean worse living conditions for us.

All of this you already know. But these observations raise a number of questions that may become increasingly relevant over the years ahead. Let's assume, for example, that a lot of countries now begin to emulate the economic success of the US or Europe. Over time, they manage to raise their per capita incomes to levels that we, in the West, would regard as respectable. My question is whether it is possible for these countries to achieve this goal without seriously denting the lifestyles that we, ourselves, have become accustomed to. No one, surely, will begrudge countries the right to improve their economic well-being. But we might have second thoughts should we discover that we are having to pay the bill for other countries' success.

I raise this issue for one obvious reason. The strength of oil prices might say a lot about uncertainty in the Middle East but, at the end of the day, at least some of this strength is undoubtedly related to the ongoing economic boom in China and the buoyancy of activity elsewhere in Asia. These rapid gains in activity have created a surge in demand for raw materials that hasn't been seen in many a year and, as these countries gain in strength, the rise in commodity prices becomes an increasing constraint on activity elsewhere.

Going back to our distinction between optimists and pessimists, the optimists will say that, overall, there is nothing to worry about. While it is true that economic success in parts of Asia will drive up the price of raw materials, this "cost" will be more than offset via the benefits of greater trade specialisation. Adopting the Ricardian view of the world, the optimists will point to the laws of comparative advantage and argue that greater trade between countries will lead to greater specialisation which, in turn, will lead to higher output for everybody to share.

The pessimists, though, will argue that the Ricardian view of the world is too simple, that eventually the population of the world will grow to such a degree that we'll all be forced down to subsistence wages. Of course, Thomas Malthus in his Essay on Population forgot about the wonders both of contraception and of technological progress, which have certainly helped to postpone this rather gloomy prognosis in many parts of the world.

Nevertheless, it may well be the case that some parts of the world have done better only because other parts have not. Imagine a situation where car ownership in China was on a par with that of America's. Under these circumstances, you can pretty much guarantee that none of us would be able to afford to consume the amount of energy we get through today, even allowing for possibly significant advances in energy technology.

No, the bottom line is that, even in a world in which Ricardo rules, it may still be the case that rapid development in some countries will leave other, richer, countries at a possible disadvantage. This will be particularly true if the rapidly growing countries are, first of all, big in terms of population and, second, are beginning to make the transition from subsistence economies to economies with burgeoning middle classes. These new middle classes will, after all, want to display their middle-class values: if they include a 4x4, a mobile phone and a couple of holidays in warmer climes, then so be it.

This week's charts put this story into some perspective. Using data from the World Bank (which only goes up to 2001 but which, nevertheless, suffices for the purposes of this argument), per capita income levels in China and India are still dramatically lower than those in the US and Europe. According to the data, gross national income per capita amounted to $34,000 (£18,500) in the US, $20,670 in the EU's 15 nations but a paltry $890 in China and just $460 in India.

To be fair, these numbers don't provide a perfect comparison because I haven't adjusted them to take into account purchasing power parity (the cost of a haircut is a lot lower in China than in Beverly Hills but the service, arguably, is much the same - unless you go for highlights). Nevertheless, they suggest that, were China and India to catch up with the West, there would be an enormous increase in demand for the world's scarce resources.

Another way of expressing this view is to take a look at energy consumption. Overall, the US is way out in front, with 2.3bn metric tons of oil (or equivalent) consumed for commercial purposes in 2001. The EU 15 and China are on similar terms, both consuming about half of the US amount, whereas India consumes about a quarter of America's amount.

However, these numbers are fairly close only because the population numbers differ hugely. Commercial energy usage per capita in the US amounts to 8,148kg of oil equivalent. The EU 15 is a lot more thrifty when it comes to energy consumption per capita, with only 3,824kg of oil equivalent per capita. China's numbers are down at 905kg, while India's are only 494kg. Were China and India really to lift off, the strains on global energy supply could become spectacularly large. Quite simply, the West massively over-consumes on energy relative to countries elsewhere in the world, yet we know that many of these countries want the lifestyles of the rich, if not the famous.

Of course, other countries have already pulled off the trick that China and India want to perform. Japan and South Korea developed incredibly quickly in the 1950s and 1960s, both becoming members of the world's élite economies. And while many economists feared that Japan and Korea would eventually take over the world in economic terms, ultimately their development coincided with rising prosperity elsewhere.

There is, however, an important difference: size. The populations of Japan and South Korea combined are no more than a fifth of China's or India's. Although strong growth in Japan and Korea was always going to have some impact on global resources, they could never provide the threat posed by economic lift-off in China or India.

So where does that leave the West? Trade will still bring significant benefits. But the risks posed by global resource shortfalls will slowly make themselves felt. Higher energy prices will squeeze profit margins. Higher energy prices will have a negative effect on consumer incomes. Higher energy prices may help erode Western wealth - softening up stock markets, for example - as growth increasingly centres on other parts of the world. Higher energy prices will also encourage greater energy efficiency and the emergence of new technologies - in time. But, for now, the awakening of China and India suggests that the West will have to get used to a world where it is no longer the monopoly buyer of the world's scarce resources.

Stephen King is managing director of economics at HSBC

stephen.king@hsbcib.com

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