World Bank conclusion that China can grow at 8% a year for 20 years is like Japan versus the US in 1990
Posted on 16 January 2012 with 1 comment from readers
Economists are an unimaginative breed, projecting the past into the future and calling that a forecast. ArabianMoney was reminded of that yesterday at a seminar organized by the DIFC. One chap said the worst investment this year would be real estate. Well would he have said that at the top of the Dubai boom in 2008?
So when the economics department of the World Bank publishes a study concluding that China can grow for eight per cent for the next two decades we should be skeptical. And not just because the jealous West is close to or already in another recession.
Japan in 1990
Think back to 1990 and the forecasts that Japan would overtake the US economy by 2010. Nobody realized then Japan was puffed up by bad debts and on the brink of 20 years of deflation and recessions. Japan is nowhere near to the size of the US economy today and has been overtaken by China which remains less than a third the size of the US economy that is still the largest in the world.
Most emerging economies go through a rapid growth stage that eventually becomes unsustainable. There is not enough land. There are not enough natural resources. The books can no longer be fiddled to exaggerate the progress. You become so competitive you undermine the economic health of your customers. Or all of the above.
Is China now ‘Dubai x1,000′ as Jim Chanos, the hedge fund manager who made his fortune shorting US subprime loans contends? He sees a property and construction bubble of historic proportions in China. All history is on his side when he notes that property booms only end one way. Dubai also thought in terms of soft landings and endless growth.
Chinese hubris
The signs of hubris are there too. The Chinese are now staying in Dubai’s most famous hotel, with 25 per cent of guests from the Middle Kingdom. Operator Jumeirah is lighting the Burj Al Arab with a Chinese dragon for the New Year and adding wok stations to its kitchens for their guests who still dislike foreign food.
The Chinese also appear in the Dubai shopping malls. Spending apparently not because things are cheap but because buying in Dubai has a status like shopping in New York or London! They go to the Ski Dubai indoor ski slope and wear the gear to have a look around but do not actually ski.
This is all rather top-of-the-market behaviour, though you can’t blame Dubai for cashing in. The Dragon Mart mall extension was the first project Nakheel got underway after its debt mountain was rescheduled.
However, beware of the dragon. Things will look rosy until they are not. Remember the Japanese in 1990!
1 Comment posted by readers:
As soon as world oil production begins to permanently decline, economic growth will end, except possibly in countries that can export oil. The global industrial economy depends on relatively cheap liquid fuel to produce food and move goods long distances.
The timing of this coming crisis is hard to predict. The development of horizontal drilling can make heretofore uneconomic oil locked in thin oil bearing strata profitable to produce. How much additional oil that will yield, would take a massive international study to determine. Without all that data, the timing to the peak is unknowable, but I doubt it is anywhere near 20 more years. Oil consumption in the developing world is increasing far too fast for that.
They are building new car plants in Asia very quickly, much faster than oil demand can be reduced in the developed world. And the oil supply can’t even stay constant. I suspect that before 2020 it will begin to decrease, as the super giant fields developed in the 1960’s & 1970’s begin to run dry. Like some fields in California, they will produce oil for decades more, but the amount coming up will decline at an increasing rate. The supply shortage problem won’t be the first crisis to emerge. It will be the bidding war that will break out for what is left that will wreck the global economy. It will be like putting a continually increasing tax on almost everything.
These current problems can be managed because they are man-made. Oil isn’t.
France isn’t spending billions on that gigantic new laser fusion research facility because they like to play with lasers.