China in Global Economic Recovery

Reuters reported on Thursday 16 July 2009 that with China’s economic activity picking up in 2009Q2, the Chinese full-year 8% growth target might now be achievable.

Will China save the world?

A natural skepticism, of course, surrounds such numbers.  So, recent historical perspective might be useful here.

The 1997 Asian Currency Crisis was, up through 2008, perhaps yet the most wrenching financial and economic crisis in East and Southeast (ESE) Asia. In its concentrated impact on the region, 1997 might well have been just as severe as 2008/2009 for ESE Asia. From June 1997 to mid-January 1998 exchange rates against the US dollar of the currencies of Indonesia, South Korea, Malaysia, the Philippines, and Thailand fell by over 50%; that of Singapore, 20%. In Japan and in every single one of these economies, GDP growth turned negative in 1998, with the combined fall in these economies’ 1998 GDP amounting to 2.4% of GDP in ESE Asia the preceding year. Millions of people lost their jobs.

So, if you had been following developments in fast-growing ESE Asia up through before 1997, were then shocked by 1997’s sweep through the region, what should you have expected for how wrenching these losses were and how much they perturbed that region’s growth path? Here’s a graph of the fitted trend line through 1996 of GDP in ESE Asia (excluding Japan), then projected forwards and compared to reality post-1997:

ESE_Asia_x-Japan.gif

The striking feature in this chart is how little a change in the growth path resulted from what at that time was viewed to be a dramatic downturn. Sure, the accumulated GDP under-performance from 1997 to 2006 was 5.1%. But the same calculation for the world economy overall was 11%, more than double that for ESE Asia, although the world’s pre-1996 growth rate was only 3.7% a year in contrast with ESE Asia’s 7.6%. Even before the 2008 global financial crisis, the world overall had slowed in comparison to the 4 decades before 1997. But ESE Asia, the centre of that period’s financial crisis, emerged far better than one might have expected then.

Or did it? If we exclude not just Japan but also China from ESE Asia, the graph that emerges is quite striking and a little scary:

ESE_Asia_x-Japan%2BChina.gif

the accumulated under-performance is then 21%! Through sheer size and economic performance, the significance of China should have been observable even from outer space. This importance of China in aggregate economic performance mirrors its single-handed reduction of the world’s poverty over the last three decades (that I’ve blogged on previously).

To emphasize further this historical point, recall that prior to 2008 the last two times the US economy went into recession was 1991 and 2001: in 1991 US GDP fell $13.7 bn. In 2001 US GDP grew US$74.1 bn. By contrast, ESE Asia generally and China in particular continued to grow throughout. Taking absolute values, and comparing these changes with those elsewhere gives this table:

RelativeGDPcontributions-WorldGrowth.gif

All data here are in constant 2005 US dollars, evaluated at market exchange rates, not purchasing power parity – so the denomination in this comparison is what the whole world would use to buy wide-body Boeing jets, Nokia cellphones, and Italian fashion design.

True, in this comparison, China’s per capita income now stands at only 1/14th that of the US; in aggregate, the US economy is still one quarter that of the entire world. But even so and even over relatively long stretches of time (2002-2006) China was already contributing more than half of the growth to the world economy that the US was doing. In times of US and world downturns, however, that ratio rises dramatically: China contributed 3 times what the US failed to do in 1991 (again, using the absolute value of the US change in income), nearly one and a half times the US’s contribution in 2001.

Indeed, the rise of China [and to a smaller extent India] since the early 1980s has shifted the world’s economic center of gravity 1800 km – 1/3 of the planet’s radius – deeper into the Earth’s crust, away from the US, and towards the East (previously blogged). This transition accelerated in 1991 and 2001, each time the US was in recession.

So, perhaps this time, it won’t surprise that China leads the world economy out of recession. After all, it’s already done so before, quietly.

Notes: I met John Ross recently, when he and I spoke on a panel on London and the global economic crisis, but hadn’t seen his recent post on China’s dramatically shrinking trade surplus, making a similar and more current point than my own post here. I highly recommend his posting.

All data are from the World Bank’s World Development Indicators 2008. I provide more details on the numbers I’ve described above in my paper, “Post 1990s East Asian economic growth” (October 2008; also Spanish translation in pp. 40-52, Claves de la Economia Mundial 2009, Instituto Espanol de Comercio Exterior, Secretaria de Estado de Comercio, Ministerio de Industria, Espana www.icex.es).

2 Responses to "China in Global Economic Recovery"

  1. Anonymous   August 1, 2009 at 12:09 pm

    The world should know that other than praises for our fellow men in other countries such as India, we chinese have nothing to say about other inhabitants of our shared planet. We would always find faults with ourselves for only then we can strive to improve, even if it proves to be too difficult. Certainly sticking our nose into other people’s knickers is not one of our habits.Save this world not our job! We are neck deep ourselves. But, commerce, we are most enthusiastic for. These are nice knickers indeed. I have in possession 1,000 different styles here to satisfy your most basic and exciting carnal needs. Drop a call, and we can do business, just like Lady Baroness T. said.We have so many our own problems, if you know them yourself, your mind probably will explode. I sometimes wonder how the Messers like Mr. Hu and Wen can ever sleep; the jobs have to be a life expectancy killer bordering on self-assisted suicide, and so little pay, and not even a mistress or two. Saving the world will just be the last straw for the life of these gentlemen.If you see any Young & Restless (FengQing) like our proverbial Mr. China, just please please please, ignore him. How does he know that no one ever falls off the train in China while speeding at 200 miles per hour, and how would he know may be some people prefer to sit on the roof of the train for a more splendid view, and indeed superior air to breathe in the scorching sun at a more leisurely pace.While their patriotism is admirable, it is not what most of us think in China. There really is nothing in the world that we want other than to get the next Bottle of White Wine (read expensive), my wife’s next Gucci bag (fake actually), any my kids next lessons (rote learned anyways), the next car, the next house, or the next mistress (shhiii…, don’t tell my wife, my last one had really those huge … you-know-what, for a chinese lady anyway). To claim that China will lead this or that really is just a little bit over the top; that one really got my plum in my mouth wriggling.For such mundane matters, we prefer to delegate to Uncle Sam. Nice Uncle indeed, who spend the money, resources, and man-power to trouble shoot for all us in the world. It is a good bargain, especially we also get to collect a small interest, we are already getting used to it.