PESTLE

China's Dilemma (3)

In the previous 2 posts I identified two desperate needs for China--they need for America to recover quickly and they need their citizens to replace export earning by consumer spending. It must be galling for the Chinese government to realise their fate is in the hands of the Yanks and their own consumers--they've been sober and conservative in their management of China's macro-economy and just got swamped in the tidal wave. But because they are autocratic and cruel, and more concerned with self-preservation than their country's future, I can't muster up much sympathy for them.

But even if both their desperate needs are satisfied (and I do think the American economy will recover quickly), China is still due for what is essentially the same disruptive period that happens in the transition to developed economies that has afflicted all of their predecessors, from the UK to South Korea, and most definitely including the U.S., which had several break points. And here is where Chinese leadership is failing China.

China has other desperate needs. The stimulus they are injecting into the economy is failing to address them. They need clean energy generation far more than the worried West--Chinese people are dying every day due to air and water pollution, and it is saving up trouble for the future to ignore it now. China is introducing a national healthcare scheme--if they don't fix their pollution problems, this scheme will be overwhelmed just dealing with the effects of pollution.

The demography of China is going to start working against them quite soon, as the one child per family rule works through the population figures like a pig through a snake, and China incredibly starts to look like Japan. Preferential abortion to insure that that one child was male will exacerbate this issue starting now. Increasing unemployment makes the idea of bringing surplus males into the military a fairly sane option. Having a larger military will create pressure to justify its existence. And war is not good for developing countries. It slows down useful development and creates a warped sense of priorities.

The consensus shared between Chinese citizens regarding the central government is entirely an economic transaction. We let you rule if we can better our lot dramatically. If the Chinese government does not keep its end of the bargain, this consensus will disappear. I think this will happen over the next 5 years, and considerable turmoil will be the result.

China's Dilemma (2)

According to Nationmaster, 22% of the world's poor live in China. I don't know if that percentage will increase--times are tough all over--but the raw number most probably will. And this isn't China of 1978, when the entire population was poor. Now, the 100 million who are living on less than $1 a day have middle class neighbours and rich Chinese people on TV.

Why am I so pessimistic about China regarding the next 5 years? These are smart people, industrious and entreprenurial. Well, partly it's because the rest of the world will let them down. In 2007, China's exports were $1.2 trillion. That compares to their total GDP in 2008 of $4.84 trillion. So far this year, exports are down by a quarter. So far during this recession, worldwide job losses are 50 million. Of that number, 20 million are Chinese.

So we have a deteriorating financial situation in a country with brand new access to communications and growing inequality. Sound like a recipe for social unrest? Add in government corruption. China is ranked at the same level as Romania. China is embarrassingly and publicly failing in its efforts to control corruption--this article in Asia Times is just more of the same. And Chinese people now see and hear this every day--and not just in the newspapers, as China has the most internet users in the world, at 300 million.

China desperately needs for its citizens to spend more and save less to compensate for reduced exports. Chinese people are famous for saving. This is the most publicized economic downturn in history, being covered like an American Super Bowl or the World Cup. Does anyone think the Chinese are going to pull their yuan out from under their mattress and buy a Haier TV on the heels of 20 million job losses and 10,000 factory closures? I do not.

More on China later.

China's Dilemma

China's manufacturers desperately need America to buy Chinese goods. China's government desperately needs America to become more conservative in its economic behaviour, the better to protect Chinese holdings of American debt.

So far, it's the worst of both worlds. America has quit buying Chinese goods, but it hasn't started acting conservatively enough to protect Chinese holdings of Treasuries.

It's a real dilemma. One of several Catch 22's that China faces over the next 5 years. We're going to focus on China for a bit.

We can start with a bit of a contrary view, one written by James Fallow for the Atlantic. Read it. He doesn't really disagree with me that China is going to have a rough 5 years--but he's considerably more optimistic about China's future after that. Well, I am, too, depending on how you define 'after that.' In 25 years, maybe, China will be back on the road to superstardom. But this five year period is going to be so tough for China that it will take 20 years to recover.

Recession, depression, what's going on?

In the U.S., factory orders and the Dow are climbing. So is unemployment and homelessness. What's really happening right now?

We've just looked at 8 countries that account for half the population and two-thirds of the GDP in this world. They certainly can serve as a proxy, as they include the BRICs, the U.S., France, the United Kingdom and Japan.

The U.S. looks schizophrenic right now, as companies are laying off workers at the same time their order books are filling up. To say this is typical is to be too kind. US managers have never yet gotten this right, and it doesn't look like they will this time, either.

China's manufacturing seems to be reacting favorably to the huge stimulus package of the government, with sentiment rising into expansionary territory. But there, too, unemployment is rising and set to rise faster. It's hard to track homelessness in China, due to migrant workers who will return to the farms and also to the quake last year that left millions homeless. But they are doubling the number of urban homeless centers, so it must be an issue.

India is just diving into the hard part of the recession, and stronger family ties may cushion the worst of unemployment rates there. But there's no question it's increasing. And although they're trying to put a brave face on it, India's manufacturing activity is decreasing. It could be a lot worse, however.

In Russia, manufacturing output was down 20% year on year in January and 13% in February. Stocks rose! Bloomberg forecasts unemployment in Russia to rise to 12%. That is just going to be really tough--inflation at 13%, unemployment at 20%, and the government having to bail out the oligarchs right and left. Hey, but stocks rose...

In Brazil, manufacturing slumped 17% last month year on year. Unemployment jumped to 8.5%.

In the United Kingdom, manufacturing dropped 4.5% for the quarter after falling 1.8% the previous quarter. Meanwhile, unemployment skyrocketed at the fastest rate in history there, to 6.5%. I think the UK will be first in, last out of this recession.

France's PMI (Purchasing Manager's Index) is at a dismal 36.5, compared to China's 51. French unemployment is at 9.9%, and expected to rise another percentage point this year.

Japan's PMI is even lower than France's, at 33.8, and even that is an improvement over Februay. Manufacturing activity has declined in Japan for 13 consecutive months. Wow. Unemployment rose to 4.4%, which is high for Japan and a 10% increase in one year.

So yeah, I guess you'd call it anything short of a depression. Countries massage their figures to make them look better. There are a lot of people in really tough times right now. Considering that it looks like it's going to get worse before it gets better, I think my comment in a previous post--that world GDP looks set to decrease for the first time since WWII may actually come true.

What have we learned from our Pestle summaries (2)

According to the Economist, the 8 countries I have selected for further analysis will contribute a negative $648 billion to the world economy this year. The only two countries on my list that they think will grow in 2009 are India (at 5%) and China (6%). The Economist forecasts that all but two (the UK, at -1.1%) and France (0.0%) will return to positive growth the next year. It's the second worksheet in this file, titled The 8. Download Top 10 in 3 categories

I don't really agree with the Economist's numbers for individual countries, but it could be that the net difference is small--as I roughly agree with the numbers for USA and Japan, the big difference is that I think China will go in the tank, but that's for another post.

But if 8 countries wipe more than 1% of world GDP off the board this year, the other 200 countries are going to have to make up for a lot of ground if world GDP is to grow at all in 2009. And I don't see where that growth is going to come from.

So it looks as if, for the first time in a very long time, world GDP may decrease this year. That's big news.

Pestle summary: USA

This is the preliminary data collection for a Pestle analysis of the United States, drawn from publicly available information on Wikipedia, the CIA World Factbook and Nationmaster. The United States has the largest GDP in the world, $14.3 trillion. That's almost as much as the next four on the list combined. The United States also spends more on the military than anyone else. A lot more. U.S. spending, at $651 billion per year, is almost 10 times as much as second place China, and about 48% of all military spending is American. It is the third most populous country in the world, with 306 million people. 

There has never been an entity to compare with the United States, and perhaps never will be. My five year forecast for American politics is here. My five year forecast for the American economy is here. My thoughts on why America will be the 'owner' of the 21st Century are here. 

I am not blind to its faults and shortcomings, and have been quick to criticize my home country--and was perfectly willing to live abroad for 13 years--but there aren't adequate superlatives to describe the size and scale of what America has achieved. Just one quick example--in the first Iraq war, George Herbert Walker Bush put together a coalition to drive Saddam Hussein out of Kuwait. The other countries ponied up more money for the adventure than the war itself cost. The U.S. made a profit on their war. His son was not quite so lucky with his misadventure.

If you've been napping, the U.S. has a new president, Barack Obama, and a recession to deal with. President Obama is spending a lot of money to stimulate the economy, and will spend a lot more trying to stabilize the financial system, and a lot more trying to help unfortunate mortgage holders hang on to their properties. Troubled times indeed. And yet, as I write this on March 29, consumer spending has increased for 2 months in a row and the number of houses sold has increased... so how deep is the recession? Well, it's not good--with unemployment pushing 8.5% and set to go into double digits this year, it's a real recession, not a fake. (However, I forecast a return to growth by 4th quarter of this year.) Obama's Democrats have solid majorities in both House and Senate, although Obama is so far trying to tread lightly with his majority.

For Americans who are not poor or black, or both (God help them), access to good education and decent healthcare is at mid-European standards, though certainly not above them. But there are too many poor, and too many disadvantaged blacks. Given the wealth of the country, it is a national disgrace. Immigration is a hot-button social issue, although America would grind to a halt without its immigrants, and the repatriated salaries from immigrants in America dwarf most foreign aid efforts (and probably do more good). One issue that needs to be dealt with in this decade is the total number of people in prison (mostly on drug charges), and the very high number of young black males behind bars.

American higher education is basically the best in the world, and this pretty much guarantees that America will do well in the future. About 99% of the population is literate, most people get 15 years of education, 7 of the top 10 universities are American--but most importantly, 168 of the top 500 universities are American.

 The list just doesn't stop. 153 of the world's largest 500 companies are American. (Second is Japan, with 64.) The U.S. is first in patent applications.

But there is a price to pay. Americans don't live as long or as well as  Europeans or the Japanese. They have to fight for their healthcare--a debilitating struggle that consumes too much time and too many resources for both individuals and businesses. Violence in America has subsided, but it is still an everyday fact of life. And the mobility of the American labor force has fragmented the nuclear family structure in ways that will take 100 years to analyse. It's great that America created MySpace and Facebook. It's not so great that America needed them so badly.

America has done more about the environment than almost any other country, instituting cap and trade on SO2 to fight acid rain, and many more measures to fight air and water pollution. There are land use and water use policies that will need to be revisited soon, due in no small part to growing population, but those types of struggles will not be new to America.

For by art is created that great Leviathan...

Pestle Summary China

Well, I guess this is where I get controversial, at least a bit. There are others who have predicted that China was in for a tough ride over the past few years, but they mostly got ignored, or were proven wrong by events. And, to a certain extent, if you cry doom long enough you'll always get proved right, given the laws of entropy. So this is a bit 'faux' controversy...

This is the introductory note taking exercise for a Pestle analysis of China, drawn on conventional internet sources such as Wikipedia, the CIA World Factbook and Nationmaster. China is the most populous country in the world, with 1.34 billion people. It has the third largest GDP, with $4.84 trillion, behind Japan and the U.S. Like India, the currency and conditions make it useful to look at some statistics using Purchasing Power Parity, which bumps up China's GDP to $7.8 trillion, which would move it ahead of Japan. It also is the second in the world in annual military spending, although that needs a bit of context, as the world's number two spends about 15% of what the world number one (USA) spends. But with PPP, that looks like more money, and insofar as it is used to pay salaries, rather than buy Israeli rocket parts, PPP is valid in this context too.

China is badly governed by the Communist Party, and in my five-year Pestle forecast I will be making the case that misgovernance will prove to be the root cause of a downward spiral that will cost China dearly. It will mark the end of an unprecedented run of growth and opportunity that began in 1978, and for the past 25 years it has averaged 10% growth per year. The record stops this year, sadly. It really is a pity--China's growth has done more to reduce world poverty than any program, aid initiative or growth in the rest of the world combined. The moral of this story is, to get rich may be glorious, but not if you trash your house and alienate your family while doing so.

China is pouring money in to the domestic economy to keep it from going sour, accelerating infrastructure development. It will help. It is unlikely to be enough. Exports have fallen by over a quarter in the last three months, and a lot of businesses have locked their doors. Unemployment is rising rapidly, and China may end up paying poorly trained workers to dig holes and then refill them.

Last year, there were 87,000 'incidents', which in other countries would have been called protests, demonstrations or riots. China is barely keeping the lid on internal unrest, much of it caused by regional and local government corruption, turfing people out of their houses or off the farms without compensation. Again, in the deeper analysis, I will try to make the case that if you get 87,000 riots with 25 years of 10% growth, what you get during a recession may look suspiciously like revolt.

China is either first or second in emitting CO2, and the overall air pollution in China's urban centers is staggeringly bad. 16 of the 20 most polluted cities in the world are Chinese.  Their water isn't so good either. They also have a problem with desertification.

There are pluses. China has 86% literacy, they lead the world in internet users, they are 4th in the world in patent applications for residents (2nd for non-residents), and have 4 of the top 100 universities in the world (and 8 of the top 500). Unlike India, they actually use half the human race (the female half) which effectively doubles their talent pool.

But it's not going to be enough, as we'll see when we dig deeper.

Pestle Summary: India

Once again, these are the topline notes to kick off a Pestle analysis of India--this is very basic stuff culled from Wikipedia, CIA World Factbook and Nationmaster. India is the largest democracy in the world, the second in population, with 1.16 billion people, and 12th in GDP, with $1.23 trillion. India is a country that benefits from having its GDP converted to purchasing power parity, and given the much lower cost of goods and services there its probably accurate to use this, whereas it's not much use for the countries we've looked at so far. At PPP, India's GDP is $3.39 trillion. A lot of that money gets spent on the military--India is 10th in the world with $32.7 billion in annual spend on defence, in no small part due to its nuclear weapons programme.

The first item that gives me pause when talking about India is its neighbors. India will struggle to maintain stable and peaceful borders with the likes of Bangladesh, Bhutan, China, Myanmar, Nepal and Pakistan. And a clear precondition for development is peace. India is not lucky in its choice of neighbors, and this is important. It has been in 5 wars since 1947. Another precondition is either called stability or internal coherence. Wikipedia says there may be as many as 1,652 dialects in India--they have two major families of languages, and 14 recognised major languages within India's borders. More than 13% of the population is Muslim. The caste system still divides India, despite laws designed to prevent it.

India is poor, unequal in income distribution, and growing. It did better with the Golden Decade than many of the other countries we are looking at, reducing poverty by 10%, but their public debt is sadly 78% of GDP. It will be higher soon.

On the other hand, it has a large and growing middle class, one of the best predictors of ongoing development. India is number 3 in the world for internet users, with 80 million. India is 10th in the world for patent applications, both for resident and non-resident filers. And it's a young country, with median age of 25. But, they don't have good drinking water through much of the country, and they have big, big problems with air and water pollution, deforestation, desertification and soil erosion. 

India's lucky to have Manmohan Singh at the helm during this period. He understands macro-economics and how public policy can interact with economic forces for good or ill. There will be a lot of ill. India has just lowered its growth estimate from 7.1% to 6.5% for 2009, which really means they are still being overly optimistic. They will be lucky to end the year with any appreciable growth.

India's society is beset by tension, only part of it coming from unequal distribution of the growth of the past decade. Terrorism by and against Muslims, persecution of Christians, blatant corruption in regional government (that seeps into Parliament) all make India a fertile ground for unrest over the next five years.

If my horizon was 25 years, I would be writing poetically about India's future. But, as we're talking about 5 years, my prediction will be considerably less optimistic.

Pestle summary: Japan

Once again, this is just note gathering for further analysis, taken from Wikipedia, the CIA World Factbook and Nationmaster. Japan is 10th in the world in population, with 127 million people, 6th in the world in military spending, with $48 million per year, and either second or third in GDP, depending on how you measure it, with $4.84 trillion.

Well, after the lost decade of the 90s, Japan had a brief interlude of mediocre economic performance, to be followed by what looks to be another lost decade. What they've lost is their people. Japan is by some measures one of the richest countries in the world. Their population peaked in 2005 and declined by about 200,000 last year. That decline is set to continue. Their population is also getting older--their median age is 44, compared to 28 for Brazi, and 22% of their population is 65 or older.

Japan has developed a two-tier workforce, with the salaryman in protected jobs with established companies, and temporary workers everywhere else. This second category, almost 30% of the workforce, is getting massacred with the recession going on now.

Their politics is entangled--they've had the same ruling party for 55 years, although that looks set to change, and that's just too long. There is corruption within government, business and even the Yakuza is getting old, fat and lazy--but still powerful. Their signature corporations, the Sonys, Canons and Mitsubishis, got fat and lazy too. Toyota is still getting it done, but doesn't have enough company.

The Japanese live forever, it seems. Their life expectancy is 81 and climbing, and they have 36,000 centenarians 32,000 of them female). With an aging population that is insular and conservative, their attitude towards much-needed immigration is skeptical at best.

The Kyoto Protocol was signed in er, Kyoto, and Japan takes global warming seriously. They lead the world in developing patents for alternative energy generation, and have paid a lot of attention to pollution since Minamata's mercury tragedy.

It wasn't supposed to be like this for Japan.

Pestle Summary: France

Okay, here we go with our initial look at France (just a topline summary of major facts, drawn from Wikipedia, CIA World Factbook and Nationmaster). France is 5th worldwide in GDP, with almost $3 trillion, and 3rd (why?) in military expenditure with $61.6 billion, and 22nd in population, with 61 million.

France is the best-positioned of all the countries we will look at here to deal with the economic crisis facing the world. Their ingrained habit of dirigisme will bail out their industry, their nuclear power plants will protect them from energy shortages, while giving them all the street cred they need for global action against greenhouse gases. They have a beautiful geographic location, brilliant public transportation, excellent education and one of the few growing populations in Europe, thanks to generous subsidies for mothers.

One of the key questions going forward will be how France tries to take advantage of this perfect positioning. Their tendency has been to try and control the European Commisssion and get over-represented in multi-national organisations. If they could figure out how to work softly and not piss everybody off, they could really work wonders. But they've never managed to do that, and I'm not sure they'll start now that they are in a privileged position.

France has just rejoined NATO, which should help them militarily and may give them cover to reduce defense spending. Their foreign policy is essentially to work behind the scenes maintaining covert control of the DomToms, their former colonies. Suspicions abound that they were heavily involved in the recent coup in Madagascar, as only the latest example. But they are pretty ham-handed about it all, and what would in a more congenial climate be a source of international support from the DomToms ends up being grudging acquiescence.

Domestically, France grumbles and strikes a lot, but has it pretty good. They have essentially 100% literacy, great schools, very productive workers, and although they can't count ethnicity, there is a tacit assumption that most unemployment occurs amongst the immigrant population stranded in the banlieues.

Nicolas Sarkozy is fortunate in his choice of enemies, as the left has formed a circular firing squad. There has been some high level corruption in France, and continued disclosure may prove embarrassing for the government, although not for Sarkozy. Embarrassment for him tends to be purely personal, as the hot rabbit has ex-lovers all over the place and word gets around.