Harry S. Dent Jr. - The Demographic Cliff

COMMODITY PRICES: THE ACHILLES HEEL OF EMERGING COUNTRIES

Commodity prices affect the fastest-growing sectors of the global economyemerging countriesbut they cant be considered in isolation. So lets begin with a little context, focusing on urbanization in particular.

Developed countries are already typically 80 percent or more urbanized, but its a different story in emerging countries. Going back to the beginning of industrializationthat takes us to Great Britain in the late 1700s and early 1800swe see the beginnings of large-scale urbanization. Britain led the industrial trend, as factories required larger numbers of workers in larger cities near ports, both to receive raw materials, produce the goods, and then ship the products efficiently.

Over the last two centuries, urbanization has spread to other countries in western Europe, the United States, and finally east to Asian nations, starting with Japan, then Taiwan, South Korea, and, more recently, China. Along with industrialization came profits, and Great Britains early lead allowed it to create the greatest empire in modern times, despite working from a small island with limited natural resources (except coal, which was abundant and essential). The rest of western Europe quickly became more urban and more affluent, although early urban life was no bed of roses with sewage and air pollution rampant.

Only so many countries can dominate the highest value-added industrial products like automobiles, appliances, and computers or the new high-tech and information industries that are gaining dominance. Countries that come ). But that advantage starts to erode with higher urbanization and increased living costs, which leads to higher wages. This upward pressure on costs is the reason why industrial production has shifted more to East Asia. It also explains why Japan is a bit richer than South Korea, and China is not nearly as rich, even though it is the largest manufacturer in the world today. China produces lower-value goods like steel, clothes, shoes, and bicycles while Japan, Taiwan, and South Korea, as well as Germany and the United States, dominate higher value-added goods (like autos, higher-end appliances, and computers and components). Hence the lower standard of living in China and higher wages and comforts in Japan, Germany, and the United States. In the same way, India is not as rich as China as it is only emerging as a substantial producer of manufactured goods.

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But back to urbanization. When people migrate from rural areas to urban areas, their incomes tend to nearly triple, as statistics from China, India, and Brazil demonstrate. Hence, GDP growth is most affected by rising urbanization. The rates of such growth have an impact even greater than from demographic trends and, in most cases, GDP per capita rises in direct and linear relationship with urbanization.

I experienced an aha! moment a few years ago when I did some research for an interview with a Brazilian magazine. I was shocked to find that Brazil was already over 80 percent urban (see ), but still had a GDP per capita of only about $8,000 (now closer to $10,000). They were fully urban, yet had just 20 percent of the standard of living of the United States. Thats when the lightbulb lit: Brazil and most emerging countries simply wont be as rich as the Western world unless they can upgrade to higher value-added industries. And I dont see Brazil competing with South Korea in high-end industrial products because, again, there is only so much room for countries to compete in that arena.

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Only a handful of East Asian countries such as Japan, Singapore, Taiwan, and South Korea have been able to industrialize and transition from emerging countries to developed countries in the last century. Singapore did it in the information and financial sectors and, as a result, is even richer than the industrial countries (it is, after all, just one city with no rural sectors). I dont see how other candidates, such as China and India, can do the same; India is not that industrialized and, though China is, its strengths tend to be in the lower value-added sectors, which are not as profitable.

Malaysia is not quite fully urban yet is richer than Brazil and most emerging countries that dont compete in higher value-added industries. Malaysia is 73 percent urban and its GDP per capita would project to about $14,000 when it hits 80 percent urban in the next decade or so. Thats about as rich as an emerging country gets without becoming an industrial giant like Japan or South Korea.

China was the first emerging country to fully appreciate the power of three times income and GDP from moving people from rural to urban areas. It has done this faster than any major country in history, and is now 53 percent urban (see future from now will only be about $14,000, similar to Malaysiaand as good as it gets in the emerging world, falling far short of the United States and other Western countries.

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China now has a new up-the-ante plan for accelerating urbanization even faster, aiming to go from 53 percent to 72 percent in just twelve years by 2025. That means 250 million more people will be uprooted from their farms and moved into high-rises. However, such overinvestment by governments can only result in a bubble and a burst, as in Southeast Asia from 1997 to 2002. China has already seen the largest shift of people from rural to urban areas since 2000 with massive overinvestments in infrastructures at all levels. In addition, Chinas timing is poor, as it is upping the ante just as global growth is slowing and its own demographics are slowing. If the world were going to continue to grow and China could continue to expand exports as fast as in the past, this plan might just work. But the plan calls for the rural migrants to build the very cities and infrastructures they move into. If they discover upon completing the construction that there are no jobs in the manufacturing sector, then the relocated workers will find themselves sitting idly in high-rises; theyll be unemployed and angry. Because I see the global economy slowing dramatically in the next six to ten years, this scenario may come true, the consequence of a disastrous policy.