ARE THE BRICs LOOSENING? IS CHINA BREAKING?

Demographics is destiny. ~ Arthur Kemp   
 

Are the BRICs loosening? Are Brazil, Russia, India and China departing from their breathtaking economic climb of the recent past? Is that the sound of breaking China I hear? It's not a familiar sound. Until recently, China and the rest of its BRIC compatriots have been on a historically-impressive streak of macroeconomic growth. In 2008 the BRICs accounted for two-thirds of world economic growth. In 2011 they accounted for about 50% of it, in 2012 a bit less than that. Many reports have credited their notable economic growth (and that of other "emerging" nations like Indonesia) with mitigating the harmful economic consequences of the slumps in "advanced" countries like the US and the European Union(EU).

Look at the "leader" of the BRICs, China, to see what's been happening. In 2012, China's GDP (PPP) was $12.61 trillion (T) and ranked 2^nd to the US. The US 2012 GDP (PPP) was $15.94T, so China's GDP was almost 80% of the US. On a per capita basis the difference between these two nations' GDP is much broader. The US GDP/capita was $50,700 (14^th in world); China's was $9,300 (123^rd), only 18% of the US.

Based on its extraordinary growth, economic commenters began guessing when the Chinese GDP would surpass the American. It became a popular sport several years ago. Few said it would take China longer than a decade to surpass the US GDP. The most recent information may suggest it could take a bit longer. However, from an historical perspective, China may remember the mirror-image of this situation. Towards the end of the 19^th century the US economy overtook China’s to become the largest in the world. Is it China's turn now to overtake the economic leader? Perhaps, but not for a while more.

Given the BRICs' increased economic stature, macroeconomic changes in not only advanced but also emerging  economies have a significant impact around the planet, especially for nations like the BRICs that rely on international trade for much of their domestic growth. Just ask Australia. World trade growth fell to 2.0% in 2012 — down from 5.2% in 2011 — and is expected to remain sluggish in 2013 as the economic slowdown in Europe continues to restrain global imports (and thus exports as well).

In 2010 China's year-on-year GDP growth rate was an impressive 10.4%. By contrast, the US GDP average growth rate during 2010 was 2.5%. However, since 2010 both nations' growth rates have declined; China's more than the US, although China's growth remains multiple times larger than the US. See the chart below. Over the first 3 quarters of 2013 China's GDP growth lessened to 7.7% and US growth tumbled to dismal 1.8%.

With the ever-increasing inter-dependency of individual national economies – aka, globalization – it is not surprising that the world's 2 largest economies have a tendency to move somewhat in step, even if it is now lesser growth.

Economic growth in the BRICs' economies has hit bumps of many sorts. In many nations (not just the BRICs) these challenges include the double-I's – inflation (too much) and infrastructure (not enough) – as well as corrupt, bloated and tentacular bureaucracy.

Another challenge that influences the longer-term economic and social future of the BRICs, and every other country, is changes in demography. Demography refers to the size, growth and characteristics of a nation's population. China, as well as Russia and several EU nations, may be more vulnerable from a demographic perspective than other countries in the coming decades.

The table below illustrates several demographic characteristics of the American and Chinese populations. Four statistics cited in the table are of particular consequence for China. First, China's

Population Characteristics of the US and China
Statistic	US	China
Population	316.7M (3rd)	1.35B (1st)
Population growth rate	0.90% (123rd)	0.46% (155th)
Median age	37.2 years	36.3 years
Life expectancy at birth	78.62 years (51st)	74.99 years (100th)
% of pop. 0-14 years	20.0%	17.2%
% of pop. 55-64 years	13.9%	11.3%
Birth rate per 103 population	13.66 births (123rd)	12.25 births (161st)
Fertility rate per woman	2.06 children (121st)	1.55 children (184th)
Sex ratio 0-14 yrs (male/female)	1.04	1.17
Source:  CIA World Factbook. World rankings in parentheses.

population is the largest in the world and over 4 times as large as the US. China's population now represents slightly less than one of every five human beings on Earth.

Second, China's population growth rate is quite low – ranked 155^th in the  world (out of 233 nations) – and is one-half as big as the US. This is a direct consequence of China's unique one-child-per-family ("Family Planning Program") population control policy, initiated in 1979. According to the government, the one-child policy has reduced the growth of the country's population by 400M people – that's 25% more than the entire current US population.

Nations that have negative population growth include Russia, Japan and several European nations. The demographic and the economic destiny for these nations will be quite stark. So stark that several of these countries are offering cash payments to families to have one or another child to promote population growth.

Third, the fertility rate of Chinese women – 1.55 children – is especially low, ranked 184^th in the world (out of 224 nations). The fertility rate is the average number of babies born per woman who is between 15 to 44 years old. The replacement-level fertility rate is 2.1 children, assuming no immigration. If unchanged, China's current fertility rate will eventually cause its population to diminish in absolute numbers.

China is now one of the most rapidly aging countries in the world. This will have numerous consequences.

Fourth, the sex ratio (male/female) of children in China between 0 and 14 years, 1.17, is the highest in the world; meaning there are way more young males than females. By 2020, China expects there will be 24 million more men than women.

This world-leading and disparate male/female ratio means there are – and will likely continue to be – increasing social tensions. One in three young men aren't married; one in five young women are unmarried. Paradoxically, there are increasing numbers of "leftover women" – a term referring to women unmarried in their late 20's – not so much because they chose to not marry, but because they have difficulty finding a suitable mate in a nation where many men "marry down" the socio-economic ladder (termed hypogamy). This means it is more difficult for late 20 year-old A-level (successful, well-educated) females and D-level males to find suitable spouses. Compounding this problem is that China, like other Asian nations, has a long history of a conservative and patriarchal view of marriage. The traditional family structure includes marrying at a young age and female hypergamy. Once a woman reaches her late 20's the vast majority of Chinese men consider her too old to marry.[1] From a relationship perspective, life's indeed a bitch for young, but too old women, especially if they're A-level females. China's unbalanced demography may hinder its future economic growth.

At the same time that China will be facing the social and economic consequences of its demographic imbalances, it is embarking on a fundamentally different macroeconomic growth strategy. China is by no means breaking, but it is going to be changing.

China's macroeconomic decision-makers want to shift from relying on public investment as the mechanism for growth and move towards more consumer spending, which is a far more typical strategy in the world's other largest economies. Last year, investment accounted for over 48% of China's GDP, funded in large part by the government's forced-savings policies for its citizens. This very substantial amount of investment – much of which has been provided to its State-owned enterprises (SOEs) – has been the economic custom in China for decades. Household consumption accounted for only 36% of China's GDP. In contrast, the US GDP is comprised of 71% consumption expenditures and 13% investment. The US has been a consumer-oriented economy for a long time. China's has been investment-driven.

Re-balancing its economic growth priorities towards consumer spending within its demographic changes will take significant effort and time on the part of many Chinese institutions. There have already been many aggrieved folks in China's SOEs; there will be more as policies are modified. For a nation of China's size, this will be a Herculean task made that much more challenging by the above-mentioned, exigent demographics. Altering demographic norms requires modifying cultural standards that are far trickier and often take at least a generation to implement.

Will China be able to smoothly shift its source of economic growth while continuing to grow rapidly and lead the BRICs? Time, and demographics, will tell.

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[1] In a 2010 Chinese National Marriage Survey, it was reported that 9 out of 10 men believe that women should be married before they are 27 years old. The average age of first matrimony for Chinese women is 22.

ECONOMICS AS A SCIENCE

The study of economics usually reveals that the best time to buy anything is last year. ~ Marty Allen

News flash: Economics has been devalued and now is hardly worth anything, at least according to a pedantic pair of university professors, one of philosophy and the other of English and comparative literature, who consider themselves to be philosophers of science (PoSers). Their economics thoughts were published in the august New York Times (actually August 24^th) in a provocative article entitled "What is economics good for?" that refuted the value of economics because "the discipline of economics hasn’t helped us improve our predictive abilities." I realize the import of this news is confined to that very narrow sliver of people who care about economics as a means of gaining insights on critical problems facing modern society. But it's my sliver. Thus this blog…

Based on the article, the authors seem to answer its title's question with, "not much." I strongly disagree. Because of this alleged failure of economics, the authors state that economics "is still far from being a science, and may never be." Wow. Perhaps they got stuck in a 19^th century time warp and mistakenly still believe that Say's Law is valid. Talk about wading into personally uncharted waters without a life-vest of knowledge. I think the authors are completely wet; they'd be better off sticking to Camus and Cummings.

I have 3 quarrels with the article. First, the authors fail to distinguish between the 2 important, complementary and distinct divisions of economics – macroeconomics and microeconomics. In economics, it is difficult to understand the forest (macroeconomics) without also looking at the trees (microeconomics). The authors completely disregard microeconomics. Naughty boys.

Microeconomics examines particular pieces of the economy – consumers, businesses, and/or specific markets. Micro-oriented economic policies that are examined and assessed include the minimum wage, rent control, cap-and-trade environmental rules and subsidies provided to particular goods like corn, sugar and solar energy. In contrast, macroeconomics examines the entire economy of a nation (or a State or region). It studies the whole economic system as well as looks at how macro-oriented policies like federal fiscal and monetary policies, affect the national economy (GDP).

The authors only talk about their problems with macroeconomics, which results in a debilitating, narrow vision of what economics is. Perhaps they have no issues with microeconomics as a science. Perhaps they just forgot microeconomics because micro's predictive power actually is quite robust, and wanted to slip it under their rhetorical rug. It is a glaring omission that does not help their crusade.

Second, the authors state that the value of any science, be it physics or economics, originates solely from its ability to accurately predict future events. Precise prediction is certainly one of several important keystones of a science, but not the only one. Accurate descriptions of how people and institutions make choices is a necessary foundation to economic forecasting. Micro- and macroeconomic theories have evolved to offer commendable records in explaining and describing the process of how and why economic choices are made. The authors' perceived value of science is unnecessarily constricted.

Strangely, the authors never define what they mean by "science." I offer the Merriam-Webster dictionary's definition: knowledge or a system of knowledge covering general truths or the operation of general laws especially as obtained and tested through the scientific method. Using this definition, or really any decent definition of science you want to pick, economics is a science. It has a long history of scientific inquiry, commonly thought to have begun formally with Adam Smith's publication of The Wealth of Nations (1776). Since the late 18^th century economics has evolved and refined itself many times using the scientific method to improve its scope, understanding and capabilities.

They make another startling declaration, "None of our models of science [referring to unstated models developed by PoSers] really fit economics at all." Which apparently is why they dismiss economics. Why am I not surprised? My response to this is, perhaps you PoSers shouldn't think of your models as complete and cast in stone (we economists don't). PoSers instead should modify their models (like we regularly do as economic scientists) so that they accurately reflect modern academic and professional reality: that economics and other social sciences are indeed science-based disciplines. It is not economics that should be questioned; it is the PoSers' unsuitable models.

Economics is a behavioral science, one that deals with how and why people, firms and institutions make economic decisions regarding the production, distribution and consumption of goods and services. As such, it is a thoroughly social, rather than physical, science.[1] The behavioral atmosphere that economics (and other social sciences) always lives in is distinct from physical sciences like physics. Predicting the movement of planets was not always straightforward, but it is fundamentally less complicated than predicting, for example, how much a 5% increase in the Federal Funds (interest) Rate will reduce gross private domestic investment. Why? Because the change in investment is influenced by decisions made by multiple thousands of individuals and hundreds of companies and banks that interact in a myriad of ways in the real-time economy. This complexity does not make economics less scientific, it makes it more challenging to precisely determine (and forecast) economic variables of interest. I believe we economists have been very successful in meeting these challenges.

I would argue that micro- and macroeconomics proffer a successful record in both describing and predicting market events. Is this record perfect? Not at all; but it has definitely improved over time, using the scientific method.

The authors' third lapse is to neglect and apparently dismiss the improvements that economic theory, models and practice have continued to achieve. The rise of behavioral economics is a recent example of how the science of economics has incorporated insights from other scientific disciplines – in this case psychology and sociology –to strengthen the understanding of how people make economic and financial decisions. Similarly, micro- and macroeconomic thinking have evolved and improved over time as new theories and data become available. And economists haven't had to rely on impenetrably obscure concepts as Higgs Bosons or 6 "flavors" of quarks to validate their theories like "true science" physics folks have. No, economists straightforwardly rely on understandable empirical data, like employment levels and product prices, to test hypotheses and improve theory and prediction.

The authors seem to wrongly suggest that economists rely on static, unchanging theories and are uninterested in improving them, when they state: "…many economists don’t seem troubled when they make predictions that go wrong." The authors are completely out to lunch (which, BTW, is not free). The ivory towers they work in are way too disjointed from reality.

Economists have frequently engaged in vociferous, quite public debates about how to improve economic theory and practice. Economic theory continues to be scientific and fully dynamic. Both macro- and microeconomics have been strengthened and advanced as a consequence. Too bad this pair of PoSers cannot fathom it.

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[1] In graduate school I took a class that attempted to overlay Classical Mechanics theory onto economics to improve economic modeling. While interesting (and fraught by overly-erudite math), it seemed like a square-peg physical science solution to a round-hole social science problem.