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The Rise and Fall of Nations: Forces of Change in the Post-Crisis World - PDFDrive.com THERISEAND FALLOFNATIONS ForcesofChangeinthe Post-CrisisWorld RUCHIRSHARMA W.W.NORTON&COMPANY IndependentPublishersSince1923 NewYorkLondon CONTENTS PROLOGUE:IntotheWild INTRODUCTION:Impermanence 1.PeopleMatter 2.TheCircleofLife 3.GoodBillionaires,BadBillionaires 4.PerilsoftheState 5.TheGeographicSweetSpot 6.FactoriesFirst 7.ThePriceofOnions 8.CheapIsGood 9.TheKissofDebt 10.TheHypeWatch 11.TheGood,theAverage,andtheUgly ACKNOWLEDGMENTS NOTES BIBLIOGRAPHY INDEX Prologue INTOTHEWILD Foreachofthepasttwenty-fiveyears,Ihavegoneonasafari,eithertoIndiaor Africa.OnonetriptoAfrica,Iheardthestoryofakingwhosendshissonoutto learntherhythmsofthejungle.Onhisfirstouting,againstthedinofbuzzing insectsandsingingbirds,theyoungprincecanmakeoutonlytheroarofthe lionsandthetrumpetoftheelephants.Theboyreturnsagainandagainand beginstopickuplessobvioussounds,untilhecanheartherustleofasnakeand thebeatofabutterfly’swings.Thekingtellshimtokeepgoingbackuntilhe cansensethedangerinthestillnessandthehopeinthesunrise.Tobefittorule, theprincemustbeabletohearthatwhichdoesnotmakeasound. TherhythmsofthejunglearefarremovedfromthoseofNewYork,whereI live,butthisoldAfricantaleisquiterelevanttoaworldreshapedbytheglobal crisisof2008.Thecrisisturnedtheworldonitshead,disruptingtradeand moneyflows,unleashingpoliticalrevolts,slowingtheglobaleconomy,and makingitmoredifficulttodiscernwhichnationswouldthriveandwhichwould failinsuchatransformedlandscape.Thisbookisabouthowtofilteroutthe hypeandnoiseandpickouttheclearestsignalsthatforetellthecomingriseor fallofnations.It’sanattempttorecreatetheeducationoftheprince,foranyone interestedintheglobaleconomy. Peopleintheworldofglobalfinanceoftenthinkofthemselvesasbigcats, predatorsalerttotherustlingsoftheeconomicjungle.ButinAfricathe differencebetweenthecatsandtherestquicklydissolves.Eachyearonthe Mara-SerengetiplainsofKenyaandTanzania,morethanamillionwildebeest walkanearlytwo-thousand-mileloopthattheyhavetracedandretracedfor generations.Movingbehindtherainsandaccompaniedbyzebraandgazelle,the ungainlywildebeestareshadowedbythelion,theleopard,andthecheetah. Thecontestlooksstacked,butlionsarerelativelyslowandshort-windedand catchtheirpreyonlessthanoneattemptinfive.Cheetahsarefaster,butbecause theyaresmallerandoftenhuntalone,theyareforcedtoconcedemanykillsto scavengersworkinginpacks.Lessthanonecheetahintenliveslongerthana scavengersworkinginpacks.Lessthanonecheetahintenliveslongerthana year.Lionsdoabitbetter,butmanymalesdieyounginterritorialbattleswith othermales.Thecircleoflifeanddeathturnsasbrutallyforthepredatorasfor theprey,afactthatmightgivepausetothewould-belionsoftheglobal economy. I’velivedinfearformyownsurvivalsinceIenteredthisjungle.Istartedout ininvestingasatwenty-somethingkidinthemid-1990s,whentheUnitedStates wasboomingandemergingnationswerestillseenaswildandexotic.Financial crisessweptfromMexicotoThailandandRussia,triggeringpainfulrecessions andreshufflingtheranksofrisingeconomiesandworldleaders.Thecollateral damageinglobalmarketswipedoutmanybiginvestors,includingagood numberofmymentors,colleagues,andfriends. Lookingback,thedemiseofnationalleaders(andglobalinvestors)followed apattern.Theyinitiallyfollowedapaththatledtoeconomicorfinancial success,butthenthepathshiftedandledtoquicksand.Ithappenedinthe emerging-worldcrisesofthe1990s,inthedot-combustof2000–2001,and againin2008.Eachtimepeoplegottoocomfortabledoingwhattheyweredoing ingoodtimes,thengotswallowedwhentheearthshiftedundertheirfeet. Thecyclesofmarketeuphoriaanddespairoftenproduceclichésabout“herd behavior,”buteveninthejunglelifeismorecomplicatedthanthatstereotype.A certain“swarmintelligence”guidesthewildebeest,ensuringthesurvivalofthe groupevenwhenitmeansanearlydeathformanyindividuals.Thewildebeest’s circularmigrationhasbeenmockedwiththeoldproverb“thegrassisalways greenerontheotherside,”buttheherdisrightaboutwherethegrasswillbe greener.Itfollowstherains,northintoKenyainthespring,backsouthinto Tanzaniaduringthefall. Thecriticaldangersappeartwiceayearat“thecrossing”oftheMaraRiver, whichtheherdmustfordwhiletravelingbothnorthandsouth.Normally,to avoidpredators,theherdheedsanancientwarningsystem—theshrieksof baboons,theharshcallsofjunglebabblers.Butthissystemfailsonthebanksof theMara,wherethewildebeestmassbythetensofthousands,withdangerin plainsight:floatingcrocodiles,rain-swollenwaters,lionsinambushonthefar side. Headsdown,thewildebeestappeartobetalkingallatonce,theirdistinctive bellowslikesomanyWallStreetanalystsonaconferencecall,plottingtheir nextmove.Theherdwaitsforonemembertogo.Ifthisanimaltakesastepand retreats,fearparalyzesthemultitude,butmemoriesareshort.Withinminutes anotherwilltry,andifitplungesin,themassfollows—manyintowaitingjaws anddeadlycurrents.Anestimated10percentofthewildebeestpopulation perisheseachyear,alargenumberofthemduringthecrossing. perisheseachyear,alargenumberofthemduringthecrossing. PeopleworkinginglobalmarketsfromNewYorktoHongKongcanget suckedintoaculturethatisprogrammed,likethewildebeest,toremainin constantmotion.Everydayresearchreportsbombardthesefinancialcapitals, urgingthecrowdtochasethenextBigThingortorunfromthenextBig Correction.Thecompulsiontomovegivesrisetoanewconsensuseveryseason oreveryquarter,animpulsethathasonlygrownsincetheglobalfinancialcrisis. Justtaketheyear2015.Duringthefirstquarterthechatterwasallabouthow youhadtoeithergetinorgetoutofthewayofthesurgingChinesestock market,whichthenseemedlikeaone-waybet.Thesecondquarterwasallabout howGreecewasgoingtotakedowntheglobaleconomy,andduringthethird quarterthefinancialpanicinChinadominatedtheconversation.Sometimesthe reportsareright,andsometimesthey’rewrong,butalwaystheymoveforward, forgettingwhattheyweresayingthedaybefore,andwhy.Attimestheshifting conversationappearstohavenorhymeorreason. WallStreetisfondofoldsayingsabouthowonlytheparanoidandthefittest survive.Iwouldphrasetheissueabitdifferently.Thechallengeishowto channelawiseparanoiaintheserviceofsurvival.Everycrisisisgreetedasa renewedcalltoaction,andthebiggerthecrisis,themorefrantictheaction. Yearsafter2008thefearofmorebiglossesstillrunssohighthatWallStreet’s biggestplayersarelikelytowatchreturnsmonthlyratherthanyearly,which pressuresmoneymanagerstotradeconstantlyinthehopeofavoidingevena singlebadmonth.Thisishappeningdespiteevidencethatgainsarenowmore likelytoaccruetoinvestorswhotradeless,proving,asonewagputit,that “slothisavirtue.” Inthesummerof2014,aftermanysafaris,Isawabigcatactuallycatchits preyforthefirsttime,inTanzania.LateoneafternoonmyfriendsandIcame uponacheetah,pantinghardafter,ourguidetoldus,twofailedchasesearlierin theday.Overthenexttwohours,thecheetahwaitedinalittledugoutasit recovereditsbreath;thelightfadedwithevenfall,andthewindshiftedtocarry itsscentawayfromasolitarymalegazelle.Whenconditionswereright,the cheetahmadeitsmove,creepingslowly,slowly,lowandunseenthroughthe shortsavannahgrasstowithinfiftyyardsofitstarget.Thenitacceleratedto sixtymilesperhourand—inazigzagfinaldashthattookfractionsofasecond— broughtdownthegazelle. Moretellingthantheburstofspeedwasthestillnessthatprecededit.Big catsareprogrammedtosurvivebyconservingenergy,nottowasteitinconstant motion.Themostcommonsightingofalioninvolveswatchingthemtakeanap; theyareknowntosleepeighteentotwentyhoursaday.Whencatsdosucceed onthehunt,theytrynottoexpendmucheffortonbattlesoverthemeal.And theydon’tpanicovercyclicalturnsintheweather.Duringtheviolentafternoon rainsthatsweeptheMasaiMaraplainsinKenya,I’vewatchedthewildanimals stopwheretheyareandstandstockstill—predatorswithinstrikingdistanceof theirprey—untilthedelugeends.Theyseemtounderstandinstinctivelythat cloudburstsareonebeatinthenormalrhythmoftheirdaysandthatpanicwill onlyleadtogreaterchaos. Manyaccomplishedsurvivalistsinhabitthejungle,andnotallarebigcats. Thebestdefensesbelongtothehulkingvegetarians,theelephantsandthe rhinos.Evenalionpridewillrarelytakeonaseven-tonelephantwithsix-foot tusks.Thebestspiesmaybethewildebeest,withtheirnetworkofbaboonsand birds.Thebesthuntersmaybethehyenas,whodespitetheirpopulardepiction asthievingscavengersareamongthemostsuccessfullargepredators.Unlikethe cats,ahyenahasendurance,canrundownvirtuallyanyanimal,anddoesnot targetmainlytheoldandinfirm.Movinginpacksofuptosixty,hyenasfearno prey.OntheplainsoftheSerengeti,Ioncesawaprideoflionscedeitskilltoa packoftwentypersistenthyenas. Earlyoninmycareer,painfulexperiencetaughtmethatanyonewhowants tosurvivelongerthanthefive-yearpoliticalandeconomiccyclesthatbuffetthe globaleconomyneedstoabsorbafewlawsofthejungle.Donotexpendenergy ondailyorquarterlyblipsinthenumbers.Adapttoachanginglandscaperather thanletegoobstructastrategicretreat.Focusonbigtrends,andwatchforthe crossings.Buildasystemtospotimportantsignsofchange,evenwheneveryone aroundyouiscomfortablygoingwiththecurrentflow.Overthepasttwenty-five yearsIhavespentlonghoursontheroad,tryingtobuildasystemofrulesfor spottingtelltaleshiftsineconomicconditions. WhatgoesforsurvivalinthewildandonWallStreetalsogoesforthe survivalofnationsintheworldeconomy.Thereisnoonerolemodel.Every nationisequallyvulnerabletothecyclesofboomandbustthatkilloffmostruns ofstrongeconomicgrowthandthatultimatelytransformsprintingcheetahsinto exhaustedcats.Thewavesofcrisisfollowingthe2008globalmeltdowncrippled manyeconomies,weakandstrong,developedanddeveloping.Followingthe well-establishedpatternsofeconomicdevelopment,thenewstarsofanewera arelikelytoemergefromnationsthatareoverlookedasscavengersandslow- footedvegetariansandwhoseriseisstartingwithoutalotofhype.Anyone tryingtounderstandtheriseandfallofnationsneedstointernalizethefactthat theglobaleconomyisanoisyjungle;booms,busts,andprotestsarepartofits normalrhythms.Whatfollowsismyguidetoidentifyingthetentelltalesignsof majorturnsforthebetterorworse,eventhosethatdon’tmakeasound. THERISEAND FALLOFNATIONS Introduction IMPERMANENCE INTHEYEARSBC—BEFORETHECRISISOF2008—THEWORLD enjoyedanunprecedentedeconomicboomthatextendedfromChicagoto Chongqing.Thoughtheboomranforonlyfouryearsanditsfoundationswere thin,manyobserverssawitasthebeginningofagoldenageofglobalization. Flowsofmoneyandgoodsandpeoplewouldcontinuetoexpandatarecord pace,increasingwealthandspreadingitaswell.Morepoornationswouldenter theranksoftherichnations.Moreoftheircitizenswouldescapepovertyand earnacomfortableliving,narrowingthegapbetweenthe1percentandtherest. Withtheirnewfoundclout,therisingglobalmiddleclasswouldputpressureon dictatorshipstoloosencensorship,holdgenuineelections,andopenupnew opportunities.Risingwealthwouldbegetpoliticalfreedomanddemocracy, whichwouldbegetgreaterprosperity. Thencame2008.TheyearsBCgavewaytotheyearsAC.AftertheCrisis, theexpectationofagoldenagegavewaytoanewreality.Hypefor globalizationyieldedtomutteringsabout“deglobalization.”Thebigpictureis complicatedandcontradictory,becausenotalltheflowsthatglobalization traditionallydescribeshaveslowedorreversed.Theflowofinformation,as measuredbyInternettraffic,forexample,isstillsurging.Theflowofpeople,as measuredbythenumberoftouristsandairlinepassengers,isrisingsharply.But overallthenumberofeconomicmigrantsmovingfrompoorcountriestorich oneshasfallen,despitetheheatedcontroversythatbrokeoutin2015over MuslimrefugeesfromSyriaandIraq.Andtheflowsofmoneythatmostdirectly influenceeconomicgrowth—capitalflowsbetweennationsandtradeingoods andservices—haveslowedsharply. Nationshavebeenturninginward,rebuildingbarrierstotradeandfencing themselvesofffromtheirneighbors.Inthe2010s,forthefirsttimesincethe 1980s,globaltradehasbeengrowingmoreslowlythantheglobaleconomy.Big internationalbankshavepulledbacktowithintheirhomeborders,afraidtoloan internationalbankshavepulledbacktowithintheirhomeborders,afraidtoloan overseas.Aftersurgingformorethanthreedecades,flowsofcapitalreacheda historicpeakof$9trillionanda16percentshareoftheglobaleconomyin2007, thendeclinedto$1.2trillionor2percentoftheglobaleconomy—thesameshare theyrepresentedin1980. Whenmoneydriesupandtraderecedes,sodoeseconomicgrowth.National economiesoftensufferrecessions,butbecausetherearealwaysfast-growing nationssomewhereintheworld,theglobaleconomyrarelyshrinksasawhole. TheInternationalMonetaryFundthereforedefinesaglobalrecessionnotin termsofnegativeGDPgrowthbutintermsoffallingincomegrowth,joblosses, andotherfactorsthatmaketheworldfeellikeitisinthegripsofarecession. AccordingtotheIMF,therehavebeenfoursuchinstances:inthemid-1970s,the early1980s,theearly1990s,and2008–9.Inallfourcases,globalGDPgrowth fellbelow2percent,comparedtoitslong-termgrowthrateof3.5percent.* Globalgrowthalsodroppedunder2percentin2001,whentheU.S.techbubble burst.Forpracticalpurposes,then,itcanbesaidthattherehavebeenfive worldwiderecessionssince1970,andtheyhadonethingincommon.Theyall originatedintheUnitedStates. Butthenextglobalrecessionislikelytobe“madeinChina,”whichinrecent yearshasrisentobecometheworld’ssecondlargesteconomyandsinglelargest contributortoannualincreasesinglobalGDP.In2015,owingtotheslowdown inChina,theglobaleconomygrewatapaceofjust2.5percent,andbyyearend wasteeteringonthebrinkofanotherrecession.China’sslowdownishitting fellowemergingnationsparticularlyhard.ExcludingtheMiddleKingdom,the otheremergingnationsaregrowingatanaveragepaceofbarelyabove2 percent,whichisslowerthanthemuchrichereconomyoftheUnitedStates.The averageincomeofthesepoorandmiddle-classnationsisnolongercatchingup tothatoftheworld’sleadingeconomy.FromBraziltoSouthAfrica,emerging economiesarefallingdownthedevelopmentladder.Thesenseofpossibility createdbyrisingglobalprosperityhastransformedintoascrambletofinda survivableniche. Thisisaworlddisrupted.Thehopethatprosperitywouldbegetfreedomand democracyhasfadedaswell.Everyyearsince2006,accordingtoFreedom House,thenumberofcountriesregisteringadeclineinpoliticalrightshas outstrippedthenumberregisteringanincrease.Inall,110countries,morethan halftheworld’stotal,havesufferedsomelossoffreedomduringthepastten years.1Thenumberofdemocracieshasnotchangeddramatically,butrepression isontheriseevenincountries,likeRussia,thatkeepuptheappearanceof elections.FewobserversargueanymorethatprosperityinChinawillleadto democracy.Theypointinsteadtotheriseofanewandincreasinglyassertive formofauthoritarianism,ledbyRussiaandChinaandmarkedbyregimesthat rejectdemocracyasauniversalvaluewhiledefendingsofterformsofpolitical repressionasexpressionsofuniquenationalcultures. Thebigblowtoglobalprosperityandpoliticalcalmcamearound2010,as theeconomicslowdownspreadfromtheUnitedStatesandEuropetothe emergingworld.Inthepreviousdecade,theworldhadseenanaverageofabout fourteenepisodesofmajorsocialupheavaleachyear,butafter2010thatnumber shotuptotwenty-two,fueledinmanycasesbygrowingmiddle-classangerat risinginequalityandatagingregimesthathadgrowncorruptandcomplacentin thecomfortableBCera. ThefirstbigwaveofrevoltcameintheArabSpring,whenprotestsfueled byrisingfoodpricesstirredhopesthatnewdemocracieswouldtakerootinthe MiddleEast.Thoseexpectationsweredashedbythereturnofdictatorshipin EgyptandtheoutbreakofcivilwarfromLibyatoSyria.By2011,therevolts werespreadingtothebiggeremergingnations.Theseprotestsweredrivenby economicgrievancescompoundedbytheglobalslowdown:byinflationinIndia, politicalcronyisminRussia,andwagesandworkingconditionsinSouthAfrica. Thisunrestculminatedinthesummerof2013,whenmillionsofpeoplejoined demonstrationsincitiesacrossthefading-stareconomiesofBrazilandTurkey. TheAmericanplaywrightArthurMilleronceobservedthatanerahas reacheditsend“whenitsbasicillusionsareexhausted.”2Todaytheillusionsof wideningprosperitythatdefinedthepre-crisiseraarefinallyspent.Thelastto diewasthefaiththatChina’sboomwouldlastindefinitely,liftingupcountries fromRussiatoBrazil,fromVenezuelatoNigeria,whichhadbeenthriving mainlybyexportingcommoditiestotheChinese.Ever-growingdemandfrom Chinawoulddrivea“supercycle”ofrisingcommoditypricesandgrowing wealthfromMoscowtoLagos.Thisstorylinebegantostraincredulityby2011, whenpricesforcopperandsteelstartedtofall.Itcollapsedcompletelyinlate 2014,whenthepriceofoildroppedbymorethanhalfinaspanofmonths. Nothingillustratestheimpermanenceofglobaltrendsbetterthanthefateof themost-hypedemergingnationsofthe2000s,Brazil,Russia,India,andChina. MarketersrolledthemintotheacronymBRICs,tocapturetheideathatthese fourgiantswerepoisedtodominatetheglobaleconomy.Todaytheacronymis oftenqualifiedwithanadjectivelikebrokenorcrumbling,dismissedasa “bloodyridiculousinvestmentconcept,”orreshuffledintoanewacronymlike CRaBs,tocapturehowungainlyChina,Russia,andBrazillooknow.IntheAC era,theannualGDPgrowthrateofChinahasfallenfrom14percenttoprivate estimatesoflessthan5,3ofRussiafrom7percenttonegative2,andofBrazil from4percenttonegative3.OftheoriginalBRICs,onlyIndiahasanyhopeof growinganywherenearasfastinthe2010sasitdidinthe2000s. TheuneaseoftheACerahasbeenmagnifiedbytherosinessofthe precedingboomandbythefactthatsofewobserverssawthecrisiscoming.The worldlookedforwardtoendlessgoodtimesandinsteadgothardtimes.It anticipatedrisingdemandfromtheemergingmiddleclassandinstead,inmany countries,gotfallingdemandfromanangrymiddleclass.Inthistenseglobal scene,thestandardfearofinflationhasgivenwaytofearofdeflation,orfalling prices,whichinsomecasescanbeevenmoredamagingforeconomicgrowth. ThehotnamesoftheBCerahavefallendeeplyoutoffashion.Asmoney flowsdriedupandreversed,thecurrenciesofemergingnationshaveweakened sharply.Afterattractingpositiveflowsofcapitaleveryyearsincerecordkeeping beganin1978,theemergingworldsawanoutflowofcapitalforthefirsttimein 2014andin2015thedamburst,withamassiveoutflowofmorethan$700 billion.Thissuddenlossoffundingmakesitmoredifficultforthesenationsto payforeigndebts.Manyemergingnationsthatfoughthardtodigtheirwayout ofdebtarerelapsing,becomingtroubledborrowersagain.Attheheightofthe BC-eraboomin2005theIMFhadconductedzerorescueoperationsandlooked aboutreadytofolditsbailoutbusiness,butitcameroaringbackin2009and sincethenhasbeenlaunchingtentofifteennewassistanceprogramseachyear, fromGreecetoJamaica. IntheACera,theperilsofgrowtharemorewidelyacknowledged.The globalexpansionthatbeganin2009isontracktobetheweakestinpost–World WarIIhistory.In2007,justbeforethefinancialcrisishit,thepaceofgrowth wasslowinginonlyoneemergingeconomyoutofeverytwenty.By2013,that ratiowasfouroutoffive,andthis“synchronizedslowdown”wasinitsthird year,thelongestinrecentmemory.Ithadcarriedonlongerthanthe synchronizedslowdownsthathittheemergingworldafterMexico’spesocrisis in1994,ortheAsianfinancialcrisisin1998,orthedot-combustin2001or eventhecrisisof2008.4Asthesluggishnessspread,theoldhuntforthenext emerging-worldstarsgavewaytoarealization:EconomicgrowthisnotaGod- givenright.Majorregionsoftheworld,includingtheByzantineEmpireand EuropebeforetheIndustrialRevolution,havegonethroughphasesstretching hundredsofyearswithvirtuallynogrowth. AtGoldmanSachs,researcherslookedback150yearsatcountriesthathad postedlongrunsofsubpargrowthandhadseentheiraverageincomeslip relativetotheirpeers.Theyfoundninetysuchcasesofstagnationthatlastedat leastsixyears,includingtwenty-sixthatspannedmorethantenyears.These leastsixyears,includingtwenty-sixthatspannedmorethantenyears.These slumpshitcountriesrangingfromGermanyinthe1860sand’70stoJapaninthe 1990sandFranceinthe2000s.Thelongeststagnationlastedtwenty-threeyears andstruckIndiastartingin1930,whilethesecondlongestlastedtwenty-two yearsinSouthAfrica,startingin1982.Thesestagnationsarenotasfamousor wellstudiedasthepostwarAsiangrowth“miracles”thatranfordecadesand liftedJapan(before1990)andsomeofitsneighborstorich-nationstatus.But stagnationsareatleastascommonasmiraclesandareperhapsmorerelevantto theACera. It’svitaltounderstandthateventhebusinesscyclecannotbereliedonto revivenationsinapredictable,linearway.Onceaneconomycontractsbeyonda certainpoint,itcanloseitscapacitytoself-correct.Forexample,anormal recessionwillraiseunemploymentandlowerwages,whichwilleventuallylead toanewcycleofhiringandarecovery.Iftherecessionistoolonganddeep, however,itcandestroytheskillsofthelaborforce,triggerwidespread bankruptcies,andgutindustrialcapacity,leadingtoanevenlongerdownturn. Thebuzzwordforthisthreatis“hysteresis,”whichdescribesaperiodinwhich slowornegativegrowthbegetsslowergrowthratherthanrecovery.Inthe sluggishACera,thenewfearisthatsomenationsmaynowbestuckinthis condition. Thefleetinganddifficultnatureofstronggrowthisnowplaintosee,andit raisesasimplequestion.How,inanimpermanentworld,canwepredictwhich nationsaremostlikelytoriseandwhichtofall?Whatarethemostimportant signsthatanation’sfortunesareabouttochange,andhowshouldwereadthose signs?Tohelpnavigatethenormalconditionoftheworld—anenvironment pronetobooms,busts,andprotests—thisbookoutlinestenrulesforspotting whetheracountryisontherise,onthedecline,orjustmuddlingthrough. Togethertherulesworkasasystemforspottingchange.Theyaremost applicabletoemergingnations,inpartbecausethosenations’economicand politicalinstitutionsarelesswellestablished,makingthemmorevulnerableto politicalandfinancialupheaval.However,asIwillshowalongtheway,manyof therulesfindusefulapplicationsinthedevelopedworld. PatternRecognition:ThePrinciplesBehindtheRules Afewbasicprinciplesunderliealltherules.Thefirstisimpermanence.Atthe heightofthe2000sboom,avarietyofglobalforces—easymoneypouringoutof Westernbanks,spikingpricesofcommodities,andsoaringglobaltrade— doubledthegrowthrateofemergingeconomies.Thescaleoftheboomwas doubledthegrowthrateofemergingeconomies.Thescaleoftheboomwas unprecedented—by2007,thenumberofnationsexpandingfasterthan5percent reachedonehundred,orfivetimesthepostwarnorm—butforecastersassumed thisfreakeventwasaturningpoint.Extrapolatingfromexistingtrends,they figuredthatifallthehoteconomiesstayedhot,theaverageincomesofmany emergingnationswouldsooncatchupor“converge”withthoseofrichnations. Thisformofstraight-lineforecastingwashardlynew.Inthe1960sManila wontherighttohosttheheadquartersoftheAsianDevelopmentBank(ADB) basedinpartontheargumentthatfastgrowthinthePhilippinesmadeitthe futureofAsia.Bythenextdecade,underthedictatorshipofFerdinandMarcos, growthwasstalling,buttheADBheadquarterswasinManilaforgood.Inthe 1970ssimilarexercisesinextrapolationledsomeAmericanscholarsand intelligenceanalyststopredictthattheSovieteconomywasdestinedtobecome thelargestintheworld.Instead,itcollapsedattheendofthe1980s.Bythen forecastershadhandedthenextcenturytoJapan,butitbecamethenext economicstartofalter. Noneofthatpreventedanewroundofexcitementintheearly2000s, focusedontheriseoftheBRICs,orBRICS(someincludedSouthAfricainthe group),andthecommoditysupercycle.Asthehypewaspeakingaround2010, thehistoricalpatternforcommodityprices—whichtendtoboomforadecade, thenfallfortwodecades—wasabouttoreassertitself.Todaytalkofthese nationsfulfillingtheirdestiniesasregionaleconomicpowerhousesseemslikea dimmemory. Recognizingthatthisworldisimpermanentleadstothesecondprinciple, whichistoneverforecasteconomictrendstoofarintothefuture.Trendsin globalizationhaveebbedandflowedeversinceGenghisKhansecured commercealongtheSilkRoadinthetwelfthcentury,andthecyclesofbusiness, technology,andpoliticsthatshapeeconomicgrowthareshort,typicallyabout fiveyears.Theelectioncycle,too,runsforaroundfiveyearsonaverage,andit canusherinreform-mindedleaderswiththepotentialtoshakeupstagnant economies.Asaresult,anyforecastthatlooksbeyondthenextcycleortwo— fivetotenyearsatmost—islikelytobeupended.Italsomakesnonsenseof recenttalkofthecomingAsianorevenAfricancentury. Oneaimofthisbookistonudgeourdiscussionoftheworldeconomyaway fromtheindeterminatefuturetoamorepracticaltimehorizonoffivetoten yearsandtothejobofspottingthenextbooms,busts,andprotests.Predictions forthenexttwentytoonehundredyearscannotpossiblybefulfilledwhennew economiccompetitorscanarisewithinfiveyears,asChinadidintheearly 1980s,aseasternEuropedidinthe1990s,andasmuchofAfricadidinthe 2000s.Inanyfive-yearperiod,anewtechnologycanspringseeminglyfrom nowhere,astheInternetdidinthe1990sandasnewdigitalmanufacturing techniqueslike3-Dprintingaredoingnow.Inthepostwarperiod,eventhe twenty-eightlongestperiodsof“super-rapid”growth—inwhichpercapitaGDP wasrisingfasterthan6percentayear—havelastedlessthanadecadeon average.5Sothelongerastreaklasts,thelesslikelyitistocontinue.Whena countrylikeJapan,China,orIndiaputstogetheradecadeofstronggrowth, analystsshouldbelookingnotforreasonsthestreakwillcontinuebutforthe momentwhenthecyclewillturn. Thetendencytobelievegoodtimeswilllastforeverismagnifiedbya phenomenonknownas“anchoringbias.”Conversationstendtobuildonthe pointthatstarts(oranchors)them.Inthe2000s,peoplewhohandicappedglobal economiccompetitioncametobelievethatdouble-digitannualGDPgrowthwas normalforChinaandthatarateofmorethan7percentwasstandardin emergingeconomies.Thosesuperhighrateswereunprecedentedbutcameto anchortheconversation.In2010thenotionthattheemergingworldwasabout toseeitsaveragegrowthratedropto4percentwassofarbelowtheanchorthat itwouldhaveseemedimplausible,eventhough4percentistheaveragegrowth rateofemergingeconomiesinthepost–WorldWarIIera.Ingeneral,thecorrect anchorforanyforecastisasfarbackassoliddataexists,thebettertoidentify themostfirmlyestablishedhistoricpattern.Thepatternsofboomandbust describedinthisbookarebasedonmyownresearch,includingadatabaseofthe fifty-sixpostwaremergingeconomiesthatmanagedtosustainagrowthrateof6 percentforatleastadecade. Thehabitofhangingontoapoorlychosenandimprobableanchoris compoundedbythephenomenonof“confirmationbias,”thetendencytocollect onlythedatathatconfirmone’sexistingbeliefs.Duringtherunawayoptimism ofthe2000s,therewasalotofconfirmationbiasinhypefortheBRICS,butin mostperiodstheprevailingintellectualfashionispessimism.Thatiscertainly thegreaterrisktoday,whenitishardtoconvincepeoplethatanynationhasa chancetorise,giventheroughglobalconditions.Thequestiontoask,inany period,isnotthetypicalone:Whatwilltheworldlooklikeifcurrenttrends hold?Itis,rather,Whatwillhappenifthenormalpatternholdsandcycles continuetoturneveryfiveyearsorso?Inasense,therulesareallaboutplaying therightprobabilities,basedonthecyclicalpatternsofanimpermanentworld. Tocriticswhoarethinkingthatthefive-to-ten-yearhorizonreflectsanarrow andshort-termWallStreetworldview,Iwouldsaywait.Thechaptersinthis bookwillshowthatlongrunsofstronggrowthlastbecauseleadersavoidthe kindsofexcessesthatproducecreditandinvestmentbubbles,currencyandbank crisesandhyperinflation—thevariouskindsofbuststhatendeconomic miracles.Therulesdoubleasaroughguidetolong-termeconomicsuccess. IncountrieslikeBrazilandIndia,oneoftenhearstheargumentthatifthe governmentfocusestoonarrowlyoneconomicgrowth,thenhealth,education, andothermeasuresofhumandevelopmentwillsuffer.Butthisisafalsechoice. Thecountrieswiththelowestpercapitaincomealsotendtohavetheworst humandevelopmentrecords.EveryyeartheUNputsoutaHumanDevelopment Index(HDI)rankingcountriesbyeducationalmeasureslikeyearsofschooling, healthmeasureslikelifeexpectancy,andbasicinfrastructuremeasureslike accesstorunningwaterandelectricity.Anation’soverallrankontheHDIoften alignsverycloselywithitsrankingforpercapitaincome,whichistheresultof itslong-termgrowthrecord.India,forexample,ranks135outof187countries onthelatestlist.Onlytencountrieswithlowerpercapitaincomerankhigherfor humandevelopment.Onlyfivecountrieswithhigherpercapitaincomerank lowerfordevelopment. Indiahasrisenintherankings,butonlyasitseconomygrew.Backin1980, whentherewereonly124countriesontheHDI,Indiarankedonehundredth. Overthesubsequentdecades,India’seconomyexpandedby650percent,while theglobaleconomyexpandedbylessthan200percent,andasaresultIndia climbedintheHDIrankings.Itnowstandsateighty-ninthamongtheoriginal 124countries,upelevenspots.However,countrieswithstrongereconomic recordsmadebiggergains.China’seconomyexpandedby2,300percent,andits HDIrankingclimbed30places,fromninety-secondtosixty-second.Thesegains arenotconfinedtothepoorestcountries,either.SouthKorea’seconomy expandedby700percent,anditsHDIrankingrose30places,fromforty-fifthto fifteenth.Thereareofcourseexceptions—thepeopleofSouthAfricalive unusuallyshortlivesforacountrywithanaverageincomeof$6,500,dueinpart toahighmurderrateandtheAIDSepidemic.Incountriesthathavefallenway behindtheirpeersonspecificdevelopmentmeasures,afocusontheseissuescan makesense.Ingeneral,however,ifacountryfocusesongrowth,development willfollow. TheImpracticalScience Publicdisillusionwiththeeconomicsprofessionhasbeengrowing,sinceit failedtoforeseenotonlytheeventsof2008butalsothemanycrisesthathave shakentheworldbeforeandsince.Economistsareunderattackevenwithintheir ownranksforbeingtooacademicandforbeingtoofocusedonelegant mathematicalmodelsandtheoriesthatpretendhumansalwaysactrationallyand onhistoricaldatathatchangetooslowlytocapturewhatmaycomenext. Whethertheyareplayersinpolitics,diplomacy,orbusiness,orarejustengaged citizens,practicalpeoplecannotbegintomakeplanswithoutmakingan educatedguessastowhatiscomingnext.Thisbookisforthosepractical people.Theyaredulyskepticalofcrystalballs,buttheyneedtolookforward, andtorecognizemisleadingeconomicfuturologywhentheyseeit. Increasingly,economicsisseenasanimpracticalscience.Forsome academics,forecastingisanintellectualexercise,andrewardsflowfrom publishingbigideas.Theresultisoftenaone-dimensionalorideological worldview.SomeAmericanandEuropeanintellectualshintthatIslamicculture istoobackwardtopromoterapidgrowth.Somepeopleontheextremeright believeeverygovernmentactionisbydefinitionbad.Liberalsoftentracestrong growthtodemocraticinstitutions,anexplanationthatcan’taccountformany things,includingthelongboominAsiafrom1980to2010,whenmostregimes intheregionwereilliberal. Ofteneconomistsandwritersoverselltheimportanceofasinglegrowth factor—thechallengeofaremotegeographiclocation,theadvantageofliberal institutionsorthefavorabledemographicsofayoungandgrowingpopulation— asthekeytounderstandingtheriseandfallofnations.Thesefactors,thesubject ofcompellingrecentbestsellers,areoftenimportantinshapinglong-term growth,butinmyexperiencenosinglefactorworkswellasasignofhowan economyislikelytochangeoverthenextfiveyears.Forexample,“thecurseof oil”isreal:Inpoornationsthatarenotpreparedtohittheoillottery,largeoil discoveriestendtobreedcorruptionandretarddevelopment.Butagutdistaste forcorruptpetrostatescanblindforecasterstothehighlikelihoodthatwhen globaloilpricesenteraboomdecade,manyoileconomieswillfollow. It’simportanttounderstandeconomictheories,butitisequallyimportantto learnhowtoapplythemandinwhatcombinationsandsituations.Aneconomy’s growthrateistheproductofmultiplefactors,andthebalanceofthesefactors willshiftovertime,asacountrygrowsricherandasglobalconditionschange. Mostmainstreamforecastersunderstandthiswellbutwindupwithnumbingly Mostmainstreamforecastersunderstandthiswellbutwindupwithnumbingly complexsystems.InstitutionsincludingtheWorldBankandtheIMFcount dozenstohundredsoffactorsthathaveastatisticallyrelevantimpactongrowth, includingeverythingfromtheshareofuniversitystudentswhoarestudyinglaw to“ethno-linguisticfractionalization,”andwhetherthecountryinquestionisa formerSpanishcolony. Practicalforecastersneedtoweedoutdatathatisnotforwardlooking, reliable,anduptodate.Peopleindevelopednationswhoworryabout informationoverloadmaybesurprisedbyhowdifficultitisinemerging countriestoobtainsolidcurrentinformationonbasicissueslikethesizeofthe economyandbyhowerraticallythesenumbersarerevised.Inearly2014 NigeriaannouncedanofficialGDPnumberof$500billion,thusalmost doublingthesizeoftheeconomyovernight.Thistransformationattracted relativelylittleattention,becausepeoplewhowatchemergingmarketshave grownmoreorlessnumbtosuchstatisticaldrama.Onlyoneyearbefore,Ghana hadissuedanequallylargerevision,effectivelypromotingitselffromapoortoa middle-classcountry.CommentingontheIndianstatisticalbureau’sfrequent revisionsofofficialeconomicdata,formercentralbankgovernorY.V.Reddy oncecrackedtomethatwhilethefutureisalwaysuncertain,inIndiaeventhe pastisuncertain. Numberscomingoutoftheemergingworldhaveastrangefluidityanda wayofmorphingtomeettheself-interestofmajorplayers.InChina,analysts skepticalofofficialGDPgrowthfigureshavestartedcheckingthemagainst otherindicators,suchascargotrafficandelectricityconsumption.Thatcheck canbeprettyreliable,exceptthatin2015reportsemergedthatgovernment authoritieswereinstructingdeveloperstokeepthelightsoneveninempty apartmentcomplexes.Theaimwastodriveupelectricityconsumptiondataso thatitwouldconfirmofficialeconomicgrowthclaims.Thisisaclassiccaseof Goodhart’sLaw,whichsaysthatonceameasurebecomesatarget,itceasesto beuseful,partlybecausesomanypeoplehaveanincentivetodoctornumbersto meetit.6 Oneusefulandtimelydatasourceisthepricesinglobalfinancialmarkets, whichinnormaltimeswillaccuratelycapturetheworld’sbestcollectiveguess aboutthelikelyprospectsofaneconomy.WhatauthorJamesSurowieckihas called“thewisdomofcrowds”hassubstance,andthemarketembodiesit, secondbysecond,subjecttoemotionalcontagionsbutnotwildrevisions.7A sharpdeclineinthepriceofcopperhasalmostalwaysbeenanominoussignfor theglobaleconomy,earningthebasemetalthemoniker“Dr.Copper”in financialcircles.IntheUnitedStates,oneoffewcountrieswheremostlending isdonethroughbondsandothercreditmarketproductsratherthanthrough banks,thecreditmarketsstartedsendingdistresssignalswellbeforetheonsetof thelastthreerecessions,in1990,2001,and2007.Thecreditmarketsalsosend falsesignalsonoccasion,butforthemostparttheyhavebeenafairlyreliable bellwether. Despitetheirperiodicboutsofeuphoriaandpanic,stockmarketsalsohavea trackrecordofanticipatingeconomictrends.Backin1966theNobelPrize– winningeconomistPaulSamuelsonquippedthatthestockmarkethad“predicted nineoutofthelastfiverecessions,”andwritersaimingtodisparagethe predictivepowerofmarketshaveoftencitedhim.ButSamuelsonwasnomore impressedbyprofessionaleconomists,whoinfacthaveaworserecordthan markets.Ina2014noteNedDavisResearchshowedthatdespiteafewbig misses,inwhichthemarkettankedinanticipationofarecessionthatnever came,themarkethasbeenaconsistentlygoodpredictorofbothgoodandbad timesfortheeconomy.Goingbackto1948,thebenchmarkS&P500Indexhas onaveragestartedtoturndownsevenmonthsbeforethepeakofanexpansion, andithasstartedtoturnupfourmonthsbeforethebottomofarecession.Onthe otherhand,NedDavisreviewedthetrackrecordforprofessionalforecasters whoareregularlysurveyedbythePhiladelphiabranchoftheFederalReserve andfoundthatasagroup,thesemainstreameconomists“calledexactlynone”of thelastsevenrecessions,datingbackto1970.8IntheUnitedStates,theNational BureauofEconomicResearchistheofficialdocumenterofrecessions,andon averageithasdeclaredrecessionstartseightmonthsafterrecessionsactually began. Marketindicatorsaside,numbersalonecannotprovideahandleonany nation’srealprospects.Mosteconomiststendtoignoreanyfactorthatistoosoft toquantifyorincorporateintoaforecastingmodel,evensomethingasbasicas politics.Instead,theystudy“policy”throughhardnumbers,likegovernment spendingandinterestrates.Butnumberscan’tcapturetheenergyunleashedbya newleader’sintoleranceformonopolists,bribetakers,orstonewalling bureaucrats.Nonationhasanentitlementtoeconomicgreatness,soleadersneed topushforitandkeeppushing.Myrules,therefore,offeramixofwaystoread harddataonthingslikecredit,prices,andmoneyflows,aswellassoftersignsof shiftsinpoliticsandpolicy. Thesearethebasicprinciples:Avoidstraight-lineforecastingandfoggy discussionsofthecomingcentury.Beskepticalofsweepingsingle-factor theories.Stiflebiasesofallkinds,betheypolitical,culturalor“anchoring.” Avoidfallingfortheassumptionthattherecentpastisprologueforthedistant Avoidfallingfortheassumptionthattherecentpastisprologueforthedistant future,andrememberthatchurnandcrisisarethenorm.Recognizethatany economy,nomatterhowsuccessfulorhowbroken,ismorelikelytoreturnto thelong-termaveragegrowthrateforitsincomeclassthantoremainabnormally hot(orcold)indefinitely.Watchforbalancedgrowth,andfocusona manageablesetofdynamicindicatorsthatmakeitpossibletoanticipateturnsin thecycle. ThePracticalArt Theserulesemergedfrommytwenty-fiveyearsontheroad,tryingto understandtheforcesofchangebothintheoryandintherealworld.Thereason Idevelopedrulesatallwastofocusmyeyesandthoseofmyteamonwhat matters.Whenwevisitacountry,wegatherimpressions,storylines,facts,and data.Whileinsightisembeddedinallobservations,wehavetoknowwhich oneshaveareliablehistoryoftellingussomethingaboutanation’sfuture.The rulessystematizeourthoughtsandhavebeenback-testedtodeterminewhathas workedandwhathasnot.Eliminatingtheinessentialhelpssteertheconversation towhatisrelevantinevaluatingwhetheracountryisontheriseorindecline. Ihavenarrowedthevoluminouslistsofgrowthfactorstoanumberthatis largeenoughtokeepthemostsignificantforcesofchangeonourradarbutsmall enoughtobemanageable.Intheory,growthinaneconomycanbebrokendown inanumberofways,butsomemethodsaremoreusefulthanothers.Growthcan bedefinedasthesumofspendingbygovernment,spendingbyconsumers,and investmenttobuildfactoriesorhomes,buycomputersandotherequipment,and otherwisebuildupthenation.Investmenttypicallyrepresentsamuchsmaller shareoftheeconomythanconsumption,oftenaround20percent,butitisthe mostimportantindicatorofchange,becauseboomsandbustsininvestment typicallydriverecessionsandrecoveries.IntheUnitedStates,forexample, investmentissixtimesmorevolatilethanconsumption,andduringthetypical recessionitcontractsbymorethan10percent;whileconsumptiondoesn’t actuallycontract,itsgrowthratemerelyslowstoabout1percent. Growthcanalsobebrokendownasthesumofproductioninvarious industries,suchasfarming,services,andmanufacturing.Ofthese, manufacturinghasbeendecliningworldwide—it’snowlessthan18percentof globalGDP,downfrommorethan24percentin1980—butitisstillthemost significantforceofchange,becauseithastraditionallybeenthemainsourceof jobs,innovation,andincreasesinproductivity.Sotheruleshavealottosay aboutinvestmentandfactoriesandmuchlessaboutconsumersandfarmers. Somesaymanufacturingisgoingthewayoffarming,asmachineslargely replacejobs,andmyrulesareevolvingtoaccountforthisshift.Butfornow manufacturingremainscentraltounderstandingeconomicchange. Thisisnotanargumentfortossingoutthetextbooks,justforzeroinginon theforcesofchangethathavethestrongestpredictivequalities.Asacasein point,textbookstalkabouttheimportanceofsavingsindrivinginvestmentand growth,becausebanksfunnelthemoneysavedbyhouseholdsandcompanies intoinvestmentsinroads,factoriesandnewtechnology.Butsavingsisa chicken-or-eggissue:Itisnotatallclearwhichcomesfirst,stronggrowthor highsavings.Similarly,thisbookelaboratesonsubjectsthatwillbefamiliarto many,liketheimpactofoverinvestmentanddebtbinges,thescourgesof inflationandinequality,andthevagariesofpoliticalcycles.Butthereare hundredsofwaystotrackandmeasurethesefactors,andtheissueItryto addressis,forexample,exactlyhowtoparsethedebtburdenofanationand howtounderstandwhendebtsignalsaturnforthebetterorworse. Ieschewfactorsthatmattertogrowthinthelongrunbutthatdon’twork wellassignsofchange.Forexample,educationiseveryone’sfavoritewayto boostthetalentofthelaborforceandraiseproductivity,butmyrulespaylittle attentiontoit.Thepayofffrominvestmentineducationissoslowandvariable thatitisalmostuselessasapredictorofeconomicchangeoverafive-to-ten-year period.Manystudieshavelinkedthepost–WorldWarIIboomsintheUnited StatesandBritaintotheadventofmasspubliceducation,butthatchangebegan beforeWorldWarI.ArecentstudybytheCentreforCitiesthinktankfoundthat theBritishcitiesthatgrewfastestinthe2000swerethesameonesthathad investedmostineducation—intheearly1900s.TheeconomistEricHanushek foundina2010reportthatatwenty-yeareducationreformprogramcouldresult inaneconomyone-thirdlarger—butthatincreasewouldregisterseventy-five yearsafterthereformprogrambegan. Inmanypostwarcasestheeconomytookoffineducationallybackward nationslikeTaiwanandSouthKorea.AstheAsiaexpertJoeStudwellhas pointedout,inTaiwan55percentofthepopulationwasilliteratein1945,and thatsharewasstillhighat45percentin1960.SouthKoreain1950hadliteracy levelscomparabletoEthiopia’s.InChina,astheeconomytookoffinthe1980s, localofficialsspentheavilyonroads,factories,andotherinvestmentsthathada fastimpactongrowth,becausetheircareersdependedonproducinghighgrowth numbersimmediately.Schoolscamelater. Investingineducationisoftenseenasasacredobligation,likedefending motherhood,andtoofewquestionsareaskedaboutwhetheritisgettingthejob done.Insomecountrieshugeexpendituresontheuniversitysystemhavehad done.Insomecountrieshugeexpendituresontheuniversitysystemhavehad almostnoeconomicimpact,evenoverthelongterm.Theemergingnationin whichthepopulationhasthehighestaverageyearsofschooling(11.5)andthe largestshareofuniversitygrads(6.4percent)isRussia,wheretheSovietera legacyofexcellenceinscienceandtechnologyeducationhasyettoaffectthe economy.Russiaisstilldependentonrawmaterials,andalthoughithasafew dynamicInternetcompanies,itlacksatechsectortospeakofandhasbeenone theworld’sslowest-growingeconomiesinthe2010s. Ialsoseelimiteduseforvarioussurveysthattry,inessence,tomakea scienceofmeasuringsomeofthefactorsthatcancontributetoproductivity.The WorldEconomicForum’sGlobalCompetitivenessReportfocusesontwelve basiccategories,butmanyareslow-movingforceslikeinstitutionsand education.Finland,forexample,hasbeennearthetopoftheforum’sranking systemforalongtime,andin2015itrankedfourthintheworldandfirstina dozensubcategoriesrangingfromprimaryschoolstoantimonopolypolicies. Finlandwasalsothesurvey’stop-rankedEuropeanUnioncountry.Yetit sufferedoneoftheslowestrecoveriesfromthecrisisof2008,farbehindthe UnitedStates,Germany,andSweden,andwasaboutonparwiththehardest-hit countriesofsouthernEurope.Finlandwaspayingthepriceforhavingletits debtsandwagesrisequicklyandforitsheavydependenceonexportsoftimber andotherrawmaterialsatatimewhenglobalpricesforthesecommoditieswas collapsing.HavinggoodprimaryschoolswasnodefenseforFinlandwhenmore importantforcesofchangewereatwork. TheWorldBankalsoputsoutrankingsofcountriesforeverythingfrom qualityofroadstohowmanydaysittakestoopenabusiness,andtheserankings havebecomeverypopular.Thatcreatesaproblem,asmorethanafewcountries havestartedhiringconsultantstohelpthemraisetheirrankings(another exampleofGoodhart’sLawinaction).In2012PresidentVladimirPutinseta goalofraisingRussia’srankfor“easeofdoingbusiness”from120totop20 withinsixyears,andhesoonsawresults.By2015,Russiawasrankedat51— morethanthirtyplacesaheadofChina,andsixtyplacesaheadofBraziland India.Thatraisedaquestion:IfitwassoeasytodobusinessinRussia,why wasn’tanyonedoingbusinessthere?Moscowin2015isincreasinglyhostileto andisolatedfrominternationalbusiness,farmoresothanChinaorBrazilor India.Totheextentpossible,Itrytoavoidrelyingonnumbersthatare vulnerabletopoliticalmanipulationandmarketing. Themostsignificantforcesofchangevaryfromyeartoyearandcountryto country.IntheACera,thedominanteconomicstorylinehasbeenaboutdebt: whichcountriesdidthemosttopaydowndebtsamassedbefore2008,andthe surprisingnumberthathavedugthemselvesdeeperintodebttryingtofightthe surprisingnumberthathavedugthemselvesdeeperintodebttryingtofightthe subsequentslowdown.Asawhole,theworldhasabiggerdebtburdennowthan itdidin2008,whichisarealissue.Butmyfirstchapterisnotabouttheruleon debt—it’saboutpeopleandpopulation,whichcouldhaveabiggerimpactgoing forward. Anothersimplewaytodefineeconomicgrowthisasthesumofthehours thatpeopleworkplustheiroutputperhourorproductivity.Butproductivityis hardtomeasure,andtheresultsaresubjecttoconstantrevisionanddebate.On theotherhand,thenumberofhourspeopleworkreflectsgrowthinthe workforce,whichisdrivenbypopulationgrowth,whichisrelativelyeasyto count.Unlikeeconomicforecasts,populationforecastsdependonafewsimple factors—mainlyfertilityandlongevity—andhaveastrongrecordforaccuracy. Beforethestartofthenewmillennium,theUnitedNationspredictedglobal populationfortheyear2000atotaloftwelvetimesgoingbacktothe1950s,and allbutoneofthoseforecastswasoffbylessthan4percent.Thefirstrule addressestheeconomicimpactofpopulationgrowth,andmostoftheothersdeal onewayoranotherwithproductivity.ButIdon’tuseproductivitygrowthdata directlybecausetheyarenotreliable. Inaway,populationtrendsarehalfthestory.Since1960theglobal economy,includingbothdevelopedanddevelopingcountries,hashadan averageannualgrowthrateofabout3.5percent.†Halfofitcamefrom populationgrowth,morespecificallylaborforcegrowth,ormorepeople workingmorehours.Theotherhalfcamefromgainsinproductivity.This50-50 splitstillholds,withonedistressingchange,whichisthatbothsidesofthe equationareslumping. Theimpactofpopulationisverystraightforward:a1percentagepoint declineingrowthinthelaborforcewillshaveabout1percentagepointoff economicgrowth.Thatisroughlywhathasbeenhappeninginthelastdecade. GlobalGDPgrowthhasbeentrendinglowerandisnowrunningmorethanafull percentagepointbelowitslong-termpre-crisisaverage.Itisnocoincidencethat since2005thegrowthinthegloballaborforce,ages15to64,hasslowedto1.1 percent,from1.8percentoverthepreviousfivedecades.Theimplicationsof thisnewpopulationthreattotheworldeconomyaredarkbutnotuniformacross countries.Theworking-agepopulationisalreadyshrinkinginGermanyand China;itisgrowing,butveryslowly,intheUnitedStates;anditisstillbooming inNigeria,thePhilippines,andafewothercountries.Slowergrowthinthe worldpopulationmaycurbbutwon’tstoptheconstantriseandfallofnations. Therestoftherulesdealonewayoranotherwiththeotherhalfoftheglobal growthstory,whichiscapturedinaloosewaybytheproductivitygrowth numbers.Heretootheglobalpictureappearsatbestmixed.Between1960and 2005,theaverageannualproductivitygrowthratewasaround2percent,butthat ratedownshiftedbyalmostafullpercentagepointinthelasttenyears.Like populationgrowthrates,officiallyrecordedproductivitygrowthrateshavefallen byvaryingdegrees,fromlessthanapercentagepointintheUnitedStatesto morethan2pointsinSouthKoreaandnearly4pointsinGreece.Butwhilethe demographicdownshiftisindisputable,debateragesastowhetherthe productivitydeclineisreal. Productivitygrowthisthesumofhard-to-quantifyimprovementsintheskill ofworkers,inthenumberandpowerofthetoolstheyuse,andinanelusivex factorthattriestocapturehowwellworkersareemployingthosetools.‡Thatx factor,whichcanbeinfluencedbyeverythingfromexperienceusingacomputer tobettermanagementorbetterroadstogetworkerstotheirworkplacesfaster,is thefuzziestpartofthisdifficultcalculation.Technoskepticssaythatthelast decade’sdeclineinproductivitygrowthreflectsthefactthatmostrecent innovationsinvolverelativelytrivialadvancesincommunicationsand entertainment:Twitter,Snapchatandthelike.Evenwithworkertrainingand experience,theseadvanceswilldomuchlesstoraiseproductivitythanprevious innovationslikeelectricity,thesteamengine,thecar,thecomputer,orair conditioning,whichwasahugeboosttohumanoutputperhourinastuffyoffice setting. Optimistsrespondthatproductivitygrowthmeasurementsaren’tcapturing thecostandtimesavingsproducedbynewtechnologies,rangingfromartificial intelligencetoincreasinglypowerfulbroadbandconnectionsandthenascent “Internetofthings.”IntheUnitedStates,forexample,thecostofbroadband Internetaccesshasremainedflatformanyyears,butbroadbandconnections havegrownmuchfasterandgonemobile—ahugetimesavingsthatisnot capturedintheproductivitygrowthdata.9Iftheoptimistsareright,productivity growthisconsiderablyfasterthancurrentmeasurementsshow,andthereforeso iseconomicgrowth.Whicheversideisright,bothwouldagreethatitiseasierto measurepopulationgrowth,whichhasamoreclear-cutimpactontheeconomy. Fewerworkingpeoplemeanlesseconomicgrowth,andthisimpacthasbecome morevisibleworldwideinthelastfiveyears. Alltherulestrytocapturethedelicatebalancesofdebt,investment,and otherkeyfactorsrequiredtokeepaneconomyhumming.Overthecourseofthis book,itwill—Ihope—becomeclearhowthetenrulesworktogetherasa system.Toforeshadowthestoryinbrief,aneconomyismostlikelytobegin risingsteadilywhenthenationisemergingfromcrisis,hasfallenofftheradarof theglobalmarketsandmedia,andhaschosenademocraticleaderwitha theglobalmarketsandmedia,andhaschosenademocraticleaderwitha mandatetoreform.Thatleaderwillcreatethebusinessconditionstoattract productiveinvestment,particularlyinfactories,roads,andtechnologiesthatwill strengthensupplynetworksandthushelpcontaininflation.Theprobabilitythat aboomisabouttoendwillriseasanationgetstoocomfortableandasprivate companiesandindividualsrunupdebtstobuyfrivolousluxuries,particularly importedluxuries.Thisperiodofextravagancewillmakeitimpossibleforthe nationtopayitsforeignbills,whilewideningthegapbetweenbillionairesand therest,andbetweenthecountrysideandthenation’scapital,provokinga politicalbacklashthatbringsdownthenowagingregime,afterwhichthecycle canbeginagain. Thebook’sfinalchaptersketcheshowthetopemerginganddeveloped nationsrankonthetenrulesatagivenpointintime.Therankingschange constantly,sothelastchaptermerelyoffersasnapshotofhowtherulesworkas asystem.Theapproachmakesnopromiseofcertaintyinanimpermanentworld, andthemostitcanhopetoachieveistoimprovetheprobabilityofspottingthe nextshiftsintheconstantriseandfallofnations.Itisasystemforhandicapping globaleconomiccompetitionasapracticalartratherthanasanimpractical science.Therearenosweepingforecastsfortheyear2050,onlyanobjective efforttoidentifythemostplausibleoutlookforthenextfivetotenyears.The aim:apracticalperson’sguideforspottingtheriseandfallofnations,inreal time. *GlobalGDPgrowthismeasuredhereinmarket-determinedexchange-rateterms. †Thisfigurereferstopotentialgrowth,whichwecalculatebytakingthesumofproductivitygrowthand employmentgrowthfromtheConferenceBoardTotalEconomyDatabase. ‡Technically,productivitygrowthisthesumofincreasesinlaborquality,capitaldeepening,andtotal factorproductivity. 1 PEOPLEMATTER Isthetalentpoolgrowing? ATFIRSTIDIDN’TTHINKTHEREWASMUCHMYSTERYTOthe lacklusterglobalrecovery.After2008,whentheUnitedStatesfellintoadeep recessionandtheworldsoonfollowed,economistsarguedthattherecovery wouldbepainfullyslowbecausethiswasa“systemiccrisis,”notanordinary recession,andIwaspersuaded.Theirresearchshowedthatfollowingacrisis thatdevastatesthefinancialsystem,aneconomytypicallyexperiencesweak growthforfourtofiveyearsevenaftertheendoftherecession.Butaseachyear passed—five,six,seven—theglobaleconomycontinuedtoperformmore weaklythanexpected.By2015,therewasstillnotasinglemajorregionofthe worldwhereeconomicgrowthhadreturnedtoitspre-crisisaverage.Ibecame convincedthatthesluggishrecoverywasnotnormal.Itwasamystery:Where wasthemissinggrowth? Economistshaveputforthmanyreasonstoexplainwhytheworldhasbeen sloggingthroughitsweakestrecoveryinthepostwarera.Mostofthe explanationsfocusonthewayseverecreditcrisescandepressthedemandside oftheeconomy,asconsumersandcompaniesstruggletoworkofftheirdebts andslowlyregaintheconfidencetospendmoney.Othersblameweakdemand onrisingincomeinequality,theregulatorycrackdownonbanklending,orsome othersymptomofpostcrisisstressdisorder.Whilealltheseargumentsmayhave somemerit,theevidenceismixedastowhatimpactthesefactorshadon economicgrowth.IntheUnitedStates,thereareclearsignsthatconsumer demandfullyrecoveredby2015:Carsaleshavehitnewhighsandjobgrowthis runningatabriskpace,yettheheadlineGDPgrowthnumberisstillwellbelow itspre-crisispace.Asoftenhappensinagoodmystery,perhapsthedetectives havebeenlookinginthewrongplace. MyteamandIturnedourattentionfromtheargumentsthatprimarilyfocus ondemandtothoseconcerningsupply,thesideoftheeconomythatsupplies labor,capital,andland,thebasicinputstogrowth.Wefoundanunexpected culprit.Onecriticalcauseofthemissinggrowthwas,ofallthings,ashrinking supplyofpeopleintheactiveworkforce.Thisfindingwassothoroughlyatodds withpopularfearsabouthowhumanjobsarebeingreplacedbytheriseofrobots andartificialintelligence,itseemedhardtoacceptatfirst.Howcouldtoofew workersbeaproblemiftechnologyhasmadethemobsolete?Butinthiscaseat least,numbersdon’tlie. Acollapseinpopulationgrowthwasalreadyunderwaybeforethe2008 crisis,andinfactitcanexplainagoodchunkofthepersistentlydisappointing recoverysince.Aswe’veseen,onesimplewaytomeasureaneconomy’s potentialtogrowisbyaddingproductivitygrowthandlaborforcegrowth,and whilebothhaveslumpedworldwide,theproductivityslowdowniswidely disputed,sincemanyexpertsthinktheofficialstatisticsareundercountingthe impactofnewdigitaltechnologies.IntheUnitedStates,bytheofficialnumbers, productivitygrewatanaveragepaceof2.2percentbetween1960and2005 beforeslowingtojust1.3percentinthepasttenyears.Thepopulation slowdownwasevenmoredramatic,anditisnotindispute.Inthefivedecades before2005,theU.S.laborforcegrewatanaverageannualpaceof1.7percent, butslowedtojust0.5percentoverthepastdecade.Inshort,theclearest explanationofthemissingeconomicgrowthintheUnitedStatesistheroughly1 percentdeclineinlaborforcegrowth,whichislargelyafunctionofgrowthin thepopulationofworking-agepeople,between15and64. Theworldstillechoeswithrecurringfearaboutthe“populationbomb” scenarios,whichsuggestthatthenumberofpeoplewilloutstripsuppliesoffood andotherresources,withexplosiveresults.ThosescenariosrelyontheUnited Nations’oft-citedforecastfortheyear2050,whichshowsthatpopulationwill riseby2.4billionpeople,from7.3billionto9.7billion.Anumberclosetoten billionmaysoundfrighteninglyhigh,buttheUNforecastinfacttakesinto accountadramaticslowdowninthepopulationgrowthrate.Manyfewerbabies arebeingborn,andfeweryoungpeopleareenteringtheworking-agecohort, whiletheoverallpopulationisgrowingmainlybecausepeoplearelivinglonger. Thismixistoxicforeconomicgrowth. Formuchofthepost–WorldWarIIera,globalpopulationgrewatan averageofnearly2percentannually,whichmeantthattheworldeconomycould alsoexpecttogrowatabaselinerateofcloseto2percent—andacoupleof percentagepointsmorethanthatwhenoutputperworkerwasalsogrowing. Thenaround1990globalpopulationgrowthjustfelloffacliff.Thegrowthrate Thenaround1990globalpopulationgrowthjustfelloffacliff.Thegrowthrate hassincehalvedtojust1percent.Thedifferencebetween1and2percentmay notsoundlikemuch,butifthepopulationgrowthratehadstayedat2percent since1990,theglobalpopulationtodaywouldbe8.7billion,not7.3billion.The worldwouldnotbeagingsorapidly,andwewouldnotbetalkingabout population’simpactoneconomicgrowth. Theeconomicimpactofthedeclineinthepopulationgrowthratehastaken timetoshowup,becauseittakesawhileforbabiestoreachtheworkingageof 15.Ofcourse,inmanyplacespeopledon’tactuallystartworkinguntilthey reach20or25,dependingonhowlongtheystayinschool.Soittakesfifteen yearsormoreforababybusttohaveaclearimpactonthepopulation contributiontoeconomicgrowth,whichhasbecomeincreasinglyclearinthelast fiveyears. Thefallintheglobalpopulationgrowthratewasthedelayedresultof aggressivebirthcontrolpoliciesimplementedintheemergingworldinthe 1970s,particularlytheone-childpolicyChinainstitutedin1978.Inemerging anddevelopedcountries,thepopulationslowdownwasalsofueledbyrising prosperityandeducationlevelsamongwomen,manyofwhomdecidedtopursue acareerandhavefewerchildrenornoneatall. Therootsofthisdemographicshiftlieinbasicchangesinmortalityand fertilityratesoverthelasthalf-century.Since1960advancesinscienceand healthcarehaveallowedpeopletolivelonger