The immediate future looks bleak in the eyes of Daniel Franklin, the editor of the Economist’s “The World in 2020”, an annually published issue on what they believe the future holds for us. Economically, we’re headed for a slowdown if not a potential recession in the States. The US-China trade conflict’s resulting tariffs have created necessary refactoring in major supply chains, leading to slower output rates. Long-term government bond yields have dropped below the rate on short-term notes. A yield is just the return an investor realizes from a bond. Yields have an inverse relationship with the corresponding bond’s demand. If yields are low, that means lots of investors are buying the bond. In this case, low long-term yields are a sign investors are uncertain about the economy and would rather focus on lending to the U.S. Treasury, considered to be one of the safest assets on the planet. When long-term yields fall below short-term yields i.e. the demand for long-term bonds like a 10-year treasury note is higher than the demand for a 2 year corporate bond, that is a predictor of recession.
Most downturns happen as a result of a financial crash or rising interest rates - stuff that causes a drop in consumer demand. Few happen because of supply-side disruptions (an example is the 1979 oil crisis). With the trade conflict with China, it’s possible the tariffs put in place turn inflationary. What that means is if you buy apples from China for your Apple Pie shop business at $5/lb but now they’re $9/lb, you’ll have to either increase the price of your pies by $4 or choose a different fruit. Either way, it will create risk for lower demand downstream, which can produce lower economic growth.
China is headed for its slowest growth yet next year which is worrying given the targets the Party has promised to hit by the end of 2020. Tensions are increasing in the South China Sea, potentially pushing the sleeping giant to finally respond. All in all, it should be quite the adventure.
Next year is a big year for China and consequentially a very worrisome one for its Party members. It is the year China becomes a “moderately prosperous society”, the literal meaning of Xiaokang[shui]. What is a moderately prosperous society you ask? It is one in which nobody falls under the designated poverty line. Deng Xiopeng in 1978 told his country they could get there by quadrupling GDP and GDP per person as compared to what it was in 1980. The problem is China achieved the GDP goal in 1997 but there were still lots of poor people. So in 2010, they announced a far more ambitious goal. In 10 years, nobody would fall under the poverty line. At the time, there were about 200 million people under the poverty line. Today, there are about 16 million (9.09 million/ year on average). So what’s another 16 million at this rate of decline?
There’s a few roadblocks: they need to grow by 6.2%, which will be hard given their most recent low of 6%, the US trade conflict intensifying, the sluggish world economy and the Party’s interests in focusing on sustainability over growth. What the latter obstacle means is they want to focus on outputs that have definite returns like the services sector as opposed to infrastructure, largely subsidized by the State. More scientists and engineers. Less construction workers.
The issue I have with all this is what the poverty line is in the first place: 2300 yuan ($340) nation-wide. This means a person living in Beijing will be compared to someone in rural China by proxy of income, ignoring all costs. Why is that number the agreed upon number? I’d also take a guess that it’s easier to make this income in urban centers versus rural ones although the quality of life may be lower. I’d be curious to learn whether there are State initiatives mandating or heavily incentivizing to emigrate people from rural areas to urban ones.
Modi has been re-elected but with a strong additive: his party, the Bharata Janata Party has achieved a huge majority (353 out of 545 seats) in the Lok Sabha, which is the arguably more powerful section of the Indian Parliament; it actually has the ability to introduce the national budget as well as control ministers by means of no confidence, adjournment and censure motions.
What is interesting are the actions that have been taking place as of late given his re-election. Modi has declared Jammu Kashmir, a historical battlegrounds between Pakistan and India and after “70 years of constitutional ambiguity”, under direct rule of India. His administration has started a program first piloted in Assam to re-evaluate whether immigrants are eligible for Indian citizenship - of which most of the 2m people denied are Muslim. A friend of mine has written a post that illustrates in detail what the bill exactly does and shares his perspective if you’re curious to learn more (highly recommend it).
It is fascinating to then see a piece by the Mumbai bureau chief, Tom Easton, on how inefficient the government has truly been in spurring economic growth. Whether that’s enforcing price controls rather than finding ways of increasing access to goods, capital infusions to select industries, the government is busy applying socialist band-aids that create unhealthy incentives. Easton predicts a pretty bad year in 2020 along with the other hawks but shares a more optimistic upshot. That is, an economic crisis is just what India has been looking for. For a couple reasons:
The slogan of Frontier is “a newsletter about trade and progress in emerging markets”. There isn’t an official definition, but when the term was coined in 1981 by Antione van Agtmael at the World Bank, the term came from a way to market stockmarkets in developing countries to investors with a more optimistic connotation than “third world”. However, his motivation was that after tracking investment returns data across 10 countries (Argentina, Brazil, Chile, Greece, India, Jordan, Korea, Mexico, Thailand, and Zimbabwe), the space was attractive and growing at unprecedented rates when compared to developed nations. An emerging market in this case is any region with highly limited economic policy, poor physical infrastructure and other systemic properties that bottleneck growth.
I’m focusing on the trade systems emerging markets employ to exchange value across the world. I’d also like to better understand the relationship between the maturity of a trade system and progress initiatives within the region. When I say progress, I refer to the definition as told by Tyler Cowen and Patrick Collison in this article. That is, “the combination of economic, technological, scientific, cultural, and organizational advancement that has transformed our lives and raised standards of living over the past couple of centuries”. To better understand what sorts of initiatives denote progress, I point you to this brilliant blog by Jason Crawford.
Frankly, there isn’t much that is written about economic growth in emerging markets that are not China or India-related. “Where there is disorder, there is opportunity”. Focusing on a region like Africa will illuminate the different challenges they face and potentially a very exciting growth story as its future is very much still unwritten. Intuitively, the ability to exchange value with each other plays a big role in promoting specialization of roles which can lead to non-linear improvements such as new companies, drugs and cultural movements. Observing this dynamic in nascent environments and trying to understand what limits them from taking the next big growth leap is exciting and I’m curious to know where and who it will lead to whilst seeking.