The Middle Kingdom

I wrote an essay, way back in ’98, about capital saturation: as an emerging economy grows, it sees an initial period of rapid improvement. Adopting technologies which were already funded and developed in other countries, the emerging economy ‘leapfrogs’. The emerging economy is also able to side-step many of the pitfalls and mis-allocations that the tech-developering economies encountered. Yet, there is a point where the emerging economy’s momentum slows. That is were capital begins to saturate.

I wrote about China, in particular. I estimated that the country had 15 years of solid growth ahead, before there were enough roads, schools, power lines, and hospitals. After that, their growth would taper, and eventually reach a level similar to ours, here in the US. A 15 year growth spurt, I noted, would put their total GDP close to ours! This argument was met with laughter, in 1998: everyone I spoke to was convinced that the US’s pre-eminence in the ‘dot-com economy’ would herald an American-led economic revolution… and a technological singularity that was certainly just a few years away!

When Pets.com and Webvan collapsed, China was growing. When our economy continued to sputter through 2004, China was growing. When our homes were forclosed in 2009, China was growing. Only by then, with Chinese GDP inching toward ours, did anyone stop to listen to my screed.

“So, now that they are as big as us, what does that matter?”

My essay in ’98 was particular on two points: China’s growth was the strongest, among numerous emerging economies, but the impact of their sum total was most important, economically, and politically. I have watched my economic prediction unfold: as these countries grew, their increased demands would raise the price of copper, steel, and concrete (that happened noticeably in 2003-2004, five years later). Other commodities, because of increased demand, would also rise in price. THIS RISE in PRICES would not be traditional INFLATION. Inflation comes from over-printing the currency. Increases in demand raise prices ‘naturally’, and inflation-fighting measures cannot stop them. The net effect, after currencies smudge the markets, is pressure on business margins, and resulting low wages. Effectively, the growth of China and others has given them a seat at the demand-table, such that the US and Europe cannot afford as much.

My political warning has not yet materialized, and I hope that China’s governance has the foresight and restraint to find better solutions than what I predicted. I worried that, when China’s economy began to slow (some 15–20 later, I supposed), their political unity could only be maintained with an immanent threat. The political class of China could not keep their people happy, in years of slowing growth, without a war or ‘peace-keeping operation’ to unite them. A half-dozen months from now, Xi will be selecting the new members of China’s ruling body, and he will have the authority to engage in whatever external or internal fights he chooses. I hope, for the safety of all of us, that he finds a way to hold his country together, without resorting to war.

And then…

In another 15 years, China will still manage to double, again! And, no, there will not be a ‘singularity.’ The US and Europe, meanwhile, will have economies that are smaller in sum than various emerging-market blocs. Those emerged economies will dictate the market, and their growth will fund expansion of research (already happened in China), as well as military capabilities. Fundamental economics will make the US largely irrelevant.

Of particular importance, to the fundamentals of our economies: China will continue building entirely new cities, while we wallow in the aging infrastructure from the Eisenhower era. New technology continues to provide significant advantages to anyone living in an ‘upgraded’ city, and it is much easier to build such cities from scratch, instead of modifying existing infrastructure.

Singapore has whispered of a city built for autonomous vehicles, with a narrow alley underground to transport everyone. Expect this to be the norm, in all cities built a decade from now. And, they will have a lower cost of living, smaller footprint, built-in security infrastructure, … ideal for authoritarian governments to extract the greatest comparative advantage from their workforce. Our cities, by design, will not be able to compete. We will still be stuck in traffic, still re-tiling our roofs, still driving past vast parking lots, while China hums ahead of us. They will set the table for diplomatic meetings, and the agenda at economic forums. ‘Buy American’ can’t save you, now. Get ready!