The Global S-Curve

Jurrien Timmer April 28, 2005 China and India are now on the exponential part of the global S-Curve. Given their enormous population, it is hard to see oil prices do anything but stay high for years to come as this population bubble makes its way up the S-Curve.
The concept of the S-Curve holds that as a company or technology progresses through its lifecycle (from innovation to growth to maturity), its growth rate takes on an S shape. You may remember seeing this curve a lot during the 1990s as way to show internet penetration rates. The chart at right shows an idealized S-Curve (from the H.S. Dent Foundation website). According to Dent, The acceleration is so rapid that it takes the same amount of time for a product to reach 90% of the market that it took to establish a 10% toehold. As we might expect, however, after it reaches 90% market share, growth tapers off. The concept of the S-Curve can be applied to countries as well. A few months ago there was a chart in Grants Interest Rate Observer (Indias Tortoise, Chinas Hare, Nov. 19, 2004 issue) that showed China and India and a few other Asian countries on an S-Curve. The chart (shown below) showed per capita GDP on the y-axis and the years of economic development on the x-axis. The point of the chart was to show that India was behind China on its way to economic maturity. There were two problems with the chart, however, which prompted us to create our own version. First, the chart was incomplete in that it did not show all countries, especially very mature ones such as the U.S. and Western Europe, but also immature ones such as the Middle East and Africa. Also, the years of economic development axis is quite subjective. How do you establish when an economy became industrialized? For instance, that chart showed the Japanese economy as only 50 years old. In other words, the author of the chart thought that Japan became industrialized after WWII. If that was so, where did all those fighter bombers and aircraft carriers come from during the war? Obviously, Japan was industrialized well before the war.

The Global S-Curve Creating a global S-Curve requires a lot of work and expertise, so we contracted the job out to Gary Shilling, a veteran independent economist who does some consulting work for us from time to time. Using a great deal of historical data and his own vast experience, Gary created the data points for the chart below. The chart shows 74 countries from all regions of the world. On the x-axis is the number of years of economic development, and on the y axis is the per capita GDP (in U.S. dollars, as of 2003). The GDP data are from the United Nations (The World
Per Capita GDP (2003 US$) 100,000

PPP approach, we will show the chart using that method as well. We used two statistical filters as inputs to help us determine where each country is on its road to economic maturity. First, we considered real GDP growth. In some case a clear acceleration in a countrys GDP growth rate marked the beginning of its S-Curve. We also considered each countrys age dependency ratio. This ratio is like the age wave but it measures what percentage of the nonworking population (under 15 and over 65) is supported by the working population (15 to 65). In many cases, countries started growing rapidly when the age dependency ratio started falling. These two filters, plus a large dosage of historical

The Global S-Curve

Source: A. Gary Shilling & Co. Norway USA Japan Sweden Denmark Belgium Australia Germany France Hong Kong Spain Canada Italy Singapore Portugal South Korea Ireland

UK

Netherlands

10,000 Mexico Chile

Tunesia

Brazil

China 1,000 India Pakistan Nigeria Mali Zimbabwe Malawi Iraq

Philipines

Years of Economic Development 100 -100 -50 0 50 100 150 200 250 300 350

Economy, Historical Statistics). Why show per capita GDP in dollars rather than adjusting for purchasing power party (PPP)? At this point, the data is more readily available this way. If and when we get per capita GDP using the 2

knowledge, produced the x-axis for the chart below. The chart illustrates nicely where many of the worlds economies are on the S-Curve. According to Shilling, African countries like Zimbabwe and

Malawi are still in their infancy, while the U.S. and Western Europe are the most mature. In fact, Shilling dates the Netherlands as the worlds most mature economy, preceding even the U.K. This is because the Netherlands became the worlds economic super power in the 17th century through its dominance in global trading. Then as the Dutch became so rich that they were busy getting their portraits painted by Rembrandt and Vermeer, the British took over with their empire (the birth of industrialized Britain is pegged at 1762 when Matthew Boulton built a 600 worker factory equipped with steam engine machines). The British also got lazy and now the U.S. is the worlds economic superpower. Shilling dates the
Per Capita GDP (2003 US$) 100,000

see that China and India have left the early flat stage of the S-Curve and are now in the vertical stage. Chinas economic birth is pegged at 1961 when a more pragmatic government initiated economic reform after the Great Leap Forward. Indias birth is pegged at 1951, when its first Five Year Plan began. These two start dates are earlier in time than some people might think. The most mature Asian economy is of course Japan. Japan became industrialized in 1868 as the Meiji Restoration ushered in sweeping economic changes. Other countries are somewhere in between. South Korea was clearly born in 1954 with the end of the Korean War. Singapores economy was born in 1966 when Lee Kuan Yews government expanded its manufacturing and

The Global S-Curve

Source: A. Gary Shilling & Co. Bubbles depict population (2003).

Norway Ireland Hong Kong Singapore Spain Portugal Denmark USA Sweden Japan Germany France Belgium Canada Italy Australia

UK

10,000

South Korea

Mexico Chile Tunesia

Brazil

China 1,000 Philipines

India Nigeria Mali Zimbabwe Malawi

Iraq

Years of Economic Development 100 -100 -50 0 50 100 150 200 250 300 350

birth of industrial America back to 1825 with the completion of the Erie Canal. You can see that this trend goes from East to West, which suggests that Asia is next. Indeed, you can 3

industrial base with heavy investing and central oversight. Hong Kongs economy was born in 1961 when it opened its free port, which caused the shipping and building industries to take off.

Other emerging markets making their way up the S-Curve include Latin America and the Middle East. Mexicos economy started to take off in the late 1930s when it supplied the Allies with war equipment and domestically began the production of consumer goods. This is also when it nationalized its oil industry. Chiles economic development dates back to 1883 when it won the War of the Pacific and gained control of the nitrate mines. For Brazil it was the 1890s when it became a major exporter of coffee. European immigrants poured into the country to work on the coffee plantations. A complete listing of all countries and their economic birthdates is shown on the last page.

countrys population. As the chart illustrates, most countries snaking their way up the curve are small and may not impact the worlds supply and demand balance for natural resources in a decisive way. However, as everyone knows, China and India are making their way up the curve too, and they have a combined population of about 2.4 billion people. As this population bubble makes its way up the SCurve, the impact on oil and other natural resources could be huge. This is illustrated by the chart below. Now the size of the bubbles represents each countrys per capita oil consumption. (We could not get this data for some of the smaller countries, so we created a

Per Capita GDP (2003 US$)

100,000

The Global S-Curve

Source: A. Gary Shilling & Co. Bubbles depict per capita oil consumption. Norway Ireland Denmark USA Sweden Japan Germany France Belgium Canada Italy Australia Spain Portugal Netherlands

UK

Hong Kong Singapore

10,000

South Korea

Mexico Chile

Brazil

1,000

China

Philipines

India Paikstan Nigeria Mali Zimbabwe Malawi

Iraq

Years of Economic Development 100 -100 -50 0 50 100 150 200 250 300 350

China and India Why is any of this of interest? The chart on the previous page shows the S-Curve as a 3D scatter plot. The size of the bubbles represents each 4

regression of the countries for which we do have data, and filled in the blanks.) The chart clearly shows that, as economies become more mature, their per capita oil consumption

increases as well. So, the biggest bubbles are at the top and the smallest bubbles are at the bottom. If we know that per capita oil consumption rises as countries travel up the SCurve, and we also know that two of those countries traveling up the S-Curve have a combined population of 2.4 billion people, then it follows that demand for oil in the coming years could rise dramatically. China vs. South Korea Lets take a look at China and see where it might be in five or ten years, all else being equal. South Korea is one possible example of where China may end up. According to our analysis, South Koreas economy is about seven years older than Chinas. It has a population of 47.7 million people, produces a per capita GDP of US$11,059, and consumes 2.303 million barrels of oil per day. China has 1.3 billion people, produces a per capita GDP of $1,100 and consumes 5.982 million barrels of oil per day. (All data are as of 2003.) So, South Korea has ten times the per capita GDP and consumes less than half the oil and has only 4 pct the population of China. By extension, if China ends up in five to ten years

years Oil of demand per capita econ Population per capita (1,000 oil demand dvlpmt (1,000) GDP (US$) b/d) (1,000 b/d) Country Mali 15 13,007 $298 Dominican Republic 17 8,770 $2,408 Tunisia 17 9,832 $2,561 Malawi 22 12,105 $158 Algeria 29 31,800 $2,049 229 7.20 Nigeria 31 124,009 $390 Mauritius 32 1,221 $4,594 Singapore 37 4,253 $21,195 672 158.01 Malaysia 38 24,425 $4,227 519 21.25 Mauritania 40 2,893 $381 China 42 1,304,196 $1,100 5,982 4.59 Hong Kong 42 7,049 $22,618 271 38.45 Morocco 42 30,566 $1,463 Indonesia 43 219,883 $944 1,131 5.14 Thailand 43 62,833 $2,273 812 12.92 Pakistan 43 153,578 $498 Namibia 45 1,987 $2,307 Swaziland 45 1,077 $1,653 Syria 45 17,800 $1,497 Zimbabwe 48 12,891 $190 Jordan 48 5,473 $1,803 South Korea 49 47,700 $11,059 2,303 48.28 Paraguay 49 5,878 $1,001 UAE 50 2,995 $22,130 296 98.83 Egypt 51 71,931 $1,062 550 7.65 India 52 1,065,462 $555 2,426 2.28 Romania 52 22,334 $2,550 232 10.39 Poland 53 38,587 $5,355 443 11.48 Panama 53 3,120 $3,400 Israel 55 6,433 $18,101 Ireland 55 3,956 $38,864 176 44.49 Ecuador 58 13,003 $2,108 134 10.31 Albania 59 3,166 $1,915 Honduras 59 6,941 $980 Jamaica 60 2,651 $2,802 Mexico 64 103,457 $5,945 1,864 18.02 Saudi Arabia 65 24,217 $8,561 1,437 59.34 Taiwan 66 22,750 $12,700 880 38.68 Bulgaria 74 7,897 $2,533 92 11.65 Hungary 74 9,877 $8,384 136 13.77 USSR 74 143,246 $3,023 2,503 17.47 Iran 78 68,920 $2,079 1,132 16.42 Iraq 78 25,175 $594 Spain 80 41,060 $20,424 1,559 37.97 Turkey 81 71,325 $3,418 687 9.63 Venezuela 83 25,699 $2,994 526 20.47 South Africa 83 45,026 $3,551 513 11.39 Czech Republic 84 10,236 $8,834 183 17.88 Peru 93 27,167 $2,238 151 5.56 Uruguay 100 3,415 $3,274 Philipines 101 79,999 $1,005 332 4.15 Argentina 101 38,428 $3,375 371 9.65 Colombia 101 44,222 $1,744 222 5.02 Guatemala 101 12,347 $1,963 Australia 102 19,731 $26,525 845 42.83 Brazil 108 178,470 $2,700 1,817 10.18 New Zealand 108 3,875 $19,350 149 38.45 Canada 118 31,510 $27,097 2,149 68.20 Chile 120 15,805 $4,523 227 14.36 Germany 132 82,476 $29,138 2,664 32.30 Japan 135 127,654 $33,819 5,451 42.70 Austria 136 8,116 $31,187 296 36.47 Finland 139 5,207 $31,069 239 45.90 Italy 143 57,423 $25,527 1,927 33.56 Sweden 147 8,876 $33,925 328 36.95 Switzerland 155 7,169 $43,486 259 36.13 Norway 158 4,533 $48,881 212 46.77 Denmark 160 5,364 $39,497 194 36.17 France 167 60,144 $29,222 1,991 33.10 Portugal 167 10,062 $14,645 346 34.39 USA 178 294,043 $36,924 20,071 68.26 Belgium 196 10,318 $29,257 715 69.30 U.K. 241 59,251 $30,355 1,666 28.12 Netherlands 300 16,149 $31,759 969 60.00
All data as of 2003. Source: United Nations, A. Gary Shilling & Co.

where South Korea is now, it could be consuming 60.141 million barrels of oil per day (11,059 / 1,100 x 5.982). And all that would be occurring at the same time that the Hubberts Peak crowd says that the world is reaching peak production. Quantifying the potential increase in demand for oil is tricky, of course. First of all, it is impossible to know to what degree, if any, China or India will substitute their need for oil with nuclear or hydro power. Also, as China becomes more mature, it may become less export driven and become more of a domestic economy. That could mean less oil demand for heavy exportrelated machinery. And, of course there are potential political upheavals and possible recessions around the world that could delay or derail Chinas path. Nevertheless, it is hard to see oil prices do anything but stay high for years to come, as China and Indias population bubble works its way through the S-curve. If, on top of that, the Hubberts Peak scenario plays out, one can only imagine how high oil prices can get. - Jurrien