Category: Development

Chinese Auto Exports Threaten the Auto Industry Worldwide

Benefiting from technology transfers from multinationals and massive government subsidies, China has made itself the dominant force in the automotive industry over the past two decades. It has achieved this supremacy at a time when the industry is undergoing the most significant technological shift in 70 years: the transition from the internal combustion engine (ICE) to the electric motor. China had the foresight to anticipate this transition and leapfrog to the forefront of EV (Electric Vehicle) technology by harnessing subsidies and private capital. However, given the current reality of global geopolitical conflict and economic stagnation, China’s dominance of this critical industry may increasingly be seen by many countries as an unacceptable strategic and security threat.

Since the launch of Ford’s Model T in 1908, the automobile industry has been at the forefront of mass production manufacturing. By the 1950s, when the industry reached its peak impact on the American economy, the industry’s core technologies had been developed, and it entered its maturity stage. Since 1960, auto manufacturing has barely grown in the U.S., and the leading firms in the industry focused on disseminating their mass production skills around the world, a process that culminated with major multinational auto companies setting up plants in China between 1984 and 2004.

The chart below shows the auto industry’s annual growth rate since the 1950s. Global growth peaked in the 1960s, driven by Europe, Japan, and Latin America, and then has fallen every decade, except during the 2000s because of the precipitous rise in Chinese domestic demand. Growth for the twelve-year period ending in 2022 has been at a record-low 0.8% annually, despite a 50% increase in China’s output. U.S. production growth stalled much earlier, already in the 1950s, and only recovered in the 1980s and 1990s because protectionist policies were introduced to force foreign firms to make their cars in the U.S. There has been no increase in U.S. output since 1990.

The decline of the U.S. as a manufacturer of motor vehicles and the rise of China can be seen in the following chart (source: OICA, International Organization of Motor Vehicle Manufacturers). The U.S. emerged from World War II with nearly 80% of world output, was overtaken by Japan in the 1980s and 1990s, bottomed at a 10% share in 2010, and in 2022 had a 12% share. Since 1990, when the first joint-ventures with foreign firms began operating, China has grown its share of world output from 1% to 32%. The dominance of China in EV manufacturing is even more pronounced, reaching 59% of world output in 2022, compared to 19% for the United States. Germany, Japan, and South Korea followed, with shares of around 10%, 8%, and 6%, respectively (Canalys).

The following two charts show emerging market producers: first, mature players (Mexico, Brazil, Korea); and second, newcomers still enjoying growth (India, Indonesia, Thailand, Turkey, and Eastern Europe). Brazil’s share of global output peaked in 2010 but is now below 1980 levels. Mexico, despite NAFTA, is back to the level of 1990. Korea is also losing global share. In the case of countries growing their share of the global automotive pie, India and Eastern Europe stand out. Indian manufacturers benefit from trade protectionism (70% tariffs) and rapid economic growth. Eastern Europe has taken advantage of favorable EEU (Eurasian Economic Union) policies allowing firms to move production to places with lower wages.

The Market’s Reaction to the Inception of Chinese Vehicle Exports

The slowdown of China’s economy and low consumer confidence, combined with sustained investment in new production capacity, has caused excess manufacturing capacity and a surge in Chinese motor vehicle exports over the past two years. According to the China Association of Automobile Manufacturers, domestic sales of ICE (Internal Combustion Engine) vehicles peaked at 2.4 million monthly in 2018 and are now running at a monthly rate of 1.6 million, 36% lower. Exports of ICE cars have surged and are expected to reach 3.2 million units in 2023, an increase of 45% over 2022 levels. EV exports may reach 1 million units this year, a 60% increase. Remarkably, in three years, China has gone from almost no participation in auto exports to the leading position. China surpassed Korea in 2021, Germany in 2022, and long-time export leader Japan in 2023.

In the case of ICE cars, most of these exports are going to Russia, Eastern Europe, and developing countries in Asia and Latin America, undermining the competitiveness of manufacturers in those regions. EVs are mainly exported to more developed regions, such as Europe, which have high “climate change” incentives for EV sales, but this is also changing fast. For example, BYD has had enormous success exporting electrical buses to major emerging market metropolitan areas suffering from high pollution levels.

China’s increasing EV exports are creating a huge dilemma for traditional auto manufacturing countries around the world. In Europe, politicians are committed to promoting EVs but are also determined to support an important domestic industry that needs time to navigate the transition to EV technologies. This week the European Commission launched an anti-subsidy probe into EVs coming from China, aiming to protect European firms from “competitors benefiting from huge state subsidies.”

The situation today is different than in the 1980s when Japanese firms were required to build their cars in the U.S. At that time, the Japanese, a key strategic ally which had outcompeted U.S. firms with marginal improvements in manufacturing efficiency (just-in-time process) and better quality, were pressured into accepting a political concession. Today, Xi’s China is a strategic geopolitical adversary competing with “unfair” advantages and seeking dominion in a frontier technology of critical economic, social, and ecological importance.

Developing countries face, perhaps, even bigger challenges. Countries with long-established automotive industries cannot sustain competition from China’s ultra-competitive, modern, and highly subsidized auto sector, and, even in a best-case scenario, would lose regional customers in markets without the industrial base. For example, in Chile, a country that imports all of its cars, China has captured 40% of the market over the past few years. Half of the car models available for sale in Ecuador are Chinese, and these brands have captured nearly half the market since 2020. Also, China’s BYD has captured half of the bus markets of Santiago and Bogota with its electric buses over the past five years.

Moreover, any shift to EVs implies the importation of batteries and motors, which leaves only minimal value-added in final assembly. EVs also pose a mortal threat to local part suppliers that are an intrinsic part of the ICE value chain. The shift to EVs implies a transition from a mature industry with processes and technologies fully assimilated by countries like Brazil and Mexico to an industry on the technological frontier, which these countries have little hope of dominating.

 

If China’s Boom is Over, Where Will Demand for Commodities Come From?

China’s economy has experienced a multi-decade period of high growth, similar to “miracle” surges previously witnessed by other countries. Today’s wealthy nations once went through these surges as well: the U.K., the U.S., and Germany in the late 19th century; and Japan in the early 20th century and again in the 1960s. Various developing countries have also seen periods of so-called “miracle” growth, such as Brazil and Mexico in the 1960s, and Korea, Taiwan, and Malaysia since the 1970s, with China starting its own in the 1990s. A significant contributor to these periods of accelerated growth is a broad and powerful one-time build-out of physical infrastructure. This will be especially true in China, which has witnessed one of the greatest construction booms in history.

The amount of infrastructure investment undertaken by China is breathtaking. For example, Shanghai had four crossings of the Huangpu River in 1980 and now boasts 17. Shanghai did not possess a subway system in 1980, and now it encompasses over 800 kilometers of lines, making it the world’s longest. China claims eight of the top ten longest subway systems globally, with a total extension of 9,700 kilometers across 45 cities. In comparison, the U.S. has 1,400 km of subway lines in 16 cities. Since 2000, China has constructed 38,000 km of high-speed train lines, more than tripling the amount built by Europe since 1980. China’s National Trunk Highway System, primarily built over the past 20 years, now totals 160,000 km, compared to the 70,000 km of the U.S. Interstate Highway System.

China’s construction boom over the past decades can be measured by its share of the world’s production of basic building materials. For example, China consistently produced more than half of the total world cement output over the past decade, securing 56% in 2019. China also commands a similar share of the world’s steel output, reaching 57% in 2020, according to the American Iron and Steel Institute (AISI). The chart below illustrates China’s increasing share of world steel output, surpassing the level the U.S. had at the end of World War II.

The following chart displays steel output since 1950, with China’s ramp-up beginning in 2000.

Major infrastructure expansions do not need to be repeated. For instance, New York City’s infrastructure (bridges, tunnels, highways, subway system) was largely completed by the 1920s, and the bulk of the U.S. highway system was constructed between 1959 and 1972. The London Underground and the Paris Metro were built before the First World War, and France established most of Europe’s best high-speed train network between 1980 and 2000. The chart below illustrates this historical process and how it has impacted the production of steel in countries undergoing these surges in investment. Steel production surged in Europe in the late 19th century (railroads, steamboats, bridges, etc.) and again in the 1920s and 1930s (automobile infrastructure) and finally in the post-World War II “Golden Years.” The U.S. followed a similar path but also had a massive expansion of automobile infrastructure in the 1950-1970 period due to suburbanization and interstate highways. Brazil experienced an infrastructure boom in the 1960-1980 period, as did Korea in the 1970s. Invariably, these booms come to an end, and steel output plateaus, tapers, and eventually decreases.

The following table presents this data in percentage terms, with the total increase in steel output for the previous ten years. The data shows that multi-decade expansions in steel output are not uncommon: Europe and Japan (1970-1900); U.S. (1970-1940); Japan (1930-1970); Germany (1950-1980); Brazil (1950-1990); and Korea (1950-2010). China has been expanding steel output since the 1950s, which provided a high base for the mammoth expansion since 1980. India has been growing output at a swift rate even before reforms were launched in the 1980s, and it is already, with over 100 million in annual steel output, at a much higher level than China was when it started its “miracle” phase of economic growth.

Eighty-seven percent of the increase in world steel production over the past 22 years occurred in China, raising the question of which countries can pick up the slack if China’s construction boom is over. The hope is that India and emerging Southeast Asia can step up. Assuming China’s steel output remains flat, to maintain the 3.5% annual increase in global steel demand of the past twenty years, it will be necessary for India, Vietnam, Indonesia, and a few more high-growth economies to more than double their steel output every decade.

 

Stages of Development; Current Implications for Emerging Markets Part2

In a previous post (link) the stages of development were discussed in the context of the transition from a traditional rural society to a modern capitalistic consumer-driven economy.  Initially, abundant labor and high returns on capital  spark lengthy periods of “miraculous” growth. Later, as labor becomes scarce and the technology frontier is approached, returns on capital decline and GDP growth has to be driven by household consumption.  In this post, the factors of production (labor and capital) are looked at in detail.

The expenditure approach is commonly used in macroeconomics to describe economic output in terms of the money spent by consumers (households and government) and investors (private business and government). Net exports are added to measure whether an economy captures foreign consumer demand through exports  or relinquishes foreign demand through imports. For example, as a net exporter China is repressing domestic consumption to capture foreign consumer demand, while as a net importer, the United States is  stimulating domestic consumption and relying on foreign producers. Another approach to understand economic output is to measure the contribution to GDP growth coming from the  factors of production: labor and capital.

The Conference Board database on national accounts (link) provides a long-term view on productivity. The data illustrates what factors of production are driving the economy, and it is useful to measure the evolution of productivity over time.

As an economy begins to  modernize, labor productivity growth will be high and investors can deploy capital with high returns. As rural migration accelerates and more capital is deployed, countries experience stages of “miracle” growth when both labor and capital productivity are high. Eventually, a country achieves a significant degree of integration into the modern global capitalistic economy. At this time, labor becomes scarce and capital returns muted. Mature economies come to rely for growth mainly on the expansion of consumer services and hard-to-achieve technological innovation.

The charts below, based on the Conference Board data, aim to illustrate how the process plays out over time for countries at different stages of the development process. The first section looks at the United States and several mature emerging markets that have already experienced a one-time phase of “miracle” growth. The second section looks at India and Vietnam, two economies currently experiencing high growth

I. Mature Economies

The United States 

The United States has been a mature economy at the technology frontier since the early 2oth century. A broad expansion of consumption in the 1950s and 1960s drove high GDP growth. GDP Growth trended down from over 4% in the 1950s to below 2% in the 2020s, and has become  dependent on debt accumulation and Fed-driven asset appreciation. Contribution to GDP growth from labor has gradually declined over the period, despite high immigration, a huge one-time increase in female participation in the workforce, and steady improvements in the quality of labor. Growth in the working age population is projected to be near zero in the 2020s. Despite the United States’s dominant position in technological innovation, total factor productivity (the residual increase in growth that is not driven by capital and labor) has fallen from 1.5% in the 1950s to zero over the past decade.

 

Brazil

Brazil’s economy took off in the 1950s and experienced “miraculous”growth in the 1960s and 1970s, driven by high levels of investment and labor growth. Since the 1980s, Brazil has been mired in a “middle-income trap” caused by  a massive expansion of unproductive government spending, a stagnant consumer, a failure to promote innovation, and institutional breakdowns (i.e. corruption). Since 1980, GDP growth has averaged about 2%, falling to near zero over the past 12 years.

Labor quantity growth in Brazil is now near zero, though labor quality continues to improve.  Capital investment has not been driving growth, due to low returns on investment. Remarkably, total factor productivity, which was high in the 1950-1980 period, has now been negative over the past 40 years, and fell by 1.4% annually during the 2010s.

Korea

Korea’s economy took off in the 1970s and experienced its economic miracle between 1983 and 1997. Real GDP growth was very high for nearly three decades (1969-1997). As the economy  achieved advanced economy status, growth has slowed down over the past 20 years. GDP growth has fallen from 7% annually in the 1990s, to 4.5% in the 2000s and 2.5% over the pat 12 years. Over the past decade, labor quantity growth has been near zero, and though still positive, labor quality improvements are well below those of the miracle years. Total factor productivity has fallen from the 2.5% annually of the miracle years to 0.5% over the past decade. Korea is now a mature economy operating at the technology frontier. This means it competes directly in innovative products with developed nations, while facing strong competition from China on traditional products.

China

China’s economy took off in the 1970s, and then entered a 30-year period of “miraculous” growth with Deng Xiaoping’s reform in the 1980s. This extended period of growth allowed China’s coastal areas to reach a significant level of economic maturity, though much of the hinterlands remained isolated from the modern economy. China’s growth was driven by massive rural immigration and  high levels of investment by both the government and foreign enterprises, which converted China into the “workshop of the world.” The growth model followed closely what Paul Krugman described in his 1994 paper “The Myth of Asia’s Miracle,” which pointed out that growth in Korea, Thailand and Malaysia was driven by extraordinary growth in inputs like labor and capital rather than productivity.

China (Alternative)

China’s economic growth is considered by many economists to be overstated by the Chinese government. This is particularly valid over the past decade as the quality of growth has declined because of unproductive investments. The Conference Board provides an alternative measure of GDP which may be more realistic. According to the Conference Board’s alternative estimates, China’s GDP growth for the past twenty years was 7.1% compared to the 8.6% recognized by the government (and reported by institutions like the IMF and World Bank). If the alternative numbers are accepted, then China’s GDP output can be considered to be 30-40%  less than reported. Alarmingly, under the alternative analyst, investment drove almost all growth over the past twenty years, and the contribution to growth from total factor productivity has been negative over the period (-0.1 annually compared to 1.3% annually reported officially.)

Thailand

Thailand took off in the 1950-1970 period, with high GDP growth fueled by a healthy combination of labor, capital and total factor productivity. It enjoyed its “miracle” growth phase between 1980-1997, marked by slower labor growth, more moderate TFP growth, and, as Krugman pointed out, increasing reliance on the capital input. The “miracle” came to an end with the “Asian Financial Crisis” (1997-1990), and since then growth has moderated, with a decline in both labor and TFP growth. Since the financial crisis, TFP growth has averaged 0.6% annually and labor quantity growth has been a meager 0.1% annually, turning negative over the past decade. Apart from the high growth take-off period of 1950-1970, Thailand’s growth has relied heavily on capital inputs.

 

Malaysia

Malaysia, more than Thailand, fits Krugman’s observation that Asian growth is overly driven by capital.  Malaysia took off in the 1960s, and like Thailand, had a period of “miracle” growth in the 1980s and 1990s, ending with the 1997 Asian financial crisis. Growth recovered in the early 2000s, but since then has drifted down to moderate levels. Malaysia’s growth throughout this entire period has been driven by capital expansion, with only moderate contribution from labor and, remarkably, none from total factor productivity. Malaysia had some moderate growth in TFP during the 1960s take-off period, but since then TFP’s annual contribution to GDP growth has been negative every decade. Labor’s contribution has been healthier, providing a constant contribution of around 1% annually over the past five decades.

 

New “Miracle Economies”

India

India’s economy initiated a moderate take-off in the mid-1980s, with the launching of structural reforms. Growth accelerated in the 1990s, reaching high miracle-like levels in the 200os. Growth slowed to mid-single digit levels in the 2010s and is expected to remain at this level, which is high for current international parameters, but low in comparison to previous “miracle” economies. India has displayed Asian-style reliance on the capital input, with unusually low contribution to GDP from growth in labor inputs. India had a brief surge in labor in the 1970s, but this had fallen to 0.5% annually in the 200os and zero annually during the 2010s. This is an anomaly compared to other developing countries at this stage of growth when rural labor is very abundant. It can perhaps be explained by( 1)  scarce growth in mass production, labor-intensive manufacturing, (2) very low levels of female incorporation into the workforce, and (3) government initiatives to improve living conditions in rural villages. TFP was low to negative in the decades before structural reforms were implemented.  TFP’s contribution to annual GDP growth rose to 1.1% in the 1980s and 0.9% in the 1990s, 1.1% in the 2000s and 2.2% in the 2010s. For the miracle-like growth enjoyed by India in the decade prior to the pandemic to persist, it will be necessary for TFP contribution to remain high and for labor quantity growth to improve considerably.

Vietnam

Vietnam’s economy took off in the 1980s, supported by massive migration and capital deployment. Investment surged in the 1990s and has remained high since then, converting Vietnam into an alternative manufacturing  center for many multinationals. Labor growth remained high through the 2000s, but fell sharply in the 2010s. Vietnam fits squarely in Krugman’s description of a capital intensive Asian “tiger.” Total factor productivity has had negative contribution to GDP growth for most of postwar Vietnam’s economic history, turning positive only during the 2010s. A combination of high TFP growth, a resumption of labor growth and continued foreign direct investment will be needed for Vietnam to sustain high GDP growth levels. So far, Vietnam has closely followed the growth path of China. However, if its Communist Party  follows the ideological course taken by Xi’s China, foreign investors are likely to quickly move on.

 

 

 

Current Implications of the Development Process For Emerging Markets Part I

 

As countries develop, they follow a process of gradual absorption of both labor and capital into the “modern” economy. This model of development was described in Walter Rostow’s book The Stages of Development (1960), and the concept has influenced policy decisions since that time. Rostow’s five stages are outlined in the chart below.

The process is driven by the migration of labor from rural to urban locations, followed by the decline in fertility and family size. In Europe, it started in the late Medieval period (13th century) with the rise of city-states in Italy and the Netherlands, though serfdom persisted in Eastern Europe into the 19th century. The rise in urbanization allows for increased labor specialization and industrialization. Migration provides abundant labor which promotes investment and capital accumulation, until, eventually, as fertility declines wages rise, and consumption expands. The five stages are detailed below. It is important to stress that the stages are not clear cut either chronologically or geographically. For example, India’s current standing covers the first three stages; though the country is arguably on the verge of take-off, it has a large traditional rural population. Though China can be categorized as mature, one third of its population remains in a traditional rural condition. Brazil is also is a mature economy with a significant population of subsistence farmers.

Stage 1- Traditional Rural – Populations are rural and consist of subsistence farmers with minimal engagement in commerce. Much of sub-Saharan Africa, rural India and rural Indonesia are still at this stage today. At this stage, capital deployment and economic output are minimal.

Stage 2- Pre-take Off – Migration from farm to city provides cheap labor and initiates specialization and capital accumulation. The poor consume little, the rich consume luxury goods.

Stage 3- Take Off – The culmination of stage 2: super-abundant labor and rapid industrialization lead to high growth and capital accumulation and great fortunes (“robber barons”). This is the period of “economic miracles,” also called Golden Ages: England (1850-1870); United States (1870-1910); Argentina (1880-1900); Brazil (1950-1970); China (1980-2008), etc… Arguably, India is in this stage today, ruled by an alliance of robber barons and politicians.

Stage 4 – Maturity – Labor becomes scarcer, leading to pressure for higher wages and political conflict. Organized labor gains bargaining power, with the support of politicians. Wages rise, boosting consumption, but returns on capital decline:  Western Europe (starting in the 1870s), the United States starting in 1900, Brazil in the 1970s, China starting in 2015 (despite Xi’s efforts to stifle dissent). Mercantilist countries (Germany, the Asian Tigers, including China) seek to repress labor by capturing foreign demand.

Sometime between Stage 4 and Stage 5, the Lewis Turning Point occurs. This concept describes the moment when excess rural labor is fully absorbed into the manufacturing sector, causing unskilled industrial  wages to rise. Economists guesstimates for the turning point are:  England (1890), France (1900), the U.S. (1910), Japan (1965), Brazil (1975), Korea (1975), Mexico (2000) and China (2015). India, Indonesia and Vietnam are expected to reach the Lewis turning point in the next 15 to 20 years.

Stage 5  – Mass Consumption – Most developed countries now have economies dominated by the consumer. These countries are at or near the technological frontier and have highly developed physical infrastructure and costly labor, conditions that result in the share of GDP coming from consumption dominating that revived from investment. Mercantilist countries like Germany and Japan reduce consumption to some degree by repressing wages, allowing them to capture through exports some of the consumption demand from countries like the U.S., France and Spain. East Asian “Tigers” have delayed the mass consumption stage by implementing mercantilist policies which enable them to capture foreign demand through exports. Latin American countries have badly managed the transition from maturity to mass consumption, and they find themselves in the “Middle-income Trap,” with low returns on investment and insufficient consumer demand from most of their citizens.

Below, a few graphic examples of the different stages are shown. The data measures the components of GDP (World Development Indicators, World Bank)

Senegal (Traditional Rural, entering Pre-Take Off): Senegal is a low-income country with a large part of the population engaged in low-tech farming. Household consumption has dominated the economy but is now declining quickly as investment is ramping up. The current account is negative, as the country imports capital to finance investment.

 

 

Indonesia (Take-off): Indonesia entered the Pre-Take Off stage in the late 1960s, as migrants left subsistence farming to settle in urban areas. Take-off occurred in the 1980s (briefly interrupted by the Asian financial crisis). Rising capital accumulation and investment have brought high GDP growth and caused a reduction in the consumption share of GDP.  As Indonesia approaches the Lewis Turning Point in the 2030s, investment can be expected to start declining and consumption should rise.

India (Take-off): India entered the Pre-Take Off stage with economic reforms in the 1980s, leading to a long period of high GDP growth, rising investment contribution to GDP and declining consumption share of GDP. India is now in a typical Take-Off, with high capital accumulation and obscenely rich “robber barons” dominating the economy (like China in 2000).  India should reach the Lewis Turning Point over the next 20 years, at which time returns on investment will decline and the economy will become driven more by consumption.

China (Maturity):  China had its Pre-Take Off (with plenty of ups and downs) in the 1950s and 1960s. Take Off came with the economic reforms in 1980, resulting in very high GDP growth driven by investments and marked by enormous capital accumulation concentrated in few hands. The 1980-2005 “economic miracle” saw investments reach extremely high levels and plummeting of consumption’s share of GDP. The economy started losing steam in the 2000s because of high debt and declining returns on investments.  China reached the Lewis Turning Point around 2015. It now has approached the technology frontier and faces rising labor costs and low returns on investment. In this Maturity stage, investment share of GDP should decline, and consumption contribution should rise, but China is finding it difficult to abandon its debt-fueled investment model because of entrenched political interests. This raises the possibility of a long period of low growth and a “Middle-Income Trap.”

 

Korea (Maturity): Korea had its Pre- Take Off and Take Off stages in rapid succession in the 1960s. A twenty-year “Economic Miracle” was marked by high levels of investment and capital accumulation and a plummeting of the consumption share of GDP. The country reached the Maturity Stage in the 2000s, and now operates largely at the technology frontier. Korea, like China, is finding it difficult to move to a more consumer-driven economy. The country has been able to pursue mercantilist policies to secure demand from abroad for its exporters, so that it can delay increasing domestic consumption.

Growth and Economic Complexity

Rich countries have complex economies, and poor countries get richer by increasing the technological content of what they produce. This requires many things, such as good institutions (e.g., law and order, property rights) as well as an educated population and research institutions that drive innovation. The Atlas of Economic Complexity (AEC) , a joint project of the Massachusetts Institute of Technology and Harvard University, provides  insight into the progress countries around the world are making towards increasing their innovative capacity by measuring the degree of complexity and diversity of what they produce for global markets.

The work of the AEC was summarized in the 2011 book The Atlas Of Economic Complexity: Mapping Paths To Prosperity,  by Ricardo Haussman and Cesar Hidalgo, and it is  periodically updated by the Harvard Growth Lab (link) and the Observatory of Economic Complexity (link). The AEC solves the complex problem of measuring technological advancement by focusing on the degree of complexity and the diversity of a country’s exports and comparing this over time and with trading partners.

The chart below uses the AEI data to compare the top 25 most “complex” economies of 1995 to those of 2021. Not surprisingly, the leaders  of the Economic Complexity Index (ECI) are mainly the highest income countries. But this is less true in 2020 when compared to 1998, as Asian and Eastern European middle-income countries are moving up the ranking.

 

Although the list is relatively stable, there are five changes: five entrants, China, Malaysia, Mexico,  Taiwan and Romania,  replacing  Canada, Norway, Spain, Netherlands and Brazil.

All of the new entrants are countries well integrated into regional or global trade value chains that import almost all their commodity needs, while three of the departees (Canada, Brazil, Norway) are commodity producers.  This is interesting because the period saw the commodity super-cycle (2002-2012),  which greatly boosted the incomes and exports of commodity producers. The drop in the rankings of these countries is evidence of the “commodity curse” at work, whereby commodity boom-to-bust cycles create economic turbulence with long-term debilitating effects. In 2020 there are no commodity producers in this top 25 group, unless one counts the United States, which, in any case, saw its ranking fall from 9th to 13th.

The significant deterioration suffered by commodity producing countries is shown in detail below. These include the highly financialized Anglo-Saxon economies (Canada, Australia, New Zealand and the United States); and the traditional emerging market commodity exporters (Brazil, Chile, Argentina, Peru, Indonesia and South Africa). Brazil shares some of the characteristics of the Anglo Saxons, as it is also a highly financialized economy suffering rapid deindustrialization.

The change in the rankings from 1995 to 2020 for commodity producers is shown below. Indonesia is the only commodity exporter with an improved ranking, no doubt because it has been influenced by the mercantilist policies followed by its neighbors in South East Asia.

The contrast with the manufacturing-export-focused economies of Asia and Eastern Europe is shown below. These are all countries that have benefited from free trade and regional integration policies.

 

Finally, the following chart highlights the different paths taken by Brazil, Mexico and Turkey. Brazil has deindustrialized dramatically since 1995 and further  increased its dependence on commodities. Moreover, it has rejected globalization and regional integration.  On the other hand, Mexico and Turkey have embraced regional integration and successfully found their place in global value chains.