For many countries in Latin America, demand from China hasbeen essential to maintaining high GDP growth rates over the last decade. Butwill Chinese demand for commodities be enough to sustain high prices for theregion’s exports in the coming years?
During the last two decades, four factors combined togenerate a sharp increase in world demand for commodities: rapid growth in global GDP, increasingurbanization in developing countries, a rise inpopulation at a rate of 800 million people per decade, and a significant decrease in poverty. With the exceptionof global population growth, China has been the most dynamic country in all ofthese respects.
For example, the number of Chinese living in poverty fellby 650 million over the last two decades. Moreover, China accounts for half ofthe global increase of 1.5 billion people earning between $2-13 a day in thepast 20 years.
But should we expect what happened from 1990 to 2010 tocontinue in the coming decades? To answer that question, several variables mustbe taken into account: demand growth, technologicalchange, investment, and the commitment to confront global warming, amongothers. Bearing in mind such complexity, let’s consider only some determinantsof demand that are linked to increased income.
Two factors appear to be the most important: China’s growthrate in the coming years, and whether its growth will be sufficient to maintainhigh levels of global demand for commodities. Even if it is, the impact islikely to be different for agricultural exporters (the members of Mercosur andsome Central American countries) than for exporters of minerals and oil (Mexicoand other South American countries).
Moreover, although fiscal and monetary stimulus in Chinacan compensate in the short term for weaker export demand, this will not beenough to sustain demand growth without economic “normalization” in thedeveloped countries. As we know, this is far from assured in Europe; nor is itevident in the United States and Japan – that is, countries that account forroughly 45% of Chinese exports.
In the medium and longer term, the expected and hoped-forincrease in China’s domestic consumption should be the most dynamic element ofdemand, with export growth continuing to slackenand investment remaining – except for brief periods – below 50% of GDP.This is not guaranteed, however, as progress in establishing social insurance –crucial to increasing consumption – has been relatively slow, while monetarytransfers to families (such as those that have been implemented in Brazil,Mexico, and elsewhere in Latin America) might not be feasible, given the logicof China’s political system.
Even if China sustains rapid growth, it is unlikely torepeat in the next 20 years the extraordinary decrease in poverty witnessed inrecent decades. The reason is simple: of the 400 million people living on twodollars a day in 2008, it is possible that “only” 300 million remain. Moreover,the rate of China’s population growth is close to zero, and will turn negativebefore 2025. As a result, fewer people will cross the poverty line, althoughmore will see their daily earnings grow from two dollars to five, and from fivedollars to ten.
That trend will have a differentiated effect on demand for cereals and soy relativeto other products that are more closely linked to higher incomes, such as foodscontaining higher-quality protein, metals, and oil. In terms of the latterproducts, China might continue to be decisive for global demand growth.
This is why, in order to maintain food prices in the mediumterm, other countries or regions will need to start reducing poverty at rates similarto that of China in the recent past. Bearing in mind the differences in theirproductive structures, sub-Saharan Africa and India appear to be the bestcandidates, given that they accounted for 1.4 billion of the world’s poor in2008 and 60% of global population growth.
Will India and sub-Saharan Africa – which grew at annualrates of 7.3% and 5%, respectively, during the last decade – assume the rolethat China has played in recent years? It seems unlikely, but without them itis difficult to foresee high prices for commodities – and food, in particular –over the next two decades. In that case, there will be less time left for thecountries that have not taken advantage of the current bonanzato lay the foundations of sustainable growth.