In the previous post I argued that the BRIC "wings" of the global economy cannot make up for the looming consumer driven recession in the US and possibly Europe. Others argue that China, and perhaps India, will simply substitute domestic consumption for exports and keep chugging along, i.e. decoupling. Is this supported by the data? No.
GDP per capita at purchasing power parity is as follows (2006 data, CIA Factbook).
The figures speak for themselves, but some further elaboration is perhaps needed:
- People in poor countries like China and India spend a greater portion of their income for basic necessities like food and fuel, leaving less for discretionary spending. For example, food in China accounts for 30-35% of the CPI index, indicating that the average family spends an equivalent portion of their income for food. By contrast, expense for food at home is only 8% of US CPI.
- A large part of GDP in China and India comes from FDI (i.e. capital spending by foreigners), geared towards creating manufacturing capacity for exports. This ties in to the previous point: most of the value added to export goods does not come from cheap labor, but from foreign capital in the form of new plant and equipment. Simply put, Chinese cannot afford to purchase the value they add to their export goods.