Often the leaders themselves are unaware of the fundamental factors behind the economic cycles of their nations. This leads them to propose messianic agendas such as “we are going to make our nation great again, etc.”.
But it turns out that these cycles of economic development are usually determined by what is known as the “unit labor cost” (= trajectory of real wages minus trajectory of labor productivity). When countries are developing, their real wages are low and so is their labor productivity. Their problem lies in having to rely on unproductive labor.
But, in the initial cycle of development, that unit labor cost begins to decrease due to productivity and this allows them to become globally competitive. A good example has been the automotive industrial processes. In the 1950s, few wanted to buy poor quality Japanese cars, but two decades later they showed the best price / quality ratio and conquered the world market and created conglomerates covering home appliances.
Then the cycle of South Korea would come, poor quality in the eighties, but they conquered international markets two decades later and also including conglomerates of electrical appliances. Currently the cycle is in favor of China and already relying on digital conglomerates. These “product-cycles” exceed those of Vernon, since they go beyond simple maquilas.
Currently, Japan’s unit labor cost has risen, as its real wages have risen to levels compatible with its per-capita income of US $ 40,000 / year, one of the highest in the world. And their productivity has stopped growing at the 3% per year rates that they did decades ago.
In contrast, China’s labor productivity has been growing at rates above that 3% per year and its relative wages are still competitive with those of Japan or the United States. These salaries are compatible with a medium-high per capita income of US $ 10,000 / year. And in parallel we have several emerging Asian countries that have also grown in the heat of their historical development cycles.
The attached table compares the results of these development cycles between Asia and Latin America during the 55 years between 1965-2019. Let’s start with the case of Japan, where an average annual growth of 2.5% is observed in its real GDP per capita, which implies that at that rate it has been able to double its real income every 30 years (let’s say every two generations of 15 years).
This figure for Japan is not at all impressive due to its marked slowdown after the 1980s and also due to the marked increase in its unit-labor costs. But if we take its period of glory (1965-1996) we see that its real GDP per capita doubled almost every generation, as it was then growing at rates of 3.7% per year. It was at that time where their manufacturing “lines of work” allowed them to copy car designs, innovate on them and improve their quality until reaching the peak around the 90s. On the other hand, in their current mature period (1997-2019) their GDP-real per capita has grown only at 1% per year. Its deflation problems have required monetary-fiscal stimuli that have not finished taking them forward, while its Public Debt / GDP ratio has risen to 230%. These levels of debt have only been “sustainable” because they are mainly local bondholders.
In second place we have the block of the four tigers (South Korea, Taiwan, Singapore and Hong-Kong) with the impressive 5% annual growth record in its real GDP per capita over that half century, which which implies a doubling of their income in each generation. Furthermore, its slowdown is only moderate, going from 6.7% to 3% annually between the two sub-periods already mentioned.
Asia’s third bloc is given by the “new tigers” (Indonesia, Thailand and Malaysia) with an average annual growth of 4% in their real GDP per capita, also doubling it each generation (and this despite their slowdown of 5 % towards 2.5% between sub-periods).
The best recent performances (1979 onwards) correspond to China, accelerating from 6% per year (1979-1996) to 8% (1997-2019), and with an impressive average of 7% per year. This last figure has implied doubling its real income per capita every decade. Vietnam has done something similar by holding rates of 5% real per capita since 1979, doubling every 14 years.
And Latin America? He never took advantage of his emerging status and is about to repeat his third lost decade (1980, 2010 and the current one). Its growth in real GDP per capita has remained close to 2% per year, which implies having to wait 35 years (more than two generations) to see a doubling of real income.
In Colombia, this growth in real GDP per capita has decelerated from 2.4% to 2% between sub-periods. The benefits of a demographic transition that reduced the population expansion from 2.5% to near zero today are still elusive. It is necessary to go from over-diagnosis, type “Modernization Mission”, to actions that solve the multiple practical-Creole problems, but all this was already left for 2022-2026.
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