China’s rise in recent decades has been well documented, but the sheer scale of its surge up the economic ladder remains breathtaking.
In 1980, China was the second-poorest country on the planet, measured by gross domestic product per capita in purchasing power parity terms, ahead only of Mozambique.
Its annual per capita output was just $719 (measured in 2011 dollars), below the likes of Burundi, Burkina Faso and the Central African Republic, less than half that of the Democratic Republic of Congo, one-29th that of Gabon and less than 1 per cent of the per capita income of Libya, according to data from the IMF.
Fast forward four decades and China’s GDP per head by the same metric has surged 2,400 per cent to $17,963, enough to place it 56th out of the 140 countries for which the IMF had data in 1980 (a list that does not include the successor states to the USSR, Yugoslavia and Czechoslovakia, which had yet to go their separate ways).
China’s GDP per head now exceeds that of Gabon, is twice as high as that of Libya and 24 times that of the DRC. In the process, it has also overtaken South Africa, Iran, Lebanon and Brazil and will surpass Argentina and Montenegro this year, according to the IMF’s forecasts.
Beijing’s rise up the global rankings is part of a broader thrust that has seen a myriad of Asian countries becoming wealthier in relative, as well as absolute terms.
Singapore has jumped in the rankings, with GDP per capita rising from $20,930 in PPP terms in 1980 to $90.470 this year. Hong Kong, Taiwan and South Korea have all made big advances.
However, it is not just these east Asian tigers, whose rise have been well documented, that have improved their place in the world. Virtually every country in south and south-east Asia has also risen up the rankings. Vietnam and South Korea have seen income per person rise by more than 600 per cent since 1980.
The biggest decliner has been Libya, where GDP per head has plummeted 90 per cent to $8,086, with its precipitous slide accelerating following its 2011 civil war.
The north African country’s starting point was admittedly inflated by oil prices being at a cyclical high in the early 1980s, an anomaly that has also pushed GDP per capita lower over the subsequent 40 years in a handful of other major oil exporters, such as the UAE, Saudi Arabia and Qatar, although these countries remain wealthy.
Non-oil states that have seen per capita GDP fall in absolute terms over 40 years include Haiti, the Central African Republic, Madagascar, Burundi, The Gambia and Lebanon.
The region to have fallen back most sharply since 1980, though, is Latin America, with virtually every country having slipped down the global rankings.
Argentina has fallen 18 places to 58th, continuing the slide that has seen it tumble from being the world’s 10th richest country, on a per capita basis, in 1913.
Brazil, Mexico, Ecuador, Paraguay, Bolivia, Guatemala and El Salvador have all lost ground. Matters have got so bad in Venezuela that the IMF has stopped counting.
Only Chile has bucked the trend, rising 12 places to 49th, although Colombia and Uruguay have held steady.
In absolute terms, Argentina’s per capita GDP has risen 16 per cent over 40 years, Brazil’s 28 per cent and Mexico’s 35 per cent, well below the median global increase of 94 per cent.
The region’s plight has worsened since 2014, with GDP growth averaging less than 0.8 per cent, undershooting population growth of 1 per cent, “so people are getting poorer”, said Alberto Ramos, head of Latin America economics at Goldman Sachs.
“In dollars, there has been a decline of between 20 and 30 per cent so they have lost purchasing power abroad,” he added.
The obvious questions are, what has Asia got right that Latin America has got wrong, and will this continental drift continue or begin to reverse?
Economic analysts are broadly in agreement about some of the key drivers, even if they have a few additional pet theories of their own.
In his own analysis of growth across emerging markets since the early 1990s, Louis Kuijs, head of Asia economics at Oxford Economics, found three factors that explained much of the divergence in fortunes.
Countries with a higher share of manufacturing in their GDP have generated faster growth. This is doubly so for countries that export a lot of their manufactured goods.
For the benefits of manufacturing to accrue in full, however, “the technology must be mastered domestically”, Mr Kuijs said, which translates as significant spending on research and development, as well as innovation.
Latin America scores badly on all these points, alongside South Africa, another big faller in the rankings, and Saudi Arabia, while China and much of south-east Asia have fared better.
“We remain very commodity-dependent economies, way ahead of the average of other EMs,” said Guillermo Tolosa, economic adviser at Oxford Economics, of his home region of Latin America. “We still have very unsophisticated economies. LatAm export growth has been more patchy because it depends on commodities. Asian export growth has been more dynamic.”
Charles Robertson, chief economist at Renaissance Capital, an emerging markets-focused investment bank, said every country that has escaped the middle-income trap had done so “through manufacturing and exports, therefore LatAm’s reliance [on commodities] doesn’t help”.
Mr Tolosa argued that even during the boom years of 2004 to 2014, when LatAm was riding the commodity supercycle, “productivity growth remained the lowest of any region”, with higher growth simply a result of an increase in the number of hours worked, a problem he said stemmed from low investment.
Mr Robertson concurred, saying “you need investment above 25 per cent [of GDP] to escape the middle-income trap and most of LatAm hasn’t achieved that”, even as this ratio is currently running at close to 40 per cent in China.
Weak investment is itself a result of lower savings rates than in other emerging markets, something Mr Tolosa attributed to “cultural” factors.
Public sector savings rates are low because Latin Americans are “world leaders” in electing spendthrift “populist” governments, he said.
“In LatAm, democracy came in way before capitalism. In other developing countries you got capitalism well before democracy,” Mr Tolosa argued. “That was the Achilles heel. We were too democratic when people were way too poor, therefore there was the solution of just handing out resources to the population, resources that did not exist. This crowded out productive investment.”
This paucity of public investment has left the region dependent on capital from outside the region, but these external flows “have come and gone dependent on financial conditions”, Mr Tolosa said. In conjunction with the continent’s reliance on inherently cyclical commodities, “that has made LatAm more prone to financial crises”.
As a result, private savings rates are also poor, with many people thinking it is not worth building up savings because they get wiped out every time there is a crisis and a resultant bout of (often hyper) inflation, something Mr Tolosa does not see changing “for many more decades to come”.
The knock-on effect is that in Brazil, for example, real inflation-adjusted interest rates have averaged more than 4 per cent since 2013, Mr Robertson said. Among countries with bank deposits above 60 per cent of GDP, Iceland is the only other nation to have had real rates above 2 per cent over this period, with India the only other country above 1 per cent.
Mr Robertson further argued that “what the Asians did very well was get their fertility rates down”, a trend that allows households to save more, creating a larger banking system, lower interest rates and higher investment rates, which exceed 25 per cent of GDP in South Korea, Taiwan and Singapore.
China, South Korea and Chile saw their fertility rates fall below 3 per cent between 1975 and 1980, he said, while Argentina, Brazil, Mexico and Colombia did not get there until the 1990s, giving the others a 15-year lead.
Moreover, Mr Tolosa argued that “the boundaries in which politicians can move in LatAm are much wider than in most other markets” with, for instance, Asia’s far larger capital markets acting as a brake on political extremism.
“They have no anchors so politicians can do whatever they want. With that degree of uncertainty people are going to be less willing to invest,” he added.
Mr Ramos said the economies that have underperformed the most in recent years have been Argentina and Brazil “because of the populist experiments that ended in tears”, while growth in Mexico since the election of president Andrés Manuel López Obrador, often described as a leftwing populist, “has basically been zero,” Mr Ramos added.
Mr Robertson pointed to a couple of additional factors to explain LatAm’s lethargy. One is education, where east Asia has not only overtaken Latin America but surged far ahead.
Another is crime, with 46 of the 50 most murderous cities in the world in the Americas (and the other four in South Africa). “How much do you want to invest in a country where you don’t feel safe at night, or even in the day?” he asked.
Analysis by his colleague Daniel Salter, head of EM equity strategy at RenCap, found that countries that had escaped the middle-income trap tended to have high levels of investment, manufacturing, exports, human capital, research and development spending, patent filings, infrastructure and electricity consumption and low levels of agriculture, resource rents, inequality, corruption and volatility of growth.
On this basis, Mr Salter concluded the likes of Poland, Hungary, Romania and Malaysia were most likely to escape the trap, while Argentina, Mexico, Turkey, Russia and Kazakhstan were more likely to stagnate and be overtaken by poorer countries such as China, India, Vietnam, the Philippines, Indonesia and Thailand.
“Asia’s secret is open source,” said Mr Ramos. “It’s not centralised economies. You trade more and you educate your population and instead of succumbing to protectionism you open up more. There is no magic.”
Few have much confidence these dynamics are likely to change in the foreseeable future, though.
Mr Tolosa said many of LatAm’s weaknesses were structural, and thus hard to reverse.
In particular, he said that “reasonable” monetary policy and an absence of “crazy” fiscal policy had allowed Asian economies to continue to maintain competitive currencies even as their exports surged, while “no LatAm country has managed to keep their currency competitive in a sustainable way”.
With currencies volatile, “it’s impossible to develop a business in the export/import sector that’s sustainable,” he added.
Mr Ramos said Brazil had already “lost two decades out of four” following slumps in the 1980s and 2010s, “and if we don’t get our act together we will lose another one as well and it will be half a century”.
He said precious few countries trade less as a share of GDP than Brazil, and it needs to “integrate deeper and better into global supply chains”.
Yet one incipient risk could make the task of reforming Latin America’s economies along the lines needed to boost growth even harder still, Mr Ramos feared: that of rising public anger.
“It seems that the politicians have not satisfied the needs of the people. Everybody seems to be up in arms across LatAm, even in Chile. There is a certain sense of exasperation brewing in the region,” he said.
“Social and economic progress has been very limited, income inequality is going up, the social safety net is failing and people don’t feel represented by the political structures. People are demanding change.”
Although Mr Ramos believed it was “reasonable that people are voicing their frustration in the public square”, as change is needed, he said that “the way this anger is channelled could be a shortcut answer to the concerns and anxieties”.
“If that is the case we would go from bad solutions to worse ones,” he said. “We need to educate our labour force, remove red tape. If it’s just more handouts, the response may aggravate the situation.”
Mr Tolosa agreed, saying: “More belligerent populations will induce policymakers to delay austerity where it is needed, creating further fiscal risk down the road.”
