Where is global oil demand coming from?

The graphic below from Barclays Research, via Floating Path, captures the sources of global oil demand growth. As can be seen, Brazil, India, China, and Saudi Arabia (BICS) have been collectively responsible for most of the global demand in the past few years. In fact, almost the entire demand growth in 2011 and 2012 is estimated to come from them.

The fiscal and monetary "wiggle-space" - where does India stand?

Free Exchange points to the contrasting macroeconomic positions of developed and emerging economies. While the former has limited fiscal and monetary space to stimulate their economies any more, the later have adequate cushion on both fronts, if the need arises.

The average budget deficit of emerging economies last year was only 2% of GDP, against 8% in the G7 economies. And their public debt ratios were on average only 36% of GDP, compared with 119% of GDP in the rich world.

The Economist article uses a mix of fiscal and monetary policy paramters to arrive at the respective nations flexibility to manoeuvre with expansionary policies. It points to five parameters that determine the monetary policy space - inflation, credit growth, real interest rate, exchange rate movements, and current account balance. It added up the scores on these five parameters to produce an overall measure of monetary manoeuvrability. On the fiscal policy side, it constructs a fiscal-flexibility index, combining government debt and the structural (ie, cyclically adjusted) budget deficit as a percentage of GDP.



It ranked 27 emerging economies according to their monetary manoeuvrability and fiscal flexibility using a "wiggle-room index" constructed using the aforementioned parameters. This index is a reflection of the ability of countries to withstand a global downturn by stimulating their economies. The verdict,

The index suggests that China, Indonesia and Saudi Arabia have the greatest room to support growth. At the other extreme, Egypt, India and Poland have the least room for a stimulus, thanks to excessive government borrowing, large current-account deficits, and uncomfortably high inflation. Brazil is also in the red zone.

At first glance, on most parameters, India stands out as being among the most constrained of emerging economies. On the fiscal side, its combined government fiscal deficit of around 9% of the GDP, means that there is limited space available for any stimulus spending.

However on the monetary side, given the recent declining trend in inflation, the 13 consecutive repo rate increases by the RBI in response to rising inflation gives the central bank adequate monetary space to stimulate the economy. Further, since credit growth has been below par and exchange rate appears to have weathered its brief period of volatility, the monetary side space may not be as constrained as it appears now.

Further, while its total public debt, at about 68% of GDP, may look high by the standards of emerging economies, closer analysis reveals that it may not be as dismal as is being projected. Here are three reasons

1. The overwhelming share of this public debt is owed to domestic creditors. In fact, the total external debt (public and private) is estimated to decline to 17.4 of GDP for 2011, with government share being a mere 4.4% of GDP. As of end-September 2011, of the total external debt of $326.6 bn, with government and non-government shares in the total external debt being 24.3% and 75.7% respectively. Short-term debt accounted for 21.9% of the country's total external debt, while 78.1% was long-term. Adjusted for this, the real effective debt burden, in relation to a sovereign debt default risk, shrinks considerably. The only area of slight concern should be the 27.4% CAGR in external commercial borrowings between end-March 2006 and end-March 2011.



2. At 122% of GDP, its overall debt is the second lowest among all the major economies. Only Russia has a lower overall debt-to-GDP ratio.

3. Though its government may be profligate, the other major engines of economic growth - households, non-financial corporates, and financial institutions - have the healthiest balance sheets among all major economies, including China.





This means that all the non-government drivers of economic growth stand on very strong platforms and have enough "wiggle-room" to manoeuvre. All that is now required is for the government to get governance and policies right. Will that happen?

What drives globalized manufacturing to emerging Asia?

Conventional wisdom would have it that the low labour cost in emerging Asia is the driving force behind outsourced manufacturing. The Times has an excellent article (see also this interactive video) that questions this belief with the example of iPhone. It argues that abundance of mid-level manufacturing skills and the advantages with the dynamics of production in massive scale are the reasons for the rapid growth of outsourced manufacturing to Asia.

Various academics and manufacturing analysts estimate that because labor is such a small part of technology manufacturing, paying American wages would add up to $65 to each iPhone’s expense. Since Apple’s profits are often hundreds of dollars per phone, building domestically, in theory, would still give the company a healthy reward.

But such calculations are, in many respects, meaningless because building the iPhone in the United States would demand much more than hiring Americans — it would require transforming the national and global economies. Apple executives believe there simply aren’t enough American workers with the skills the company needs or factories with sufficient speed and flexibility. Other companies that work with Apple, like Corning, also say they must go abroad.

Apple's iconic iPhone is the exemplar of modern day globalized production,

Though components differ between versions, all iPhones contain hundreds of parts, an estimated 90 percent of which are manufactured abroad. Advanced semiconductors have come from Germany and Taiwan, memory from Korea and Japan, display panels and circuitry from Korea and Taiwan, chipsets from Europe and rare metals from Africa and Asia. And all of it is put together in China.

Among the emerging economies, China has an unparalleled comparative advantage as the electronic products assemly line of the world. Its advantages as the assembler are numerous...

The entire supply chain is in China now... You need a thousand rubber gaskets? That’s the factory next door. You need a million screws? That factory is a block away. You need that screw made a little bit different? It will take three hours.

... and in leveraging its massive labour force with mid-level manufacturing skills...

China provided engineers at a scale the United States could not match. Apple’s executives had estimated that about 8,700 industrial engineers were needed to oversee and guide the 200,000 assembly-line workers eventually involved in manufacturing iPhones. The company’s analysts had forecast it would take as long as nine months to find that many qualified engineers in the United States. In China, it took 15 days.

... finally, China has companies like Foxconn, which can mobilize massive numbers of diligent workers in quick time to deliver on any electronic assembling activity. It writes about the Foxconn City,

The facility has 230,000 employees, many working six days a week, often spending up to 12 hours a day at the plant. Over a quarter of Foxconn’s work force lives in company barracks and many workers earn less than $17 a day... Foxconn employs nearly 300 guards to direct foot traffic so workers are not crushed in doorway bottlenecks. The facility’s central kitchen cooks an average of three tons of pork and 13 tons of rice a day.

Foxconn Technology has dozens of facilities in Asia and Eastern Europe, and in Mexico and Brazil, and it assembles an estimated 40 percent of the world’s consumer electronics for customers like Amazon, Dell, Hewlett-Packard, Motorola, Nintendo, Nokia, Samsung and Sony. They could hire 3,000 people overnight.

The article highlights the critical importance of a large base of mid-level manufacturing skills and the presence of a broad-range of manufacturing supply-chain in the success of any economy. They are essential ingredients to the development of a large manufacturing base. The United States which had these capabilities for many decades has seen them get eroded and has now ceded way to China.

Countries like India, which are waiting in line to emulate the Chinese growth miracle, would do well to appreciate the vital role played by these factors. India has nothing comparable to Foxconn and suffers from acute shortage of mid-level skilled technicians. Attempts to build up supply-chain capacities through growth clusters and special economic zones have borne limited success and that too only in a few sectors. Unless these deficiencies are bridged, India's growth potential will remain just that, potential.

Update 1 (26/1/2012)

NYT investigation reveals serious problems with working conditions in Chinese factories supplying components to consumer electronics firms like Apple. Here is the list of Apple's suppliers.

Emerging economies and Europe

FT has an excellent article that examines the impact of the Eurozone crisis on the emerging economies. The graphic below highlights the negative effect of Eurozone crisis on the emerging economy bond and equity markets and their currency markets.


Private capital flows to emerging economies have declined, raising questions about financing current account deficits, especially in certain highly stretched economies. As the graphic below shows, the inflows have been declining since the second half of 2010, when the full magnitude of the Eurozone crisis started becoming apparent.


Though emerging economies exports to Eurozone have grown impressively in the past decade, except for the East Europeans, it remains a small proportion of their GDP.

The global economic power shift

The spectacular growth of emerging economies led by China in the past decade or so has dramatically altered the global economic power equations. The sub-prime meltdown and the resultant Great Recession have only accelerated this trend. The Economist has two graphics that captures the essence of this shift.



Whereas the real GDP in most developed economies is still below its end-2007 level, the same has risen more than 20% for emerging economies. This has hastened the process of convergence between the shares of the two parts of the world economy.







The rapid rise of emerging economies since 1990 has seen them close in on the developed economies in their respective global shares across a range of parameters.







If GDP is measured at purchasing-power parity, emerging economies overtook the developed world in 2008 and are likely to reach 54% of world GDP this year. Further, they accounted for three-quarters of global real GDP growth over the past decade. Though they consume 60% of the world’s energy, 65% of all copper and 75% of all steel, given the low per capital consumption, there is plenty of room for even more growth.



At a time when public debt is the biggest macroeconomic concern, emerging economies are responsible for only 17% of all outstanding government debt. The long-term outlook for these economies over the coming years appears bright, with less debt, more favourable demography and huge potential to lift productivity, besides considerable room for further growth.

The 3G economies

Citi economists William Buiter and Ebrahim Rahbari investigated the likely future sources of global economic growth between 2010 and 2050 and have come up with 11 global growth generators. The 11 3Gs are Bangladesh, China, Egypt, India, Indonesia, Iraq, Mongolia, Nigeria, Philippines, Sri Lanka, and Vietnam.


Their analysis (full report here) is based on country forecasts of macroeconomic data, historical data for the past 10 years, and research data on the drivers of long-term economic growth. They constructed a 3G index that aggregates some key growth drivers - gross fixed domestic capital formation (as a share of GDP), gross domestic saving (as a share of GDP), a measure of human capital, itself aggregating demographic, health and educational achievement indices, a measure of institutional quality, a measure of trade openness, and the initial level of per capita income.

Interestingly, three of the eleven are from South Asia and two are from Africa. Does this signal that the next half-century could belong to South Asia just as the previous half belonged to East Asia? It forecasts India to overtake China and become the world's largest economy by 2050, with India's economic growth to peak in the 2030-50 period. Further, the presence of two African countries lend credence to the growing belief that Africa is one the take-off path.

Developing Asia will contribute more than half the global economic growth over the next forty years, with Africa following behind. The combined shares of North America and Europe will be slightly more than 10%.



A reflection of Asia's pre-eminence as the engine of global economic growth is the eastward shift in the global economic center of gravity.



India is set to emerge as the largest economy by 2050



However, despite the spectacular and sustained growth, the per capita GDPs of most of these economies will remain less than half of the US per capita GDP even by 2050. This also means that the room available for convergence or catch-up growth with the technology frontier (say, the US) will be considerable, thereby boosting the economic prospects of these economies in the next half century.