The Chilean Tiger and the Demographic Dividend

This is fascinating:

"The price of copper, Chile's main source of foreign exchange, has rocketed to $3 to $4 a pound in the past year, from as low as 60 cents in 2001. The high copper price has added billions of dollars of new wealth to a country that is now the richest in Latin America...."

"Yet Chile's population is on edge over the question of how quickly to spend its copper windfall. In demonstrations in May and June, student and teacher groups demanded that President Michelle Bachelet pay out more for education and other social programs. High-school students called a strike, and more than 800,000 people protested at high schools and universities across the country. Police in the capital of Santiago and other locales responded with water cannons and tear gas, arresting more than 1,000."

"We have the money from copper now, and it should be used now"

Now the interesting point to note, as the Bloomberg article points out, is that Chile is now the richest Latin American country in terms of income per capita. In part this wealth is a product of the copper boom, but this boom comes at a very favourable time in terms of Chile's demographic and institutional development (to what extent are these two inter-connected? Just a question).

Here is a page summarising demographic data for Chile, which, as can be seen, are now relatively favourable for economic take-off, with fertility around replacement level, and life expectancy (and education levels) increasing nicely. Here is some background economic data, and here's a more extensive pdf file summary. The pyramid evolution also looks good, and if you're interested you can check it out here.

Now the issue that presents itself is that all this is very finely balanced. There are limited resources and conflicting demands. There is, if you like, an 'allocation problem'. The copper price element could be considered a kind of 'one-off' windfall. The issue is how to best use this. Clearly neither extreme will be optimal, there needs to be a 'balanced path' or political pressures will 'upturn the cart'. But this is just what Bachelet seems to be working towards, a balanced path.

Now interestingly enough this whole situation can be conveniently understood in terms of Bo Malmberg's 'Four Phases of the Demographic Transition' approach (I have a PDF file here which outlines this in some detail). Basically Chile is moving from being a child dominated society to being a young adult dominated one. Now as Malmberg suggests 'young' child-dominated societies, tend to be very economically dependent on the primary sectors (agriculture and raw materials extraction), and this is evidently Chile's case. Now the interesting thing to do would be to 'leverage' the windfall to facilitate a transition to a more sustainable path. This would normally be industry, but it may be that Chile will never be an industrial power-house (think Australia) and may move directly from extractive and agriculture to high value services like design and digital communication.

`The Poor Can't Wait'

This is a real and pressing human concern. However a judicious use of existing resources may mean that Chile is better able to long term address the povery issue, an 'injudicious use' may mean, OTOH, that the poor stay poor, at least for much longer.

German Business Optimistic, While Individual Germans Save Rather Than Spend

The latest Ifo index, made public this morning, jumped from 105.7 in May to 106.8 in June: German business is happy. And little wonder if you look at those global growth rates mentioned in my last post, and think about the fact that German industry is export driven.

But in the unemployment lines, and among those about to lose the extra payments allowances brought to them by Hartz IV, things may look a little less rosy, Germans in general, it seems, are saving at very high levels, and seem set to continue to do so as they get older and older, and with an extra 3 percent VAT charge coming in next year, it's hard to see those lines getting any shorter, not any time soon at any rate:

The savings rate of German private households – savings as a share of disposable incomes – reflected "rational behaviour", given the country's future pension requirements, Axel Weber, Bundesbank president, said on Monday. Although high by US or UK standards, Germany's savings rate was not abnormal by historical standards or in comparison with other European countries.

The trend rise in Germans' savings ratio has acted as a brake on consumer spending – which remains the Achilles heel of Europe's largest economy, even as its industrial sector enjoys a export-led renaissance.

In sharp contrast, the French economy, which faces similar problems with high unemployment and labour market reform, has seen growth boosted in recent years by consumer spending, with the French reducing the share of their incomes that they save.

In 1970s West Germany, the savings ratio of private households averaged more than 14 per cent. In the 1990s, for reunited Germany, the ratio averaged more than 11 per cent, before falling to a low point of 9.2 per cent in 2000. Since then, the ratio has risen steadily to 10.7 per cent last year. In France, the trend might be downwards, but its savings ratio last year – at 11.6 per cent – was still higher than Germany's. Italy's was even higher at 12.1 per cent. The ratio in the US and Canada was negative.

The steps Germans are taking to increase their private provision for old age were revealed in a breakdown of the private households' financial assets published yesterday by the Bundesbank. This showed pension entitlements accounting for more than 30 per cent of assets last year, compared with little more than 20 per cent in 1970.

China Still Booming

The Chinese economy is on course to grow at an annual rate of 10.3 percent in the first six months of the year, at least according to data just released from the Bank of China. So there are no real signs of that long predicted slowdown, at least not just yet. Indeed growth in other parts of the world ex-China is also strong, with the IMF forecasting global growth at around 5% this year.

Now if you think about it, with Eurozone growth at around 2%, Japan at around 2.5% and the US around 3-3.5% (ie with the majority of the large developed economies running at well beow the 5% mark) this must mean that there is a hell of a lot of growth going on across the developing world and not just China. This is growth from very low per capita incomes sure, but it is driving the global economy, and it is what makes this current expansionary wave so stable.