Prices and Earnings: A comparison of purchasing power around the globe / 2009 edition

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Prices and Earnings: A comparison of purchasing power around the globe / 2009 edition (PDF; 1.2 MB)
Source: UBS

When UBS published its first Prices and Earnings com- parison 38 years ago, in 1971, it comprised 31 cities. Every three years since, we have drawn on the broad network of UBS branch offices, countless universities and our researchers’ personal contacts to update this comparison. Our study that now offers a detailed look at prices for goods and services, and wages and work- ing hours for 14 professions in 73 cities worldwide. Doha, Qatar, and Cairo, Egypt, are new to the list this time around.

Can China Save the World?

by Bill Powell

On a steamy saturday afternoon just outside Shanghai, Zhang Yi is in a blessedly cool General Motors showroom, kicking the tires of the company's newer models. He's not there to beat the heat. He drives a small Volkswagen now and wants to upgrade. A middle manager at a state-owned steel company, Zhang has no worries about his job or China's economy. "Things are still pretty good," he says. "I have no problem now affording one of these," nodding toward the array of gleaming new Buicks nearby. (Read "China's Booming Car Market Shifts into Reverse.")

There aren't a lot of places in the world these days where consumers speak with that kind of confidence. With the U.S., Japan and all of Europe mired in the worst global recession in 30 years, China has shown a restorative strength that six months ago many doubted it had. A devastating slump in exports crippled growth late last year, but on the back of a $586 billion government stimulus program — about 13% of GDP, spread over two years — China has snapped back. The economy grew 7.9% in the second quarter and will now probably expand 8% or more this year. Evidence of increasing momentum appears almost every day. Factory production has begun to edge up, in part because Chinese consumers continue to spend money at a healthy pace. Auto sales, helped significantly by government subsidies for small-car purchases, hit an all-time record in April and will easily surpass those in the U.S. this year. Overall, retail sales in China this year are up 16%. (Read "Is China's Economy Strong Enough To Save the World?")

Numbers alone do not capture the sense that the balance of global economic power is shifting eastward. There have been several moments that seemed to crystallize the zeitgeist, none more memorable than U.S. Treasury Secretary Timothy Geithner's speech in June before the best and the brightest at Peking University, the Harvard of China. Not long ago, students there would have been the most respectful and polite of audiences. Yet when Geithner tried to reassure one questioner that China's investments in U.S. government debt were "very safe," the response was perhaps an indication of the onset of a new economic order: the students laughed.

The U.S., the unquestioned leader of the global economy, is now in the midst of a disorienting shift in economic policy, away from the let-it-rip form of capitalism that has guided it for almost 30 years and toward more overt government control and regulation of huge swaths of the economy. No one yet can safely say whether this is wise, but in the U.S. it is certainly the stuff of increasingly fierce debate. No such doubts are evident in China, where the government reacted to the crisis with alacrity and the economy is now responding in kind.

That's why, for global companies like General Motors, China is no longer the future. It's the present. Of the world's 10 biggest economies, China's is the only one that is growing, and it could soon surpass Japan's to become the world's second largest. The Shanghai exchange has soared more than 80% this year, by far the best performance among major markets. Nations that depend on producing commodities, such as Australia and Brazil, have benefited immensely over the past six months as demand from China has driven up the price of raw materials. Helped by trade with China, Asia's export-driven economies are sputtering back to life. Overall, the International Monetary Fund (IMF) forecasts that in the three years from 2008 to 2010, China will, astonishingly, account for almost three-quarters of the world's economic growth. Not surprisingly, China has now become the focus of a world that is looking for a way out of the swamp. As Shanghai-based economist Andy Xie puts it, "Everyone wants to know the same thing: Can China save the world?"

Trading Places
A few years ago, that question — and the notion that China could drive global growth — would have seemed absurd. After all, China's economy was dependent on manufacturing, which was in turn dependent on demand from the U.S., the world's undisputed economic locomotive. But that engine remains sidetracked. The IMF predicts the U.S. economy will contract 2.6% this year. American home prices continue to fall in some cities, while the unemployment rate has soared to 9.5%, the highest since 1983. The U.S.'s much ballyhooed stimulus plan has so far yielded little measurable benefit, save putting some spark back in stock markets. The absence of real signs of recovery has Washington discussing the possibility of yet another round of stimulus spending, despite a ballooning federal budget deficit.

Read "China Takes on the World."

See The China Blog.

The speed and relative success so far of China's stimulus stands in stark contrast with that of the U.S. According to a recent study by the World Bank, Beijing's government spending will generate more than 80% of the country's overall economic growth this year. This is partly because China was already in the midst of a nationwide infrastructure program when the recession hit. Emergency spending measures simply added to existing schemes already under way. In other words, the projects really were shovel-ready, and the money hit the streets quickly — and in large dollops. Outlays on new railway construction, for example, were $41 billion last year. They will be $88 billion this year. Says one senior FORTUNE 500 executive: "In the U.S., NIMBY [not in my backyard] is still the order of the day, whereas in China it's more like IMBY. They build where they want, when they want. And they move fast." (Read "A New Deal for China?")

China's recovery and growing economic importance have led some to suggest that global institutions such as the Group of Eight — the U.S., the U.K., Canada, France, Germany, Italy, Japan and Russia — are becoming obsolete; that the only dialogue that really matters going forward is the conversation between the "G-2": China and the U.S. On July 27, President Barack Obama appeared to acknowledge this when, addressing participants in high-level talks between the two countries, he said Washington's relationship with Beijing would "shape the 21st century." In recent months, Beijing has started to throw its weight around. China seeks — and will almost certainly soon get — greater voting rights in the IMF. In June, China agreed to buy up to $50 billion in bonds issued by the IMF to boost the fund's capacity to deal with the global financial crisis. Earlier this year, Chinese leaders, worried about the strength of the U.S. dollar and the safety of their own $763.5 billion investment in U.S. Treasury Department debt, called for the creation of an alternative to the greenback as a global reserve currency. More recently, Beijing has signaled an intention to slowly establish its own currency, the renminbi, as a dollar alternative in international trade by providing subsidies for Chinese companies to price their exports in renminbi. One economist, Qu Hongbin of HSBC in Hong Kong, goes so far as to say that 40% to 50% of China's overall trade flows could be settled in renminbi by 2012 (though few other economists believe this will happen anywhere near that fast). This willingness to make its positions known publicly and push other governments to see things China's way "is very different from 10 years ago, when Beijing was much quieter and more low-profile," says Jun Ma, an economist at Deutsche Bank in Hong Kong. (See China covers.)

Indeed, China is increasingly open about both its ambitions and its concerns over U.S. economic policy, given its position as Washington's largest foreign creditor. Beijing never signed on to what became known in the late 1990s as the Washington Consensus on global economic policy, which called for free trade, privatization, light-touch regulation, prudent fiscal policies and — at least as many interpreted the consensus — free capital flows. The U.S. Treasury, in the wake of the credit meltdown, has put forward a plan to enhance regulation of its own capital markets, but that is unlikely to prevent Beijing from continuing to push for the IMF to take a greater role in policing global markets. At its core, despite embracing many aspects of the market, China runs a top-down, command-and-control economy, and its success so far in skating through the recession relatively cleanly may encourage other developing countries to adopt its brand of capitalism.

Not So Fast
still, the best possible answer to the question of whether China can save the world is: Not yet. Plenty of economists doubt that China's economy is as sound as it appears or truly on the road to a sustained recovery. And many more dismiss the chatter about China as the world's economic savior as hopelessly premature.

China's overall economic vigor may continue to impress, but there are questions surrounding the quality of its performance. The People's Bank of China, the central bank, is giving great gobs of money to state-owned banks that, with Beijing's forceful encouragement, are lending to state-owned companies participating in infrastructure construction. Skeptics are frightened by the amount of cash being shoveled out the doors. The central bank recently announced that new loans in June totaled $224 billion. That was more than double the previous month's amount and brought new bank lending in the first six months of the year to nearly $1.1 trillion, exceeding the total for all of 2008.

Read "Why China's State-owned Companies Are Making a Comeback."

See pictures of life on the fringes of the People's Republic.

To optimists, the June data showed just how determined the Chinese government is to implement effective monetary countermeasures to fight the downturn. As Peking University finance professor Michael Pettis says, China is "throwing everything including the kitchen sink'' at the problem. There is no question that as a result of the flood of financing, a lot of Chinese have jobs they otherwise wouldn't. But, as Grant's Interest Rate Observer, an influential Wall Street newsletter, points out in its latest issue, "Massive injections of money and credit ... are always bullish before they are bearish." The newsletter draws worrying parallels between China's current credit boom and the gush of lending that produced the U.S. housing bubble, the collapse of which devastated the financial sector and triggered the global credit crisis and current recession.

There are certainly signs that some aspects of China's recovery are ephemeral. Part of the reason China's stock market has soared is that Chinese companies have received so much cheap financing that they have dumped proceeds into the equity market for lack of better alternatives. Andrew Barber, Asia strategist at Research Edge, a New Haven, Conn., investment-research firm, estimates that up to 30% of new bank lending this year has wound its way into equities. Why isn't the money going into new businesses? The evidence suggests that in key parts of the economy growth remains anemic, particularly the important export-manufacturing sector, which continues to suffer from the reduction in global demand. According to a report from Fitch Ratings in the U.S., Chinese lending continues to accelerate even though corporate profits overall are shrinking — suggesting that China may be incubating its own financial crisis that could be triggered when the adrenal rush of the stimulus wears off. (Read "Is a China Stock Bubble Forming?")

Little Big China
Those caveats are important. But China's technocrats are well aware of the risks they are running. "They came into this [crisis period] with eyes wide open," says Barber, recognizing that loans being granted in a relatively weak economic climate could start to go bad in droves. The country's once shaky financial sector was cleaned up several years ago — in 2007, nonperforming loans amounted to just 3% of total bank assets — and vehicles set up to deal with China's last banking crisis still exist. In other words, Beijing thinks its financial system is strong enough to handle the risks of its very loose monetary policy.

To be sure, even if darker scenarios never unfold and China's economy continues to power ahead, it will probably not, on its own, be enough to drag the rest of the world into a recovery. Size matters. The U.S. has a $14 trillion economy; China's is $4.4 trillion. The U.S. accounted for nearly 21% of total global GDP last year; China just 6.4%. Chinese consumption, in other words, is growing — but is still insufficient to lift the world's advanced economies out of recession. Consumer spending drives less than 40% of China's GDP; in the U.S. before the bust, the consumer accounted for almost 70%. With American shoppers now on the sidelines — the U.S. savings rate has soared from zero to nearly 7% in the past nine months as consumers have closed their wallets — the world desperately needs someone to step into that void. (Read "China Won't Ride to World's Economic Rescue.")

China can help. But it remains a relatively poor country, with an annual per capita income of $6,000, compared with $39,000 in the U.S. and $33,400 in the E.U. To be solidly middle class in China's big cities is to have an income of about $12,000. Brisk though auto sales may be, most Chinese still can't afford a Volkswagen or a Buick, let alone a BMW. Even as China's consumers feel richer, their share of its economy may not change much until Beijing enacts reforms to the health-care and social-security systems, steps that would give people more confidence to spend rather than save. Last year, says Peking University's Pettis, China's consumption was about the equivalent of France's. No one is calling on France to save the world. (Read "China's Auto Bailout Takes a Different Route.")

China faces enormous challenges — a massive shift of population from rural areas to cities, cleaning up decades of environmental degradation, continuing to provide the increase in prosperity that has underpinned political stability. Given their scale, it should surprise nobody that it is still most concerned with saving itself economically — not anyone else. Beijing is most unnerved by the prospect of labor unrest of the sort that resulted in the death on July 24 of a steel-company executive in northeast China at the hands of a mob.

But the resilience of the Chinese economy is no mirage. If Beijing can come through the global crisis without an economic meltdown of its own, its leaders' reputation and confidence will be boosted. An economic model that survives the worst downturn since the Great Depression will have undeniable appeal in the developing world, at a time when the Washington Consensus is thoroughly shot. Beijing, before the crisis, was already rising, its global reach and influence expanding. As the rest of the world falters, that is truer than ever. China is not yet the leader of the global economy. But it's getting there.

— with Reporting by Austin Ramzy / Beijing

See pictures of China's investment in Africa.

Opening Their Wallets, Emptying Their Savings

By Blaine Harden
Washington Post Foreign Service
Thursday, July 30, 2009

SEOUL -- In pursuit of middle-class prosperity, South Koreans have looted their household savings like no other people on Earth.

They have collectively binged on private schools and fancy cars, language camps and new apartments, foreign travel and designer shoes.

Americans, the longtime avatars of consumerism gone mad, will save next year at double the rate of South Koreans, according to a report this month from the Organization for Economic Cooperation and Development (OECD), a group that supports sustainable economic growth in developed countries.

When it comes to buying high-priced, brand-name stuff as if there were no tomorrow, Sabina Vaughan concludes that Americans are relative wimps. "Koreans spend more, way more," said Vaughan, 35, who travels to Seoul every summer with her Korean-born mother and spies on her cousins as they shop. "It is a kind of competition for them. It doesn't matter what their income is."

Her conclusion is supported by a mountain of data and a chorus of concerned economists. The household savings rate in South Korea will have plummeted from a world-beating 25.2 percent in 1988 to a projected world low of 3.2 percent in 2010, according to the OECD. Government policies have encouraged borrowing, while Korea's aggressive culture has supercharged spending on signifiers of success, whether they be Ivy League degrees or Louis Vuitton handbags.

"It is not recognized as a virtue to save, not anymore," said Lee Sun-uk, an investment adviser for an office of Samsung Securities that is located in a wealthy neighborhood of Seoul. "To maintain a certain status, people are willing to spend, even if their incomes have declined."

In the past decade, average savings per household have plunged from about $3,300 to $525. On a percentage basis, it is the steepest savings decline in the developed world. Meanwhile, household debt as a percentage of individual disposable income has risen to 140 percent, higher than in the United States (136 percent), according to the Bank of Korea.

The consequences of South Korea's collapsed savings rate are beginning to register in the country's slowing rate of growth, economists said. For nearly 40 years, growth galloped along at between 6 and 8 percent, as banks were flush with household savings that fueled business investment and research. But growth slowed to about 4.5 percent after 2000, when the savings rate dipped below 10 percent.

"The low savings rate is sapping our capacity to grow, and it is going to get worse," said Park Deog-bae, a research fellow who specializes in household finance at the Hyundai Research Institute. "It will lead to credit delinquency. It will cause greater income disparity. It means less resources for our aging population."

As South Korea changed from a war-battered farming society to Asia's fourth-largest economy, its savings rate was almost certain to decline. Economists consider a fall in savings and a rise in consumer spending to be part of the normal development process, as government-backed social services increase, property values rise, and stock markets grow.

But the fall-off-a-cliff character of what has happened with household savings in South Korea strikes many experts as abnormal and worrisome. It is one of several trends suggesting that South Korea, as it wrestles with post-industrial affluence, is a society under extraordinary stress.

South Koreans work more, sleep less and kill themselves at a higher rate than citizens of any other developed country, according to the OECD. They rank first in time spent online and second to last in spending on recreation, and the per capita birthrate scrapes the bottom of world rankings. By 2050, South Korea will be the most aged society in the world, narrowly edging out Japan, according to the OECD.

At the same time, South Korea ranks first in per capita spending on private education, which includes home tutors, cram sessions and English-language courses at home and abroad.

An obsessive pursuit of educational achievement, it seems, is one of the driving forces behind the low savings rate. About 80 percent of all students from elementary age to high school attend after-school cram courses. About 6 percent of the country's gross domestic product is spent on education, more than double the percentage of spending in the United States, Japan or Britain.

"Education is a fixed expenditure for Korean parents, even when household income shrinks," said Oh Moon-suk, executive director at LG Economic Research Institute. "Parents often overspend. It even appears to be leading to a slowdown in the birthrate."

As she plans her family's monthly spending, Lim Ji-young says she makes sure that at least a third of the money is reserved for the education of her 5-year-old son, Roah.

Besides day-care fees, he requires money for books, alphabet tutoring and sports training.

"We want to give our son the opportunity not to be left behind in this society," said Lim, 34, an office administrator in Seoul. "We want to provide him with what other people are providing. To avoid condescension from other people, you want to have the best."

Competitive spending -- on tutors, apartments, imported whiskey and designer handbags -- is a significant factor in the decline of saving in South Korean, according to Park at Hyundai Research.

"Koreans are so much concerned about saving face," Park said. "This is encouraging overspending and it is sometimes irrational."

There are other reasons for the fall in savings that are eminently rational -- and sponsored by the government.

When the economy nearly collapsed a decade ago during the Asian financial crisis, the government made low-cost loans available for the purchase of apartments.

Borrowing exploded, as did housing values, while savings began to evaporate.

"Young households without proper discipline borrowed heavily from banks and on credit cards," said Lee Doo-won, a professor of economics at Yonsei University in Seoul. "They ended up with a huge amount of debt, and the debt trap is still there."

Stagnant incomes and job losses in the current recession have further reduced capacity for savings and have slowed debt repayment.

As important, the spending patterns of aging parents, many of whom have been tapped for loans by children in pursuit of real estate, mean that cash is steadily disappearing from savings accounts.

"Old people do not save," Lee said. "This is a long-term structural phenomenon. It will not change with the business cycle."

Special correspondent Stella Kim contributed to this report.

Asian Nations Revisit Safety Net in Effort to Bolster Spending

By PATRICK BARTA

Bangkok

Asian countries are beginning to build extensive social-welfare programs like those that long have existed in the West, a move they hope will encourage their people to save less, spend more and help put the region -- and the world -- on a stronger economic footing in the years ahead.

But creating a reliable social safety net is hard work, and it may be a long time, perhaps decades, before Asia sees results.

Analysts have long worried that Asians lack sufficient health, unemployment and other benefits to tide them over when downturns or emergencies occur, or to prepare for old age. Only about 30% of Asia's elderly receive a pension, according to the United Nations. Just 20% of its unemployed have access to unemployment benefits or other work-related social programs.

Partly as a result, Asians tend to save more and spend less of their income than their counterparts in the West. That contributed to the global imbalances that are one cause of the current world recession: U.S. consumers went deep into debt to finance consumption while Asians socked away money and relied on exports to Western consumers.

Social-welfare programs are one way of addressing those imbalances. The idea is that if Asian consumers have more confidence in their governments to take care of them in times of trouble, they will be more willing to spend today, igniting new demand for consumer goods and leaving the world economy less dependent on Western shoppers.

China recently said it will invest $120 billion to improve health care by building clinics and extending basic medical coverage to 90% of its 1.3 billion people within three years. Vietnam is implementing a national unemployment-benefits system. India has unveiled a voluntary pension system for up to several hundred million people who work at small companies, and is developing a nationwide identification database to better provide health care and other benefits.

Those programs build on efforts undertaken in recent years. Thailand launched a national health-care program in 2001 that offers basic medical care for just 30 Thai baht, about $1, to most citizens. India's latest national budget expands a program begun in 2005 that guarantees 100 days of work per year for rural laborers.

Public health expenditure* as a percentage of GDP in 2006

India	0.9
Indonesia	1.3
Philippines	1.3
Cambodia	1.5
Malaysia	1.9
China	1.9
Vietnam	2.1
Thailand	2.3
Australia	5.9
Japan	6.6
United States	7.0
High-income OECD	7.0
New Zealand	7.2

*Includes recurrent and capital spending from government, borrowings, grants and social insurance funds

Source: World Bank

The expansion of Asia's safety net "is happening, and it will help" wean Asia from an over-reliance on exports, says Robert Subbaraman, chief Asia economist at Nomura International in Hong Kong.

But many governments, including India, suffer from large budget deficits or lax tax collection, and may find it hard to finance expanded welfare programs.

In addition, a stronger safety net is no guarantee Asians will consume more. Europeans enjoy one of the world's most robust safety nets, and they tend to save more than Americans.

And it can take years, maybe decades, before consumers build up enough trust in welfare programs to modify spending behavior. In many Asian countries, such as Indonesia, services provided by social programs are dismal, with many residents avoiding government medical clinics altogether.

"The credibility of the systems has to be tested, and people have to be comfortable" that they still will be around after changes in government or economic crises, says Joseph Zveglich, an Asian Development Bank economist. Although he supports efforts to expand social safety nets, he says, "it's going to take time for people's activities to change."

Agence France-Presse

Consumer spending has fueled growth in South Korea, which reported its best quarterly performance in more than five years.

Some analysts say a better way to wean Asia off exports and encourage domestic consumer spending would be to let Asian currencies appreciate. That would make Asian exports less attractive to foreign consumers, give local consumers more spending power to buy imported goods, and force Asian business to diversify beyond exports. But Asian authorities may be unlikely to risk putting exporters in jeopardy by allowing their currencies to rise.

Those countries that have expanded their safety nets over the past decade have seen mixed results. In Thailand, residents were quick to take advantage of the country's new national health-care program. More than 45 million people registered to participate by mid-2003. Consumer spending shot up soon after the program was introduced, but economists believe the surge was driven more by an expansion of consumer credit and a sharp uptick in growth that occurred as Thailand's economy rebounded from the 1997-98 Asian financial crisis.

Growth in consumer spending later slowed, and in recent years Thailand's savings rate has begun climbing again after several years of declines, according to the Asian Development Bank. Most other major Asian countries have likewise seen their savings rates increase or stay about the same since the late 1990s, including Vietnam, where savings climbed to about 32% of gross domestic product in recent years from roughly 18% in 1995. Those trends could intensify in the future as the region struggles to fully recover from the current recession.

"In this economy, I'm trying to save as much as I can," says Banyen Sriwongrak, a 43-year-old vendor in central Bangkok who makes about $12 a day selling jasmine garlands near a religious shrine. She says she used Thailand's 30-baht health-care program to have a lump removed two years ago in a surgery that normally would have cost 16,000 Thai baht, or about $475. Having that protection was helpful, she says, but it hasn't fundamentally changed her spending, which includes squirreling away two or more days' worth of income each month and sending an additional $60 or so to support her mother in rural Thailand. "We don't know what the future will bring," she says.

None of that means Asian governments should stop investing in welfare programs. Such programs can greatly improve residents' lives even if they don't ultimately affect spending patterns. And the benefits in terms of changed consumer behavior may show up later.

Upgrading safety nets "isn't something that's going to get us out of the [current financial] crisis," says Mr. Zveglich, the Asian Development Bank economist. But if investments in the social safety net are made now, it may help the next time.

Write to Patrick Barta at patrick.barta@wsj.com