Ichiro Suzuki
Global South is closing in on the North after decades of the latter’s dominance in the global economy and politics, it’s been said. Since the late 20th century, Global South has made a stride, accounting for greater portion of the global economy. The North - South divid has been an issue among developmental economists since over half a century ago. In the recent decades, the South began to meet expectations with strong growth, pulling hundreds of millions people out of poverty, primarily based on development in Asia, with its spillover effects to the rest of the South. Prosperity gave the South a clout in global politics, especially in a place like the UN general assembly where headcount matters. Is the South on the verge of dominating the world?
It’s not so simple. While Global South may be growing faster than the North, it is no longer growing as fast as it once did. Marked deceleration of the Chinese economy has been well documented already. Its growth rate was once comfortably in the double digit territory but is now struggling to post 5% and lower numbers are expected as years go on. Even worse, it is widely believed that China’s official growth numbers are fudged. Some say it’s growing at half the official numbers. Brazil is growing at 3% at best, not much higher than the U.S. Africa in general grew fast in the boom years of emerging and frontier markets. Red hot growth of the Chinese economy in the past drove commodities producers’ economies. China’s voracious appetite and their wasteful manner of consumption drove commodities‘ prices hard. Much of the South outside East Asia is dependent on commodities and hence was immense beneficiaries of China-led growth. Now China is growing at far more modest rates and have learned to consume commodities more efficiently, making a dent on commodities exporters’ economies. On top of it, the great African boom in the early years of the century was sparked after their debt was forgiven by the Paris Club, a group of Western lenders. With freshly healthy balance sheets, African economies took off, and surging commodity prices added them a boost. Such one-off factors can’t be repeated.
Developing countries always danced too long in a party. Latin America often accumulated excessive debt in a boom only to find themselves unable to serve the obligations after the party was over. Argentina has defaulted a number of times in the last 200 years. Lenders in London witnessed the first Latin American debt crisis in the 1820s, when the outlook of the region never looked brighter before or since, upon their independence from Spain and Portugal. Since then, debt crisis hit the region rather regularly.
This time around, Latin America stayed away from borrowing too much, with the exception of Argentina. Yes, they did it again. A more pronounced debt binge, however, took place in China and Belt & Road Initiative recipient countries, many of whom are in Africa. China exported infrastructure development to many developing countries in the name of BRI, with higher lending rates than those offered by multi-lateral lenders or developed world’s leading banks. Roads, railways and ports were built, but with lax cashflow projections, leaving debts they have to serve for a very long period of time. Even worse for Africa, the United States and the North also moved to woo the region, offering them money and projects, for greater influence on the continent. Competitive offerings to borrow to autocratic rulers almost certainly are a recipe for a financial disaster. That’s where many countries stand today.
There is a problem of economic structure within Global South, where China is a dominant champion. The ruler of the South is a relentless export machine accounting for a 30% share of the world’s export volume, the North and the South combined. Quality of Chinese exports has improved immensely over the last few decades. The brutally efficient gigantic export machine doesn’t leave much room for other members in the South to grow on exports, denying their manufacturing industries a chance to take off. The pandemic and the recent geopolitical tension drove the North to move their factories out of China to Vietnam, India and Mexico. The majority of the countries in the South, however, is left in the shadow of China. Heightened tensions with the U.S. is driving China harder to export within the South. Though the rest of the South hasn’t said much, so far, they are not happy about the Chinese export machine’s aggressiveness.
Then there is demography. East Asia is following the footsteps of Japan in aging of its population. China’s working age population has already peaked out ten years ago, with its entire population having started to fall in 2022. While South Korea and Taiwan are aging along with China, they belong to the North. In the South, Vietnam is still young but Thailand is aging, too, albeit more slowly than China. What’s not known widely is aging of Latin America. Birth rate is falling rapidly in Latin America in the recent decades. An average Brazilian woman gives birth to 1.63 babies and the rate is expected to go down further. Brazil’s working age population is expected to peak out at the end of this decade. It’s been said on Wall Street “Brazil is the country of the future, and will always be.” This adage no longer holds true. Brazil has missed the last chance to get out of the middle income trap in the great boom 20 years ago. The country starts aging soon without becoming rich. Mexico has a higher birth rate at 1.80 but is on the same track essentially as Brazil. Population keeps growing in the Middle East and Africa. With the exception of a few oil rich Gulf states, this part of the world has been struggling, unable to manage the economy. With insufficient economic growth and rising population, per capita income growth has been stagnant for decades. People there rush to immigrate to where life looks better, thus creating a serious problem for Europe.
Despite posting higher growth rates than the North, the South has been failing to create wealth after the first decade of the century. The most clear-cut gauge of wealth creation is stock markets, and the South, as measured by the MSCI emerging market index, is still trading 30% lower than its boom year high, at the end of October 2007 when the future of EMs looked limitless. Since then, as discussed above, China has slowed down considerably, taking commodity prices down with it. When high growth companies decelerate, the market gives them valuation downgrades, and EMs have received the same treatment. The nail in the coffin was Xi Jinping’s stunning denial of capitalism that made tech entrepreneurs kneel down to the Chinese Communist Party rather than to shareholders. The conduct instantly led to materially higher risk premium on the Chinese market, brining down the share princes sharply. Amid darkened soft infrastructure for wealth creation, such as rule of law or property rights protection, capital no longer flows into China from the North and what’s still left there is leaving the country. In the mean time, the markets in the North have enjoyed phenomenal rallies. American tech led the roaring bull market and the rest of the North have posted stronger returns than those in the South. Coming off three decades of adjustment period, Japan has been a very strong performer over the last dozen years, even taking a falling yen into consideration.
In the South’s setback, India stands out as a notable exception, upholding the image of the South. The country is neither commodity-dependent nor a BRI recipient. India continues to post healthy growth rate of 6%+, with strong supply of tech engineers and entrepreneurs even if the growth rate is still far short of what China delivered more than a decade ago. Multi-national corporations in the North are trying to make India their manufacturing hub, departing China. That said, too many people in rural India can’t read unlike near 100% literacy in east Asia that took off on exports of manufactured goods. After Infosys stormed into IT services at the turn of the 21st century, no Indian tech company has dazzled in the global market despite Indian diasporas crowd C-suites in Corporate America.
The North in the meantime remains relatively stable. While Trump 2.0 has started with immense risks of derailing the U.S. Retreat of democratic norms, however, still doesn’t seem to affect the U.S. economy’s trajectory in the short run though it might have adverse effects over the next few decades. Nonetheless, rule of law stays more firmly imposed than in the South and it is highly unlikely that property rights protection is threatened. On the other hand, Trump’s economic policy poses more immediate risks of upheavals due to their contradictions. The President, however, is certain to respond to revolts of the market if bond, stock and foreign exchange markets send strong signals of disapproval of his policy. This sets Trump apart from Xi Jinping who has no ear to messages from the financial markets. The North doesn’t look so bad.
About the author: Mr. Suzuki is a retired banker based in Tokyo, Japan.
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