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...

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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
Answered 1 days AfterMar 12, 2021

Answer To: The Rise and Fall of Nations: Forces of Change in the Post-Crisis World - PDFDrive.com THERISEAND...

Abhishek answered on Mar 13 2021
145 Votes
Running Head: INTERNATIONAL BUSINESS                        1
INTERNATIONAL BUSINESS                                5
INTERNATIONAL BUSINESS
Table of Contents
Impact of the Political Circle of Life on Country    3
Impact of Good versus Bad Billionaires on Country    3
Reference    5
Impact of the Political Circle of Life on Country
The author of the book Sharma takes the example of Putin to demonstrate the political circle of life. Sharma (2016) sheds light on the rise and the fall of the Russian economy in a matter of a few decades. After the 1990s, the change in Russia's political scenario led by Vladimir Putin changes the design of the Russian economy.
This led to the rise of Russian's significant economic surge from the export of oil and gas. Thus, the author signifies that with the height of the Russian economy, Putin had become much more arrogant from his earlier times and has led to the fall of the great opportunities the county had in the process. The Russian government did not shift and diversify from the gas and oil economy.
This led to...
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