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Caixin Online
Feb. 1, 2011, 9:56 p.m. EST
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By Andy Xie
BEIJING (Caixin Online) "” Despite the dot-com bust, 9-11, the wars in the Middle East, the U.S. property bubble, the euro-zone sovereign credit crisis, the continuing stagnation of the Japanese economy "” the first decade of the 21st century was the most prosperous, according to conventional measurements, in our lifetime.
But the prosperity on paper isn't reflected in the moods of peoples around the world. In fact, most people around the world say that they are dissatisfied with their economic plight.
The poor quality of economic growth may explain the gap between economic indicators and social moods. The poor growth quality is reflected in (1) inflation of economic necessities, (2) rising debt levels for the support of living standards in the developed world, (3) rising property prices that puts housing out of reach for the middle class in the developing world, and (4) skyrocketing economic inequality that makes the economy dependent on the demand of a small, wealthy minority.
The right path forward is slower but results in more equitable growth. The most important policy change should be to move away from using liquidity to boost economic growth. It is the most important cause of inflation and rising inequality.
While food is getting more expensive, information is getting cheaper.
The combination is highly combustible. This year may see more political instability around the world. Inflation could become another global crisis in late 2012. It would start with either a collapse of the U.S. Treasury market or an inflation-indexed hard landing in the emerging economies.
In the past decade, the world saw unprecedented prosperity. The global nominal gross domestic product nearly doubled to $62 trillion in the first decade of the 21st century. The dollar decreased by one-fourth in the decade, and the U.S.'s inflation was similar in magnitude, i.e., the global GDP rose by 50% if discounting for the dollar's depreciation and the U.S.'s inflation.
But, when you travel around the world, the impression one gets from talking to people is of anything but the most prosperous decade.
Americans complain bitterly about life getting harder, less affordable, and more insecure. Europeans complain less only because they have low expectations. The Japanese have given up. They assume things are always bad.
For the Chinese, nominal GDP has quadrupled in the past decade. This achievement ought to produce a sense of satisfaction, but instead, many bitterly lament that things are becoming too expensive, property is no longer affordable, and food and water are less safe.
What's going on? Is the prosperity a mirage? Is the GDP measurement wrong?
Global grain output has increased by one-tenth in the decade, about the same pace as in the previous decades, and energy by one-third "” all much faster than before. Forty percent of the energy output growth came from China increasing coal production. Excluding China's coal production, the world energy production was sluggish, like in previous decades.
Grain and energy are the most basic inputs in the global economy. As energy and grain affect low-income people most, and the overwhelming majority of the global population falls into this category, their sluggish growth suggests that life hasn't been improving as quickly as the economic prosperity on paper suggests.
Moreover, as global GDP doubled in dollar terms, far outstripping the output growth of grain or energy, their prices have surged. The FAO global food-price index rose by 138% in the decade, and the Brent crude price rose to about $100 per barrel now from an average of $20 in the 1990s. Even if the average income rose by 90% in dollar terms as the economic data suggest, the outsized price increase in food and energy could have offset that for a big chunk of the global population. A sizable portion of the global population may be worse off today than 10 years ago.
While the inflation of necessities keeps most people down, statistics point to rapidly rising income and wealth for a minority. The top 1% of the U.S. population is getting one-fourth of the national income and nearly half of the national wealth, twice as much as two decades ago. In China, the ratio of property prices to income more than doubled in the decade, indicating that inequality more than doubled too. While the trend may be sharpest in China and the U.S., rising inequality is a global phenomenon.
The surge in income inequality has skewered economic growth toward expenditures by the affluent. Such items have high accounting value and low penetration. Hence, the boom on paper and popular discontent can coexist.
If economic data suggest prosperity, it must show up in more of something. One example would be rapid growth in some product or service. I see three booming areas. Two are China-related, and one is U.S.-related.
First, there are more light-manufacturing goods around the world. The rise of China's manufacturing sector is the driver. From water purifiers and rice cookers to microwave ovens, light-manufacturing goods have become much more ubiquitous around the world. The reason is the lower price level due to China's rise. Poor people have greater access to such goods.
It is reflected in China's exports rising from $350 billion to $1.6 trillion in the decade.
These light-manufacturing goods retail for three to four times the factory gate price on the shelves in developed economies and two times the price in developing economies. If you multiply the ratios to China's export growth, one could say that China's export boom may account for 15% of the global prosperity.
Second, China's infrastructure boom is obviously much faster than before and big enough to have a global impact. China's physical infrastructure "” highway, railway, electricity production and distribution "” is now similar to the U.S.'s in size. Most of it has been built in the past decade.
Infrastructure is a long-term investment. Its impact cannot just be calculated in terms of today's GDP. Nevertheless, the $4.5 trillion increase in China's nominal GDP during the decade could be used to quantify its impact. That amount would be another 15% of global prosperity during the decade.
Third, the IT revolution has continued at a rapid pace. The price of information goods have come down by 90% during the decade. The low price has made IT products affordable to low-income people.
Mobile phones, for example, have become affordable to most people in the world. Even though the nominal value of IT production and information services may be 5% of GDP or so, its massive price decline could explain much of the remaining prosperity.
AOL sometimes reminds Wall Street of Brett Favre, the NFL quarterback, writes Jon Friedman.
10:18 a.m. Today10:18 a.m. Feb. 2, 2011
"RT @MWRadio: More stores are offering to buy back your used technology, with some strings and fees attached. http://fb.me/UgdJI0Dx" 2:47 p.m. EST, Feb. 2, 2011 from MarketWatch
"U.S. stocks pause after latest rally http://bit.ly/g9IV5l" 2:18 p.m. EST, Feb. 2, 2011 from MarketWatch
"News Corp. launches #TheDaily on #iPad http://bit.ly/hrz71a" 1:48 p.m. EST, Feb. 2, 2011 from MarketWatch
"Sugar futures hit 30-year high as cyclone threatens Australian crop http://on.mktw.net/hlsVqA" 1:20 p.m. EST, Feb. 2, 2011 from MarketWatch
"RT @MarketWatchGame: Find us on #Facebook at Facebook.com/fantasyearningstrader" 12:58 p.m. EST, Feb. 2, 2011 from MarketWatch
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