April 26, 2015
The Washington Post had a front page story in the Sunday business section headlined, “The Great Unraveling of Globalization,” which told readers that the overseas profits of U.S. corporations are not growing in line with their expectations from two decades ago. Among the main complaints is that consumer markets have not developed as expected.
“Those vast new consumer markets in globalized nations have not emerged either. For example, Chinese household consumption accounts for about 34 percent of GDP — down four points in the past decade — compared to a healthier 70 percent in the United States. And Chinese consumer diffidence is not an outlier.”
Okay, we will need Mr. Arithmetic to help with this one. Mr. Arithmetic points out that a relatively small share of the pie in China goes to consumption, but because of its rapid growth, this is now a very large pie. Since 1994 China’s economy has grown by more than 520 percent. By comparison Mexico’s economy, which was the beneficiary of NAFTA and the basis for many Post articles on a rising middle class, has grown by just 66 percent over this same period. Mr. Arithmetic tells us that if China’s economy had grown at the same rate as Mexico’s, but its consumers spent 70 percent of GDP instead of the current 34 percent cited in the article, its consumer market would be just over half the current size.
This means that even if consumption is a relatively small share of GDP in China, because of the economy’s extraordinary growth, the consumer market has probably increased by at least as much as anyone could have reasonably expected. It is also worth noting that the small share of consumption in GDP is directly related to growth. In general, countries that invest more grow more rapidly. (In addition, some of the companies discussed in this piece, like Caterpillar and IBM, largely sell investment goods. They would be helped by the large share of investment in China’s GDP.
If U.S. companies are not faring well in international markets it likely means that they are losing ground to foreign competitors. This could reflect the quality of the highly paid CEOs at U.S. companies. Perhaps some of the much lower paid CEOs at companies in Europe and Asia are better at their jobs.
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