Government, energy & environment

Two divergent views of the future

Two big banks, Citigroup and HSBC, have developed two different visions of what the world could look like in the future. If you live in the West – and are of a pessimistic persuasion – then the Citigroup forecast is the one for you. According to this scenario, the West is finished. By 2050, for instance, Indonesia’s GDP will eclipse that of Germany, France, Italy and the UK combined and together the economies of China and India will be 400% larger than the US. Meanwhile, the fastest growing region will be Africa (growing at 7.5% per year over the next 20 years). Surprisingly, the UK does quite well in this scenario. It is the tenth biggest economy in 2050 and the only EU nation (assuming the EU still exists) that remains in the top 10. Britain even surpasses the US on a per capita basis. Why could this happen? The answer is that it’s partly due to fertility rates. God bless those unwed teenage mums. To be fair there is some small print associated with this prediction and Dr Buiter, who is responsible for the forecast, clearly states that we should ‘beware of compound growth rate delusions’ and that ‘convergence is neither automatic nor inevitable. In history, it has been more the exception than the rule.’ Quite. Over in the other corner we have the more optimistic scenario courtesy of HSBC. In this forecast we enter a period of unparalleled prosperity and the West does not fall off the growth charts. Yes, China does overtake the US in economic terms, but only just and the world ends up being ruled by a G2 of China and America – not China and India. The reason for this is the US fertility rate, which means that Americans end up 300% richer than the Chinese in 2050 and this gives rise to a totally different geopolitical picture. Interestingly, both studies rely to some extent on the theories of Robert Barro, a Harvard economist, but differ widely on the subject of how nations will cope with ageing populations and declining fertility. China, for example, hits a peak workforce in 2015 and stops population growth altogether in the mid-2020s. This demographic double whammy is expanded upon by George Magnus from UBS who comments that the number of children in China aged under 14 will decline by 53 million and that over-60s will grow from 12% of the population to 31% by 2050. Why is the fertility rate collapsing across the world? The reason is largely to do with incomes and education, although later marriage and aged care responsibilities also have something to do with it. Lessons? Look at the demographics, don’t get too caught up in BRIC hysteria and don’t write the US off quite yet.
Ref: Daily Telegraph (UK), 28 February 2011, ‘Will “Chindia” rule the world in 2050, or will it be America after all?’, by A. Evans Pritchard.
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Search words: Demographics, population, ageing, fertility
Trend tags: Ageing

No substitute for a shrinking state

In the UK, government spending cuts are starting to bite, but the result is more a genteel rage than radical street protest. The problem is bad any way you look at it, but it’s made worse by something the Prime Minister refers to as Big Society (BS?).
No, this is not Britain’s growing obesity epidemic; rather it’s the idea (rather badly put) that we should all be responsible for each other. This is an admirable aim, but it seems that nobody told the PM that people had been doing this for years. Volunteering is a huge part of British society, but it has become more difficult of late due to the spending cuts. Moreover, the idea that charities will step in to fill the void created by government cuts seems a little insulting if you stop to consider the share options and bonuses being given out in other parts of British society. Given that British families face the biggest squeeze on incomes since the 1920s, it’s a bit rich to ask them to step in and run the public sector. Moreover, many of the cuts are short-sighted. If you close a local library you are not simply closing down a building that lends people books. You are also removing a local community space that hosts mother and toddler groups, aged care help and health and immigration advice. Look at Manchester. Not only has the local council been forced to close all its public conveniences (who knew!) but also three leisure centres, two swimming pools and five libraries. As Geoff Mulligan, the thoughtful head of the Young Foundation and former Head of Strategy for Tony Blair, says: ‘Even on the most optimistic scenarios, there is a vast gap between the scale of new money coming into social ventures and the sheer speed and scale of the cuts.’
Ref: Financial Times (UK), 12-13 February 2011, ‘A quiet rebellion’, by G. Parker, E. Jacobs & J. Pickard.
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Search words: Economy, middle class, squeezed middle, community, Big Society
Trend tags: Free, anxiety

Oil shock

Why are more people not worried about the oil price? OK, recent spikes aside, the price is moderately low compared to its peak in 2008, but if global growth comes back prices will soon skyrocket. Furthermore, geopolitics and geology can cause havoc. North Africa isn’t very important for oil production. The region produces a mere 5% of supply. But the Middle East is different. This region is responsible for 30%, so turmoil in this region, especially in Saudi Arabia, would be very serious.

At this point it’s perhaps worth remembering that three things determine the price of oil: supply, demand and fear. So where will demand go, how likely is a major interruption to supply and what would the world’s politicians (and businesses) do if any of the worst-case scenarios actually happened? There is also another, related, issue, which is that costlier oil could fuel broad inflation – the Achilles heel of developed and emerging economies. And if inflation kicks in, governments could react by clamping down on the money supply, which could in turn throttle economic growth (although, one could argue that this would in turn reduce the demand for oil, which would reduce the cost). Where am I going with this? Around in circles, but that’s my point. The world is now more connected than ever before and almost everything impacts on almost everything else. That’s why so many people have a case of the jitters and any small spark could set off widespread panic within the oil market and elsewhere. And let’s not forget that declining capacity within the oil market could amplify everything still further. So to conclude, if we get growth, we get a high oil price and everyone runs for the exits. If we get a slump, prices collapse and everyone does much the same thing. It’s called uncertainty and volatility. Get used to it until some serious alternatives start to appear. In the meantime expect to see a repeat of the 2008 scenario and I suspect that this could be sooner rather than later.
Ref: The Economist (UK), 5 March 2011, ‘The 2011 oil shock’ and ‘The price of fear’ (same issue).
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Search words: Oil, peak oil, Middle East
Trend tags: Oil

Inequality is growing. Should we be worried?

First, the good news. Inequality between nations is falling. Now the bad news. Inequality within nations is increasing. Does this matter? In some instances the answer is yes. In many Western nations, individual expectations are rising. But this strong sense of entitlement is occurring against a backdrop of declining opportunities. In theory this should wear down the social fabric of society and cause riots in the streets. In practice it seems to depend on where you live and what you are used to. Take the US as an example. Here the income of the richest 20% of Americans increased by 14% during the 1970s, while the income of the poorest increased by 9%. In the 1990s, it was 26% for the rich against 10% for the poor. This ratio between the richest segment of society and the poorest is what most economists study, but it seems to me that what we should be looking at is incomes and expectations for those in the middle because these tend to be the most organised and vocal members of society.
Ref: The Economist (UK), 22 January 2011, ‘Unbottled Gini’.
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Search words: Inequality, social inequality, wages, incomes, wealth
Trend tags: Anger, inequality

Will it be democracy or autocracy that’s history?

I’ve been saying for some time that China’s primary weakness is demographic. Put simply, there is an imbalance of young men in the Chinese population. This is not a worry if the economy keeps growing, but if Chinese growth stalls (possibly due to an external trigger such as a collapse in US demand) then many of these young men could be jobless and homeless and there are not enough young women in the population to have a moderating influence. Wishful thinking? Not necessarily.

Take the recent case of Tunisia. The events that triggered the downfall of President Ben Ali were to some extent unique, but popular rage and unrest were amplified by unemployment, especially among students. In a sense what happened in Tunisia and across swathes of the Arab world was that the unspoken contract between the ruler and the ruled had broken down. The deal was that the state would provide individuals with certain basic requirements (primarily economic growth and jobs, but also health care, food, security and other essential services) in return for the exclusion of voting rights or certain freedoms. Without the prospect of jobs or homes, many educated individuals saw no future for themselves under the existing system. And without respect and dignity (but with mobile phones and the internet) they became increasingly organised and assertive.

Does this ring any bells? It should. The principal of rage arising from increasing expectations meeting declining opportunities (i.e. dashed hopes) works best when you have populations containing lots of young men. In most Arab countries, for example, 75% of the population is aged under 30. But the formula for frustration doesn’t just apply to Asian and Middle Eastern nations. It applies to the US and Europe too, especially when lots of people become aware that the gap between the richest few and poorest majority is growing or that the rules (or taxes) that apply to them are not applied to others. It’s certainly revolutionary thinking.
Ref: Prospect (UK), March 2011, ‘Is democracy a fantasy?’ by E. Rogan, The Daily Telegraph (UK), 17 January 2011, ‘Is Tunisia the first domino to fall?’ by C. Spencer, The Economist (UK), 19 February 2011, ‘The awakening’ and ‘The autumn of the patriarchs’.
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Search words: China, Tunisia, Middle East, demographics, social media, BRICs, democracy
Trend tags: Power shift eastwards