Today the world is much more equal in
income terms than in earlier decades while inequality grows within
nations. Meanwhile, the question of the survival of the standard of western affluence is
being increasingly raised at a time when in the United States, the biggest
economy of advanced nations, the inflation-adjusted (real) income for the typical American household in 2012
was below the level in 1989.
Reverend Thomas Robert Malthus (1766-1834), who was also an economist, earned posterity
for his 1798 prediction that population would continually increase faster than
the food supply, causing chronic food shortages. He was blind to contemporary
developments in Britain that would radically change societies that had been static
and predicable for thousands of years. Thomas Hobbes (1588-1679) had written in
1651 of "the life of man, solitary, poor, nasty, brutish, and short."
There were about 1bn people in the world in Thomas Malthus' times and
according to the late eminent economic historian, Angus
Maddison (1926-2010), until 1800 about three fifths of the world’s commerce
and production took place in and around China and India. So did much of the
world’s scientific and technological progress, including the Chinese invention
of paper, explosives, and printing, and medieval India’s launch of modern
mathematics. In the early 1830s, when President Andrew Jackson sent the first US
envoy across the Pacific to Siam (Thailand), Asia still accounted for over half
of global GDP (gross domestic product).
China's Qing dynasty was overthrown after 267 years in power by a republican
revolution in 1911. It was a colonial power with the Manchus from northeast
China ruling the majority Han people. Technological advances stalled and in
1793, the emperor rejected the request of a British delegation led by George
Macartney (1737-1806), an Irishman, to open diplomatic relations with the British.
Macartney wrote in his journal: "The Empire of China is an old, crazy,
first-rate Man of War, which a fortunate succession of and vigilant officers
have contrived to keep afloat for these hundred and fifty years past, and to
overawe their neighbours merely by her bulk and appearance. But whenever an
insufficient man happens to have the command on deck, adieu to the discipline
and safety of the ship. She may, perhaps, not sink outright; she may drift some
time as a wreck, and will then be dashed to pieces on the shore; but she can
never be rebuilt on the old bottom."
Emperor Qianlong in a letter to King George III said: “we
possess all things. I set no value on objects strange or ingenious, and I have
no use for your country’s manufactures.”
In the prescient 1919 book 'The Economic Consequences of the Peace,' on the
vengeful Treaty of Versailles, John Maynard Keynes (1882-1946), the
renowned British economist, describes free trade as it existed in 1914, when a
businessman in London could travel the world freely, invest wherever he wanted,
and "could order by telephone, sipping his morning tea in bed, the various
products of the whole earth, in such quantity as he might see fit, and
reasonably expect their early delivery upon his doorstep." Not only that,
Keynes' Londoner "regarded this state of affairs as normal, certain, and
permanent, except in the direction of further improvement."
The genesis of modern globalisation began in the 1950s with moves to reduce
tariffs and Ireland was an early beneficiary of it.
In 2008, we reported on the final report of the Commission on Growth and
Development, which examined examples in recent decades of what were termed
Dr. Michael Spence (b. 1943), a winner of the 2001 Nobel Prize in
the Economic Sciences and
chairman of the commission, said that sustained high growth in developing
economies is a recent, post-World War II phenomenon. Using GDP figures,
"high" is above 7% and "sustained" is over 25 years or more, he said that these
cut-offs are arbitrary, but a similar picture emerges with variants. Growth at
these rates produces very substantial changes in incomes and wealth: Income
doubles every decade at 7%.
There are 13 such cases of sustained high growth, and nine are in Asia. These
are Botswana, Brazil, China, Hong Kong (China), Indonesia, Japan, Korea,
Malaysia, Malta, Oman, Singapore, Taiwan (China), and Thailand.
Each and every one of these miracles had an export sector as a driver of growth
and an increasing share of trade in GDP.
There are no exceptions.
growth miracle involves leveraging the demand and resources of the global
Finfacts: Commission on Growth & Development Report: 13 countries had sustained high
growth - defined as 7% per year or more for 25 years or longer; Highlights four
sets of countries where growth has stalled
Last month we wrote that the workforce in the global trading economy doubled
to 3bn in the period 1980-2000.
Finfacts: Why should Europe expect ever rising standards of living?
Era of low price commodities over
Growth in the developed world for most of the
20th century was boosted by either low or falling real (inflation adjusted)
McKinsey Global Institute says that with
the notable exception of the 1970s, oil and gas prices (in real terms) were flat
or fell throughout the 20th century. Yet energy prices have soared by an average
of 260% since 2000 as a result of a combination of strong demand (notably from
China) and rising supply costs. For instance, the average real expense of
bringing a new oil well online doubled between 2000 and 2010 -- an increase of
more than 7% a year.
While metal prices fell (in real terms) throughout the 20th century, they have
jumped 176% since 2000. Many observers attribute the increase largely to demand
from emerging markets, but McKinsey’s Basic Materials Institute finds that
geological challenges and the rising cost of inputs, notably energy, have also
boosted prices. In the case of gold, for example, more than 45% of the increase
in supply costs between 2001 and 2011 resulted from geological factors that we
believe will persist and an additional 30% from shortages of inputs, including
equipment and skilled labour.
Demand for food increased throughout the 20th century, but thanks to higher
yields, prices fell (in real terms). Yet they have risen by almost 120%
since 2000 as yield improvements slowed, demand for feed went up, and
agriculture endured droughts, floods, and variable temperatures. The net result
is that global buffer stocks are running low but demand for food, largely in
Asia and Africa, is expected to go up by 35% during the next 20 years. In
addition, higher production of biofuels is boosting demand for land. So is the
fact that more than 20% of the world’s arable land has been seriously degraded
through, for example, pollution and soil salinization. Finally, the land
shortage is further exacerbated by the mass migration of people from rural areas
to cities: urban sprawl could reduce the world’s cropland by two million
hectares a year.
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When the money runs out?
Stephen King, group chief economist of HSBC, a banking giant, has
written a book,
'When the Money Runs Out: The End of Western Affluence,' that was published in
the early summer. It raises relevant issues and of course, a bank economist has
to avoid some sensitive ones.
The author acknowledges that in a paper currency system,
the money in a narrow sense may never run out but he argues that the ability of the developed
world to generate significant economic growth, and thus wealth, has declined. He
highlights that in the first four decades of his own life real British incomes
per head almost tripled; in his fifth decade, they rose just 4%.
In an op-ed piece in
The New York Times on Monday (the reader comments are also interesting), he
"The underlying reason for the stagnation is that a half-century of
remarkable one-off developments in the industrialized world will not be
First was the unleashing of global trade, after a period of protectionism and
isolationism between the world wars, enabling manufacturing to take off across
Western Europe, North America and East Asia. A boom that great is unlikely to be
repeated in advanced economies.
Second, financial innovations that first appeared in the 1920s, notably consumer
credit, spread in the postwar decades. Post-crisis, the pace of such borrowing
is muted, and likely to stay that way.
Third, social safety nets became widespread, reducing the need for households to
save for unforeseen emergencies. Those nets are fraying now, meaning that
consumers will have to save more for ever longer periods of retirement.
Fourth, reduced discrimination flooded the labor market with the pent-up human
capital of women. Women now make up a majority of the American labor force; that
proportion can rise only a little bit more, if at all.
Finally, the quality of education improved: in 1950, only 15 percent of American
men and 4 percent of American women between ages 20 and 24 were enrolled in
college. The proportions for both sexes are now over 30 percent, but with
graduates no longer guaranteed substantial wage increases, the costs of
education may come to outweigh the benefits."
King makes a plea for "economic honesty, to recognise that promises made during good
times can no longer be easily kept."
He proposes reforms such as raising pension ages, increasing immigration in
ageing societies and a social pact where an older population does not
cannibalise benefits at the expense of the young.
The economist also recognises that rising inequality is part of a process
feeds mistrust within nations.
Stephen King writes in his book:
Company cash hoards rise to $8tn; Taxes, squeezed labour and
"Based on our collective belief in ever-rising living standards, we have
spent the last half-century watching our financial wealth and our political and
economic 'rights' accumulate at an incredible pace. We all, directly or
indirectly, own pieces of paper or rely on political promises that make claims
on future economic prosperity. Only a handful of years ago, we were so confident
in continued economic progress that we could be educated yesterday, consume
today, retire tomorrow, have excellent healthcare the next day and create a
better life for our children while, at the same time, saving very little. We
hadn’t just mastered our economies. We had mastered time itself.
What happens, however, if the future is worse than we hoped it would be? What
happens if, collectively, the claims incorporated in our pieces of paper and our
political promises cannot be honoured?"
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