Joyless growth in China, India, and the United States

A man walks in front of the India Gate shrouded in smog in New Delhi, India, October 29, 2018. REUTERS/Anushree Fadnavis     TPX IMAGES OF THE DAY - RC113DDAC100
Editor's note:

To kick off the Future Development blog in 2019, we present the final in a four-piece series about the future of development including mortality, global economic puzzles, and technology and government effectiveness.

During the last few weeks of 2018, I spent time in Washington, D.C., Beijing, and New Delhi, the capitals of the largest high-income, upper-middle income, and lower-middle income economies, respectively. This blog’s title conveys both my findings and my forecast for 2019: Upbeat economies, and downcast people.

Together the U.S., China, and India have more than 3 billion people, almost exactly 40 percent of the world’s population. With GDPs of $21 trillion, $13.5 trillion, and $3.9 trillion, their economies also add up to about 40 percent of global GDP. Adjusted by purchasing power, they’d add up to almost half (to obtain GDP adjusted by purchasing power, a rough rule of thumb today is to multiply India’s nominal GDP by 4, China’s by 2, and America’s trivially by 1). But their sway on the world’s morale may be even bigger. What happens in Europe and Japan now mostly affects the mindset of Europeans and the Japanese. What happens in the U.S., China, and India changes the mood of the world.

Before I explain why I’m spoiling your mood, let’s take a look at the growth numbers from the World Bank’s latest “Global Economic Prospects.” Last year, the U.S. economy grew by nearly 3 percent, China’s by 6.5 percent, and India’s almost 7.5 percent. Between them, they added roughly $1.8 trillion of GDP at market prices, but almost twice that when adjusted for purchasing power. An extra $3 trillion—even when divvied up among three billion people—ought to buy some happiness. But you wouldn’t have found it on the faces of people or in the conversations in Washington, Beijing, and Delhi. Instead, what was striking was the joylessness.

The talk in all three capitals was, unsurprisingly, about politics. Their economies were doing well, and their politics have been rocky, so this was understandable. The last quarter of 2018 had brought serious setbacks for the parties in power. President Xi has had to make concessions to the U.S. on trade (see this blog that had predicted this), Prime Minister Modi had just lost elections in three big states to the opposition, and President Trump had lost the House to the Democrats. Given the zero-sum nature of politics, though, what’s bad news for one faction is invariably good for the other. So fractious politics couldn’t explain the general mood. What is going on?

My hypothesis is that all three economies are superficially healthy but deeply stressed. In China it is the strain of suppression, in India that of inefficiency, and in the U.S. of partisanship. The strains are showing up not in headline statistics but in the moods of people. Beijing was clean and censored, Delhi sick and polluted, and Washington prosperous but depressed.

The World Bank’s report talks of darkening skies. I think the real problem is darkening moods.

Censored China

When I got to Beijing, the news was all about the trade war with the U.S., and the arrest of Meng Wanzhou, the CFO of telecoms giant Huawei, on charges of tricking banks into violating U.S. trade sanctions. I could not find anything in the Chinese media on China’s own wrongs, such as hacking into the computer systems of foreign companies and stealing industrial secrets. And there was no way that you could read the reports by outlets like the Economist, which published this thoughtful reflection on the disillusionment among the friends of China because of its actions abroad. The government’s censors make sure that articles like this are never read in China.

Mindless censorship by the Communist Party may provide one clue to what I saw as the joyless mindset of the Chinese. When I read up about it back at home, I was staggered by the size of the enterprise. In 2017, China spent $180 billion on domestic security; more than 6 percent of total government spending (it spends less on the military). The People’s Party spends more money defending itself from its people than it does on protecting its borders.

Repression by your own government would kill anyone’s joy. But perhaps a big reason for the joylessness of growth is the increasing difficulty of converting saving into output. Since 2007, the incremental capital-output ratio (ICOR) in China has tripled from 3 to 9, while the growth rate of GDP has fallen by half. The Chinese people are still saving a bunch, but investment is paying off less and less. Imagine trekking into a headwind three times as strong as it was ten years ago; it would make a pleasant hike into a painful slog.

Figure 1. Incremental capital-output ratio and GDP growth

Incremental capital-output radio and GDP growthSource: DBS Bank.

The solution to the growing inefficiency is in plain sight. China has to liberalize the markets for capital, land, and labor, much as it liberalized product markets three decades ago. This will bring back joy to China. But don’t expect this to happen in 2019, or any time soon afterward.

Inefficient India

China has been increasingly inefficient in how it allocates capital and labor to production. But it has both factors in abundance. A billion Chinese still are of working age, and the national gross savings rate is 46 percent of GDP. It doesn’t help to be inefficient in utilizing resources you have in abundance, but it won’t kill you. India has a much more serious problem: It grossly misallocates water and land, resources in which it is dangerously deficient. India’s per capita availability of fresh water is down to about one-third of what it had in the 1950s, and is now just half of China’s per capita availability of 2,000 cubic meters. If China is shooting itself in the foot, India is blasting away at both feet. An excellent Systematic Country Diagnostic by the World Bank puts the pivot to a resource-efficient growth path as the first of India’s top three development priorities.

But the conversations in Delhi weren’t about economic efficiency. The talk was about the December elections, in which the ruling People’s Party lost the states of Chhattisgarh, Rajasthan, and Madhya Pradesh. These are not small places; they have a combined population larger than that of Brazil. The ruling party had unexpectedly become vulnerable. There was talk also of the tussle between the central bank and the Ministry of Finance. The governor of the Reserve Bank had quit in protest of government meddling in monetary policy, suddenly seen as critical because of the upcoming national elections in 2019.

What overwhelmed visitors though is the pollution. Delhi is being choked by smog. Every taxi driver I encountered had a horrible cough and a runny nose kept in check by the back of the hand. (They must’ve known that it wasn’t generosity that made me insist “No no, please keep the change.”) Urvashi Narain, a colleague at the World Bank, told me that almost every city in the Indo-Gangetic plain is suffering the same fate as Delhi’s. The World Bank reckons that 90 percent of all Indians breathe in higher levels of pollutants than what is considered safe by international standards. More Indians die from air pollution than HIV/AIDS, tuberculosis, malaria, and diarrheal diseases combined, and India loses between 0.3 and 0.9 percent of GDP because of illnesses caused by pollution. Households burn biomass for cooking and heat, and agriculture and electricity generation emit more pollutants per unit of GDP than any of India’s peers. The numbers appear set to increase.

Agriculture and subsidized electricity have combined to create an equally serious problem: India’s overuse of groundwater. Perhaps the most serious example of inefficiency in the use of water is the export of rice from the water-deficient state of Punjab to relatively water-abundant eastern states, a trade tantamount to exporting water from a desert. India and China each have about 70 million hectares of irrigated land. But while in China half of this is done through water-efficient drip or sprinkler irrigation, in India this share is barely a tenth. The culprits are massive fuel and power subsidies that are hard to change because they are the third rail of Indian politics. In urban areas, where 40 to 50 percent of piped water is lost, the problem may be just plain incompetence.

The other major misallocation is how India utilizes urban land. China is criticized for overdevelopment—building empty cities in the wrong places; India’s helter-skelter construction seems even crazier. Mistakes in urban development could lock in spatial inefficiency for decades, even longer. India has to sustain a growth rate of at least 6 percent for 25 years just to get to China’s current per capita income of $8,000. How it uses its land and water will make the difference between success and failure.

Right now, things look bleak. Unless India quickly changes tack, cities snarled by traffic and lungs clogged by pollution will kill the joy that comes with higher incomes.

Angry America

During the last two years, a buoyant U.S. labor market has been pulling in more and more job seekers. The economy has been creating jobs—the unemployment rate is below 4 percent—and earnings have been going up. In December, 312,000 jobs were created and hourly wage earnings rose 3.2 percent in 2018. But all the talk in Washington was about the fight over a border wall and the federal government shutdown. Every dinner conversation would end in an angry rant against President Trump, with the rare Republican in the room mumbling that Trump is just doing what he said he would while campaigning for the presidency. Americans are going from jobless to joyless.

My guess is that the real culprit is growing inefficiency due to declining competition in the U.S.—and disagreements about whether this is because of too much regulation or too little. This can create tensions easily fueled by political factionalism. It is never easy for a government to ensure competition, and it will take a while to reverse this trend. In the meantime, Americans of all stripes should read George Washington’s warnings about party politics in his 1796 farewell address:

“Let me now … warn you in the most solemn manner against the baneful effects of the spirit of party, generally. … The alternate domination of one faction over another, sharpened by the spirit of revenge, natural to party dissension, which in different ages and countries has perpetrated the most horrid enormities, is itself a frightful despotism. But this leads at length to a more formal and permanent despotism. The disorders and miseries which result gradually incline the minds of men to seek security and repose in the absolute power of an individual; and sooner or later the chief of some prevailing faction, more able or more fortunate than his competitors, turns this disposition to the purposes of his own elevation, on the ruins of Public Liberty.”

Those more psychologically inclined might feel better after reading Sigmund Freud’s “Civilization and its Discontents.” On page 61 of the book, Freud described what America might be experiencing as a harmless—even convenient—release of steam:

“I once discussed the phenomenon that it is precisely communities with adjoining territories, and related to each other in other ways as well, who are engaged in constant feuds and in ridiculing each other—like the Spaniards and the Portuguese, for instance, the North Germans and South Germans, the English and Scotch, and so on. I gave this phenomenon the name of ‘the narcissism of minor differences,’ a name which does not do much to explain it. We can now see that it is a convenient and relatively harmless satisfaction of the inclination to aggression, by means of which cohesion between the members of the community is made easier.”

You need only spend a week each in Beijing, Delhi, and Washington to realize the big differences in how Chinese, Indians, and Americans see themselves and the rest of the world, and how similar Democrats and Republicans are to each other. And if you believe—as I do—that the greatest force for economic development has been the United States, you’d have to hope that Freud was right and Washington just paranoid.

For now, though, my forecast for 2019 reflects the mood in these three countries. The year will bring the world much prosperity, but little joy.