For many countries in Latin America, demand from China has been essential to maintaining high GDP growth rates over the past decade. However, will Chinese demand for commodities be enough to sustain high prices for the region’s exports in the coming years?
During the past two decades, four factors combined to generate a sharp increase in world demand for commodities: rapid growth in global GDP, increasing urbanization in developing countries, a rise in population at a rate of 800 million people per decade and a significant decrease in poverty. With the exception of global population growth, China has been the most dynamic country in all of these respects.
For example, the number of Chinese living in poverty fell by 650 million over the past two decades.
Moreover, China accounts for half of the global increase of 1.5 billion people earning between US$2 and US$13 a day in the past 20 years.
However, should we expect what happened from 1990 to 2010 to continue in the coming decades?
To answer that question, several variables must be taken into account: demand growth, technological change, investment and the commitment to confront global warming, among others. Bearing in mind such complexity, let us consider only some determinants of demand that are linked to increased income.
Two factors appear to be the most important: China’s growth rate in the coming years and whether its growth will be sufficient to maintain high levels of global demand for commodities. Even if it is, the impact is likely to be different for agricultural exporters (the members of the Mercosur trade bloc and some Central American countries) than for exporters of minerals and oil (Mexico and other South American countries).
Moreover, although fiscal and monetary stimulus in China can compensate in the short term for weaker export demand, this will not be enough to sustain demand growth without economic “normalization” in the developed countries. As we know, this is far from assured in Europe; nor is it evident in the US and Japan — that is, countries that account for about 45 percent of Chinese exports.
In the medium and longer term, the expected and hoped-for increase in China’s domestic consumption should be the most dynamic element of demand, with export growth continuing to slacken and investment remaining — except for brief periods — below 50 percent of GDP.
However, this is not guaranteed because progress in establishing social insurance — crucial to increasing consumption — has been relatively slow, while monetary transfers to families (such as those that have been implemented in Brazil, Mexico and elsewhere in Latin America) might not be feasible, given the logic of China’s political system.
Even if China sustains rapid growth, it is unlikely to repeat in the next 20 years the extraordinary decrease in poverty witnessed in recent decades.
The reason is simple: Of the 400 million people living on US$2 a day in 2008, it is possible that “only” 300 million remain.
Moreover, the rate of China’s population growth is close to zero, and will turn negative before 2025.
As a result, fewer people will cross the poverty line, although more will see their daily earnings grow from US$2 to US$5, and from US$5 to US$10.
That trend will have a differentiated effect on demand for cereals and soy relative to other products that are more closely linked to higher incomes, such as foods containing higher-quality protein, metals and oil. In terms of the latter products, China might continue to be decisive for global demand growth.