THE

10

RULES OF
SUCCESSFUL
NATIONS
RUCHIR SHARMA
 CONTENTS

INTRODUCTION. IMPERMANENCE

1. POPULATION

2. POLITICS

3. INEQUALITY

4. STATE POWER

5. GEOGRAPHY

6. INVESTMENT

7. INFLATION

8. CURRENCY

9. DEBT

10. HYPE

ACKNOWLEDGMENTS
APPENDIX
NOTES
INDEX
 THE 10 RULES OF
SUCCESSFUL NATIONS
 Introduction

IMPERMANENCE

Economists have failed to predict every US recession since records

began, including the Great Recession that rattled the world in 2008.
They are under attack even within their own ranks for being too
academic—too focused on elegant mathematical models that
pretend humans always act rationally, or on data that is updated too
infrequently to foretell big economic shifts.
Everyone knows that forecasting is a mug’s game, but also
necessary and unavoidable. Politicians, technocrats,
businesspeople, and investors all have a huge stake in predicting the
economic rise and fall of nations, since they can’t begin to formulate
plans or policies without making an educated estimate as to what is
coming next. Getting it right can help billions of people; the costs of
getting it wrong are equally large.
This book, culled from my quarter century in the game, outlines
ten rules for spotting whether a country is on the rise, on the decline,
or just muddling through. Together, the rules work as a system for
spotting change.
A few basic principles underlie all the rules. The first is to
recognize the impermanence of economic trends and the regular
rhythms of change. Recent crises are just the latest reminder that
the normal condition of the world is impermanence—an environment
prone to booms, busts, and protests.
In the 1960s the fast-growing Philippine economy was being feted
as the future of Asia, and that buzz helped Manila win the right to
host the headquarters of the Asian Development Bank. By the next
decade, under the dictatorship of Ferdinand Marcos, growth was
stalling, but the ADB was in Manila for good. In the 1970s, similar
exercises in extrapolation led some American scholars and
intelligence analysts to predict that the Soviet economy was destined
to become the largest in the world. Instead, it collapsed at the end of
the 1980s.
Hard experience did not prevent a new outburst of hype in the first
decade of the twenty-first century, when global forces—easy money
pouring out of Western banks, spiking prices of commodities, and
soaring global trade—doubled the growth rate of emerging nations.
By 2007, the number of economies expanding faster than 5 percent
had reached 100, or five times the postwar norm—but forecasters
assumed this freak event was a lasting condition. They figured that if
the hot economies stayed hot, the average incomes of many
emerging nations would soon catch up to, or “converge” with, those
of rich nations. Envisioning a world without poor countries was about
as plausible as forecasting a world without poor people, but few
questioned these forecasts.
Marketers had started calling Brazil, Russia, India, and China the
“BRICs” to capture the idea that these emerging giants were a solid
bet to dominate the global economy. They assumed China’s rise
would lift up countries like Russia and Brazil, which had been thriving
mainly by exporting oil and other commodities to the Chinese. Ever-
growing demand from China would drive a “super cycle” of rising
commodity prices and growing wealth from Moscow to Lagos. At the
same time, global trade and capital flows were soaring, and many
forecasters thought those forces would help boost incomes in the big
emerging markets.
This optimism was derailed by the crisis of 2008. Trade flows
slowed. Money flows collapsed. The price of oil and other
commodities fell sharply, and by 2014, analysts were spoofing the
BRICs as “broken,” crumbling, and a “bloody ridiculous investment
concept.”1 Since then China’s annual GDP growth has slumped from
14 to 6 percent, and less by private estimates.2 As of 2019, Russia
and Brazil were growing at 1 percent. India, the one BRIC that
looked reasonably solid in 2014, was slowing sharply as well.
The fate of the BRICs is a reminder that it is hard to sustain rapid
economic growth. The widespread prosperity of the West after World
War II, and across the world after 1980, has blinded many to this
fact. Looking back 150 years, researchers at Goldman Sachs found
dozens of “great stagnations,” long slumps that lowered a nation’s
average income, relative to its peers. Of these slumps, 90 lasted at
least six years, and 26 spanned more than ten years. These slumps
hit countries ranging from Germany in the 1860s and ’70s to France
in the first decade of the twenty-first century. The longest lasted
twenty-three years and struck India starting in 1930. Even before the
Industrial Revolution, major regions of Europe and Asia went through
phases stretching hundreds of years with virtually no growth.3
Writers have lavished attention on the post–World War II
“miracles”—particularly Asian nations like Japan, South Korea, and
Taiwan—that sustained strong growth for decades and graduated
from the developing to the developed ranks. But they are rare
exceptions to the rule of impermanence. The long slumps and
extended setbacks are more common, and at least as relevant as
the postwar “miracles” to understanding how economies really work.
Yet forecasters have continued to assume that booms—from China
to India and Kenya—will last indefinitely. The impermanence of
economic conditions means that one can never extrapolate current
trends into the distant future.

Keep the Future Close

One basic goal of this book is to refocus economic conversation on a
practical time frame. Trends in globalization have ebbed and flowed
since at least the twelfth century, when Genghis Khan secured
commerce along the Silk Road, and the cycles of business,
technology, and politics that shape economic growth are short,
typically about five years. As a result, any forecast that looks beyond
the next cycle or two—five to ten years—is likely to be way off the
mark.
Predictions that look 20 to 100 years into the future cannot
possibly survive change in the intervening years. New economic
competitors can arise, as China did in the early 1980s, or as eastern
Europe did in the 1990s. New technology can emerge, as the
internet did in the 1990s and as new digital manufacturing
techniques like 3-D printing are doing now. When a country like
Japan, China, or India grows rapidly for a decade, analysts should
be looking not for reasons the streak will continue but for the
moment the cycle will turn.
For practical people, forecasting is all about timing. The dogged
consistency of permabulls and permabears undermines their
credibility, because timing matters. Economists like Nouriel Roubini,
who had been predicting a US debt meltdown for many years, were
given a lot of credit when it finally came in 2008. But had businesses,
policy-makers, and investors built plans around those warnings, they
would have missed the global boom before 2008 and all the
opportunities that came with it. Practical forecasters focus on
dynamic indicators that can reveal critical change at the margin,
meaning imminent shifts in the economy that can foretell its basic
direction for the next five years. They ignore futurists predicting the
coming Asian or African century.
Noted psychologist Philip Tetlock has put thousands of predictions
to the test, and in his book Superforecasting4 he presents evidence
confirming that forecasts get less reliable the farther they reach into
the future, and that they become no more accurate than random
guesses beyond five years.

The Market as Mirror

A realistic approach to economic forecasting also needs to weed out
data that is not forward-looking, reliable, and up to date. In early
2014, Nigeria revised its official GDP to $500 billion, almost doubling
the size of the economy. This transformation caused no stir because
people who watch emerging markets have grown accustomed to
shifting numbers. Commenting on the frequent revision of official
Indian economic data, former central bank governor Y. V. Reddy
once cracked to me that while the future is always uncertain, in India
even the past is uncertain.
Numbers coming out of the emerging world have a way of
morphing to satisfy the interests of major players. In China, skeptical
analysts have started checking official GDP growth figures against
data they consider more reliable, such as electricity consumption. In
2015, however, reports emerged that the government was instructing
developers to keep the lights on even in empty apartment complexes
—so that electricity consumption data would confirm official growth
numbers. Four years later, the informal data still suggested that the
official growth claims were too high.
Investors take pains to find real-time intelligence from the field,
and market movements accurately reflect their collective wisdom
about the prospects of an economy. True, markets are subject to
flights of panic, and critics like to quote Nobel Prize–winning
economist Paul Samuelson, who quipped in 1966 that the stock
market had “predicted nine out of the last five recessions.” But
Samuelson was no more impressed by economists, who have a
worse forecasting record than markets. Ned Davis Research has
shown that “economists, as a consensus, called exactly none” of the
last seven recessions, dating back to 1970.5 In the United States,
the National Bureau of Economic Research is the official documenter
of recessions, and on average it has recognized the start of
recessions eight months after the beginning of the recession.
To see how well markets anticipate trouble for the economy, I
looked at data for the past fifty years for periods when the S&P 500
fell from its most recent peak by 10, 15, or 20 percent. It turned out
that, typically, the market declined by at least 15 percent six months
before the seven US recessions officially began. In short, the market
sniffed out trouble in a timely manner.
 But, as Samuelson suggested, the stock market also raised false
alarms. The S&P 500 has suffered 15 percent declines twelve times
since 1965, so there were five times when a sharp decline was not
followed by a recession, most recently in 2011. All told, though, the
market accurately signaled a coming recession 60 percent of the
time. Economists as a group got it right zero percent of the time.
Credit and commodity markets can also be timely indicators. In
financial circles, copper is known as “Dr. Copper” because a sharp
decline in its price is almost always an ominous sign for the global
economy. In the United States, one of few countries where most
lending is done through bonds and other credit market products
rather than through banks, the credit markets started sending
distress signals well before the onset of the last three recessions, in
1990, 2001, and 2007. The credit markets also send false signals on
occasion, but for the most part they have been a fairly reliable
bellwether.

Stifle Biases
The prosperity of the postwar era created what World Bank
researchers have called “optimism bias,” a tendency to predict that
strong growth streaks will continue and weak economies will soon
revive. After a shock like the global financial crisis in 2008, however,
the popular mood was likely to revert to pessimism, which Austrian-
born economist Joseph Schumpeter described as the default attitude
of the intellectual classes. The trick for forecasters is not to get
caught up in the current mood, and to remember the widely known
but widely ignored tendency of any economic trend (whether in GDP,
investment, credit, or other factors) to regress to the mean—or return
to its long-term average.
The tendency to believe that current trends will endure is
magnified by “anchoring bias.” Conversations tend to build on the
point that starts or anchors them. During the first decade of this
century, the average growth rate of emerging nations accelerated to
the unprecedented rate of 7 percent, and economists came to see 7
percent as the new standard. By 2010, the notion that emerging
economies were about to see growth drop to 4 percent seemed
implausibly pessimistic, even though 4 percent is their average
growth rate in the postwar era. Yet that drop is what happened.
In general, the correct anchor for any forecast is as far back as
solid data exists, the better to grasp the historic pattern. The patterns
of boom and bust described in this book are based on my own
research, including a database of postwar emerging economies that
managed to grow at a rate of 6 percent for at least a decade. Though
many emerging economies still aspire to grow faster, few do. Six
percent is rapid enough to lift their average incomes eventually to
developed world levels, yet moderate enough that it yields a broad
and statistically significant sample of fifty-six cases.*
The habit of hanging on to an improbable anchor is compounded
by “confirmation bias,” the tendency to collect only data that confirms
one’s existing beliefs. In the first ten years of this century, hype for
the BRICS dominated public discussions. Liberal advocates for the
poor were thrilled by the rise of poor nations; investors on Wall Street
were thrilled by the prospect of making fortunes in the big emerging
markets. Many found data to confirm the hype. Few wanted to hear
that it was all likely soon to revert to the mean. But it did.
The question to ask is never, What will the world look like if current
trends hold? It is, rather, What will happen if the normal pattern holds
and cycles continue to turn? In a sense, the rules are all about
playing the right probabilities, based on the cyclical patterns of an
impermanent world.

What Matters Most

Often, economists and writers oversell the importance of a single
factor—geographic location, the “curse of oil,” the advantage of
liberal institutions or of a young and growing population—as the key
to understanding what makes nations succeed or fail. These factors
are often important in shaping growth, and my rules take account of
all of them. But no single factor determines how an economy is likely
to change over the next five years. For example, the “curse of oil” is
real: many countries have grown poorer since they discovered oil,
owing to the corruption that often bubbles up around hydrocarbons.
But a gut distaste for unsavory petrostates can blind forecasters to
the likelihood that when global oil prices enter a boom decade, many
oil economies will follow.
On the other hand, sprawling, multidimensional growth models are
even more common. Most forecasters understand that economic
growth is the product of multiple factors, and the balance of these
factors will shift over time, as a country grows richer and as global
conditions change. Institutions such as the World Bank and the
International Monetary Fund count hundreds of factors that have an
impact on growth, from the share of university students who are
studying law to whether the country in question is a former Spanish
colony.
Trying to avoid the mistakes of excessive simplicity and
unmanageable complexity, I settled on a system of ten rules—
enough to capture the big picture without bogging down in detail.
The rules emerged from my twenty-five years of experience leading
a team of investors in emerging markets, and trying to make sense
of the fascinating welter of data and observations they would pick up
on the road. Early on, the discussions tended to wander with the
whims of the person in the field. So we started to test our
observations empirically, to see which ones really worked in
forecasting. The rules distill that research, narrowing down the
thousands of factors that can determine the economic success of
nations to the ten that matter most.
One way to think about economic growth is that it is the sum of
population growth and productivity growth: how many more workers
are entering the labor force, plus how much more they are
producing. Throughout recorded economic history, in fact, population
has accounted for half of GDP growth. That is why the first chapter
focuses on the inexorable impact of population trends on the
economy, and what governments can do about it. In a way, this is
half the story.
The rest of the rules deal one way or another with the other half of
the growth story, which is captured in a loose way by the productivity
growth numbers. Between 1960 and 2005, the average annual
productivity growth rate worldwide was around 2 percent, but that
rate downshifted by almost a full percentage point in the last ten
years. Like population growth rates, productivity growth rates have
fallen by varying degrees, from less than a percentage point in the
United States to more than 2 points in South Korea and nearly 4
points in Greece.
The big difference is that population growth is easy to measure,
and there is no question about the scale of the slowdown.
Productivity is very hard to measure, and debate rages about
whether the productivity decline is real. Optimists say existing
measures fail to capture the cost and time savings produced by new
technologies, including robots, artificial intelligence, and the “internet
of things.” Skeptics say these new technologies contribute as much
to wasting time—on gaming, cat videos, and the like—as to boosting
productivity.
Whichever side is right, population data is reliable, and is therefore
a very practical economic forecasting tool. Productivity data is too
fuzzy to be useful in itself, so the rest of my rules get at this side of
the story in other ways.
Economic growth can also be thought about as the sum of
spending by government, spending by consumers, and investment to
build factories or homes and businesses. Of these, investment is by
far the most important generator and indicator of change, because
investment generates the income that makes spending by
government and consumers possible.
Growth can also be broken down by the major sectors: agriculture,
services, and manufacturing. Of these, manufacturing has the
biggest impact on the direction of the economy, because it has
traditionally been the main source of jobs, innovation, and increases
in productivity. So the rules have a lot to say about investment and
about factories, but much less to say about consumers and farmers.
Similarly, when the rules drill down into investment and
manufacturing, or currencies and debt, they aim to narrow the
hundreds of measures one could use to track these factors to the
one or two that matter most. To anticipate the next global financial
crisis, which among thousands of available debt measurements
should we be watching?
For the purpose of forecasting, it’s also important, perhaps
counterintuitively, to ignore long-term factors that economists and
politicians may love, but that don’t work well as signs of change. The
payoff from investment in education, for example, is so slow and
variable that it is almost useless as a predictor of economic change
in the foreseeable future. The Soviet-era legacy of excellence in
education has given Russia the highest average number of years of
schooling (11.5) and the largest share of university grads (6.4
percent) of any emerging economy, but with little impact on
economic growth. In China, the economy took off in the 1980s as
officials lavished money on roads, factories, and other investments
that had a fast impact on growth; good schools came later. The
post–World War II booms in the United States and Britain have often
been linked to the spread of public education, but that change began
before World War I. So my rules largely ignore the sacrosanct
subject of schools.
Aspiring to scientific credibility, economists also tend to ignore any
factor that is too soft to quantify or incorporate into a forecasting
model—even a factor as critical as politics. Numbers alone can’t
capture the impact of an energetic new leader bent on economic
reform or, on the flip side, lining his cronies’ pockets. My rules
therefore offer a mix of ways to read hard data on critical factors like
credit, prices, and money flows, as well as softer signs of shifts in
leadership and policy.

An Eye for Balance

Emerging countries often grow in torrid streaks, only to fall into major
crises that wipe out all their gains. That’s why among the nearly 200
economies currently tracked by the IMF, only 40 have reached the
“developed” class. The last to make it was South Korea, two
decades ago. The rest are emerging, and most have been emerging
forever. All the rules aim, one way or another, to capture the delicate
balances of debt, investment, inflation, currency values, and other
key factors required to keep an economy growing steadily faster than
its peers.

These are the basic principles: Remember that economic trends are
impermanent; churn and crisis are the norm. Avoid straight-line
forecasting, foggy discussions of the coming century, and sweeping
single-factor theories. Stifle biases, whether political, cultural, or
“anchoring.” Recognize that any economy, no matter how successful
or how broken, is more likely to return to the long-term average
growth rate for its income class than to remain abnormally hot or
cold indefinitely. Watch for balanced growth, and focus on a
manageable set of dynamic indicators that make it possible to
anticipate turns in the cycle. With these principles in mind, the rules
can help turn the “dismal science” into a practical art, and perhaps
nudge economists to think in ways that could help anticipate the next
big crisis.

____________
* See the Appendix for this list of fifty-six postwar success stories.
 1

POPULATION

Successful Nations Fight Demographic Decline

The impact of population growth on the economy is very

straightforward, and very large. If more workers are entering the
labor force, they boost the economy’s potential to grow, while fewer
will diminish that potential. And unlike any other major force in
economics, population growth is a function of just a few factors—
fertility, longevity, and immigration—which can be measured with
high accuracy. The result is that the track record of population
forecasts is strikingly good. Starting in the 1950s, the United Nations
issued forecasts for global population in the year 2000 a total of
twelve times, and all but one of those forecasts was off by less than
4 percent.
According to numbers from the authoritative Maddison database,
going back more than 1,000 years, the world economy has never
broken free of the limits imposed by population growth. Throughout,
increases in population have accounted for roughly half of economic
growth. Before the Industrial Revolution of the late nineteenth
century, annual global population growth did not exceed half a
percent, and global economic growth did not exceed 1 percent—for
any sustained period. Population growth increased to 1 percent by
the early part of the twentieth century, on the back of falling mortality
rates, and economic growth accelerated to about 2 percent. After
World War II, the baby boom pushed population growth toward 2
percent, and economic growth rose to an annual pace of nearly 4
percent for the first and only time in history.
Then came a stark shift. As emerging countries like China started
to implement strict birth control policies, and women in developed
countries started to delay or avoid childbirth to pursue careers,
suddenly around 1990 population growth started to dry up. Fears of
overpopulation, which had wracked the world in the 1960s and ’70s,
began to fade. Fifteen years later, the growth rate in the world’s
working-age population—defined as people between the ages of 15
and 64—also began to fall sharply.
Today, successful nations are taking aggressive steps to combat
working-age population decline. To identify those countries, look first
at the natural growth rate in that age group. This rate is a baseline
for how fast an economy can grow. A 1 percent decline in the
working-age population growth rate will shave about 1 percentage
point off economic growth, which is roughly the story of the last
fifteen years.
In the five decades before 2005, growth in the global working-age
population had averaged 1.9 percent a year, but it has since
plummeted to 1.2 percent. Nonetheless, most economists have yet
to lower their economic growth forecasts accordingly. One reason is
“anchoring bias”: 4 percent global economic growth has been the
norm for much of their lifetimes, and their assumptions are still
anchored in that era. Another is that, by sheer coincidence, the
collapse in working-age population growth came on the eve of the
global financial crisis, which became the go-to explanation for all the
world economy’s ills.
The economic impact of the demographic downshift is hard to
overstate: if population growth had stayed around 2 percent—the
trend rate between 1950 and 2005—the global population today
would be 8.7 billion, not 7.7 billion. And very few countries would be
worried about the new demographic drag on economic growth.
The working-age population is already shrinking in Germany and
China; it is growing, but very slowly, in the United States; and it is
booming in only a handful of large emerging countries, including
Nigeria, the Philippines, and Saudi Arabia. The United Nations
forecasts that population growth will continue slowing through the
end of this century, all over the world.
Next, look at what governments are doing to counteract slow
population growth. One tactic is financial “bonuses” for women to
have more children, but these incentives have a spotty record and
are not a promising sign over a practical time frame, since it takes at
least fifteen years for newborns to age into the labor force.
Governments can, however, quickly address the demographic
challenge by tapping often underutilized pools of adult labor. In
particular, they can increase the size of the labor force by
encouraging immigrants, women, and retirees to enter or reenter the
job market. Perhaps most controversially, they can subsidize robots
in the workforce.

The 2 Percent Population Pace Test

Unlike most of my rules, demographics are not a dynamic indicator
of coming shifts. The number of young adults entering the workforce
changes glacially, but it sets a baseline for how fast the economy
can grow and is therefore too important to ignore.
Consider my database of the fifty-six postwar cases in which a
country sustained an average economic growth rate of 6 percent or
more for at least a decade. In three out of every four, from Brazil in
the 1960s to Malaysia in the 1990s, the working-age population grew
at an average pace of at least 2 percent a year. In short, if a
country’s working-age population growth rate is not above 2 percent,
the country is not likely to enjoy a long economic boom.
Moreover, when economies did boom without 2 percent population
growth, they did so in unusual circumstances. Some, like Japan in
the 1960s or Russia after the fall of Communism, were rebuilding
after a period of war or crisis. Others were already relatively well off,
such as Chile and Ireland in the 1990s, when reform and new
investment increased productivity and compensated for weak
population growth.
The 2 percent pace test does not bode well for the world’s growth
prospects. In the 1980s, seventeen of the twenty largest emerging
economies had a working-age population growth rate above 2
percent, but after 2010 that number fell to just two: Nigeria and Saudi
Arabia. It is expected to fall to just one—Nigeria—after 2020. The
number of working-age people is also growing at a rate near or
above 2 percent in some smaller economies, such as Kenya,
Pakistan, and Bangladesh. But the overall picture is clear: a world
with fewer booming populations will produce fewer economic stars.

The Uncertain Demographic Dividend

Even in countries with strong population growth, leaders need to
avoid falling for the idea that population booms pay off automatically
in rapid economic growth.
Before 2000, strong population growth was common but typically
did not produce an economic boom. Scanning the record for nearly
200 countries, going back to 1960, I found 698 cases in which data
for both population growth and GDP growth are available for a full
decade. In more than 60 percent of these cases, the country had a
working-age population growth rate of more than 2 percent, but only
a quarter of those population booms were accompanied by average
GDP growth of 6 percent or more. The countries where a population
boom failed to produce rapid economic growth include Turkey in
every decade between 1960 and 2000, and the Philippines between
1960 and 2010.
Good demographics are often a necessary condition for rapid
growth, but never a sufficient condition. The “dividend” pays off only
if political leaders create the environment necessary to attract
investment and generate jobs.
 In the 1960s and ’70s, booming populations in Africa, China, and
India led to famines, unemployment, and civil strife. In the Arab
world, the working-age population grew by 3 percent a year between
1985 and 2005, with no economic dividend. By 2010, high youth
unemployment was fueling discontent from Iraq to Tunisia, where the
Arab Spring revolts began the next year. India, too, had assumed
that its booming population would provide a demographic dividend,
but now it struggles to generate jobs for all its youth. So, look at the
working-age population growth rate to understand the economy’s
potential, then look at what the government is doing to realize that
potential.

When Populations Shrink

If the population is shrinking, it is close to impossible to generate
strong economic growth, or as the European Commission warned in
2005, “Never in history has there been economic growth without
population growth.”1
In my analysis of population and GDP growth in 200 countries
going back to 1960, I found only 38 cases (out of 698) in which the
working-age population was shrinking over the course of a decade.
The average GDP growth rate in these cases was just 1.5 percent;
only 3 of these countries managed to sustain a GDP growth rate of 6
percent or more. All three were small countries in special
circumstances: Portugal after opening to free trade in the 1960s, and
Georgia and Belarus following the tumultuous collapse of the Soviet
Union.
This record suggests that rapid GDP growth is unlikely in countries
with shrinking populations, which are increasingly common. In the
early 1980s, there were two countries with a declining population of
working-age people: war-torn Syria and Afghanistan. In 2019, there
were forty-six, including major powers such as China and Russia,
and that number is on track to double by the middle of the century.
 Shrinking Labor Forces

Source: United Nations.

In China, the working-age population growth rate hovered near 2

percent as recently as 2003, then dropped steadily until it turned
negative for the first time in 2015. That makes it unlikely that China
can achieve its official growth target of better than 6 percent, and
helps explain why 2015 was also the year when China replaced its
one-child policy with a two-child policy. The impact of these
restrictions will linger, however; China’s labor force is still expected
to lose a million workers a year in coming years.
Shrinking workforces are the result of falling birth rates. Since
1960, the average number of births per woman has fallen from 4.9 to
2.5 worldwide. In emerging nations, the collapse has been more
dramatic, owing in part to those aggressive birth control policies.
Fertility rates in India and Mexico have plummeted, from more than 6
in 1960 to nearly 2.1—the “replacement rate” below which the
population eventually starts shrinking. Nearly one of every two
people on earth already lives in one of eighty-three countries where
the birth rate is below the replacement level, including China,
Russia, Iran, Brazil, Germany, Japan, and the United States.2
Population forecasts also bode poorly for economic growth in
developed countries between 2020 and 2025. Among the ten largest
developed economies, the number of working-age people is
expected to grow at a rate of about 0.2 percent in the United States,
Britain, and Canada; shrink a little in France and Spain; and contract
at a pace of 0.4 percent a year or more in Italy, Germany, and Japan.
The best news for developed countries is confined to smaller ones,
led by Singapore and Australia. In short, slower population growth
also reduces the potential for powerful economic engines to appear
in the developed world.

Baby Bonuses
The race to fight the baby bust is already on. According to the United
Nations, 70 percent of developed countries today have implemented
policies to boost their fertility rate, up from about 30 percent in 1996.
Many nations have tried offering women “baby bonuses,” a form of
state meddling in the reproductive process that is often controversial,
and rarely effective.
In 1987, Singapore pioneered these campaigns, under the slogan
“Have three, or more if you can afford it.” The incentives it offered,
including subsidized hospital stays, had little effect on fertility rate.
Canada introduced a baby bonus in 1988 but later withdrew it, in part
because—as other countries have also found—many of the women
who responded to direct cash incentives were very poor, and their
children added greatly to welfare expenses.3
When Australia’s treasurer Peter Costello announced baby
bonuses in 2005, he urged women to “lie back and think of the aging
population,”4 but they mostly ignored the call, and six years later the
government cut the bonuses. Few people struggling to balance
career and family are going to respond to officials issuing patriotic
calls for more babies.
In France, the socialist government of Prime Minister Lionel
Jospin, who was in power from 1997 to 2002, tried to widen the
appeal of baby bonuses by making them more generous. Looking to
push French fertility back above the replacement rate, it offered
lavish incentives for parents having a third child: home-help
subsidies, tax cuts, and a 10 percent pension increase, a 75 percent
discount on rail tickets, a monthly allowance of over $400. Architects
of the plan called baby bonuses “spending on the future,” and they
are still in place.
Like China’s now abandoned one-child policy, baby bonuses are a
form of meddling with reproduction and are liable to produce new
distortions. In Europe, as demographers Hans-Peter Kohler and
Thomas Anderson have argued, the birth rate has fallen especially
fast in countries like Germany, where more traditional cultures
frowned on mothers returning to work and, as a result, more
professional women chose not to have children. In part because of
such cultural differences, the impact of state intervention in the
human reproductive process is likely to be both slow and
unpredictable. The more promising approach is to open doors to
adults who are ready and willing to work immediately.

The Battle to Attract Migrants

Every nation prefers to think of itself as productive in the sense of
innovative and smart, not just fertile. But population growth—the
race to make babies and attract immigrant workers—is where the
real action is.
In recent years, productivity growth has not only been slowing
across the world; it has also been converging. Looking at the United
States, Germany, Japan, Canada, Australia, and Britain, I found that
regardless of which two countries you compare, the gap in
productivity growth has been narrowing sharply. The reasons are
complex, possibly having to do with the accelerating pace at which
technology spreads, but if the hotly debated productivity data is
accurately capturing the trends, the implication is striking.
For example, the success of the United States, which is often cast
as more dynamic than its rivals, owes more to babies and
immigrants than to big ideas coming out of Silicon Valley. Until
around 2010, for example, productivity was growing significantly
faster in the United States than in Japan or Germany, but that
advantage has largely disappeared since then. If it weren’t for the
boost the United States gets from babies and immigrants, its
economy would have grown no faster than those of Japan and
Europe in the 2010s. In terms of per capita income, the yearly
growth rates of the United States, Germany, the rest of Europe, and
Japan have been essentially the same: about half a percentage
point.
Therefore, population growth gaps will be increasingly decisive for
economic competition. In the battle to attract immigrants, the big
winners are expected to include Canada, the United States, and
especially Australia, where net migration was on track to increase
the population by about 3 percent between 2015 and 2020—the
most of any large developed country. Though its population is
starting to age, as so many are, the economic impact will be
relatively light in Australia—if it keeps its doors open.
That’s a big if, given the scale of the anti-immigrant backlash. In
2014 and 2015, a flood of refugees boosted migration into Germany
more than eightfold, to over a million a year, triggering street
protests. Ultimately, those protests made more open immigration
policies politically untenable, even though in theory, Germany could
have used every one of the new arrivals, and then some. By my
calculation, Germany would have to accept 1.5 million immigrants a
year, every year between 2015 and 2030, to maintain its current
balance of working-age people to retirees.
But it makes no sense to calculate the immigrant impact on an
economy without factoring in the likelihood of political resistance. In
Japan, less than 2 percent of the population is foreign-born,
compared to 30 percent of Australia’s population, and political
leaders have only recently begun to question the old assumption that
Japan’s ethnically “harmonious” culture is an economic advantage.
Recognizing the need for more workers, Prime Minister Shinzo Abe
increased the number of visas available to economic immigrants
after taking power in 2012. The numbers picked up a bit, but Japan
would have to increase net migration tenfold—from the current rate
of 50,000 people a year—to make up for its projected population
decline through 2030. In other words, Japan would have to become
another Australia, which is politically improbable.
 South Korea, another aging nation that once celebrated its ethnic
homogeneity, is more open to change. After the crisis of 1997–98,
South Korea began promoting multiculturalism and extending work
permits to foreigners in industries facing labor shortages. Since the
year 2000, the immigrant population has increased 400 percent, to
1.3 million, compared to an increase of just 50 percent in Japan.
Though the working-age population is already shrinking, it would
have been shrinking four times more rapidly without the influx of
migrants.

Free the Forced Retirees

The next pool of mature labor is the elderly. To figure out which
economies are most vulnerable to aging, compare the number of
working-age people to the number of people who are older than 64
or younger than 15—also known as the “dependency ratio.” When
the dependency ratio is rising, fewer workers are available to support
the growing number of retirees, and growth suffers.
Dependency ratios are expected to rise especially fast in emerging
economies, because of a sharper fall in fertility rates and a faster rise
in life expectancy. Worldwide, the average life span is nineteen years
longer today than it was in 1960, but in China the average person
lives thirty years longer, until the age of 75. This progress has a cost.
The share of the Chinese population that is over 65 is on track to
double, from 7 to 14 percent, between 2000 and 2027—a period of
28 years. In contrast, that doubling took 115 years in France and 69
years in the United States.
Aging trends impact an economy mainly by increasing or
decreasing the number of available workers, but they also impact
productivity. In recent years, countries where the dependency ratio is
declining also tended to exhibit faster productivity growth. The
greater the share of the population that is employed and saving
money, the greater the pool of capital, which can be used to invest in
ways that raise productivity.
 According to demographer Andrew Mason, this secondary impact
on productivity was an important driver of the economic miracle in
East and Southeast Asia.5 During South Korea’s postwar boom, its
GDP growth rates rose or fell closely in line with changes in the
dependency ratio. China’s GDP growth peaked in 2010, the same
year the dependency ratio bottomed out at one dependent for every
three workers and started to climb.
The best-positioned countries are those taking steps to keep older
people working and out of the “dependent” population. While retirees
weigh on growth, an older labor force with a high share of
experienced workers tends to be more productive. In 2007, Germany
increased the retirement age from 65 to 67 for both men and women,
to be phased in gradually. European countries including Italy and
Portugal have pegged changes in the retirement age to increases in
life expectancy, and others are debating a retirement age of 70 or
more. There are holdouts, but pushing back the retirement age is a
positive sign for aging economies, adding both workers and output
per worker.

What Happened to Women in the Workforce?

The worldwide movement of women into the workforce that
energized much of the postwar era has stagnated in the past twenty
years, with the average female labor force participation rate stuck at
around 50 percent.
To get a sense of which economies have the most to gain from
tapping female labor, compare countries in the same income class.
Among rich countries, according to Organisation for Co-operation
and Development (OECD) figures for 2019, female labor force
participation ranges from 80 percent in Switzerland to 73 percent in
Japan and just 68 percent in the United States.
But government moves can change these numbers quickly. In
1990, only 68 percent of Canadian women participated in the
workforce, but that figure has since risen to 76 percent, owing to tax
cuts for second earners and new childcare services. In Japan, Prime
Minister Abe has incorporated “womenomics” into his plan to revive
the economy, and female labor force participation has risen from 65
to 72 percent during his five years in office. In the Netherlands, the
share of women active in the workforce has doubled since 1980, to
76 percent today, as a result of expanded parental leave policies and
flexible working hours. In short order, the Netherlands raced past the
United States in terms of utilizing the talents of its women.
The countries with the most to gain are those with the worst
gender imbalances. The OECD has estimated that if its member
nations could eliminate the gender gap by the year 2030—bringing
as large a share of adult women into the workforce as men—the
GDP gains would peak at close to 20 percent in Japan and South
Korea and more than 20 percent in Italy, where less than 40 percent
of women are in the formal labor force.
Scrapping outdated laws can provide a quick boost. In a 2014
survey of 143 emerging countries, the World Bank found that 90
percent have at least one law that limits opportunities for women.
Russia still has Soviet-era laws that rope off over 450 occupations as
“too strenuous for women.” Other nations ban women from owning
property, opening a bank account, signing a contract, entering a
courtroom, traveling alone, driving, or controlling family finances.6
Such restrictions are particularly prevalent in the Middle East and
South Asia, the regions with the lowest female labor force
participation rates: 26 and 35 percent, respectively.
The barriers to removing these laws are surmountable. Latin
America, despite its macho reputation, is making gains. Between
1990 and 2013, five countries increased female labor force
participation by more than 10 percentage points, and they were all
Latin. In first place was Colombia, where the share of women active
in the workforce rose by 26 percentage points, followed by Peru,
Chile, Brazil, and Mexico. In a country like Brazil, where fewer men
are working, the economy would have slowed a lot more if women
were not stepping in to fill their places.7 To get a bigger economic
boost from working women, many countries can start by just lifting
existing restrictions.
 Welcome, Robot
The last pool of available talent is bottomless but controversial:
robots. Today, many writers warn that the automation revolution
threatens to render human labor obsolete. Unlike nineteenth-century
technologies such as the loom, they argue, the latest advances are
not machines designed for one task, but automatons with artificial
intelligence that are capable of “machine learning” and will rapidly
replace humans even in thinking professions, such as law and
medicine.
This logic echoes arguments we have heard before. According to
Berkeley’s Machine Intelligence Research Institute, the standard
forecast for when artificial intelligence will “arrive” is the same today
as it was in 1955: in five years.
The automation revolution is still likely to be gradual enough to
complement rather than destroy the human workforce. The world’s
industrial robot population of about 2.1 million is growing, but it is still
dwarfed by the 247 million humans in the global industrial labor
force. Most industrial robots are still unintelligent machines,
committed to a single task, like turning a bolt, and nearly half are in
the car industry, which is still the single largest employer (of humans)
in the United States.
Workplaces evolve to incorporate machines, and people find a
way to fit in. Addressing fears of a jobless future, the Harvard
economist Lawrence Katz has remarked, “We never run out of jobs.
There is no long-term trend of eliminating work for people.”8 Though
US banks have installed many thousands of automated tellers, the
savings have allowed them to open up a lot more branches, so that
in total, the number of human tellers actually increased from 500,000
in 1980 to 550,000 in 2010.
If automation were displacing humans as fast as is implied in
recent books like Martin Ford’s The Rise of the Robots, then we
would be seeing a negative impact on jobs. We’re not. After the
crisis of 2008, economic growth was weak, but job growth was
unusually strong in major industrial countries, compared to earlier
recoveries. In fact the job picture has been particularly strong in
Germany, Japan, and South Korea, the industrial countries that
employ the most robots.
The practical answer to fewer young workers is, arguably, more
robots. An interviewer recently asked the Nobel economist Daniel
Kahneman about the threat that robots pose to employment in
China. “You just don’t get it,” Kahneman responded. “In China, the
robots are going to come just in time” to rescue the economy from
population decline.9 Beijing does get it, and now subsidizes industrial
automation.
Over the past quarter century, as the consulting firm McKinsey &
Company has pointed out, about a third of the new jobs created in
the United States were types that did not exist, or barely existed,
twenty-five years ago. In the next transformation, humans are likely
to replace jobs lost to automation with new jobs we can’t yet
imagine. And economists may start counting growth in the robot
population as a positive sign for economic growth, the same way that
today they analyze growth in the human population.
To assess whether population trends are pushing a nation to rise
or to fall, look first at growth in the working-age population, which
sets a baseline for how fast the economy can grow. Then track what
countries are doing to bring more workers into the talent pool,
quickly. Are they opening doors to the elderly, to women, to
foreigners, even to robots? In a world facing the challenge of
growing labor shortages, it’s all hands—human or automated—on
deck.
 2

POLITICS

Successful Nations Rally behind a Reformer

In the circle of political life, crisis forces a nation to reform, reform

leads to good times, and good times encourage an arrogance that
leads to a new crisis.
I have seen this pattern over and over. Even a figure like Vladimir
Putin, now widely castigated as a dictator, came to power as a
reformer out of necessity, following the financial crises that battered
Russia in the 1990s. He kept his head down, pushed economic
discipline, simplified a byzantine tax system, and began saving oil
profits. Over the next decade, his nation’s average income
quintupled, to around $12,000, encouraging complacency among
ordinary Russians and arrogance in the Kremlin. Intoxicated by sky-
high approval ratings, Putin quit pushing reform and began
tightening his hold on power. In 2014, a new crisis hit as oil prices
collapsed. Russia’s average per capita income fell by nearly a third,
to $8,000, and five years later it has yet to fully recover.
These relapses are commonplace. In the emerging world, growth
is much less steady than in the developed world, and it is marked by
sharper upturns and more prolonged downturns. Often the
downturns are painful enough to wipe out gains made during the
booms, limiting a nation’s progress over time. While politics can
shape the economy of developed nations, it matters even more in
emerging countries, where institutions tend to be weaker, and one
man or woman at the top can make all the difference.
Successful nations throw their political weight behind a reformer,
frequently one new to office. Often they are most likely to change for
the better when they are in the early stage of the circle of life: in the
depths of crisis, ready to back a serious reformer. On the far end of
the circle, they are most likely to change for the worse in boom
times, when the populace is sinking into complacency, accepting an
aging leader, forgetting that in a competitive world the need to reform
is constant.
The most auspicious moment is the arrival of the right leader, at
the right time. Putin fit this profile when he assumed power in 1999
and immediately launched sweeping reforms.
The least auspicious periods come during good times, when even
reformers tend to grow stale and overconfident, and begin hanging
on to power by extending government largesse to powerful allies and
to a complacent populace. By 2008, Putin fit this profile too. Many
others have followed the same trajectory, from agent of change to
obstacle to further reform, including Suharto of Indonesia, Mahathir
Mohamad in Malaysia, and Recep Tayyip Erdoğan in Turkey.
I have a couple of guidelines for spotting the leaders most likely to
shape popular support for reform into a workable program, at least
for the next five years. The probability of successful reform is higher
under fresh leaders than stale leaders, under leaders with a mass
base than well-credentialed technocrats, and under democratic
leaders than autocrats.

Fresh Leaders
The bigger the crisis, the more eagerly people will support a powerful
leader capable of disrupting the old order. Or as French president
Charles de Gaulle once put it, “History is the encounter of will and
exceptional periods.”1
The first big shock to postwar prosperity came in the 1970s, as
economic growth stagnated and inflation took off on the back of
runaway welfare-state spending and oil price shocks. As in any
crisis, some nations turned to populists promising easy answers and
national glory, but by the 1980s, a few had turned to pioneering
reformers, led by Margaret Thatcher in Britain, Ronald Reagan in the
United States, and Deng Xiaoping in China.
In these cases, the precipitating crisis was less a sudden shock
than a slow-burning fear of losing economic stature. Thatcher and
Reagan both vowed to turn back “socialism” and to make up for the
humiliations of the 1970s, when Britain became the first developed
nation to seek an IMF bailout and the United States was humbled by
the OPEC oil price hikes. Deng, in turn, had visited Singapore and
New York and had seen that these capitalist economies were far
ahead of his own.
The stagflation of the 1970s was traceable in varying degrees to
cumbersome state controls, and the solution pushed by this
generation of leaders created a basic template for cutting back the
state. In the United States and Britain, reform included some mix of
loosening central control over the economy, cutting taxes and red
tape, privatizing state companies, and lifting price controls. In China,
it included freeing peasants to till their own land and opening to
foreign trade and investment. As the United States and Britain
started to recover in the 1980s, and particularly as China’s economy
took off, these role models helped to inspire other reformers.
By the 1990s, under the new free market orthodoxy, many
emerging nations started to open up to outside trade and capital
flows, and some started borrowing heavily from foreign creditors.
Induced by these rising debts, currency crises struck in Mexico in
1994, spread through Asia in 1997–98, and then leapfrogged to
Russia, Turkey, and Brazil. The circle of life was turning, as these
crises generated popular support for a new generation of leaders:
Kim Dae-jung in South Korea, Luiz Inácio Lula da Silva in Brazil,
Erdoğan in Turkey, and Putin in Russia.
 This quartet brought runaway spending under control, laying the
foundation of budget and trade surpluses, shrinking debts, and
falling inflation that helped to underpin the greatest boom ever to lift
the developing world. In the five years before 2010, 107 of 110
emerging nations for which there is data saw their per capita income
rise relative to that of the United States. That catch-up rate of 97
percent compares to an average of 42 percent for every previous
five-year period going back fifty years. All the reasonably large
emerging economies were catching up, and the leaders of South
Korea, Russia, Turkey, and Brazil contributed more than any other
leaders to what became known as “the rise of the rest.”2
Kim Dae-jung of South Korea was arguably the most impressive
change agent in this group. A charismatic dissident who had been
jailed repeatedly by authoritarian regimes of the 1970s and ’80s, he
finally won election at the height of the Asian financial crisis in 1998.
He set about breaking up the secretive ties among politicians, state
banks, and leading conglomerates that had allowed Korean
companies to run up the massive debts that melted down in the
crisis. No member of this leadership generation did more to reform
the basic structure of his nation’s economy, which is one reason
South Korea remains economically stronger than Russia, Turkey, or
Brazil.
Still, the accomplishments of Kim’s peers were also remarkable.
Taking the advice of reformers like Russian finance minister Alexei
Kudrin, Putin attacked the corruption inherent in a byzantine tax
system by cutting the number of taxes from 200 to 16, combining
multiple income tax rates into a low flat rate, replacing multiple
collection agencies with one, and even firing all the tax police. The
reforms raised revenue and helped stabilize the national finances for
the first time since the collapse of the Soviet Union.
In 2003, Erdoğan took office in Turkey, and he, too, listened to
clearheaded advice about how to fix his nation’s finances. He
reformed a wasteful pension system, privatized state banks, passed
a law to shut down bankrupt companies more smoothly, and vowed
to maintain a budget surplus. Over the next decade, the Turks, like
the Russians, would see their average per capita income rise many
times over, to more than $10,000. Both countries would move from
the ranks of poor nations to the middle class, at least for a while.
One natural objection to this argument is that Russia and Turkey
were growing in the midst of a global boom, no credit to Putin or
Erdoğan. While good luck and global circumstances were part of the
story, good policies helped boost Russia and Turkey, which enjoyed
more solid growth and lower inflation during this period than did
economies under less responsible populists, like Hugo Chávez in
Venezuela and Néstor Kirchner in Argentina.
The same mix of good luck and good policy marked the rise of
Lula in Brazil. Elected in 2002, he replaced Fernando Henrique
Cardoso, a reformer who had started the fight against hyperinflation.
But it was the left-wing radical Lula who had the charisma and street
credibility to finish the job. He installed an inflation fighter in the
central bank, setting the stage for a steady boom. Following in the
footsteps of strong economic leaders before him, Lula combined a
basic understanding of what his country needed to recover with the
popular touch needed to sell hard reform, and thus he helped to
extricate his country from an exceptionally difficult period.

Stale Leaders
One simple way to think about this rule is that high-impact reform is
most likely in a leader’s first term, and less likely in the second term
and beyond, as a leader runs out of ideas or support for reform and
turns to securing a grand legacy, or riches for friends and family.
There are exceptions—Lee Kuan Yew governed Singapore for more
than three decades and never seemed to lose energy for reform—
but the general pattern holds. In the end, said the American essayist
Ralph Waldo Emerson, every hero becomes a bore.
Even Reagan fell victim to the “second-term curse,” that cycle of
scandal, popular fatigue, and congressional opposition that has
made it tough for American presidents to push change after their first
terms. Thatcher never lost her zeal for reform, but even fellow
conservatives tired of her uncompromising style and pushed her out
after twelve years. Deng, arguably the most important economic
reformer of the twentieth century, had ruled for only nine years when
he lost his titles as military and party chief following the 1989
uprising at Tiananmen Square. That episode sets a striking
benchmark for the political life span of even the best economic
leaders. By then, China had imposed a two-term limit to prevent
leaders from hanging on too long, but it effectively lifted that ban in
2018 for Xi Jinping, making him president for as long as he wishes.
Today, both Erdoğan and Putin are in their fourth terms in top
posts, and they are particularly ripe examples of stale leadership. By
the time his third term began in 2011, Erdoğan was abandoning
economic reform, enforcing Islamic social mores more aggressively,
and spending lavishly to re-create what he saw as the Islamic
greatness that had been Turkey in the Ottoman era. In 2013,
Erdoğan’s plan to turn a popular Istanbul park into an Ottoman-
inspired mall would envelop Turkey in a broad middle-class revolt
against aging governments across the emerging world.
Writers racing to explain these revolts focused on the rise of the
middle class, and its demands for political freedom, but there was a
problem with this analysis. Over the previous fifteen years, in twenty-
one of the largest emerging nations, the middle class had expanded
by an average of 18 percentage points as a share of the total
population, to a bit more than half.3 The protests, however, had
erupted in nations where the middle class had grown very fast, such
as Russia, or quite slowly, such as South Africa. The biggest
protests hit countries where the middle class was expanding at a
pace close to the 18-point average: Egypt, Brazil, and Turkey. In
short, there was no clear link between growth in the middle class and
the location or intensity of the protests.
However, every one of these protests targeted an aging regime.
Though just about every emerging economy was lifted up by the
global boom of the early twenty-first century, many leaders took
personal credit for this success and started playing tricks—dodging
term limits, switching from the prime minister’s office to the
presidency—to hang on to power. Between 2003 and 2013, among
the twenty most important emerging economies, the average tenure
of the ruling party doubled from four years to eight years.
By 2013, seven of the twenty most important emerging economies
were suffering political unrest: Russia, India, South Africa, Egypt,
Turkey, Brazil, and Argentina. And every one of those outbreaks
targeted a regime that had been in power more than eight years; this
was a revolt against stale leaders.
The stock markets sense this decay. Since 1988, the major
emerging countries have held more than 100 national elections,
producing seventy-six new leaders. Nineteen of those leaders,
including Putin, Erdoğan, Lula, and Manmohan Singh of India, lasted
two full terms in office. As their tenures wore on, the stock markets
turned on the entire group. These markets outperformed the global
average for emerging markets by 16 percent in the leader’s first
term, then barely matched the global average in the second term.
To pinpoint the moment when markets tend to turn on seated
leaders, I looked at the same set of elections and identified leaders
who lasted at least five years. For this group of thirty-nine leaders,
the stock market outperformed the emerging-world average by close
to 20 percent in the first 43 months of the leaders’ tenure—with close
to 80 percent of that gain coming in just the first 24 months. After 43
months, the market started to move sideways. This finding looks like
strong confirmation that emerging-world leaders are most likely to
push significant economic reform in their early years; markets, of
course, tend to go up when investors have reason to expect the
economy to accelerate and inflation to decline.
The same analysis for developed countries revealed no clear
connection between stock market returns and aging regimes. This
lack of a link doesn’t suggest that leaders don’t matter in developed
economies—only that they can produce much bigger growth swings
in developing economies. Sensing that, markets respond more
sharply to politics in the emerging world.

Populist Demagogues versus Populists Who Get It

Successful leaders often share two key attributes: support among
the masses, and a clear understanding of economic reform, or at
least a willingness to delegate policy to experts. In contrast,
demagogues who artfully combine populism and nationalism can be
politically successful but tend to be a disaster for the economy.
Consider the way Venezuela and neighboring Colombia parted
ways following the crises of the 1990s. In 2002, Venezuelans elected
radical populist Hugo Chávez, who pushed an experimental
socialism under which Venezuelan incomes have continued a half
century of decline. The same year, Colombia elected right-wing
populist Álvaro Uribe, who put the books in order and managed to
quell the guerrilla uprisings that had upended the economy for
decades. Uribe was hugely popular; in his first term the Colombian
stock market rose more than 1,600 percent—the biggest increase for
any of the sixty-three first-term leaders in my study.
The best leaders often combine public charisma and private
earnestness. Deng Xiaoping was a visionary reformer and magnetic
public personality, yet in private he could surprise visitors like Henry
Kissinger with detailed updates on such subjects as the
accomplishments of the department of metallurgy. Benigno “Noynoy”
Aquino, the Philippine president from 2010 to 2016, was not in the
same league as a reformer but had similar qualities. Aquino could
speak at length on subjects like local sardine fisheries—exactly the
kind of brass-tacks reformer the Philippines needed after a string of
flamboyantly corrupt leaders.
The global markets often make no distinction between reckless
and practical populists, or they project their own hopes for business-
friendly reform onto an election. In 2014 the markets were stunned
by the victory of the left-wing candidate Dilma Rousseff in Brazil, in
part because market analysts lost sight of how often nations facing
economic trouble will respond to a mix of nationalism and populism.
By early 2019, markets were hopeful about the rise of business-
friendly conservative governments across Latin America, only to see
those new regimes stumble in the face of popular protests in Brazil,
Argentina, Chile, and Peru.
 The False Dawn of the Technocrats
The markets tend to cheer for technocrats, assuming that leaders
with backgrounds at the World Bank or a prestigious university will
understand the requirements of strong growth. But technocrats rarely
succeed in national leadership roles, because they often lack the flair
to sell reform. The European Commission president Jean-Claude
Juncker captured the lament of technocrats everywhere when he
remarked, “We all know what to do, we just don’t know how to get re-
elected after we’ve done it.”4
During the euro crisis of 2010, several nations turned to
technocratic leaders. Greece brought in former central bank chief
Lucas Papademos; the Czech Republic appointed former national
chief statistician Jan Fischer. Italy put its hopes in Mario Monti, a
former university president and European commissioner. None
lasted much more than a year. In 2011, Italy’s stock market rose on
reports that Monti would be prime minister, but typically, he made
necessary austerity moves and failed to sell them to the public. He
lost the next election, taking just 10 percent of the vote.
Authoritarian states have been perhaps the most avid believers in
technocratic expertise. The Soviet Union collapsed in part because
of its devotion to pseudoscientific central planning, and its obsession
influenced many other countries, including dictatorships like East
Germany and democracies like India under the Congress Party or
Mexico during the seventy-one-year rule of the Institutional
Revolutionary Party (PRI).
On the other hand, technocrats can serve reformers well, if they
are giving the right advice and leaders are willing to listen. Former
World Bank economist Vikram Nehru tells a story about the bank’s
point man in Asia, Bernard Bell, during the 1960s. Bell advised
countries with a menu of ideas on how to boost exports and open to
global trade, but not every nation was ready to hear him. In India he
was greeted with a headline saying, in effect, “Bernie Bell Go to
Hell.” Then he went to Indonesia, where President Suharto was so
impressed that he asked the bank to appoint Bell as its
representative in Jakarta. Bell served there from 1968 to 1972, and
with a circle of advisers known as the “Berkeley Mafia” he helped to
put Indonesia on track to become a mini–Asian miracle over the next
two decades.
This model can be effective: technocrats serving an autocratic
regime, which can implement ideas rapidly. The trouble comes when
those in power ignore popular sentiment. In 1990s Argentina,
President Carlos Menem appointed his own team of US-trained
experts, who experimented with currency controls that stabilized the
peso but eventually led to mounting debt and an outright depression,
which began in 1998. The economy contracted by nearly 30 percent
over the next four years, leaving behind a populace that to this day is
deeply suspicious of technocrats bearing big ideas for reform.
China is the very different case of a successful technocracy that
may be growing too confident. For years, China reported much less
volatile economic growth than other developing nations, creating
suspicion that it was manipulating the numbers. I thought that
suspicion was overblown; Deng Xiaoping’s underlings did not always
report that growth was hitting the target.
The situation changed in 2012, when authorities began reporting
that growth was coming within a few decimal points of its official
target, and they continue to claim this uncanny accuracy seven
years later. At one point a top Chinese official went so far as to
declare that the leadership would not “tolerate” growth below 7
percent, as if they could forbid slowdowns in an $8 trillion economy.
Throughout, China has based its target on calculations of how fast
the economy needs to grow to catch the United States—a political
target reminiscent of those that guided the Soviet Union’s effort to
bury the West. We all know how that attempt ended. It is not possible
to engineer endless runs of fast growth, and that lesson applies to all
technocrats, even the successful ones in Beijing.

Bullets versus Ballots

The long boom in China, which dates back to the late 1970s, led
many people to believe that autocracies are better than democracies
at generating long runs of growth, and it’s true that autocrats do have
some distinct advantages. They can ignore or overrun opposition,
and that freedom allows the few visionaries among them to
accomplish a lot more than democratic rivals do. Autocratic leaders
have presided over enduring economic miracles in South Korea
under Park Chung-hee, and in Taiwan under Chiang Kai-shek and
his son. But these are exceptional cases.
Over the last three decades, there were 124 cases in which a
nation posted GDP growth faster than 5 percent for a full decade,
and 64 of those growth spells came under the rule of a democratic
regime, 60 under an authoritarian regime. In general, autocrats are
no more likely to produce long runs of strong growth.
Authoritarian systems also have glaring economic weaknesses.
Because the top leader faces no opposition at the ballot box, the
threat of regimes growing stale looms large. As the New York
University development expert William Easterly has pointed out, for
every long run of 10 percent growth produced by an autocrat like
Deng Xiaoping, there were several long periods of stagnation under
a Castro in Cuba, a Kim in North Korea, or a Mugabe in Zimbabwe.5
Once an authoritarian regime is forced to hold elections, it loses its
power to force rapid growth, but as a democracy it gains an incentive
to let growth rise naturally by, for example, respecting property rights
and breaking up state monopolies.
Because of their unchecked power, autocrats are also much more
likely to produce destabilizing swings between high and low growth.
Looking at records going back to 1950 for 150 countries, I found 43
cases in which the economy grew at an average annual rate of 7
percent or more for a full decade. The majority of these booms—35
—unfolded under an authoritarian government. These cases include
the Asian “miracle economies” that kept growth alive for several
decades. But they also include many economies that stumbled after
one strong decade, including Venezuela, which stalled in the 1960s,
Iran in the 1970s, and Syria in the 1980s.
Long slumps are also much more common under authoritarian
rule. Since 1950, there have been 138 cases in which, over the
course of a full decade, a nation posted an average annual growth
rate of less than 3 percent—which feels like a recession in emerging
countries. And 100 of those cases unfolded under authoritarian
regimes, ranging from Ghana in the 1950s and ’60s to Saudi Arabia
and Romania in the 1980s, and Nigeria in the 1990s. The critical flaw
of autocracies is this tendency toward extreme, volatile outcomes.

Extreme Growth in Autocracies

Source: World Bank, Haver Analytics, Politi-Score.

In the worst cases—economies that toggle between rapid growth

and recession—the government is usually authoritarian. Looking
back to 1950, there are 36 countries that have seen frequent
extreme swings, with years of growth above 7 percent alternating
with years of negative growth. Whipsawed in this way, it is
impossible for people to lead a normal life. And 27 of these
traumatized countries—including Iran, Ethiopia, Iraq, Syria, and
Nigeria—were governed by an authoritarian regime for most of this
period. Most of these countries are very poor to this day, with
average incomes below $5,000, because the boom years were
wiped out by bust years.
Sometimes these extreme booms and busts unfold under a single
dictator, who refuses to leave, despite the chaos he creates. The
most dizzying dictator was Saddam Hussein, who ran Iraq for
twenty-five years, through 2003, with more than three-fourths of
those years marked by extreme high or low growth. Close behind is
Hafez al-Assad, who ran Syria for thirty years, until 2000; nearly two-
thirds of those years were marked by extreme growth.
In contrast, democracies dominate the list of countries with the
steadiest growth. Together, Sweden, France, Belgium, and Norway
have posted only one year of growth faster than 7 percent since
1950. But over that time, these four democracies have all seen their
average incomes increase five- to sixfold, to a minimum of more than
$30,000, in part because they rarely suffered full years of negative
growth.
This is the stabilizing effect of democracy, and it accounts for a
simple fact: every large economy that has seen average income
grow to more than $10,000 is a democracy. China, with an average
income approaching $10,000, is trying to become a large, rich
autocracy, but it would be the first. Anyone looking for nations that
can grow steadily into the wealthy class should not bet on autocrats.

The Circle of Life

The fact that crisis and revolt can force elites to reform has been
clear at least since the early critiques of Marx, who thought
capitalism would collapse in a series of increasingly violent attempts
to defend the upper classes. Instead, leaders proved capable of
reforming capitalism, deflecting popular revolt by creating the welfare
state, starting in Germany and Britain.
The link between boom times and political complacency is equally
well documented—for example, in the cases of modern Japan and
Europe, which are often described as too comfortably rich to push
tough reform. What is less well recognized is that even in normal
periods, the circle of life turns, constantly reshaping economies for
better or worse.
The circle turns erratically, even in democracies where elections
are regularly scheduled. Nations may wallow in complacency for
years, which helps explain why the “lost decades” in Africa and Latin
America lasted longer than a decade. On the other hand, strong-
willed leaders have been known to keep pushing reform for decades
—but only in the rare “miracle” cases, including Korea, Taiwan, and
Japan before it fell off the miracle path in 1990.

Modern economies thus follow a cycle similar to that of energy and

matter—exploding in crisis, only to re-form and revive before dying
out once again. The circle of life tells you that the likely timing and
direction of change depends in part on where a country stands on
the cycle of crisis, reform, boom, and decay. In general, the fortunes
of a nation are most likely to turn for the better when a new leader
rises in the wake of a crisis, and most likely to decline when a stale
leader is in power.
The circle of life also helps explain why so few booms last long
enough to vault developing economies into the developed ranks, and
why those that make the leap are called “miracles”: they have defied
the natural complacency and decay that kills most long booms.
 3

INEQUALITY

Successful Nations Produce Good Billionaires

Until recently, wealth inequality was often downplayed as a social

issue, too soft to shape an economic forecast, despite the growing
body of research showing that rising inequality can undermine
growth in at least three ways: by discouraging mass consumption,
rewarding corruption, and fueling political resentment against wealth
creation.
Rich people tend to save more, if only because there is a limit to
how much more they can spend on material goods like food,
clothing, appliances, and cars. So, when more of the national income
goes to the rich, they spend less of this additional income than the
poor or middle class would, and the economy slows. The way
economists put it is that the rich have a lower “marginal propensity to
consume.”
Wealth inequality also both reflects and encourages capital
misallocation, as entrenched political elites steer government
business and protection to favored cronies, diverting funds away
from the most efficient businesses and the most productive
investment targets.1
The spectacle of wealth concentrating in the hands of a narrow
elite can also provoke revolts against the whole idea of wealth
creation. In the postwar period, for example, Latin America has
enjoyed spells of rapid growth as frequently as Asia has, but Latin
growth spells are more likely to be short and to end in “hard
landings.” Why? IMF researchers Andrew Berg and Jonathan Ostry
argue that the strongest explanation is the colonial-era legacy of
rampant inequality in Latin America, which “may impede growth at
least in part because it calls forth efforts to redistribute that
themselves undercut growth.”2
In many cases these efforts appear as more or less heavy-handed
attempts to spread the wealth through higher taxes or regulation or
welfare spending, as was the case in many developed nations by
2019.
All too often, the backlash brings to power a populist firebrand who
delivers radical redistribution in a way that burns down the economy.
In extreme cases, these demagogues seize private businesses, ban
foreign investors, raise taxes to choking levels in the name of helping
the poor, and rapidly expand the government and spending on
wasteful subsidies.
This growth-killing agenda has been pursued by populists in every
region of the world, from Robert Mugabe of Zimbabwe to Kim Il-sung
of North Korea and Zulfikar Ali Bhutto of Pakistan. But their epicenter
is Latin America, where the list of populists pushing radical
redistribution extends from Fidel Castro of Cuba in the 1950s
through Juan Velasco Alvarado of Peru in the late 1960s, Luis
Echeverría Álvarez of Mexico in the 1970s, Daniel Ortega of
Nicaragua in the 1980s, Hugo Chávez of Venezuela in the 1990s,
and Néstor Kirchner of Argentina in the early years of the twenty-first
century.
The economic impact of inequality is likely to grow because
inequality has been rising worldwide, particularly for measures of
wealth, for decades. It began to widen even faster after central
banks, responding to the global financial crisis of 2008, began to
loosen monetary policy aggressively. Though intended to fuel
investment in new plants and business ventures, much of this easy
money was diverted into purchases of stocks, luxury homes, and
other financial assets, pushing up prices. Since the wealthiest people
own the bulk of these assets, they got richer the fastest.
The poor were not getting poorer, but the wealth of the rich, and
particularly the superrich, was growing faster. Between 2009 and
2019, despite the weak global economy, the number of billionaires
worldwide more than doubled, from 1,011 to 2,153, and their
combined fortunes rose from $3.6 trillion to $8.7 trillion. The boom
helped bring to power anti-elite populists on the left and right,
including, ironically, a self-proclaimed champion of the blue-collar
working class who also claimed to be a billionaire, President Donald
Trump.
The challenge is how to track inequality—and the threat it poses to
economic growth—in real time. The most common measure of
income inequality, the Gini coefficient, is derived from official data by
academics, using a variety of methods, published on no particular
schedule and for no consistent sample of countries. Often, the most
recent Gini score for any given country can be five to ten years out of
date.
My approach uses a forensic reading of the Forbes billionaire list,
which is at least updated annually and has evolved so that it tracks
shifts in billionaire wealth daily. To identify nations in which tycoons
are taking a large and growing share of the pie, I calculate the scale
of billionaire wealth relative to the size of the economy. To identify
countries in which tycoons are becoming an entrenched elite, I
estimate the share of inherited wealth in the billionaire ranks.

Billionaire Index: Emerging Countries

Bad Billionaires’ Inherited

Wealth/Total Billionaires’
Total Billionaire Billionaire Wealth/Total
Country Wealth/GDP Wealth Billionaire Wealth
Brazil 9% 3% 38%
 China 7% 30% 3%
India 14% 29% 60%
Indonesia 7% 8% 68%
Mexico 11% 67% 42%
Poland 2% 0% 27%
Russia 26% 69% 0%
South Korea 6% 6% 59%
Taiwan 14% 9% 38%
Turkey 6% 17% 40%
Emerging-
Country
Average 10% 24% 37%

Source: Data from Forbes billionaires list.

Billionaire Index: Developed Countries

Bad Billionaires’ Inherited

Wealth/Total Billionaires’
Total Billionaire Billionaire Wealth/Total
Country Wealth/GDP Wealth Billionaire Wealth
Australia 8% 50% 33%
Canada 9% 17% 43%
France 12% 8% 78%
Germany 13% 13% 70%
Italy 7% 7% 55%
Japan 2% 14% 15%
Sweden 23% 13% 73%
Switzerland 15% 13% 50%
United 6% 22% 16%
 Kingdom
United
States 15% 14% 30%
Developed-
Country
Average 11% 17% 46%

Source: Data from Forbes billionaires list.

Most important, I track the wealth of “bad billionaires” in industries

long associated with corruption, such as oil or mining or real estate.
It is the rise of an entrenched class of bad billionaires in traditionally
corruption-prone and unproductive industries that is most likely to
choke off growth and to feed the popular anger on which populist
demagogues thrive. Successful nations generate good billionaires,
or at least more good ones than bad ones.

Scale: Shockingly Large Billionaire Shares of the

Wealth
The advantage of screening three ways is that it will identify nations
where the billionaire class is vulnerable to political attack for its
scale, family ties, or political connections. Any one of those avenues
can generate popular resentment.
I started building this system around 2010, amid growing outrage
in India over news media exposés about how a corrupt elite had
wormed its way to the top in parliament, industry, even Bollywood
movies. To check the popular story line, I scanned the billionaire list
for that year and found that the top ten Indian tycoons controlled
wealth equal to a stunning 12 percent of GDP—compared to only 1
percent in China. The perception that India suffered from an unusual
concentration of wealth seemed to have some truth to it, but when I
pressed high officials on this point, they dismissed inequality and
corruption as normal conditions in a developing country. Early-
twentieth-century America had its robber barons too, they argued.
Many of these officials would change their tune, however, as the
Indian growth rate slowed by almost half in subsequent years and it
became clear that corruption and inequality were key factors in the
slowdown.
Crony capitalism steers money and deals to undeserving hands
and sets off a chain reaction in the political system. India’s courts
began in 2010 to punish high-profile businessmen, holding them in
jail for months before filing charges, pressuring the Central Bureau of
Investigation to pursue cases aggressively, even if evidence was
thin. Bureaucrats feared granting business anything, even routine
permits. In 2015, Indian finance minister Arun Jaitley said that
investigative “overkill” had “hindered the whole process of economic
decision-making.”3 At this point it was hard to tell which was worse
for the economy—crony capitalism and inequality, or the battle to
root it out. India had lost its balance.
One way to tell whether billionaire wealth threatens to destabilize a
country is to compare it with its peers. In the 2010s, total billionaire
wealth has averaged about 10 percent of GDP, in both developed
and large emerging economies, and any share above 15 percent is a
significant outlier. Among emerging nations, Russia has suffered
extreme wealth inequality since it began selling off state companies
after the fall of Communism. The corrupt privatization process
created a new class of oligarchs in the 1990s and turned Moscow
into an open-air showroom for Bugatti and Bentley. Today, Russia
has close to 100 billionaires, far more than many much larger
economies, and they control fortunes equal to an astonishing 26
percent of GDP, the largest share of any country in my index.
No other emerging country is so top-heavy with wealth. Though
Chile and Malaysia have in recent years also seen billionaire wealth
swell dangerously, as of 2019 the only emerging economies where
the billionaire share of GDP approached 15 percent were India and,
surprisingly, Taiwan. Though Taiwan was one of the few nations that
managed to produce a long postwar run of high growth with no spike
in inequality, today Taiwan billionaires control wealth equal to 14
percent of GDP, up from 9 percent a decade earlier. The fact that
most of them are in tech and other relatively uncorrupt industries,
and that the inherited share of their wealth is (at 37 percent) pretty
typical for an emerging country, helps explain why the scale of their
fortunes has so far not become a hot political issue.
Billionaire elites also control bloated fortunes in some developed
nations—none more unexpected than Sweden. Despite its
egalitarian image, Sweden turned to the right after a financial crisis
in the early 1990s, cutting taxes and welfare payments. Since then,
Sweden’s economy has grown more steadily than most of its peers,
but so has inequality. Sweden has only thirty-three billionaires, but
that number is up by ten in recent years, and their wealth is now
equal to 23 percent of GDP, up from 17 percent in 2010. That
proportion would be extreme even by emerging-world standards, and
it helps explain how the Social Democrats staged a comeback in
2014, promising to raise taxes on the rich, and still hung on to power
—though just barely—five years later.
Despite its reputation for winner-take-all capitalism, the United
States until this decade had a medium-sized billionaire class, with
fortunes equal to roughly 10 percent of GDP—close to the global
average. That share increased to 15 percent by 2014, where it
remains today, driven in part by easy money pouring out of the
Federal Reserve, and by the rise of Silicon Valley tycoons.
On the flip side, it is normally a healthy sign when billionaire
wealth is below the global average of 10 percent of GDP. It seems
fair to say, for example, that in countries where billionaire wealth is
around 5 percent of GDP or less, such as Poland or South Korea,
the scale of the billionaires’ fortunes is not large enough to become a
target for serious social unrest.
The exception to that rule is a country like Japan, where relatively
small billionaire fortunes may reflect a chronic incapacity to create
wealth. Some academic research shows that growth tends to slow
not only when inequality is very high but also when it is very low.4
Japan’s billionaire class may be too small for the nation’s good, and
some Japanese seem to realize this. They have a word, akubyodo,
which translates as “bad egalitarianism” and describes a leveling
culture that rewards seniority more than merit and risk-taking. It’s not
a good sign when rainmakers are seen as inherently disreputable.
 Quality: The Good versus Bad Billionaires
Looking at the scale of billionaire fortunes is not enough to reveal the
extent of their political vulnerabilities. New names on the billionaire
list can be a favorable sign, but only if they are good billionaires,
emerging outside “rent-seeking industries” such as construction, real
estate, gambling, mining, steel, aluminum, oil, gas, and other
commodity sectors that mainly involve digging resources out of the
ground. In these businesses, major players often spend their time
extracting maximum rents from limited national resources by bribing
politicians if necessary, not growing national wealth in innovative
ways.
To make a qualitative judgment about the sources of great
fortunes, I compare the total wealth of tycoons in these corruption-
prone businesses to that of all billionaires in the country. This
comparison yields the share of the wealth generated by “bad
billionaires.” This label no doubt miscasts many honest mining and
oil tycoons, but even in nations where these industries are relatively
uncorrupt, they tend to make weak contributions to productivity, and
to tie the economy to the volatile swings of commodity prices.
My assumption is that other billionaires make a greater
contribution, but I reserve the “good billionaire” label for tycoons in
industries that are known to make the largest contributions to growth
in productivity, or that make popular consumer products like
smartphones or cars. These “good” industries are the ones least
likely to generate backlashes against wealth creation; they include
technology, manufacturing, pharmaceuticals, and telecoms, as well
as retail, e-commerce, and entertainment.*
To be clear, the billionaire analysis does not generate hard data
but does offer anecdotally telling, real-time evidence of how nations
are generating wealth. Among the largest developed economies, as
of 2019, bad billionaires controlled the smallest shares of billionaire
wealth in Italy (7 percent) and France (8 percent)—a good sign for
both countries.
In Sweden, the scarcity of bad billionaires has taken some edge
off the backlash against their bloated share of the economy. Only 13
percent of Swedish billionaire wealth originates in rent-seeking
industries. Much of the rest is created at globally competitive
companies, including H&M in fashion and IKEA in furniture retailing.
These companies are making the most of their revenue abroad and
pulling money into Sweden—not battling to dominate domestic
resources.
For years, the prevalence of good billionaires had a similar impact
in the United States. Many of the top ten tycoons had been around
for decades, but the companies they own—Microsoft, Berkshire
Hathaway, Oracle, and Walmart—would make any economy more
competitive. Figures like Warren Buffett and Bill Gates were almost
folk heroes, for their business accomplishments and philanthropy,
and for pressing fellow billionaires to bequeath their fortunes to
charity too.
The newer generation of American tycoons, arising from tech
companies like Google, Apple, and Facebook, were also emerging
as pop icons, largely because consumers loved the goods and
services they provide. Only in recent years did a backlash set in, as
regulators and politicians began to investigate the tech giants as
monopolists who profit by misusing private data and allowing hate
speech to flourish online. There still is no modern equivalent to the
widely despised American monopolists of the early twentieth century,
when John D. Rockefeller was vilified as “public enemy number
one,” but figures like Facebook founder Mark Zuckerberg are starting
to be viewed in this negative light. And by 2019 the backlash was
generating regulatory proposals to break up or rein in their
monopolies—and their capacity to generate wealth.
China’s billionaire class has also been reshaped by the tech
boom. The fortunes of its richest individuals surpassed $10 billion for
the first time in 2014, led by internet magnates including Jack Ma of
Alibaba. These decabillionaires are rising in the most liberalized and
competitive private-sector businesses, not older state-dominated
sectors. In recent years, however, the bad-billionaire share has
climbed upward to 30 percent, close to the average for emerging
nations, as real estate tycoons in particular have climbed toward the
top of the list. And even some of the tech billionaires were taking
seats in the National People’s Congress, which is widely dismissed
as a rubber-stamp legislature but does provide direct access to the
top corridors of political power.
Few new or good billionaires are to be found in nations like Turkey
or Russia, where aging regimes have turned away from reform and
promoted favored tycoons. Eight out of every ten Turkish billionaires
live in Istanbul, long the commercial center of the country, to be
closer to the action. But the undisputed capital of connected tycoons
is Moscow. Nearly 70 percent of Russian billionaire wealth comes
from bad billionaires—one of the highest shares in the world—and
seventy-one of the country’s ninety-eight billionaires live in the
Russian capital. These imbalances illustrate why the environment for
wealth creation in Russia is so hostile. The Kremlin treats billionaires
with contempt, arbitrarily changing rules that govern their
businesses, knowing the public has little sympathy for a billionaire
class widely perceived as corrupt.
Popular resentment against great wealth is palpable in Mexico as
well, where bad billionaires also control close to 70 percent of
billionaire wealth. Mexican tycoons are known for cornering
industries such as telephones and concrete, which earn monopoly
profits for their owners while driving up prices for consumers. The
resulting anger helps explain why the Mexican rich live in fear of
kidnappings for ransom, and the superrich live behind high walls and
heavy security. The contrast to many developing economies in Asia
and eastern Europe, where high-profile billionaires often bask in
national adulation, could not be sharper.

Family Ties
Bad billionaires typically arise in family empires, particularly in the
emerging world, where weaker institutions make it easier for old
families to cultivate political connections. To identify nations where
bloodlines are most likely to distort competition, I use Forbes data
that distinguishes between “self-made” and “inherited” fortunes.
Among ten of the major developed economies in 2019, the
inherited share of billionaire wealth was around 15 percent in Britain
and Japan, slightly above 30 percent in the United States, and 70
percent or more in Germany, France, and Sweden. Sweden has
been able to grow steadily over time, despite being so top-heavy
with billionaires, including many who inherited their wealth, because
it scores well on most of the other ten rules. Still, the fault line of
rising inequality makes Sweden fertile ground for a populist
backlash.
Among ten of the largest emerging economies, the range for
billionaires who have inherited their wealth was even wider—from
nearly 70 percent in Indonesia to 40 percent in Turkey, 3 percent in
China, and 0 percent in Russia. The low share of inherited wealth in
Russia and China likely owes to their relatively recent transition from
Communism to market-based economic systems, which allow
families to amass great wealth.
In general, heavy concentrations of family wealth are a bad sign,
but the sources of family wealth matter. The low levels of inherited
wealth in countries like Britain and the United States appear to
reflect strong competitive environments in which new businesses
can displace old ones. Even some of the oldest and most familiar
names on the US billionaire list, like Gates and Zuckerberg, did not
inherit wealth. They are self-made entrepreneurs. Zuckerberg is in
his early thirties. By the standards of many countries, they are fresh
faces.
Elsewhere, new billionaires are often not that fresh, having seen
their wealth build within family companies for years, even
generations. But blood ties are not always the enemy of clean and
open corporate governance, particularly where the family has
stepped back to play an ownership role in a publicly traded company,
leaving management in professional hands. This is the model in
Germany, where 70 percent of billionaire wealth is inherited but
billionaire families control some of the world’s most productive
companies, including many of the Mittelstand (small to medium-
sized) companies that drive the flourishing manufactured-export
sector and arouse more national pride than resentment.
In Italy and France, too, there are many new names on recent
billionaire lists, but most rose slowly within old family companies.
Since 2010, twenty-eight new billionaires have emerged in Italy,
more than half in luxury goods companies such as Prada, Dolce &
Gabbana, and Bulgari. France’s new billionaires also tend to rise in
family firms, like Chanel and LVMH. These new billionaires are
capitalizing on the competitive advantage that France and Italy have
in producing fine handcrafted goods, which is part of their national
identity.
For all the recent hype about a new Asia, many of its tycoons still
emerge from family companies, but with only occasional stirrings of
popular resentment. In South Korea, just 6 percent of billionaire
wealth comes from rent-seeking industries. Many of the superrich
derive their fortunes from global companies and avoid garish
displays of bling. More important, while total inherited billionaire
wealth remained stable in the last five years, at around $60 billion,
self-made billionaire wealth nearly tripled, to more than $40 billion,
driven by entrepreneurs like healthcare tycoon Seo Jung-jin and
gaming magnate Kim Jung-ju. The prominence of these good
billionaires has helped contain any signs of revolt against the power
and influence of the wealthy in general.

The Rise of the Billionaire Rule

For much of the last decade, wealth has been rising all over the
world, from the United States and Britain to China and India, mainly
because of massive gains for the very rich. While in many nations all
income classes are making gains, the rich are gaining faster than the
poor and the middle classes. In a 2014 study of 46 major countries,
Credit Suisse found that before 2007, wealth inequality was on the
rise in only 12 of those countries; after 2007, that number more than
doubled, to 35, from China and India to Britain and Italy.5
As a result, the poor are more likely to rub shoulders with the
middle class, and both are more likely to live in the shadows cast by
a fast-growing global billionaire class. Rising wealth inequality is an
increasing threat to social stability and economic growth. It is worth
tracking seriously.
 Growth is particularly at risk in countries where bad billionaires are
on the rise, because their success reflects deep dysfunctions: a
business culture in which entrepreneurs become brazen after a run
of success, a political culture in which officials grow complacent after
a long period in power, an economic system in which cumbersome
or nonexistent rules open the door to corrupt behavior.
Historically, political revolts against inequality have often been as
destructive as the inequities themselves. Demagogues who seize
private and foreign businesses in the name of redistributing wealth to
the poor often end up keeping the money for themselves or their
cronies—a pattern repeated with tragic frequency. Africa alone has
seen this syndrome unfold under Robert Mugabe of Zimbabwe,
Kenneth Kaunda of Zambia, and Julius Nyerere of Tanzania, among
others.
Mugabe ruled for more than three decades, aggressively
redistributing property from the old white elite to the black majority,
who in many cases did not know how to farm, and appropriating vast
wealth for himself and his cronies. Agricultural production collapsed,
turning a food-exporting nation into an importer. When Mugabe was
ousted in 2017, Zimbabwe was as poor as when he took power in
1980.
On the other hand, countries may be poised for an upturn if they
are repairing the system to reduce inequality—for example, by
writing land acquisition laws that fairly balance the interests of
farmers and developers, as Indonesia did recently, or by holding
auctions for public goods like wireless spectrum in a transparent
manner that rules out backroom deals. Mexico’s auction in 2015 to
sell offshore oil rights drew relatively low bids, but it was a success
for the system because it was conducted live on TV, which made
crony deal-making unlikely.

As the number of billionaires rises, the data are becoming more

significant as a statistical sample and as a tool for identifying
countries where the balance of wealth is skewing too sharply to the
superrich. Tracking billionaire wealth can provide insight into whether
an economy is creating the kind of wealth that will help it grow—or
trigger revolt—in the near future. Tracking it by scale, share of
inherited wealth, and share of bad billionaires ensures that none of
these potential sources of political resentment will be missed.
It’s a bad sign if the billionaire class controls too fat a share of
national wealth, becomes an entrenched and inbred elite, and builds
fortunes mainly from politically connected industries. A healthy
economy needs an evolving cast of productive industrialists, not a
fixed cast of corrupt tycoons. Creative destruction drives growth in a
capitalist society, and because bad billionaires have everything to
gain from the status quo, they are enemies of wider prosperity and
lightning rods for populist revolts pushing to redistribute rather than
grow the economic pie.

____________
* In a few cases, I counted tycoons in good industries as bad billionaires, because
of well-documented ties to political corruption.
 4

STATE POWER

Successful Nations Have Right-Sized Governments

How much government is too much, for a balanced economy?

Most economists think about this question in numbers, flagging a
threat to growth when the budget deficit tops 3 percent of GDP.
That’s a useful rule of thumb, but my approach is more holistic,
looking broadly at the question of whether the state is meddling in
the economy more or less.
The conventional wisdom is still that less government involvement
in the economy is better for growth, and broadly I would agree.
There are, however, many countries where the state is too weak
even to provide the basic infrastructure necessary for growth, and for
them more government would be a step forward. Successful nations
don’t have small governments; they have the right-sized government
for their stage of development.
Government attempts to manage economic growth come in many
forms, but I watch three basic trends: how the level of government
spending changes as a share of GDP, whether that spending is
going to productive ends, and how much the government is
restraining growth in private companies or misusing state companies
for political goals.

When Spending Becomes a Problem

As a country grows wealthier, spending by the government tends to
increase. So, to spot nations that are out of balance, I identify those
where government spending is much higher (or lower) as a share of
the economy than in other nations at the same income level. The
worst case is a fat state getting fatter, compared to its peers. Among
the top twenty developed economies, the rotund king of this class
has long been France.
The French government spends an annual sum equal to 56
percent of GDP, more than any other country, barring the possible
exception of Communist throwbacks like North Korea. France’s
spending level is 18 percentage points above the 39 percent
average* for developed nations—the biggest gap in the world. Over
the last decade, the tax burden required to support this state was
driving businesspeople out of the country in droves, and adding to
the deep trove of French jokes about government bumbling. In the
early twentieth century, France’s own president, Georges
Clemenceau, described it as “a very fertile country: you plant
bureaucrats and taxes grow.”1
Many European states have been under pressure to cut back
since the crisis of 2008, particularly where their spending amounts to
more than half of GDP. Led by France, that list includes Sweden,
Finland, Belgium, Denmark, Italy, and until recently, Greece. Greece
has been moving in a positive direction—with state spending falling
from 51 to 47 percent of GDP—in part because its creditors forced
Athens to make painful cuts in civil service jobs and salaries.
The downsizing of even the Greek state demonstrates that
government is not fated to evolve into the Leviathan that some
conservatives fear. Prior crises had already started to erode the
welfare state in Europe, starting in the late 1990s in Sweden, which
has since seen state spending fall from 68 to 48 percent of GDP.
Germany, too, began cutting welfare benefits, and over the last
decade it has lowered state spending by 3 percentage points, to 44
percent of GDP. Scarred by the crisis of 2008 and its aftermath,
other European nations will remain under pressure to keep the size
of the state in check.
The lighter spenders in the developed world include the United
States, Austria, and Australia, with government spending amounting
to between 35 and 40 percent of GDP. Switzerland was even lower,
at 33 percent, in part because its pension and healthcare services
are not counted as government agencies. Nonetheless,
Switzerland’s government is quite lean. Tax collections amount to
only 29 percent of GDP—among the lowest in the developed world—
reflecting a political system that decides many issues by referendum,
giving Swiss voters the right to veto tax hikes and prevent bloat in
their government.

Fat State, Skinny State I

Source: Haver Analytics, IMF; data as of 2018.

Emerging Big Spenders

Among the twenty largest emerging nations, the outlier for many
years was Brazil, where official government spending amounted to
more than 40 percent of GDP, a level more typical of a rich European
welfare state than a middle-class nation. In recent years, under a
controversial right-wing government, that figure has come down to
38 percent, still well above the 32 percent average for nations with a
per capita income of around $12,000. But what matters most is that
the trend was moving in the right direction. Bucking the general
move toward higher spending and deficits, Brazil had by 2019 fallen
behind Poland (42 percent) and Argentina (39 percent) for the title of
the emerging world’s biggest, most bloated spender.
In emerging countries, however, these numbers have to be treated
with caution. Russia, for example, reports that state spending is 33
percent of GDP, but in the past Moscow officials have admitted
privately that the share is closer to 50 percent, which would make it a
bigger spender than Poland.
Brazil’s recent turn reflects the growing realization that it could not
keep spending like a rich European welfare state, as well as growing
frustration with the dysfunctional system. When millions of Brazilians
joined street protests in 2013, their central grievance was that the
state takes much more in taxes than it delivers in services. When the
Brazilian Institute of Planning and Taxation, a consulting firm,
compared government tax collection and service delivery in thirty
major countries, it found the worst results in Brazil: the Brazilian
government collected the most in taxes—35 percent of GDP—but
ranked last in terms of delivering public services. This inefficiency is
not surprising, since Brazil started building a European-style welfare
state at an early stage of development, when public institutions don’t
have the capacity to deliver and are often corrupt.
The large emerging countries with the smallest governments
include Indonesia, Nigeria, South Korea, and Taiwan, and the last
two should be no surprise. The East Asian success stories were built
on a model that, until very recently, delayed the development of
welfare programs, kept government spending around 20 percent of
GDP or less, and focused that spending on investment in
infrastructure and manufacturing. Even today, only 30 percent of
Asia’s population is covered by a pension plan, compared to more
than 90 percent in Europe. Taiwan’s government spends an amount
equal to just 18 percent of GDP, which is half the norm for its income
class, and it has developed pension and healthcare systems with a
careful eye to controlling costs. Its public healthcare system did not
exist in 1995 but now covers nearly 100 percent of the population
and costs just 7 percent of GDP; that compares well to spotty
coverage costing 18 percent of GDP in the United States.

Fat State, Skinny State II

Source: Haver Analytics, IMF; data as of 2018.

Interestingly, Latin governments have a reputation for

overspending that is not fully borne out by the numbers.
Governments in the Andean countries of Colombia, Peru, and Chile
all look relatively undersized, as does Mexico, with government
spending equal to 25 percent of GDP, 7 percentage points below the
average for its income class. It is mainly on the Atlantic coast—in
Brazil, Venezuela, and Argentina—that governments suffer from
bloat.

When Government Is Too Small

The state needs to be large enough to maintain conditions essential
to civilized commerce, including basic infrastructure and
mechanisms to contain corruption, monopolies, and crime. An
inability to collect enough taxes to support these missions suggests
administrative incompetence and invites popular disdain. In Mexico,
the state collects taxes equal to about 16 percent of GDP, which is
quite low for a middle-class country, and it is having difficulty
maintaining law and order and battling the corrupting influence of
drug cartels.
In the weakest states, like Pakistan, Nigeria, and Egypt, the thin
veneer of state authority creates a strange sense of fragility.
Pakistan has 180 million people, but fewer than 4 million are
registered taxpayers, and fewer than 1 million file taxes. The edifice
of state authority is so riddled with loopholes that one almost feels it
could blow apart at any moment, in some upwelling of the
underserved majority.
The underbelly of the underfunded state is the black economy,
where people do business off the books to evade taxes. Jobs in this
netherworld tend to be poorly paid, dead-end career paths without
benefits. The black economy can be shockingly large—from 8
percent of GDP in Switzerland and the United States to more than
30 percent in Pakistan, Venezuela, Russia, and Egypt. Employers in
this realm get the kind of productivity they pay for.
Tax-dodging spills over into other forms of dysfunction. Nonpayers
tend to avoid banks, thereby reducing the pool of savings available
for investment and creating an inefficient back channel for allocating
capital. It’s not uncommon for Egyptians to throw fake weddings as a
way to raise capital from friends and relatives, without going to the
bank or paying taxes.2
A fragile state can face sudden pressure to raise revenue,
destabilizing already unbalanced economies. When Indonesian
president Joko Widodo (commonly known as Jokowi) took office in
2014, his government set out to fix crumbling bridges and roads by
raising tax collections from 12 percent of GDP to 30 percent within a
year. To hit that target, tax agents resorted to staking out car
dealerships and real estate offices to collect on the spot. Not
surprisingly, car, motorbike, and property sales slumped, and the
economy slowed further. In cases like this, the basic problem is a
state too weak and small to support growth.

Misreading the Lessons of China

Most of the Asian miracle economies were governed, in their early
years, by autocrats. But that doesn’t mean they favored big
government or rigid state control of the economy. Early on, they
invested almost exclusively in supporting export manufacturers,
which meant building roads and factories. Welfare systems were
designed to keep industrial laborers on the job. Protecting the weak
was seen as the responsibility of family, not the state.
It was only after the Asian financial crisis that South Korea and
Taiwan started to roll out an “inclusive” welfare system, aiming to
protect the poor, the weak, and the elderly. By then they had average
incomes approaching $15,000, much higher than emerging countries
that began rolling out inclusive welfare systems when they were
much less wealthy, such as India or Brazil. Even today, the typical
East Asian government spends only about 20 percent of GDP, a
pittance for relatively rich countries.
So, the East Asian model was state capitalism with a small “s,”
and it respected market forces. Asia scholar Joe Studwell has written
that South Korea’s leaders didn’t pick industrial champions; they
encouraged competition and then helped the winners become global
players. Governments helped with financial, technical, and marketing
support, but in a way, as Nobel laureate Joseph Stiglitz has pointed
out, “that promoted rather than thwarted the development of private
entrepreneurship.”3
One of the biggest misconceptions about China, the most recent
East Asian miracle, is that its economy took off under the rigid
control of an all-powerful state. In fact, China began to grow rapidly
only after the government started to ease its grip on the economy in
1980.4
 Since the early 1980s, the output of private companies in China
has risen by a factor of 300, or five times faster than the output of
state companies. As a result, the share of GDP produced by state
companies has fallen from about 70 percent in the early 1980s to
about 30 percent now.5 Between 1993 and 2005, Chinese state
enterprises eliminated a staggering 73 million jobs, cutting those
workers loose to find their way in the growing private sector.
Yet when China managed to weather the global financial crisis of
2008 relatively unscathed, by rolling out massive new spending and
lending, many pundits began writing about the “rise of state
capitalism.” Gatherings of the global elite began to talk about how a
new “Beijing Consensus,” in favor of strong government guiding the
economy, was replacing the old Washington Consensus, in support
of free markets.
In fact, the stimulus campaign that inspired so much hype for state
capitalism represented a partial reversal of China’s earlier reforms.
After 2008, Beijing began to direct public spending and lending to big
state-owned companies, which regained momentum. Private
companies were still growing faster than state companies in the
2010s, but only 4 percentage points faster, down from 12 percentage
points faster a decade earlier.
Global markets were not as impressed by the alleged benefits of
state capitalism as the chattering classes were. Over the next five
years, the total value of emerging stock markets fell from $11 trillion
to $9 trillion, and all of that $2 trillion loss came out of state
companies. Market players were watching closely how governments
were spending stimulus funds, and they saw that much of the money
was going to protect jobs at inefficiently run state companies. As
profitability and productivity fell, stocks in state-owned companies
collapsed. China’s state oil giant, PetroChina, fell from first to
fourteenth among the world’s most valuable companies by market
cap. Apple, the private American giant, took over the top spot.
Lately, the state has been growing quickly in many nations; in the
emerging world, government spending now amounts to 31 percent of
GDP, on average—up from less than 24 percent in 1994. While this
increase in spending by the state is in part natural, since government
has grown with national wealth in all countries during the postwar
era, my sense is that most countries are getting less and less
economic bang for their government buck. The key to look for—at
least in the current global scene—is states that are meddling less.

Spend in Haste, Repent at Leisure

Even John Maynard Keynes, the intellectual father of stimulus
campaigns, saw them as emergency measures to ease recessions,
not open-ended attempts to generate growth—which is what many
governments attempted after 2008. In all these cases, the spending
campaign did little to accelerate growth, but rang up debts that will
slow growth in coming years. This is what it means to say states are
“borrowing from the future.”
Among the world’s twenty major economies, developed nations
spent a sum equal to 4.2 percent of GDP on economic stimulus in
the two years after 2008. Their counterparts in big emerging nations
spent much more, 6.9 percent of GDP, simply because they had the
money.
Emerging nations entered the 2008 crisis with generally low levels
of public debt, large reserves of foreign currency, and strong budget
surpluses or at least relatively small deficits. Having money to burn,
they burned it. After bottoming at 3 percent in mid-2009, the average
GDP growth rate among major emerging economies hit more than 8
percent in 2010. Supporters of big government cheered this
apparent success, but the bounce back was short-lived, and the
average emerging-world growth rate soon fell back to 4 percent,
even as deficits kept mounting. Russia spent the equivalent of 10
percent of GDP on stimulus in 2008 and 2009 alone, much of it to
bail out big state firms, and got the worst result, an 8 percent
contraction in output.
By early 2018, the emerging-world budget surpluses of 2007 had
melted into an average deficit equivalent to 3 percent of GDP, a level
that often foretells serious budget problems. And many big emerging
countries were getting little return for all the money they were
spending to stimulate growth in the wake of the global financial
crisis.
This explosion in state spending contributed to a serious decline in
productivity. In Russia, South Africa, Brazil, India, and China, a
critical measure of productivity known as the incremental capital
output ratio (ICOR) rose sharply. This worrisome sign meant it was
taking more capital to produce the same amount of economic
growth, in part because so much money was going to wasteful
government projects or giveaways.

The Political Abuse of State Banks

Despite recent waves of free market reform, many banks in the
emerging world are still run by the state. State banks control about a
third of all banking assets in the typical large emerging economy.
Countries where that share is much higher face the resulting risk,
which is that politicians will meddle in the banking system to divert
funds to their pet welfare projects and investment schemes. Despite
the leading role that private banks often play in the lending manias
that lead to financial crises, private lending by banks and in the bond
markets tends to dominate healthy financial systems in normal times.
Today the state share of bank assets is 45 percent or more in
Thailand, Brazil, and China; 60 percent or more in Malaysia, India,
and Russia. Nearly one-third of Russian lending is controlled by just
one bank, which is run by the central bank. Twenty years after
Communism fell in Russia, it is still difficult to obtain a loan to start a
small business or buy a house.
When state banks mobilize lending to fight economic downturns,
the effort has a disturbing tendency to backfire. By 2014, in many
emerging nations, more than 10 percent of total bank loans had
gone bad—meaning the borrower had not made a payment in
months. In most cases, the bad-loan problem was concentrated in
state banks, which had been ordered to dole out credit as part of the
stimulus campaigns. These debt burdens were a big reason why, for
the rest of the decade, economic growth fell well short of popular
expectations across the emerging world.
Brazil offers a case study of how the political misuse of state
banks can slow an economy. After President Dilma Rousseff came to
power in 2010, she started pressuring banks to fight the global
slowdown by lending more. Private banks resisted, but state banks
did not; BNDES, the largest state development bank in the world,
gave out cheap loans to virtually any company that asked. Between
2008 and 2014, state bank lending grew 20 to 30 percent a year, and
the state banks’ share of total lending rose from 34 to 58 percent—
an expansion unmatched anywhere else in the emerging world. The
result was a rapid run-up in debt, of the kind that often clogs the
banking system with bad loans and can stall the economy. True to
form, Brazil fell into a catastrophic recession in 2014 and has not
grown faster than 2 percent in any year since.

When State Companies Become Political Tools

Governments that mobilize public banks for political ends are likely
to misuse other state-owned companies too—for example, by
deploying state oil, gas, or electric companies to fight inflation by
subsidizing energy prices.
Energy subsidies play a major role in draining national treasuries.
In the Middle East, North Africa, and Central Asia, many
governments spend more on cheap fuel than on schools or
healthcare. In six countries—Uzbekistan, Turkmenistan, Iraq, Iran,
Saudi Arabia, and Egypt—energy subsidies amount to more than 10
percent of GDP.
Energy subsidies keep fuel prices irrationally cheap, encouraging
people to burn too much fuel, accelerating climate change and
discouraging investment, which leads to shortages and inflation. Fuel
subsidies also tend to widen inequality in poor countries, where cars
are owned mainly by the privileged. In emerging economies, more
than 40 percent of the $600 billion in annual energy subsidies goes
to the richest 20 percent of the population, according to the IMF.
Food subsidies do not suffer the same drawback, since they do not
go mainly to the rich, but rather help the poor remain active in the
workforce.
Yet energy subsidies remain popular, particularly in oil-rich
regions, where gasoline is often seen as a natural bounty that should
be virtually free, like water. If one country is rich in oil, neighbors
often expect free gas too. Oil-poor Egypt spends as heavily on
energy subsidies as oil-rich Saudi Arabia—just over 10 percent of
GDP.
State-owned companies are often viewed by politicians as job-
creating machines. On average, in both developed and emerging
countries, jobs in government and state-owned companies amount
to about 23 percent of all employment, according to data from the
International Labour Organization (ILO). Governments above that
mark look bloated. In East Asian economies known for small
government—Japan, South Korea, and Taiwan—government
accounts for less than 10 percent of all jobs. In the generous welfare
states of Norway, Sweden, and Denmark, government accounts for
around 30 percent of all jobs. And in the bloated oil state of Russia, it
accounts for 38 percent.
Since the crisis of 2008, Russia has expanded the 400,000-person
payroll at Gazprom, the state-owned gas giant. In China, the state
share of employment is estimated at around 30 percent, and it has
been inching higher since 2008. China’s state tobacco company
alone employs half a million people and accounts for 43 percent of
cigarette sales worldwide. The power of these behemoths is a threat
to the balance of emerging economies, and scaling them back has to
be a top reform priority.

The Fifty Shades of Meddling in Private Companies

What’s needed is a sensible Leviathan that spends money in a
strategic way and creates stable conditions in which entrepreneurial
types—whether in government or private business—dare to invest.
 Consider the contrast between Russia and Poland, both of which
shook off Communism in the late 1980s. Poland is evolving in line
with continental European powers like Germany, where the state
supports the private economy with the help of clear rules.
Russia is regressing, expanding the state under regulations that
shift with the whims of autocratic bosses, who have allowed and
encouraged well-connected oligarchs to take over private
companies, both Russian and foreign owned. This trend started in
the oil patch and over the course of the 2010s spread across the
economy, with state-run banks pushing out efficient foreign rivals and
a state umbrella company venturing into armaments,
pharmaceuticals, and other industries.
Backroom deals of this kind discourage any business activity
outside the political “in” crowd. Until recently, the Kremlin elite
appeared content to leave small internet industries to younger
members of the wider Moscow elite. Russia was one of the few
nations in which locals were holding their own—without state support
—against American internet companies. By 2014, however, the
Kremlin began taking steps to control internet servers and monitor
traffic, and that April it transferred half the shares of a company
known as the Russian Facebook to allies of Putin.
Meddling in this way kills small business. The number of
companies listed on the Moscow stock exchange exploded from
fewer than 50 in 2002 to 600 in 2008 but has since dwindled to fewer
than 300. In contrast, Poland created fertile ground for
entrepreneurs, and the number of listed companies has risen
steadily from 200 in 2002 to more than 800 today.
Polish state companies are big players in industries from copper
mining to banking, but they are not swallowing private rivals with
help from the president’s office. Instead, Poland is pushing state
companies to reform. Even in unionized industries like mining, state
companies have brought in professional management, cut payrolls,
and raised profits, transforming themselves into legitimate global
competitors.
In Brazil, the state is so bloated that there is an unusual subculture
of companies devoted to dodging its rules. For example, a 2002
revamp of regulations set off a boom in dentistry, and Brazil now has
more dental schools and more dentists per capita than the United
States or Europe. Brazil has many kinds of service companies that
are found in few, if any, other countries, including one that rents
vehicles only to corporate clients and makes its money selling one-
year-old cars. These businesses innovate in order to evade
byzantine regulations, so they provide services that would serve no
niche outside Brazil. This is the opposite of a society in which
competitive global companies flourish under sensible laws.

A Sensible Role for the State

When commentators call for “structural reform,” they are generally
summoning a lesson of Econ 101: an economy’s output is the sum of
three basic inputs—land, labor, and capital. Structural reform often
entails creating an efficient regime governing the purchase of land
for new business ventures, the lending of capital to finance those
ventures, and the hiring and firing of workers to staff them. In
Indonesia, a recent increase in public investment was spurred by
bureaucratic reforms that cut the time required to complete land
acquisitions from a matter of years to days or weeks.
Though it is politically incorrect to say so, some cultures seem less
eager than others to follow sensible rules. Since the early 1990s, the
number of nations with a law requiring the government to run a
balanced budget has risen from a handful to more than thirty—but
not all take this pledge seriously. The recent battles over Greece’s
debt crisis pitted those who thought Athens should be compelled to
respect Eurozone spending caps against those who thought it should
get a pass. In Indonesia, by contrast, the Jokowi government cut
spending to keep its deficit under a new legal cap, despite the
resulting economic slowdown in 2014 and 2015.
India may be the world’s largest democracy, but it still has a
relatively loose respect for laws. Even a genteel sport like golf is
played under free-flowing rules that are often debated hole by hole.
In the early 2000s, India drafted a law capping the budget and
aiming to keep the deficit under 3 percent of GDP, but it was ignored
when the government wanted to boost spending in response to the
crisis of 2008. A decade later, India has yet to hit the 3 percent target
again. Where rules are often ignored, the uncertainty can distort
economic outcomes.

To spot whether the state is meddling more, or less, look first at

trends in government spending as a share of GDP. Then check
whether the spending is going to productive investment or to
giveaways. Finally look at whether the government is using state
companies and banks as tools to pump up growth and contain
inflation, and whether it is choking or encouraging private
businesses.
In recent years many countries have been raising the government
share of the economy, steering bank loans to big state companies,
subsidizing cheap gas for the privileged classes, and enforcing
insensible rules in an unpredictable way. Even low-income countries
like India are rolling out full-service welfare systems, a luxury that the
Asian miracle economies began to adopt only much later in their
development. At that point, countries like South Korea and Taiwan
had already invested heavily in factories and transport networks, and
they could well afford inclusive pension and health programs.
In contrast, many states are now managing the economy in ways
that effectively retard growth, thereby fueling disrespect for
establishment politicians, and the rise of radical populists. In an
environment like this, especially, less meddling is best.

____________
* The norm here is defined by use of a simple regression, comparing government
spending as a share of GDP to GDP per capita. Government spending data is
from the IMF, which includes national, state, and local governments and defines
spending broadly to include everything from the public payroll to welfare payments.
 5

GEOGRAPHY

Successful Nations Make the Most of Their Location

It has become fashionable to say that location no longer matters,

because the internet allows anyone to provide services from
anywhere. But physical goods still make up the bulk of global trade,
amounting to about $18 trillion a year, compared to $4 trillion for
services. Since transport is an even larger share of manufacturing
costs than wages are, location near trade routes or important trade
customers is still critical for makers of goods. And even service
industries are not scattering to wherever there is an internet
connection; they are clustering in accessible, convenient, and
attractive cities.
While countries can’t change their location, the most successful
ones make the most of their location. To spot likely winners, I watch
what countries are doing to develop trade and investment with the
world, and with their neighbors. I also track what they are doing to
make sure gains from growth and trade are spreading to provincial
regions, and are not concentrated in a few large cities.
 Nations that are successfully building trade ties to the world, and
spreading the wealth to their own provinces, are carving out what I
think of as a geographic sweet spot. The best current example is
China. It has invested hundreds of billions of dollars to build ports on
a coast largely devoid of natural harbors, to forge trade and
investment ties across Asia and the world, and to transform fishing
villages into globally competitive cities.

Ties to the World

It is no accident that the Asian “miracles” in Japan, South Korea,
Taiwan, and Singapore sustained average annual export growth of
around 20 percent—twice as fast as the average for the rest of the
world—during their sustained runs of rapid economic growth. Export
sales are critical to steady growth, earning the foreign income that
allows a nation to invest in new factories and roads, and to import
consumer goods, without building up foreign debt and sparking
currency crises.
And geography is critical to exports. Any nation that wants to thrive
as an export power has a huge advantage if it is located on trade
routes that connect the richest customers to the most competitive
suppliers.
The Hong Kong–based economist Jonathan Anderson created a
“heat map” of rising manufacturing powers and found that the
common link was location.1 In recent decades, countries in which
manufactured exports have grown significantly as a share of GDP
have been clustered in Southeast Asia, led by Vietnam and
Cambodia, and in eastern Europe, led by Poland, the Czech
Republic, and Hungary. In short, wrote Anderson, they are located
either next to the big consumer markets of Europe and the United
States, or “on the same shipping lanes that Japan and the original
Asian tigers” used to transport goods to Western markets.
Vietnam is replacing China as a base for making sneakers for
export to the West. Poland is prospering as a platform for German
companies to manufacture cars and other goods for export to
western Europe. To a lesser extent, Mexico and Central America
have also seen an increase in manufactured exports, owing in part to
proximity and low shipping costs to the United States.
To get a handle on which countries are likely to thrive in export
competition, the first thing I check is their location: whether they are
on a critical trade route, and how open they are to global trade.
Among the largest emerging nations, trade amounts to 60 percent of
GDP on average, and countries well above that average tend to be
major export manufacturers, led by the Czech Republic, Vietnam,
Malaysia, and Thailand.
The most closed economies, with trade at less than 40 percent of
GDP, fall into two groups. Populous countries like China, India, and
Indonesia rely less on trade simply because their domestic markets
are so large. The other group includes commodity economies like
Nigeria, Iran, and Peru, which have a history of protecting
themselves from foreign competition. On a list of thirty of the largest
emerging countries, the most closed is Brazil, which has both a large
domestic population and a commodity economy. There, trade has
been stuck for decades at around 20 percent of GDP, the lowest
level of any country outside deliberately isolated outliers such as
North Korea. Though it is a leading exporter of soybeans and corn
and has been hyped as a breadbasket to the world, Brazil has been
resisting opening to the world for years. Its trade share of GDP is
barely two-thirds that of peers like China, India, and Russia.
Historically, Brazil simply didn’t do trade deals. By 2016, it had cut
only five trade deals, all with small economies like Egypt and Israel,
while India and China had both cut nearly twenty, with major
economies all over the world. That cloistered mind-set began to
change under President Jair Bolsonaro, who took power in 2019, but
Brazil still had a long way to go. To compete in trade, a country has
to show up more often at the negotiating table.

Good Luck, Good Policy

Around the year 1500, for the first time in history, the average
incomes in one region—Europe—began to clearly outpace all others.
And it continued to do so for the next three and a half centuries.
According to development experts Daron Acemoglu, Simon
Johnson, and James Robinson, the rise of Europe was driven largely
by Britain and the Netherlands, which had major ports on Atlantic
trade routes, as well as monarchs wise enough to respect private
property rights and grant merchants the latitude to exploit growing
trade channels.2
In short, the secret of Europe’s success was the good luck of
location, leveraged by good policy. That combination still works
today and explains more than a few recent booms, including the
comeback of Vietnam. Late in the first decade of this century,
Vietnam was hyped as the next China, even though its young
population was only one-tenth as large and its Communist reformers
were not as competent. Vietnam ran up its debts at a rate that would
normally signal a sharp economic slowdown, yet when the global
credit crisis hit in 2008, the country barely stumbled.
The strongest explanation is that Vietnam was cleverly exploiting
its position on key east–west trade routes. It struck a major trade
deal with the United States in 2000, joined the World Trade
Organization in 2007, and benefited greatly as export manufacturers
started looking for alternatives to China’s rising wages. After 2008,
global trade was growing more slowly than the world economy for
the first time in a generation, and Vietnam was one of the few
emerging countries that were rapidly increasing their share of global
exports.
Japanese firms cited Vietnam as their preferred site for new Asian
plants, drawn in by a cheap currency, a rapidly improving
transportation network, and reasonably inexpensive labor. Work was
in full swing on new metro lines in Ho Chi Minh City, as well as on
new roads and bridges all over the country. Vietnam was building an
old-school manufacturing powerhouse, reminiscent of Japan in the
1960s, and turning itself into a new geographic sweet spot.
 Ties to the Neighbors
The last round of talks on opening global trade, the so-called Doha
Round, went off the rails amid the tensions of the 2008 financial
crisis and collapsed in 2015. As a result, many countries are shifting
focus to building regional trading communities and common markets
—a promising sign.
It is natural for any nation to trade most heavily with its neighbors;
in fact, postwar economic success stories have tended to cluster in
regions from southern Europe to East Asia. The latter offers perhaps
the most promising model. Rising intraregional trade was one of the
main drivers of the long economic miracles in Japan, Taiwan, South
Korea, and lately China, all of which proved willing to drop old
wartime animosities to cut trade deals. In 2015, China signed a
landmark free trade agreement with South Korea that was expected
to inspire copycat deals across East Asia, perhaps beyond.
The biggest opportunities are in the worst-connected regions.
Around 70 percent of exports from European countries go to regional
neighbors, and in East Asia and North America the figure is 50
percent. In Latin America the figure is only 20 percent, in Africa it is
12 percent, and in South Asia it is just 5 percent—so these
continents have the most room for regional deals to drive new
growth.
Strong leadership is critical to getting deals done. Asia’s postwar
boom began in Japan and spread to a second tier of economies led
by South Korea and Taiwan, then to a third tier led by Thailand and
Indonesia, and a fourth led by China. A Japanese economist called
this the “flying geese” model of development3—with Japan playing
the lead goose.
In recent years, a similar story has unfolded in Indochina, as
wealthier neighbors persuaded Vietnam, Laos, and Cambodia to
drop their Communist guard and start building transport arteries that
now form a network “as dense as the wiring on a computer chip,”
one Thai official told me.
Meanwhile, South Asia remains fenced off. Isolation, lawlessness,
and the lingering bitterness produced by regional wars have made it
difficult for India, Pakistan, Bangladesh, and Sri Lanka to open
borders, and so far, no leader has stepped forward to ease
hostilities.
Africa’s record is mixed. Founded in 2000 by Kenya, Tanzania,
and Uganda, the East African Community later expanded to include
Rwanda and Burundi, and delivered on its aims to boost trade by
building the regional roads, rails, and ports required to accelerate
commerce.
Other African trade groups were stillborn. West Africa has been
trying since 1975 to energize a union known by its acronym
ECOWAS, built around the anchor state of Nigeria. But wars and
chaos have limited its accomplishments to what has been called
“organizational matters such as the drafting of protocols and the
conduct of studies.”4
South America was for decades just as sharply divided. On the
Atlantic coast there is an old trade alliance, Mercosur. Traditionally
hostile to free trade, it combined Brazil, Argentina, Bolivia, Paraguay,
and Venezuela in what has been described as “an anti-gringo talking
shop.”5 Then came the recent advent of conservative governments
in Argentina and Brazil, which combined to expel Venezuela and
then complete what was hailed as a landmark free trade deal with
the European Union in the summer of 2019. Though trade has
declined as a contributor to growth in Mercosur member states since
its inception, that trend may change.
On the Pacific coast, meanwhile, there is “the most important
alliance you’ve never heard of,” as former Venezuelan trade minister
Moisés Naím put it. Linking Chile to Colombia and Peru, the Pacific
alliance achieved more within twenty months of its 2013 founding
than Mercosur had in two decades,6 quickly eliminating 92 percent of
the tariffs among its member states, scrapping visa requirements for
business travelers and tourists, and focusing on practical progress
rather than bashing the United States. Building regional trade deals
can be a very good sign, if it is done right.

Geography Is Not Destiny

As McKinsey & Company has pointed out, the world’s “center of
economic gravity”—the point most central to commercial activity—
has shifted rapidly in the last half century, moving from North
America over the North Pole to China, where it started out a
thousand years ago.7 This shift shows that global trade patterns do
change and can be altered by smart policies.
Under strong leaders starting with Deng Xiaoping in the early
1980s, China carved out its own geographic destiny. It dredged
rivers and harbors to create six of the world’s ten busiest ports, all of
them located on a Pacific coast with much less “prime port property”
than the United States has.8
Now the center of economic gravity is moving again. As wages
rise in China, simple manufacturing is moving, and not necessarily to
countries with the cheapest labor, which counts for only 5 percent of
export production costs in emerging nations, on average.9 Instead,
manufacturers are choosing countries, like Vietnam, Cambodia, and
Bangladesh, that combine lower wages with a location on Pacific
trade routes and open doors to outsiders.
After leaving the Indian Ocean, the major shipping routes run into
the Red Sea and through the Suez Canal to the Mediterranean,
where they pass states that are struggling (Libya, Sudan, Algeria)
and a few that are thriving. The relatively placid kingdom of Morocco
is drawing investors with new free trade zones, a stable currency,
cheap labor, and competent leadership. It is one of the first African
countries to attract Western companies looking to build advanced
industries such as aeronautics and automobiles.
Opportunities to extend these global trade routes abound. British
colonizers first imagined a Trans-African Highway from Cairo to
Cape Town, but today it is a patchwork of finished and unfinished
road, with many stretches in decay or teeming with bandits. The
highways from Central to South America are another tangle of more
or less finished roads, interrupted at the Darien Gap, 60 miles of
impenetrable rain forest on the Panama-Colombia border.
China is working to connect these less tracked regions. In 2013,
Chinese president Xi Jinping began unveiling plans for a New Silk
Road, evoking the land and sea routes that tied China to the West in
the thirteenth and fourteenth centuries. The $300 billion plan aims to
connect central China to its border provinces, and the border
provinces to seaports worldwide, including those that Beijing is
funding, from Gwadar in Pakistan to Chittagong in Bangladesh,
Kyaukpyu in Myanmar, and Hambantota in Sri Lanka. In Europe,
Poland and Hungary, among others, have already signed on as
partners in the plan.
China seems to understand how to make the most of its location,
and how to make sure its own provinces participate. Plans for the
New Silk Road include “domestic silk roads” that will fan out from
central China, turning western Xinjiang province into a transport hub
for central and South Asia, Guangxi and Yunnan into hubs for
Southeast Asia and the Mekong region, and Inner Mongolia and
Heilongjiang into hubs for travel north to Russia. When complete, the
network could bring outposts of the old Silk Road, like the western
city of Urumqi, back onto global routes for the first time since the
Mongol era. This is how geographic sweet spots are developed, by
spreading the wealth.

Second Cities
The need to spread a nation’s rising wealth to remote provinces
came home to me on visits to Thailand, where in 2010, a long
simmering urban-rural conflict was erupting in Bangkok. Local
experts told me that rural anger could be explained in one number:
the 10-million-plus population of central Bangkok is more than ten
times larger than that of the second-largest city, Chiang Mai.
A ratio that lopsided is abnormal. In small countries, it’s common
for the population to be concentrated in one city, but in midsize
countries like Thailand, with 20 to 100 million people, and in large
countries of more than 100 million and meganations of more than 1
billion, it is unusual. Typically, in midsize nations, the population of
the largest city outnumbers that of the second city by around three to
one, and often less. That ratio held in the past and holds today for
urban centers of the Asian miracle economies, including Tokyo and
Osaka in Japan, Seoul and Busan in South Korea, and Taipei and
Kaohsiung in Taiwan.
My sense is that any midsize nation where this ratio is significantly
more than three to one faces a risk of Thai-style regional conflict.
Today, a look at the twenty major emerging economies in this
population class shows that ten look out of balance, most
dramatically in the cases of Thailand, Argentina, and above all, Peru.
The 10.4 million residents of the Peruvian capital, Lima, outnumber
residents of Arequipa, the second city, by a factor of twelve, helping
to explain why Peru still faces embers of the Shining Path, a rural
insurgency that raged in the 1980s.
Though Vietnam also looks out of balance on the second-city rule,
it has seen little unrest as a result, because the provinces are
flourishing. After Vietnam’s civil war ended in 1975 with victory for
the north, its leaders buried the hatchet and promoted development
all over the country. Two of the world’s fastest-growing ports are in
Vietnam—one in southern Ho Chi Minh City, the other in the northern
city of Haiphong. Between them, the old American naval base at Da
Nang has tripled in population, to nearly a million, since 1975 and
has been called an emerging “Singapore,” with a bustling port and a
streamlined local government.
Colombia is the only Andean nation with regionally balanced
growth. Bogotá’s 9.8 million people amount to less than three times
the population of Medellín, and both Medellín and the third major
city, Cali, are growing at a healthy pace. Once known as the murder
capital of the world, Medellín began to turn around in the 1990s, after
the central government gave local officials more control over their
own budgets and police forces.
In the developed world, seven countries have a midsize population
between 20 and 100 million. In five—Canada, Australia, Italy, Spain,
and Germany—the first city is no more than twice as populous as the
second. In the United Kingdom, where London is more than three
times larger than Manchester, residents of provincial cities have long
complained that national policies favor the global elite of London.
Those resentments came to a head in 2016 when the provinces
combined to outvote London and take Britain out of the European
Union.
France is even more unbalanced. Paris accounts for 30 percent of
the economy, and the 11 million Parisians outnumber residents of the
second city, Lyon, nearly seven to one. In the past, France has tried
to redistribute wealth to the provinces by building new towns or
cutting the number of domestic regions to consolidate their political
power. But Paris still dominates, and one way an economic
turnaround in France will likely manifest itself is in the emergence of
other large cities.
Countries with a population of more than 100 million will naturally
have many big cities, so the relative size of the second city is less
revealing. In these large countries, I look at the broader rise of
second-tier cities—meaning cities with more than a million people.
Eight emerging countries have populations of more than 100
million but less than a billion, ranging from the Philippines with 101
million to Indonesia with 255 million. As countries develop, they
naturally generate more second-tier cities, so it is important to
compare large countries to peers at a similar level of development.
Among those with a per capita income around $10,000, Russia is the
laggard. Over the last three decades it has seen only two cities grow
to a population of more than 1 million, compared to ten in Brazil—
one of the more dynamic stories in this class. The most dynamic is
Mexico, which has also produced ten cities of more than a million
people since 1985, but in a national population much smaller than
Brazil’s.

The Fattest First Cities

1st City Population 2nd City Population Ration of 1st

Country (million) (million) City to 2nd City
Peru Lima: 10.4 Arequipa: 0.9 11.6
Argentina Buenos Aires: 15.1 Cordoba: 1.6 9.4
Thailand Bangkok: 10.2 Samut Prakan: 1.3 7.8
Philippines Manila: 13.5 Davao: 1.7 7.9
 Malaysia Kuala Lumpur: 7.6 Johor Bahru: 1.0 7.6
Chile Santiago: 6.7 Valparaiso: 1.0 6.7
France Paris: 10.9 Lyon: 1.7 6.4
Sri Jayewardenepura
Sri Lanka Colombo: 0.6 Kotte: 0.1 6.0
Ho Chi Minh City:
Vietnam 8.1 Da Nang: 1.4 5.8
Egypt Cairo: 20.5 Alexandria: 5.2 3.9
Kenya Nairobi: 4.4 Mombasa: 1.2 3.7
UK London: 9.0 Manchester: 2.7 3.3

Source: CIA World FactBook; data as of 2018.

In Mexico, second-tier cities are flowering, often as manufacturing

centers producing exports bound for the United States. Among the
fastest-growing Mexican cities with populations of more than a
million, three are near the US border: Tijuana, Juárez, and Mexicali.
In central Mexico, Querétaro is making everything from wine to
appliances, and offering services from call centers to logistics.
Farther south, the city of Puebla has a large Volkswagen plant. The
flourishing of export manufacturing all over Mexico is a sign of
unusually strong regional balance.
Until recently, the anti-Mexico was the Philippines, where the
lingering influence of an old plantation society has created a
remarkable split. Currently, 13 percent of Filipinos live in Manila—a
proportion that has not changed since 1985 and is more than the
share of people living in all other Philippine cities combined. This
“missing middle” is quite unusual, even for a relatively undeveloped
country like the Philippines, where average income is less than
$3,000. However, second cities like Cebu and Bacolod are now
growing in population, and starting to attract global call centers and
IT service companies—a positive sign.
In the developed world, there are only two countries with more
than 100 million people, and they are mirror opposites. Since 1985,
fifteen cities in the United States have grown to more than 1 million
people, compared to just one in Japan—the industrial city of
Hamamatsu, southwest of Tokyo. Though second-city growth is
hampered in Japan by the slow-growing national population, it is also
constrained by the stagnation of Japanese policy-making, which has
long favored dominant cities like Tokyo, Osaka, and Nagoya.
The United States, by contrast, is the only rich country that has
seen massive internal migration, with a postwar shift of more than 15
percent of the population from the Northeast and Midwest to the
South and West. People have followed the flow of companies and
jobs, which have moved to younger states with lower tax rates, less
heavily unionized workforces, and sunny environments made
tolerable for summer office work by the spread of air-conditioning
since World War II. Of the fifteen US cities that have risen into the
million-plus category, thirteen are in the South or in the West—from
Jacksonville, “the city where Florida begins,” to Sacramento, the
capital of California.
The class of meganations with more than a billion people has only
two entries: China and India. And here, China is winning. It has seen
nearly 100 cities grow to more than a million, twice as many as India,
and has an even more dramatic lead in genuine boomtowns, cities
that started out with fewer than a quarter million people three
decades ago and mushroomed to more than 1 million, some many
times more. There are nineteen such boomtowns in China, and only
two in India—Malappuram and Kollam in Kerala state—which barely
topped the million mark and only because their territory expanded
when authorities redrew the local administrative maps.
In a sense, mass migration within the United States has a parallel
in China, and only China, where the move has been from inland
provinces to the southeastern coast. Despite China’s top-down
approach to growth, Beijing gave lesser cities surprising leeway to
guide development, even to commandeer land for building projects.
Shenzhen was a Pearl River fishing village before 1979, when
Beijing made it the first of many new special economic zones, open
to foreign trade and investment. The resulting boom lifted Shenzhen,
as well as neighboring Dongguan and Zhuhai, and these three are
China’s fastest-growing cities.
 In India, cities grow more slowly in part just because the economy
has grown more slowly, but authorities there have also done much
less to encourage second cities. India is a slow-moving democracy,
where local opposition can block development and the state still
reserves huge swaths of urban land for itself. Lutyens’ Delhi, a
verdant 25-square-kilometer enclave in the capital named after the
British architect who designed it, is owned almost entirely by the
government. It includes a “bungalow zone” of homes valued at up to
$50 million, occupied by top officials. In the emerging world, the only
comparable government oases I know of are also in India, in second-
tier cities like Patna and Bareilly.
India tried to create special economic zones like China did, but it
imposed restrictive rules on the use of land and labor, so these
zones have done little to create jobs or build urban populations.
India’s outdated building codes discourage development and drive
up urban prices.
Though Delhi has in recent decades ceded significant spending
authority to chief ministers in India’s twenty-nine states, that power
has not filtered down to the mayoral level. Smaller cities struggle to
grow, and when rural Indians migrate, they gravitate to one of the
megacities, with populations of over 10 million: Mumbai, Delhi,
Kolkata, and Bangalore. If China is a nation of boom cities, India is a
land of creaking megacities surrounded by small towns, in large part
because of bad policies pushed by a cumbersome state.

Firing on All Three Fronts

Location still matters. In a period when trade and capital flows have
slowed, growth that once flourished along trade routes is
accompanied by the rise of cities at the center of various service
industries. Though the internet was expected to disperse service
jobs to the far corners of the world, it has instead concentrated
industries from insurance to finance in about fifty global cities, from
New York and London to Shanghai and Buenos Aires. People still
need to meet face-to-face to conduct business, and the result is the
rise of cities with a cluster of talent in a specific service niche: Busan,
South Korea, in shipping logistics; Manila in back-office services;
and so on.
To carve out a geographic sweet spot, a country needs to open its
doors on three fronts: to trade with its neighbors, the wider world,
and its own provinces and second cities. In Asia, the leading
example of a country firing on all fronts is China, with countries like
Vietnam and Bangladesh close on its tail. In Latin America, the
leading examples are Mexico and, of late, Colombia. The latter’s
2012 free trade deal with the United States was the first of its kind in
South America; Colombia belongs to one of the more promising new
regional trade alliances, along with its Andean neighbors and
Mexico, and it has encouraged the transformation of Medellín from
murder capital to model second city. In Africa, Morocco and Rwanda
are carving out export success stories in very rough neighborhoods.
Geography is never enough to produce strong growth on its own,
unless a country takes steps to turn its ports and cities into
commercially attractive magnets. The luck of location can change
too: the advantage of a location on the border of rich markets like the
United States or Germany depends on which one is growing faster at
any given time. Trade routes are not written in stone, and the
advantages or disadvantages of location can be reshaped by good
policies. Not so long ago China was seen as hopelessly poor and
isolated, before it took the steps necessary to carve out a new
geographic sweet spot and put itself at the center of global trade.
 6

INVESTMENT

Successful Nations Invest Heavily, and Wisely

Any economic textbook will tell you that growth can be tallied as the
sum of spending by consumers and government plus investment and
net exports: (C + G) + (I + X) = GDP. It is one of the most basic
formulas in economics, but what the book often won’t tell you is why
I reveals the most about where the economy is heading.
Without investment, there would be no money for government and
consumers to spend. I includes total investment by both the
government and private business in the construction of roads,
railways, and the like; in plants and equipment, from office machines
to drill presses; and in buildings, from schools to private homes.
Investment helps create the new businesses and jobs that put
money in consumers’ pockets.
Consumption typically represents by far the largest share of
spending in the economy—more than half. Investment is usually
much smaller, around 20 percent of GDP in developed economies,
25 percent in developing economies, give or take.* Yet I is by far the
most important indicator of change, because booms and busts in
investment typically drive recessions and recoveries. In the United
States, for example, investment is six times more volatile than
consumption, and during a typical recession it contracts by more
than 10 percent, while growth in consumer spending merely slows
down.
In successful nations, investment is generally rising as a share of
the economy. Over the long term, when investment spending
reaches a certain critical mass, it tends to keep moving in the same
upward direction for nearly a decade. When investment is rising,
economic growth is much more likely to accelerate.
There is a rough sweet spot for investment in emerging
economies. Looking at my list of the fifty-six highly successful
postwar economies in which growth exceeded 6 percent for a
decade or more, on average these countries were investing about 25
percent of GDP during the course of the boom. Often, growth picks
up as investment accelerates. So any emerging country is generally
in a strong position to grow rapidly when investment is high—roughly
between 25 and 35 percent of GDP—and rising.
On the other hand, economies face weak prospects when
investment is low, roughly 20 percent of GDP or less—and falling.
Many countries, including Brazil, Mexico, and Nigeria, have
stagnated at these low levels for years, and here the failure to invest
manifests itself in a breakdown of public life: endless lines at the
airline ticket counter, overflowing trains with riders squatting on the
top, or underpaid traffic police hitting people up for bribes.
In reaction, one often sees private citizens building their own
workarounds: the private rooftop helipads that link corporate
headquarters in São Paulo, the gated communities north of Mexico
City, the generators that companies use to keep the lights on during
outages in Lagos. Much of what makes the emerging world feel
chaotic reflects a shortage of investment in the basics.
In developed economies, investment spending tends to be lower
because basic infrastructure is already built, so I pay less attention to
the level of spending as a share of GDP and more to whether it is
rising or falling. Strong growth in investment is almost always a good
sign, but the stronger it gets, the more important it is to track where
the spending is going.
The second part of this rule aims to distinguish between good and
bad investment binges. The best binges unfold when companies
funnel money into projects that fuel growth in the future: new
technology, new roads and ports, or—especially—new factories.
Of the three main economic sectors—agriculture, services, and
manufacturing—manufacturing has been the ticket out of poverty for
many countries. Even today, when robots threaten to replace
humans on the assembly line, no other sector has the proven ability
to play the booster role for job creation and economic growth that
manufacturing has in the past.
As a nation develops, investment and manufacturing both account
for a shrinking share of the economy, but they continue to play an
outsize role in driving growth. Manufacturing generates around 15
percent of global GDP, down from more than 25 percent in 1970. Yet,
in larger economies at all levels of development, from the United
States to India, manufacturing accounts for nearly 80 percent of
private-sector research and development, and 40 percent of growth
in productivity, according to the McKinsey Global Institute.1 When
workers are increasingly productive, turning out more widgets per
hour, their employer can raise wages without raising the price it
charges for widgets, which allows the economy to grow without
inflation.
As the French economist Louis Gave has argued,2 an investment
binge can be judged by what it leaves behind. Following a good
binge on manufacturing, technology, or infrastructure, the country
finds itself with new cement factories, fiber-optic cables, or rail lines,
which will help the economy grow as it recovers. Bad binges—in
commodities or real estate—often leave behind trouble.
Investment does little to raise productivity when it goes into real
estate, which has other risks as well: it is often financed by heavy
debts that can drag down the economy. When money flows into
commodities like oil, it tends to chase rising prices and evaporate
without a trace as prices collapse. So, while investment booms are
often a good sign, it matters a great deal where the money is going.
 The Virtuous Cycle of Investment
Nations that invest wisely tend to generate a positive economic
momentum of their own. When investment surpasses 30 percent as
a share of GDP, it sticks at that level for nine years, on average, for
the postwar cases I have studied. Leaders in many of these nations
showed a strong commitment to investment, particularly in
manufacturing, which can begin a virtuous circle. Harvard economist
Dani Rodrik calls manufacturing the “automatic escalator” because
once a country finds a niche in global manufacturing, productivity
often seems to start rising automatically.3
The early steps have always involved manufacturing goods for
export. In a study of 150 emerging nations looking back fifty years,
the Hong Kong–based economic research firm led by Jonathan
Anderson found that the single most powerful driver of economic
booms was sustained growth in exports, especially of manufactured
products.4 Exporting manufactured goods increases income and
consumption, and generates foreign revenues that allow the country
to import the machinery and materials needed to upgrade its
factories, and to build roads and ports to move goods from factories
to export markets, all without running up foreign bills and debts. In
short, manufacturing investment seems to spark other good binges.
In the nineteenth century the United States saw two huge railroad
spending booms, followed by two quick busts, but the booms left
behind the rail network that would help make the country the world’s
leading industrial power. China began industrializing when it was still
very poor, and for three decades the investment went into factories,
roads, bridges, and other productive assets. Only when the boom
was in its fourth decade did investment flows in China shift to
frivolous targets like real estate showplaces.
There are, of course, exceptions: countries that invested heavily
but so unwisely that they were left with little to show for it. In the
Soviet Union, investment peaked at 35 percent of GDP in the early
1980s, but much of that money was directed by the state into ill-
conceived one-industry towns, from the timber mills of Vydrino to the
mines of Pikalyovo. In India, investment exceeded 30 percent of
GDP during the early 2000s, but little went into manufacturing.
Between 1989 and 2010, India generated about 10 million
manufacturing jobs, but nearly all in small shops; investors fear
building large factories, which attract tough scrutiny from bureaucrats
enforcing strict labor rules.5 The absence of large manufacturing in
India is thus a symptom of the state’s failure to create conditions in
which business can thrive.

The Service Escalator

Before the global financial crisis, Indian economists began to argue
that their country’s heavy investment in technology service industries
could work as a development strategy for the internet age. While
Western consumers would still need a local beautician or
landscaper, they could purchase many services, from law to
radiology, over the internet. Instead of developing by exporting
manufactured products, India could grow rich by exporting services.
The idea of the new “service escalator” to prosperity was born.6
If only this could work. In times of technology-induced job
destruction, we should be looking not for a catastrophic ending but
for the next transformation. However, in the emerging world most
new service jobs are still in traditional ventures like curbside bicycle
repairs, or barbershops in plywood stalls. These services do not
generate export earnings or boost nations up the development
ladder.
In India, economists got excited about modern IT services, which
had made cities such as Bangalore and Pune world-famous
boomtowns. The hope was that India could advance from simple
back-office services to more profitable consulting and software
services. But a decade on, India’s tech sector is still focused on
back-office operations. Only about 4 million people work directly in
IT, barely more than 1 percent of the workforce.
IT service booms inspired similar hopes in Pakistan and Sri Lanka
but produced jobs in only the tens of thousands. In the Philippines,
employment in call centers and other back-office services exploded
from no jobs in the early years of this century to more than a million
by 2018, but people who land these jobs are often already middle-
class and well-educated urbanites who speak English.
Lately, in emerging countries, service industries have not risen fast
enough to drive mass modernization of the labor force, the way
manufacturing did in the past. In Japan and South Korea, as much
as a quarter of the population migrated from farm to factory during
their long periods of “miracle” growth. At the peak of its
manufacturing prowess in the early postwar years, the United States
employed one-third of its labor force in factories. Workers can move
quickly from farms to assembly lines, because both rely on manual
labor. The leap from the farm to modern services—which require
advanced language and computer skills—is tougher. For now, the
rule still looks for investment in factories first.

The Narrow Ladder to a Stable Perch

It is getting harder for established export manufacturers just to hold
on to their customers, in part because the sector has been shrinking
worldwide. Exports out of the big emerging economies had been
growing at an annual pace above 20 percent before the global
financial crisis of 2008, with peaks near 40 percent. But then global
trade slowed, and export growth in these nations turned negative by
the middle of the next decade.
As the manufacturing sector shrank, competition intensified. New
players like Vietnam and Bangladesh rose up to challenge China,
and rich countries began moving to block the tricks (subsidizing
exports, undervaluing currencies) that East Asian nations had used
to become export powerhouses in the 1960s and ’70s.
Developed nations, led by the United States, also began adopting
advanced manufacturing techniques, and they built a huge lead in
this field. As both competition and protectionism spread,
manufacturing hubs in the developed world are reviving as major
rivals for emerging-world factories, and the manufacturing ladder is
getting tougher for any developing country to climb.
 Historically, the clearest measure of success has been the pace at
which a country is increasing its share of the global market for
manufactured exports. Recent successes include China, Thailand,
and South Korea, which illustrate how strength in manufacturing can
insulate an economy from shocks. In recent years, strong
manufacturing has continued to drive the South Korean economy
forward at a healthy pace, despite a huge burden in household debt,
equal to 150 percent of GDP.
Thailand is an even more striking example. It invests a healthy 25
percent of GDP and has the second-biggest manufacturing sector
(near 30 percent of GDP) among large economies. It has been
increasing its share of global manufactured exports, including steel,
machinery, and cars, and as a result Thailand has an unusually high
proportion of adults who are gainfully employed. They act as ballast,
stabilizing the economy even when protestors are filling the streets.
Thailand has suffered thirteen coups and a further six coup
attempts since the 1930s. Yet before the last coup, in 2014, Thailand
had sustained an economic growth rate of around 4 percent for a
decade. Even in late 1997, when the Bangkok real estate market
was crashing, Japanese companies were powering an investment
boom on the eastern seaboard, where new auto and petrochemical
plants were rising on green, pagoda-dotted hills and white-sand
beaches. This investment binge helped Thailand bounce back much
faster after the crisis than most people expected.

The Upside of Tech Booms

After the dot-com crash of 2001, the conventional wisdom was that
tech investment bubbles fuel mainly junk companies. While
hundreds of companies went under in 2001, a few, including Google
and Amazon, would survive to help make the United States much
more productive. In fact, the dot-com boom helped to drive the US
productivity growth rate up from 2 percent in the 1980s to near 3
percent in the 1990s, the highest rate since the 1950s.7
 Even though the tech boom imploded, it left consumers with the
ability to make phone calls and transfer data more cheaply, as well
as to make use of call centers and other cost-effective services
located in countries such as India or the Philippines, thus improving
standards of living in both rich and poor countries. At the height of
the dot-com mania, the huge investment in fiber-optic cables looked
like the biggest bubble of all. But those cables eventually made high-
speed broadband connections a reality in the United States.
The infrastructure left behind by investment binges in factories or
technology tends to increase productivity for years after the boom
has ended. The rub: tech booms are rare outside the leading
industrial nations. In the emerging world, they have unfolded so far
only in Taiwan, South Korea, Israel, and, most spectacularly, China.
Recent visitors are dazzled by the most sweeping consumer tech
revolution ever seen, anywhere in the world.
Land with an Indian passport and the scanner speaks to you in
automated Hindi. Check into a prototype hotel with no clerks—only a
scanner that recognizes you as the person who booked the room.
Open your room with no key—just your face. Go to lunch at a new
grocery store where your meal is delivered by little white robots
rolling along a sparkling white track. Be sure to download a digital
payment app, because many stores no longer take cash or credit
cards. Forecasters who once questioned whether China could
develop beyond low-end manufacturing have their answer.
A New China, led by the tech sector, has emerged with stunning
speed as a global competitor or leader in industries ranging from
renewable energy to e-commerce and artificial intelligence, and has
kept up the momentum by rapidly expanding its spending on
research and development. Over the last decade China’s spending
on R&D tripled, to around $380 billion, putting it ahead of Europe
and closing the gap with the United States. In fact, the boom in tech
helps explain why China’s record debts, which are concentrated in
old state-run industries, have slowed the economy but not led to a
collapse of the economic model. The millions of jobs lost in heavy
industries have been partially offset by millions hired as ride share
drivers and other tech service workers.
 Taiwan and South Korea have also invested heavily in research
and development—more than 3 percent of GDP a year over the past
decade—in order to create technology industries from scratch. South
Korea has built the most complete broadband coverage in the world
and is globally competitive in industries from cars to consumer
electronics. Taiwan’s companies are quick to respond to new global
trends but so far have been confined mainly to making components
for PCs, mobile handsets, and other consumer electronics.
Israel also fostered a tech boom while it was still developing. Israel
is home to the second-highest number of start-up companies in the
world, after the United States, and spends nearly 4 percent of GDP
on R&D. Several large US corporations, such as Microsoft and
Cisco, set up their first overseas R&D facilities in Israel, and the
country now derives 40 percent of its GDP from exports and half of
its export income from tech and life sciences.
Another possible tech binge is unfolding in Mexico, where the
Monterrey Institute of Technology now plays a role similar to that
played by Stanford University in Silicon Valley, a cornerstone of a
local culture that celebrates engineering, entrepreneurship, and
aggressive innovation. Today, Monterrey is home to a striking array
of companies that are applying high technology to everything from
lightweight aluminum auto parts to white cheese and cement.
Elsewhere, trend watchers have spotted new Silicon Valleys
popping up from Nairobi, Kenya, to Santiago, Chile, but often these
are microbooms, consisting of a few individual start-ups in one small
neighborhood. Chile spends less than 1 percent of GDP a year on
research and development—a fraction of what Asian rivals spend,
and not enough to drive a real tech boom.

Bad Binges: Real Estate

The worst investment binges leave behind little of productive value,
in part because the trigger is not a real innovation but spiking prices
for a coveted asset like real estate or oil. Investors pouring money
into houses may accelerate construction—not a bad thing—but a
house will provide a home to one family, not a steady boost to
productivity. And since so many people dream of buying that perfect
home, the real estate market seems particularly prone to irrational
manias and runaway debts.
The quality of an investment binge also depends on how
businesses pay for it. If they borrow money, trouble erupts when the
bubble bursts. As businesses and banks struggle to deal with bad
debts, the credit system is paralyzed and the economy slows for
years.
But if businesses raise money by selling equity shares, the market
sorts out the mess. Stock prices fall, and owners are forced to take
the hit; there is no protracted negotiation. The best funding source is
foreign direct investment, because when foreigners buy direct stakes
in businesses, they tie themselves to these projects as owners. This
financing can’t flee easily in a crisis.
Nations often move from good to bad binges, and back. In the
United States, for example, the dot-com boom was a classic good
binge. Because it was financed mainly by the stock market and
venture capitalists, there was no debate about who should take the
pain when stock prices collapsed. The United States fell into
recession, but it was the shallowest in postwar history, and it left
some valuable investments behind.
The subsequent boom in US housing, however, was a bad binge
financed largely by debt. Real estate crashed in 2008, followed by
the sharpest recession in postwar history and an agonizingly slow
recovery, as banks and their customers struggled to resolve the
debts.
Real estate binges are often pumped up by borrowing and, as a
result, tend to end in a serious economic slowdown. Some of the
most famous economic miracles ended with the implosion of a debt-
fueled property bubble, including Japan in 1989 and Taiwan in the
early 1990s. It is hard to pinpoint when a real estate boom becomes
a bubble, but a study of eighteen of the worst housing price busts
since 1970, from the United States to China, suggests a rough rule
of thumb: all those busts came after investment in real estate
construction reached an average of about 5 percent of GDP.
 It’s not clear why “safe as houses” ever came to mean completely
safe, since housing binges are particularly dangerous for the
economy.

Bad Binges: The Curse of Commodities

Bad binges can also flow from the “curse” of natural resources.
When nations discover oil or gems, a scramble over the profits
ensues, corrupting the business culture and the political system. The
government starts relying on oil profits, not taxes, for revenue,
undermining the relationship between voters and elected leaders. To
buy voters off, leaders begin subsidizing gas, cheap food, and other
freebies.
Foreigners pump in money to buy the oil, which drives up the
value of the currency, in turn making it difficult for local factories to
export their goods. The oil windfall tends to undermine every industry
other than oil, retarding development.
To study this effect, I looked at average real income in eighteen
large oil-exporting nations since the year they started producing oil.
In five of them, average incomes had actually fallen. And in all but
one of them, Oman, average income had fallen compared with the
leading global economy, the United States. Two of the largest
exporters—Saudi Arabia and Russia—are not included in the chart
here, for lack of income data going back to the year they discovered
oil. But in recent decades they have shown a similar pattern, rising
and falling with oil prices, never gaining steadily on the United States
in per capita income terms.

Finding Oil, Falling Behind

Some top exporters have seen incomes drop, and all but one dropped relative to the United
States, since discovering oil.

Nation GDP per $ Gain/Loss in % Gain/Loss

Capita Today GDP per in GDP per
Capita since Capita
 Discovery of Relative to
Oil U.S. since
Discovery of
Oil
1 Oman $18,082 $16,333 19.0%
Dem. Rep. of
2 Congo $495 –$250 –2.6%
3 Chad $888 –$19 –2.7%
4 Sudan $728 –$607 –4.2%
5 Syria $2,807 $1,022 –4.5%
6 Nigeria $2,233 $958 –5.2%
7 Angola $3,060 $1,950 –5.5%
8 Ecuador $6,155 $5,281 –5.9%
9 Libya $6,836 $4,900 –6.4%
10 Cameroon $1,538 –$703 –6.6%
11 Colombia $6,681 $5,718 –6.7%
12 Tunisia $3,073 $854 –6.8%
Republic of
13 Congo $2,444 $1,291 –6.8%
14 Yemen $919 –$1,392 –9.5%
15 Algeria $4,230 $2,511 –9.7%
16 Venezuela $2,724 $1,655 –16.2%
17 Gabon $8,031 $4,204% –22.6%
18 UAE $39,806 $16,626 –133.2%

Source: Haver Analytics; data as of 2019.

Consider what was really happening during Africa’s widely hyped

“renaissance” in the last decade. Many African countries grew
rapidly, and investment rose from 15 to 22 percent of GDP, on
average, but much of the money flowed into services and commodity
industries. Manufacturing shrank as a share of Africa’s exports, and
millions of Africans moved out of industrial jobs and into informal
shops. And while manufacturing was helping to stabilize countries
like Thailand, heavy investment in commodities was destabilizing
countries like Nigeria.
The largest economy in West Africa, Nigeria, has seen average
income fall from 8 to 4 percent of the US average since it started
pumping oil in 1958. Billions of oil dollars have disappeared into
corrupt pockets.8 With little revenue left to build roads, Nigeria
struggles to attract investment. Manufacturing is less than 5 percent
of GDP—the fourth lowest in Africa. The result is a deep vulnerability
to outside shocks. Unlike the situation in Thailand, a currency
collapse in Nigeria provides no significant boost to manufactured
exports because, for the most part, they don’t exist.

When Oil Economies Work, Briefly

On my list of fifty-six countries that saw at least a decade of rapid
growth, twenty-four are commodity economies, including Brazil and
Indonesia. But these gains were often fleeting. Over the last 200
years, the average price of commodities has remained flat in
inflation-adjusted terms. Upswings tend to last for a decade, but then
prices drop and stay low for around two decades, leaving the
economy no richer.
In Saudi Arabia, average incomes have swung wildly with oil
prices, doubling to $20,000 as oil prices shot up in the 1970s and
early ’80s, falling to $10,000 in the 1990s, recovering in the next
decade to $25,000, and drifting back down as low as $20,000 in
recent years. Countries with natural resources less bountiful than
Saudi Arabia’s have tended to stagnate at a much lower income
level. Argentina, Colombia, Nigeria, and Peru have experienced an
even more pronounced roller-coaster ride since 1960, seeing
average incomes swing with prices for their commodity exports.
 Though commodities are not generally an advantage in the long
term, they can drive good runs of a decade or less. If the money is
going mainly to a new technology, for example, investment in a
commodity can qualify as a good binge. The recent shale energy
boom in the United States, which was built on technology for drawing
oil and gas from shale rock, forced older companies to lower prices.
This cheap energy made the US economy more competitive and
created a reservoir of new expertise. Just as the dot-com boom had
done, the shale bubble left behind a valuable industrial infrastructure
that will continue boosting productivity long after the boom is over.

The Point of Excess

While rising investment often augurs well, any strength taken too far
can become a weakness—which is why the ideal level of investment
is roughly in the range of 25 to 35 percent of GDP.
The Asian miracles showed that investment spending tends to be
“monophasic,” meaning that once trends turn, the same conditions
persist for years. After investment peaks at more than 30 percent of
GDP and begins to fall, it tends to keep falling. The landscape is
littered with idle or unfinished plants, malls, and other ill-conceived
investment projects that weigh on the economy, and growth slows by
a third, on average, over the next five years.
If investment peaks at more than 40 percent of GDP, the backlog
of unnecessary projects is even longer, and growth slows by about
half over the next five years. Only ten countries have reached this
peak in the postwar era, including South Korea in the 1970s, and
Thailand and Malaysia in the 1990s. Of these countries, just two—
Norway in the late 1970s and Jordan after the year 2000—escaped
a major slowdown.
This signal bodes ill for China, where between 2002 and 2017,
investment rose from 37 percent of GDP to 47 percent, a level never
before attained by a large economy. As investment in heavy industry
climbed, China was pouring better than two times as much cement
per citizen as any other country. And as investment to GDP rose,
more of the money started going to wacky real estate projects and
the like.

When Good Binges Go Bad

China’s experience is typical. In the late stages of a good boom, the
number of opportunities to invest in high-return factories or
technologies will diminish before the optimism does. The general
euphoria makes many people complacent, and more investment
goes to waste. Investors start putting money into houses, stocks, or
commodities like oil and gold, and the binge starts to go bad. The
economy slows because the contribution from productivity falls.
This process of decay has led to many a real estate bubble,
including those that popped across Europe and the United States in
the early years of the twenty-first century and the one that
threatened China by the mid-2010s. By 2013, investment in real
estate had risen from 6 percent of GDP to 10 percent in just five
years, and the price of land had risen 500 percent since the year
2000. In major Chinese cities, prices for pre-owned homes were
rising much faster than average incomes were, feeding middle-class
resentment of those who could afford a house.
Since investments are often funded by borrowing, investment and
credit tend to grow in tandem, and to turn for the worse together. In
the 2010s, China was seeing more investment go to wasteful
targets, and more financing come from debt. China’s size tends to
produce larger-than-life tales, and the term ghost town fails to
capture the scale of its vacant and debt-fueled megaprojects.
Outside the city of Tianjin, developers were building a financial
district designed as a larger replica of New York—with a skyline one
critic called “eerily similar.”
As good investment binges decay, a meltdown often follows. Even
in resilient Thailand, optimism about the manufacturing-driven boom
inspired many locals to borrow heavily to buy real estate, inflating the
bubble that collapsed in 1997.
 In Malaysia, investment peaked in 1995 at 43 percent of GDP, the
second-highest level ever recorded in a large economy, behind
China today. Guided by an autocratic prime minister, Mahathir
Mohamad, the country poured money into some projects that proved
useful, like a new international airport, and many that did not.
Mahathir’s grand vision included a new government district called
Putrajaya, which today is home to just a quarter of the 320,000
people it was designed to house. This is another classic case of a
bad binge that left behind little of value.

The Opposite of a Binge Is the Blahs

If investment is too low as a share of GDP, around 20 percent or less
for emerging countries, and stays low for a long period, it is likely to
leave the economy full of holes—unpaved roads, drafty schools, ill-
equipped police—that make rapid growth unlikely.
Weak investment tends to degrade both the supply network and
respect for the government. In African countries, including Nigeria,
city dwellers often string up wires to draw free electricity from power
lines, reducing revenue that the state utility needs to build out the
national grid. When it rains in São Paulo or Mumbai, traffic
screeches to a halt because the sewers overflow.
If a nation’s supply chain is built on inadequate road, rail, and
sewer lines, supply cannot keep up with demand, which drives up
prices. In this way, weak investment is a critical source of inflation—a
cancer that has often killed growth in emerging nations.
This link between weak investment and weak growth is clear
because it is so common. In the postwar era, few countries have
maintained a high rate of investment and thus generated strong GDP
growth for a decade or more. Many have seen investment remain
below 20 percent of GDP for a decade, and most of these (60
percent) have seen the economy grow at a paltry rate of less than 3
percent over that decade.
Investment is the critical spending driver of growth, and a high and
rising level of investment is normally a good sign. My research
shows that investment running below 20 percent of GDP foretells of
shortages and gridlock; above 40 percent is excessive and often
presages a serious slowdown. The sustainable sweet spot for
investment is between 25 and 35 percent of GDP, and it can last for
many years, particularly if the investment is going to projects that
generate growth in the future.
The most productive investment binges are in manufacturing,
technology, and infrastructure, including roads, power grids, and
water systems. The worst are in real estate, which often rings up
crippling debts; and commodities, which often have a corrupting
influence on the economy and society.
Although a case can be made that services will come to rival
manufacturing as a catalyst for sustained growth, that day has yet to
arrive. For now, the best investment binges are still focused on
manufacturing and technology.

____________
* Throughout this chapter, investment as a share of GDP refers to total investment,
public plus private.
 7

INFLATION

Successful Nations Control the Real Inflation Threats

No subject in economics is more paralyzed by traditional thinking

than inflation, a term that generally refers only to the pace of
increase in consumer prices, a once ubiquitous threat that has
largely vanished in recent decades.
Consumer prices were rising at a double-digit pace and wreaking
economic havoc all over the world until the early 1980s, when they
began to recede under pressure from rising global competition and a
concerted attack by central banks. Raising interest rates to painful
heights, central banks choked off money flows and won the war on
inflation just about everywhere. Between 1981 and 1991, the
average rate of inflation in developed nations fell from 12 percent to
just 2 percent, where it remains today.
Meanwhile, in emerging nations, the average rate of inflation
peaked at a staggering 87 percent in 1994 and reached the
hyperinflationary triple digits in major countries like Brazil and
Russia. Then, over the subsequent decades, it receded to its
current, much calmer rate of just 4 percent.
 Those averages are still very useful as benchmarks for judging
when inflation may be too high. Any emerging nation with a rate of
inflation much above 4 percent, or any developed nation with a rate
much above 2 percent, has cause for concern. In a world where
double- and triple-digit consumer price inflation is a rare threat, the
outliers are worth watching closely because they are out of balance
and seriously at risk.
The traditional view of high consumer price inflation—that it is a
growth-killing cancer—still holds true. In the short term, rapidly rising
prices compel central banks to raise interest rates, making it more
expensive for businesses and consumers to borrow. High inflation
also tends to be volatile, and its swings make it impossible for
businesses to plan and invest for the future. Over the longer term,
inflation erodes the value of money sitting in the bank or in bonds,
thus discouraging saving and shrinking the pool of money available
to invest in future growth.
The rub is that central banks are now fighting a very different war.
In the slow-growth environment that took hold after the crisis of
2008, central banks often worry that inflation may be too low, not too
high. In developed countries, instead of raising rates to make sure
inflation doesn’t increase to far above a target of 2 percent, they now
cut interest rates when inflation is falling too far below 2 percent.
Their big fear is that low inflation will lead to outright deflation—the
dreaded but overblown “Japan scenario.”
History, in fact, shows that neither low inflation nor deflation are
necessarily bad for economic growth. Japan suffered a rare bout of
“bad deflation” after the collapse of its stock and housing bubbles in
1990. Consumer demand dried up, prices started to fall, and
shoppers began delaying purchases in the expectation that prices
would fall further. The downward spiral depressed growth for two
decades. However, deflation can also follow a new tech or financial
innovation that lowers production costs and boosts economic growth.
If inflation is too high, it is almost always a threat to growth, but the
same cannot be said of low inflation. Even if low inflation threatens to
devolve into deflation, it could be good for growth if falling prices are
driven by new innovations and expanding supply, rather than by
depressed demand.
Perhaps the deepest flaw in traditional thinking, however, is that it
still focuses on the kind of inflation that has largely disappeared.
After central banks won the war on high consumer price inflation,
they cut interest rates to levels that have fueled a massive run-up in
prices for financial assets, including stocks, bonds, and houses. And
in recent decades, as we have seen, stock market and housing
bubbles have been increasingly common precursors to financial
crises and recessions.
Economists have been very slow to recognize this new inflation
threat, and central banks have been very slow to think outside their
official mandates, which focus on stabilizing the economy by
controlling inflation in consumer prices, only. But successful nations
will control both kinds of inflation, in consumer markets and in
financial markets.

Hot Economies Don’t Run High Inflation

Textbook economics typically traces consumer price inflation to
unpredictable demand shocks (like spikes in government spending
or consumer euphoria) or supply shocks (like oil price hikes and
droughts). In practice, however, countries make themselves
vulnerable to inflation when they invest too little in roads,
communications, and other supply networks. If these networks are
inadequate, supply will fall short of demand, and prices will begin to
rise very early in an economic recovery, ensuring that it won’t last
long.
A classic case is Brazil, where (as we have seen) investment has
stagnated for decades at around 20 percent of GDP. The
government has invested too little in roads, schools, and public
infrastructure of all kinds, so when economic activity starts to pick
up, companies quickly begin bidding up prices for a limited supply of
everything from transport services to skilled employees. As a result,
prices begin to rise at a very early stage in the economic cycle.
 Because Brazilians have come to expect large price increases
early in a recovery, they are also quick to demand higher wages.
Inflation thus begins to raise its ugly head at a GDP growth rate of 4
percent or even less, forcing the central bank to increase interest
rates and restrain economic growth. Brazil has thus inadvertently
built a high-inflation economy, in which growth tends to sputter out
before it really gets going.
This is the opposite of what happens in an economy headed for a
long boom. On my list of the fifty-six nations that, since 1960, have
posted runs of GDP growth faster than 6 percent for at least a
decade, nearly three out of four had inflation rates lower than the
emerging-world average during those runs.
The thirteen best-known postwar miracle economies typically
invested the equivalent of 30 percent of GDP every year, and high
growth was accompanied by low inflation. South Korea, Taiwan,
Singapore, and China all saw booms lasting three decades or more,
and rarely saw inflation higher than the emerging-world average. In
some miracle cases, inflation was high at the start of the boom but
fell gradually. Moreover, one of the signs heralding the end of these
growth “miracles” was a flare-up in inflation, like sparks from a
sputtering engine.
In China, investment peaked at 47 percent of GDP in 2011, and
much of it was, until recently, flowing into new roads, phone
networks, and factories. Now, when the economy starts to pick up,
businesses can put half-idle factories and railcars back on a full
schedule, so there is no upward pressure on prices. During China’s
long boom, lasting three decades through 2008, its extensive supply
networks made it possible for the economy to grow at 10 percent
with an average inflation rate of around 5 percent. That is a record
any emerging country would die for.

Inflation and the Circle of Life

There is never one cause of a political revolt, but food prices have
played a role in many. Consumer prices have thus been intimately
connected to the cycle of political crisis, revolt, and reform described
in chapter 2.
Though the Revolutions of 1848 targeted European monarchies
and followed the spread of democratic ideas on the continent, new
research identifies spiking food prices as the main catalyst.1 In
recent decades, Latin America has been a cauldron of inflation-
driven unrest. Between 1946 and 1983, according to Martin Paldam
of Aarhus University in Denmark, 15 governments fell in Latin
America, and in 13 of those cases, from Mexico to Argentina, the
regime change followed a surge in the annual rate of consumer price
inflation to 20 percent or more.2 Rising prices for wheat and other
grains also contributed to the 1989 fall of Communism in the Soviet
Union.
In the following decade, inflation fell in most emerging nations, but
occasional flare-ups continued to topple leaders. University of
Minnesota economist Marc Bellemare found a strong link between
food prices and unrest in many countries between 1990 and 2011.3
Inflation helped oust regimes in Brazil, Turkey, and Russia (again) in
the late 1990s. In 2008, World Bank president Robert Zoellick
warned that at least thirty-three countries faced a risk of social revolt
sparked by food prices, which had risen 80 percent in the previous
three years.4
In fact, food prices did help spark revolts worldwide in 2011,
including the Arab Spring. Yet in India, where rising prices for staple
foods have been toppling leaders since British rule, out-of-touch
leaders of the ruling Congress Party continued to argue that inflation
was no cause for worry. While I was traveling through India before
the seminal 2013 election, all I heard from voters was complaints
about the price of onions. After Congress lost, and Narendra Modi’s
Hindu nationalist party took over, polls showed that inflation had
played a major role in the government’s downfall.
The point is that high or rapidly rising consumer price inflation
threatens economic growth directly and indirectly, because it can
provoke destabilizing social protest. So, watch for leaders who
understand this inflation threat, and how to use the weapons that can
control it.
 Weapons against Consumer Price Inflation
In part, the victory over consumer price inflation was won by opening
to global trade. The world is much more interconnected now than it
was before China and other emerging nations began to open to
trade around 1980, and despite a recent slowdown, trade with these
low-cost countries continues to restrain both wages and prices for
consumer goods worldwide. If local wages rise, producers can shift
operations to countries with lower wages. If a local supplier raises
prices, wholesalers can just find a cheaper supplier overseas.
Opening to these global market forces maintains a permanent check
on inflation.
The second weapon against consumer price inflation is sound
financial management. In the late 1990s, as we have seen, a new
generation of leaders, with Kim Dae-jung of South Korea at the
forefront, brought a new ethos of financial responsibility to the
emerging world. These leaders began stealing less, keeping budgets
in balance, and investing more wisely, including in supply networks.
Perhaps the most important weapon is held by central banks. For
much of the postwar era, even many nominally independent central
banks could not ignore pressure from political leaders, who generally
pushed for low interest rates and easy money, even with inflation
threatening. But the crises of the 1970s showed leaders how painful
inflation can be, particularly for poor and middle-class voters, and
turned many politicians into anti-inflation warriors.
That shift in attitude freed central banks to fight inflation in earnest.
The revolution began in New Zealand, which passed a law in 1989
that granted its central bank independence and directed it to set a
target for inflation. Critics screamed that the move could destroy
jobs, and one offered to supply a rope to hang central-bank chief
Don Brash, but the measure passed. Having seen his uncle’s life
savings wiped out by inflation, Brash declared that fighting inflation
would be the bank’s top priority, and within two years the inflation
rate fell from nearly 8 percent to hit the new target: 2 percent.5
Inspired by Brash, central bankers in Canada, Sweden, Britain,
and beyond soon began to apply inflation targets. Citigroup
estimates that fifty-eight countries (including the Eurozone members
as one country), accounting for 92 percent of global GDP, now have
an inflation target. Emerging countries, including Chile, Brazil,
Turkey, and Russia, adopted targets, which proved effective if the
central bank managed to change expectations—to convince the
public it was prepared to increase the price of money and induce the
pain necessary to control inflation. Even in inflation-prone Brazil, the
central bank adopted a tough target in 1999, and inflation fell to just
4 percent over the next seven years, after averaging in the high triple
digits for a decade.
This struggle is far from over, however. The legal independence of
central banks is honored strictly in emerging countries like South
Africa, Chile, Poland, and the Czech Republic, but not so much in
others. Though officially committed to targeting inflation, many
central banks are still informally obliged to answer the phone when
the president’s office calls asking for easy money. To figure out
whether a nation has the tools to fight inflation, look first for a
genuinely independent central bank, and next, for a clear inflation
target.

Good and Bad Deflation

The problem with targets is that trying to hit them makes more sense
when consumer price inflation is high and rising than when it is low
and falling, as is increasingly the case.
To reconstruct price trends before official records began in the
twentieth century, investigators turn to government surveys, farm
ledgers, even department store catalogs. The earliest records are
available in only a few developed countries, starting with Britain and
Sweden, and thus “global” measurements likely become less
accurate as researchers push back in time, but the broad trend is
clear. For the eight centuries beginning in 1210, the world’s average
annual inflation rate was only 1 percent, according to the Global
Financial Database.
 For most of that period, however, the long-term 1 percent average
concealed sharp swings between inflation and deflation. Then, in the
early 1930s, deflation disappeared (see the chart), for reasons that
remain mysterious but include the spread of the banking industry
and the wider availability of credit, with consequently more money
chasing the available goods. The end of the gold standard in the
1970s made it easier for central banks to print money, which also
tends to fuel inflation. The result was that deflation disappeared
completely on the global level, and bouts of deflation—particularly
longer ones—became much less common within individual nations
as well.
A Deutsche Bank analysis showed that before 1930, it was
common for more than half of all countries to be experiencing
deflation in any given year. After 1930 it was rare for even one
country in ten to be experiencing deflation. In the postwar period,
only two economies have experienced deflation lasting at least three
years: the little-known case of Hong Kong—for seven years after
1998—and the infamous case of Japan after its bubble burst in
1990.6
The Japan case gave deflation its bad name. After Japan’s
housing and stock market bubbles burst in the early 1990s, demand
fell and prices started to decline, as heavily indebted consumers
began to delay purchases of everything from cars to TV sets, waiting
for prices to fall further. The economy slowed to a crawl. Hoping to
jar consumers into spending again, the central bank pumped money
into the economy, but to no avail. Critics said Japan took action too
gradually, so its economy remained stuck in a deflationary trap for
years.
 The 800-Year History of Inflation

Source: Global Financial Database, using a sample of 30 countries; shown as a five-year

moving average.

After the crisis of 2008, many countries seemed to face a

combination of forces similar to what triggered deflation in Japan,
including heavy debt and supply overcapacity. By 2015, with inflation
dropping close to zero in developed nations, the fear was that other
countries could fall into a deflationary spiral like Japan’s.
Deflationary spirals are hard to stop because of the effect on
consumers, and on debtors as well. As prices fall, every unit of the
local currency is effectively worth more, and hard-pressed borrowers
are forced to pay down loans in an increasingly valuable currency.
As the American economist Irving Fisher put it during the Great
Depression, “The more debtors pay, the more they owe.”7 The
deflationary spirals that struck Japan and Hong Kong were sustained
in part by strong currencies and mounting debt burdens.
The problem, however, is that not all deflationary cycles are
destructive. In The Great Wave, Brandeis University historian David
Hackett Fischer traced the records for the United States and various
European countries as far back as the eleventh century and found
long periods when stable or falling prices were accompanied by high
GDP growth.8 In these periods, the fall in prices was not driven by a
blow to consumer demand.
 These waves of good deflation all date from before the 1930s, and
they were driven by technological or institutional innovations that
lowered the cost of producing and distributing consumer goods.
Holland’s economy tripled in size during the seventeenth century as
new openings to trade and innovations in finance sparked a golden
age of inflation-free growth. In England in the late eighteenth and
early nineteenth centuries, breakthroughs such as the steam engine,
railroads, and electricity were lowering the costs of making
everything from flour to clothing. During this era, consumer prices fell
by half, while industrial output rose sevenfold. In the United States
during the early 1920s, the economy was expanding at a near 4
percent pace annually, and new labor-saving devices such as the
truck were driving down prices for consumer goods from food to
home furnishings.
The point is that one can’t say consumer price deflation is in itself
good or bad for growth. Between the late 1870s and the outbreak of
World War I in 1914, the US economy grew at a steady average
pace of around 3 percent. During the first half of this period, deflation
averaged 3 percent a year, and during the second half, inflation
averaged 3 percent a year.
Though deflation has largely vanished, worldwide, it continues to
surface in isolated pockets. Japan is the only major country to have
suffered a multiyear case of deflation in the postwar era, but many
countries have suffered a single-year bout. Again, however, these
periods did not have a consistent impact on growth, for better or
worse.
In early 2015, the Bank for International Settlements (BIS) looked
at the postwar record for thirty-eight countries. In all, these countries
had seen more than 100 years in which prices fell. On average, GDP
growth was higher by a statistically insignificant margin during
deflationary years, at 3.2 percent, than during inflationary years, at
2.7 percent. The cases in which deflation was accompanied by
strong growth occurred from Thailand and China to the Netherlands
and Japan. The BIS concluded there is no clear evidence that
consumer price deflation is bad—or good—for economic growth.9
 But how can you tell when consumer price deflation is the good
kind, driven by growing supply, or the bad kind, driven by shrinking
demand? This task requires parsing conflicting forces of supply and
demand, often with unclear results. The takeaway is simply that
while many analysts now assume that any hint of deflation is
worrisome, this assumption is not borne out by the evidence. High
inflation for consumer prices is almost always a threat to growth, but
deflation is not.

Consumer Prices Aren’t the Whole Story

Central bankers and economists still tend to focus on consumer
price inflation, even though it has largely disappeared, and to ignore
prices for assets like stocks, bonds, and real estate, even though
there is an increasingly clear link between real estate and stock
market busts and economic downturns.
Rising global competition and the emergence of independent
central banks have helped countries contain consumer prices. But
globalization is pushing asset prices in the opposite direction. In a
world with few barriers to the flow of capital, foreigners are often the
main buyers of stocks, bonds, and real estate in markets from New
York to Seoul, making prices for these assets less stable, and an
increasingly telling signal of a coming economic crash.
Research by the International Center for Monetary and Banking
Studies shows that many postwar economic “miracles,” ranging from
Italy and Japan in the 1950s to Latin America and Southeast Asia
later, first took off because of strong fundamentals (like strong
investment and low inflation) but were sustained by rapidly rising
debts and ended with a bursting property bubble.
In recent decades, recessions have been more likely to originate
in debt-fueled property booms, for the simple reason that there has
been an explosion in mortgage finance. As Alan Taylor has pointed
out, since the boom in modern finance began in the late nineteenth
century, mortgage lending has grown much faster than other lending
to households and private companies, which helps explain why
economic booms and busts “seem to be increasingly shaped by the
dynamics of mortgage credit.”
The growing threat posed by asset bubbles was dramatized in a
2015 paper by Taylor and his colleagues, who researched 170 years
of data for seventeen countries.10 Before World War II, there were 78
recessions—including only 19 that followed a bubble in stocks or
housing. After the war, there were 88 recessions, the vast majority of
which, 62, followed a stock or housing bubble.
For the last three decades, every major economic shock has been
preceded by a bubble in housing, stocks, or both, including Japan’s
meltdown in 1990, the Asian financial crisis of 1997–98, the dot-com
crash of 2000–2001, and, of course, the global financial crisis of
2008.
Often, a crash in prices of houses or stocks will depress the
economy, by making people feel suddenly less wealthy. Thus
shaken, they spend less, resulting in lower demand and a fall in
consumer prices. In other words, asset price crashes can trigger
bouts of bad consumer price deflation.
This is what happened in Japan, where the real estate and stock
crash of 1990 led to the long fall in both asset and consumer prices.
It also happened in the United States, where the stock crash of 1929
was followed by consumer price deflation in the early years of the
Great Depression.
But how can you identify potentially threatening asset price
bubbles? Be alert when prices are rising at a pace faster than
underlying economic growth for an extended period, particularly for
housing. While home prices typically rise by about 5 percent a year,
the IMF has found that this pace speeds up to between 10 and 12
percent in the two years before a period of financial distress.11
Taylor and his team added a useful warning: once prices for stocks
or housing rise sharply above their long-term trend, a subsequent
drop in prices of 15 percent or more signals that the economy is due
to face significant pain. In general, they found, housing bubbles were
much less common than stock bubbles but were much more likely to
be followed by a recession.
 The downturn is much more severe if borrowing fuels the bubble.
When a recession follows a bubble that is not fueled by debt, five
years later the economy will be 1 to 1.5 percent smaller than it would
have been if the bubble had never occurred. However, if investors
borrow heavily to buy stock, the economy five years later will be 4
percent smaller. If they borrow to purchase housing, the economy
will be as much as 9 percent smaller.
It is time for forecasters, including those at central banks, to
recognize that times have changed. In a globalized world, with few
barriers to capital flows, investors around the world can bid up prices
for stocks, bonds, and real estate in local markets from New York to
Shanghai. Central banks have fueled these purchases with record
low interest rates and by entering the bond market as major buyers
themselves. Largely as a result, global financial assets (including
only stocks and bonds) are worth $280 trillion and amount to about
330 percent of global GDP, up from $12 trillion and just 110 percent
in 1980.
Traditionally, economists have looked for trouble in the economy to
cause trouble in the markets. They see no cause for concern when
loose financial policy is inflating prices in the markets, as long as
consumer prices remain quiet. Even conservatives who worry about
easy money “blowing bubbles” still look mainly for economic threats
to the financial markets, rather than the threat that overgrown
markets pose to the economy. But financial markets are now so
large that the tail wags the dog. A market downturn can easily trigger
the next big economic downturn.

The general rule is that strong growth is most likely to continue if

consumer prices are rising slowly, or even if they are falling as the
result of good deflation, driven by a strengthening supply network.
But in today’s globalized economy, in which cross-border competition
tends to suppress prices for consumer goods but drive them up for
financial assets, watching consumer prices is not enough.
Increasingly, recessions follow instability in the financial markets. To
understand how inflation is likely to impact economic growth, you
have to keep an eye on stock and house prices too.
 8

CURRENCY

Successful Nations Feel Cheap

Political leaders often celebrate a strong currency as the sign of a

strong economy, overlooking the risks. If a currency starts
appreciating too fast, foreigners will start buying local stocks or
bonds not because they believe in the economy, but because they
believe the rising currency will increase the US dollar value of those
investments. For a while this bet is self-fulfilling, as foreign money
continues to drive up the value of the local currency. Eventually,
though, an expensive currency makes the country’s exports too
pricey to compete in global markets. The economy stalls, the
currency crashes, and the country will be poised to grow only when it
stabilizes again, at a competitive value.
Ironically, successful nations feel cheap, at least to foreign visitors.
Cheap is good because a currency that makes local prices feel
affordable will draw money into the economy through exports,
tourism, and other channels. An overpriced currency will encourage
both locals and foreigners to move money out of the country,
eventually sapping economic growth.
 In many countries, nonetheless, politicians still ascribe a
weakening currency to nefarious plots, as King Henry I did. In 1124,
suspicious that conniving royal money changers were to blame for
the falling value of the English sterling, he summoned them to
Winchester and, in what historian Nicholas Mayhew described as “a
very public occasion designed to bolster confidence,” subjected the
entire lot to castration or, for the less unlucky ones, amputation of the
right hand.1 Today, the understanding of currency movements has
advanced a little, but perhaps not as much as you might expect.

Why “Feel” Is the Best Measure

Judging a currency by how cheap it “feels” may sound vague, but
there is no better way. If it takes three Brazilian reals to buy a dollar
today and four reals next year, it appears that one real is buying less
and less. But that is not necessarily the case, if prices are rising at
different rates in the United States and Brazil.
To accurately value currencies, one has to correct for different
inflation rates. One common measure, the real effective exchange
rate (REER), corrects for consumer price inflation in a country’s
major trading partners. Competing measures correct for producer
prices, labor costs, or per capita income. The results, however, are
often contradictory. The Brazilian real may look cheap by one
measure, expensive by another, fairly priced by a third. As a veteran
analyst once put it to my team, “In valuing currencies, nothing
works.”
To improve clarity, experts have attempted to rank how expensive
countries are by comparing prices for common items. The
granddaddy of these rankings is the Economist’s Big Mac index, but
others compare prices for Starbucks coffee, iPhones, and other
goods. All these approaches acknowledge that the only way to value
a national currency is by how cheap it feels to buy goods in that
country.
The more formal measures are open to manipulation by
politicians, who can make their currency, and thus their country, look
competitive by cherry-picking data. The Turkish lira looks a lot less
expensive when compared to its high price in the 1970s than to its
cheap price in the 1990s. In the absence of an accurate measure,
outsiders need to trust that they will know an expensive currency
when they feel it.
Of course, the feel of a currency will vary with the traveler. Brazil
may feel less expensive to Americans paying in dollars than to
Europeans paying in euros. In general, though, a rising currency
tends to be rising against most major currencies, and the currency
that matters most is the US dollar.

Why the Dollar Matters Most

Even though the United States has slipped as an economic
superpower—it accounts for 24 percent of global GDP, down from a
peak of 34 percent in 1998—it is still the sole financial superpower.
The world is on a dollar standard, and in some ways the reach of
the dollar is expanding. When individuals and companies borrow
from lenders in another country, they increasingly borrow in dollars,
which now account for 75 percent of these global flows, up from 60
percent just before the global financial crisis in 2008. Even though
the crisis began that year in the United States, American banks
dominate global finance more now than they did before the crisis—in
part because debt troubles have dogged banks in Europe, Japan,
and China even more persistently.
The share of countries that use the dollar as their main “anchor”—
the currency against which they measure and stabilize the value of
their own currency—has risen to 60 percent today from about 30
percent in 1950. And those countries collectively account for some
70 percent of global GDP. In other words, most of the world chooses
to live in a dollar bloc. And because the Federal Reserve controls the
supply of dollars, it is, now more than ever, the central bank of the
world.
Nearly two-thirds of the $12 trillion of foreign exchange reserves
held by central banks around the world is held in dollars, and that
proportion has barely changed for decades. Going back to the mid-
fifteenth century, in fact, only six countries have enjoyed this “reserve
currency status,” and all were imperial powers, starting with Portugal,
then Spain, the Netherlands, France, and Britain. All enjoyed what
the French have called the “exorbitant privilege” of borrowing
cheaply abroad and living well beyond their means, since every
nation is happy to collect interest in the reserve currency. Americans
still enjoy that luxury today.
According to the Bank for International Settlements, close to 90
percent of all global financial transactions conducted through banks
use the dollar on one side, even if the deal does not involve an
American party. A South Korean company that sells smartphones to
Brazil will likely request payment in dollars, because most people still
prefer to hold the world’s leading reserve currency. In a world still
dominated by the dollar, the most important perspective on any
currency is how cheap it feels in dollars.

How to Read Money Flows

If the currency feels cheap and the economy is healthy, bargain
hunters will pour money in. If the currency feels cheap but money is
still fleeing, something is wrong. For example, in late 2014 the
Russian ruble collapsed because of the falling price of oil, but
Russians were still pulling tens of billions of dollars out of the country
every month, fearing that the situation would get worse. Cheap was
not yet a good sign, because the ruble was not yet cheap and stable.
All the legal channels for money flows can be found in the balance
of payments, particularly the current account. Composed mainly of
net trade (exports minus imports), the current account also includes
other foreign income—remittances from locals working abroad,
international aid, and interest payments—that can make import bills
easier or harder to pay.
The current account thus captures how much a nation is producing
compared to how much it is consuming, and it reveals how much a
nation has to borrow from abroad to finance its consumption habits.
If a country runs a sizable deficit in the current account for too long, it
is going to amass obligations it can’t pay. The trick is to identify the
tipping point.
In a paper written in 2000, economist Caroline Freund found that
signals of a turn for the worse flash when the current account deficit
has been rising for about four years and hits a single-year peak of 5
percent of GDP. At that point, typically, businesses and investors
lose confidence in the economy and start pulling out money, thus
undermining the currency and forcing locals to import less. The
economy slows significantly until falling imports bring the current
account back into balance.2
Pushing Freund’s research forward, I screened the available data
for 186 nations going back to 1960. Testing for various sizes of
deficits, over various time periods, my search† confirmed that when
the current account deficit runs persistently high, the normal
outcome is an economic slowdown. If the deficit averages between 2
and 4 percent of GDP each year over a five-year period, the
slowdown is relatively mild.
If the deficit averages 5 percent or more, the slowdown is sharper,
shaving an average of 2.5 percentage points off the GDP growth rate
over the following five years. There are only forty cases of a current
account deficit rising that fast and long; 85 percent of those cases
ended in a major growth slowdown over the next five years, and 80
percent led to a crisis of some kind. † The growth slowdown hit
countries rich and poor, including Norway and the Philippines in the
1970s, Portugal and Malaysia in the 1970s, Spain and Turkey during
the last decade.
This is the danger zone: if a country runs a current account deficit
as high as 5 percent of GDP each year for five years, it is consuming
more than it is producing and more than it can afford. Running
sustained current account deficits of more than 3 or 4 percent of
GDP can also signal coming economic and financial trouble—just
less urgently. In fact, some emerging-world officials have come to
believe that when the current account deficit hits 3 percent of GDP, it
is time to restrain consumer spending and prevent the country from
living beyond its means.
 Below the 3 percent threshold, a persistent current account deficit
may not be a bad thing. If money is flowing out of the country to
import luxury goods, which do not fuel future growth, it will be harder
for the country to pay the import bills. If it is going to buy imports of
factory machinery, the loans financing those purchases are
supporting productive investment in future growth.
One quick way to determine whether the rising deficit is a bad sign
is to check whether investment is rising as a share of GDP. Such a
rise at least suggests that the money is not flowing out for frivolous
consumption.

Anatomy of a Currency Crisis

Thailand offers a classic case study in how an overpriced currency
allows a country to live beyond its means, driving up the current
account deficit and ending in a severe economic slowdown.
In the early 1990s, Thailand saw itself as the next Japan. It had
already graduated from making textiles to manufacturing cars and
semiconductors, and Thais were getting too confident. Because the
value of the baht was pegged to the strong US dollar, Thais felt like
kings of the mall when they traveled abroad.
During this period, Thais could borrow more cheaply in dollars
than in baht, and they started taking out dollar loans to buy stocks,
real estate, and luxury goods. Thai bankers became known for their
taste in Château Pétrus wines and Audemars Piguet watches.
Property and stock prices began shooting up to heights that could
last only as long as the strong baht did.
Trouble signs appeared in 1993, when China devalued its
currency to boost exports at a time when its economy was
weakening. The devalued renminbi helped China to gain global
export market share from Asian rivals, including Thailand.
Nonetheless, Thais continued consuming blithely; between 1990 and
1994 the current account deficit exploded as a share of GDP by an
average of 7 percentage points a year.
 Then, in the spring of 1995, the dollar started to appreciate, and
the baht rose with it. The baht started to feel very expensive, slowing
Thai exports. The current account deficit widened to 8 percent of
GDP in 1995 and 1996, moving from deep to deeper in the danger
zone.
Investors began to question Thailand’s ability to pay its foreign
bills and to sustain the exorbitant prices in the Bangkok stock and
housing markets. When they started to pull money out, the Thai
central bank responded by spending billions of dollars to buy baht,
hoping to prevent a precipitous collapse. As its foreign exchange
reserves dwindled, the central bank had to give up the fight and
abandon the dollar peg. The baht fell 50 percent against the dollar in
1997, and suddenly Thai borrowers couldn’t pay the dollar loans they
had taken out to buy houses and stock.
The stock and real estate markets plummeted. In the midst of one
of the worst debt binges ever recorded in the emerging world,
Thailand was forced to seek a bailout from the IMF in order to pay off
its foreign loans. Within months, excesses that had been mounting
for years unraveled completely. As the late MIT economist Rudiger
Dornbusch put it, crises “take a much longer time coming than you
think, but happen much faster than you would have thought.”3

Anatomy of a Currency Contagion

A current account deficit becomes a clear concern when it has been
rising as a share of GDP for many years and the accumulated bill
grows too big to pay. Yet time and again, the world has been gripped
by currency contagions, in which investors start pulling money out of
one troubled country, triggering a pullout from countries in the same
region or income class, even though those nations can pay their
bills. In a way, the serial crises that have rocked the emerging world
since the 1970s are one rolling crisis built on the recurring fear that
poor nations won’t have the money to pay their bills. The Mexican
peso crisis of ’94 begat the Thai crisis of ’97 begat the Argentine
crisis of 2002 and many others.
 At the first signs that one emerging-world currency is faltering—as
the Thai baht did in 1997—investors often flee from emerging
markets in general. They do not pause to distinguish between
countries that face a serious current account deficit problem and
those that do not.
To cite just one example, the contagion that swept emerging
markets in the summer of 2013 made no distinction between the real
trouble in Turkey and the passing problems in India and Indonesia.
At that point, India and Indonesia were running current account
deficits ranging between 2 and 4 percent of GDP, but all it took was a
10 to 20 percent fall in their currencies to quickly narrow the deficits,
in part because their currencies did not feel too expensive to begin
with. These countries were much less vulnerable than Turkey or
Brazil, where the currencies felt very expensive and thus were likely
to encourage more people to shop and invest overseas, and make a
persistently large current account deficit even bigger.
Investors fled blindly from all these countries, even though Turkey
was the only one seriously at risk. Its economy is almost purpose-
built to run up large deficits in the current account. Located on terrain
devoid of natural resources, Turkey has to import oil, iron, copper,
and most other raw materials. Turks are also heavy importers of
goods from cars to computers, and they save just 15 percent of their
income, the lowest savings rate among large emerging countries.
That means Turks have to borrow heavily from abroad to finance
their consumption.
The small pool of savings starves local industries, including
exporters, of investment funding. With weak exporters and heavy
demand for oil and other imports, Turkey is prone to running up
deficits in the current account. By 2013, it was the only major country
in the world that had been running a current account deficit that
averaged more than 5 percent of GDP for the previous five years.
Since then it has experienced a major economic slowdown, just as
this rule predicts.

Does Deglobalization Change the Rule?

To pay their import bills, countries need foreign currency, which they
can obtain from foreign bank loans, foreign purchases of stocks or
bonds, or direct foreign investment in local factories. These flows all
show up in the capital account of the balance of payments, but
analysts and newspaper headlines tend to focus only on foreign
purchases of stocks and bonds—often called “hot money” because
foreigners looking for a quick profit can dump stocks and bonds like
hot potatoes when crises begin.
In recent decades, however, the most volatile capital flows have
actually been bank loans, which are now the real hot money. After
China and other emerging markets began opening their doors to
foreign capital, capital flows rose from 2 percent of global GDP in
1980 to 16 percent—a whopping $9 trillion—by early 2007.
Then came the 2008 crisis, and optimism about emerging nations
vanished; by 2014, capital flows had fallen back to $1.2 trillion—once
again about 2 percent of current global GDP. Bank lending, the
largest portion of capital flows, turned negative during the crisis,
indicating that banks were liquidating loans to bring money home.
This “deglobalization of banking”4 will make it increasingly difficult
for many countries, including the United States and Britain, to
continue living beyond their means by borrowing from foreigners.
With capital flows slowing, these countries may run into trouble
financing their persistent current account deficits much sooner. In the
pre-2008 era, the tipping point came when the deficit had been
increasing by 5 percent of GDP for five years in a row. In the
postcrisis era, the tipping point may come faster and at lower deficit
levels; the 5 percent rule may become a 3 percent rule.

Follow the Locals

When a currency crisis begins, blame often falls on big global
players like hedge funds and venture capitalists for fleeing the
country. This suspicion has arisen in every currency meltdown from
the Asian financial crisis of 1997–98—which Malaysia’s Mahathir
Mohamad pinned on “evil” foreign speculators—to the 2013 attacks
on the Turkish lira and other emerging currencies.5
The problem with these conspiracy theories is that foreigners are
not more flighty or less loyal than locals. My data for twenty-one big
emerging countries shows that locals have been moving money out
of emerging stock markets since records begin in 1995. Local
investors were net sellers in the local stock markets every single
year, while foreigners were net buyers every year, with only three
exceptions: 2008, 2015, and 2018.
Blaming rich foreigners for emerging-world currency crises also
assumes—incorrectly—that money flows naturally from rich
countries to poorer ones. Nobel laureate Robert Lucas pointed out
three decades ago that it most certainly does not.6 In financial
markets, American and European investors have an incentive to
seek high returns in hot emerging countries, but investors from
emerging nations have an incentive to diversify by seeking safer
investments—such as US Treasury bonds—in developed markets.
People move money out of self-interest, not to prove their patriotism
or to sabotage foreign nations.
In fact, balance-of-payments data shows that in ten out of the
twelve major emerging-market currency crises over the past two
decades, local investors headed for the exits before foreigners. As
the value of the currency reached its low point, foreigners did move
much larger sums than locals, but they began moving later. During
Mexico’s “tequila crisis” in December 1994, locals started to switch
out of pesos and into dollars more than eighteen months before the
sudden devaluation. Similarly, locals began to pull money out of
Russia more than two years before the ruble collapsed in August
1998.
Capital flight begins with locals, I suspect, because they have local
intelligence. They can pick up informal signs—struggling businesses,
looming bankruptcies—long before big foreign institutions do.
Instead of anticipating crises, foreigners tend to sell at the bottom
and lose a fortune. In eight out of the twelve major currency crises,
foreigners started pulling out—calling in loans and dumping stocks
and bonds—as the currency was hitting its low point.
 Savvy locals are also often the first to return. In seven of the
twelve major emerging-world currency crises, locals started bringing
money back home earlier than foreigners and acted in time to catch
the currency on its way up. Big global players are not the all-seeing
eyes, and locals are not the provincial dupes, that many people
seem to imagine.
As locals begin sending money abroad, it will show up in the
balance of payments as capital outflows. To cite one example,
outflows from Russia reached $150 billion—more than 8 percent of
GDP—in 2014, the year oil prices collapsed and took the Russian
economy with it.
Rich locals can also slip money out through illicit channels that
show up only in the “errors and omissions” column of the balance of
payments. When money flows out of Russia as “errors and
omissions,” money tends to flow into Britain via the same channel.7
And the very rich often pick up and move themselves, not just their
money. The research group New World Wealth, which tracks
migration among the world’s 15 million millionaires, found that by
2017, the largest exoduses were out of Turkey, Venezuela, India,
and Russia, which lost 2 percent of its millionaire population that
year alone.
Even locals who lack access to the flight paths used by the
superrich always have an escape hatch. When trouble looms,
Indians convert rupees into the traditional safe haven of gold,
sometimes at the rate of tens of billions of dollars each quarter. In
2017, as growing financial instability sent inflation into the double
digits in Turkey, ordinary Turks started converting their bank deposits
from liras into dollars, effectively shipping their savings out of the
country without leaving town. Meanwhile, more than one out of every
ten Turkish millionaires moved out of their home country that year
alone.
This was not the first time that locals successfully anticipated an
important shift. Before the crises of the 1990s, domestic investors
moved large sums out of emerging nations, fleeing regimes prone to
seizing wealth and economies destabilized by high inflation. Since
many governments strictly limited capital flows, locals often found
roundabout paths that registered only as “errors and omissions.”
As calm returned after 2000, locals were first to move back. They
brought billions of dollars home to Indonesia, South Africa, Brazil,
and other emerging nations, again often through back channels. In
2002, global markets avoided Brazil for fear of its radical new
president, Lula, but locals looked past his rhetoric and saw the
moderate reformer he would be in office. Their heavy purchases of
reals helped stave off a currency collapse, and foreshadowed the
economic rebound that followed.
To anticipate a currency crisis or recovery, follow the locals.

When Money Flows Flash a Green Light

The clearest sign that a currency crisis is about to pass comes when
the current account rebounds from deficit into surplus. Such a
surplus shows that the currency is likely stabilizing at a competitively
low rate, boosting exports while forcing locals to cut back on imports.
The country is living within its means. The crisis is passing, putting
the economy in position to start growing again.
Consider how quickly Asia recovered from the crisis of 1997–98,
and how slowly southern European countries recovered from the
crisis that started in 2010. In Asia, the hardest-hit stock markets fell
by an average of 85 percent; in Europe, they fell by an average of 70
percent. In 1997–98 the hardest-hit economy was Turkey, in 2010 it
was Greece, and both saw GDP shrink by about a quarter. So the
economic losses were very similar (see the chart).
 Mirror Damages: Crises in Asia and Europe

Source: Haver Analytics.

But the European recovery was slower, because the way Europe
managed its currency prevented the current account from
rebounding quickly from deficit into surplus.
Before their crises, both Asia and Europe adopted a fixed
exchange rate in some form. Asian countries pegged the value of
their currencies in dollars. Europe adopted the euro, so countries like
Germany, France, and Italy no longer had a national currency, or the
flexibility to allow (or manage) its value to adjust for local conditions.
In both Asia and Europe, as confidence in the new fixed
currencies spread, banks lowered borrowing costs, and locals
started borrowing heavily to shop, build houses, and start
businesses. This spending drove current accounts into the red,
stirring fears about whether these countries could pay their mounting
debts.
In Asia, however, as soon as countries stopped trying to defend
the dollar peg, currencies crashed. In Thailand, the epicenter of the
Asian crisis, the economy stalled, the unemployment rate tripled,
property prices fell by half, and the collapsing baht reduced average
income by more than a third in dollar terms. Yet within eighteen
months, the cheap currency was driving a strong recovery.
 The collapsing currencies forced locals to buy fewer imports and
boosted exports. Current account deficits in the hardest-hit countries
—Thailand, Indonesia, Malaysia, and South Korea—quickly gave
way to an average surplus equal to 10 percent of GDP. Within just
three and a half years, these economies recovered all the output
they had lost since the massive recession started in 1998.
In Europe, however, the main crisis-hit nations could not just
abandon the euro, so there was no sudden drop in the value of the
currency, and no rapid drop in imports or boost to exports. The only
way they could regain a competitive position was by making painful
cuts to wages, welfare, and bloated public payrolls. Economists call
this belt-tightening process “internal devaluation,” which unfolds
much more slowly and painfully than currency devaluation. Four
years after the crisis, Europe’s hardest-hit economies—Greece,
Spain, Italy, Portugal, and Ireland—were only starting to show real
improvement in the current account, and they were still struggling to
recover.
Put simply, governments that attempt to create artificial stability by
fixing the price of their currency tend, instead, to provoke much
worse currency crises. As foreigners start to follow locals out the
door, the central bank often spends billions buying its own currency,
draining the national reserves but achieving only a temporary pause
in the currency’s slide. That pause gives investors a chance to flee
the country with partial losses. Many currency traders joke that
“defending the currency” really means “subsidizing the exit” of
foreign investors.

You Can’t Devalue Your Way to Prosperity

Since a cheap currency is an advantage in global competition, it
might seem smart for national leaders just to devalue the currency.
Indeed, technocrats often do order currency devaluations. But this is
a form of state meddling that has proved increasingly ineffective.
Since the crisis of 2008, many nations have tried to improve their
competitive position by devaluing currencies, but none have
managed to gain an advantage. The central banks of the United
States, Japan, Britain, and the Eurozone have pursued policies that
effectively amount to printing money, in part as a way to devalue
their currencies. But each has achieved at best a brief gain in export
share, because rivals quickly match each other’s policies. The rise in
2016 of Donald Trump, who keeps a hawkish watch on the moves of
foreign central banks, made it increasingly difficult for any nation to
devalue its currency without being called to account for it.
By 2019, many emerging countries had seen sharp currency
depreciation, but with little boost to growth. One reason was foreign
debt; since 1996, in the emerging world, the debt owed by private
companies to foreign lenders had more than doubled as a share of
GDP, reaching 20 percent or more in Taiwan, Peru, South Africa,
Russia, Brazil, and Turkey. For these countries, devaluation made it
more expensive for private companies to service foreign debt, and
forced them to spend less on hiring workers or investing in new
equipment.
The world had watched this self-defeating cycle before. The Latin
American crisis of the 1980s began in part because Argentina, Chile,
and Mexico had opened up to foreign loans, which produced sharp
spurts of growth, but only briefly. Many leaders tried to revive growth
by devaluing their currencies, but instead pushed many of their
countrymen into default on foreign loans. The process hit bottom in
Argentina, which in 2002 suffered the largest sovereign debt default
in history.
Another factor that can derail devaluations is heavy dependence
on imported food and energy. In this case, a cheaper currency will
make it more expensive to import these staples, driving up inflation,
further undermining the currency, and encouraging capital flight. This
is a recurring syndrome in nations like Turkey, which imports all its
oil, but the problem is spreading.
These days, even manufacturing powers are mere cogs in a global
supply chain, relying heavily on imported parts and materials. They
thus find it harder to capitalize on a cheap currency, because
devaluation raises the prices they pay for those parts and materials.
 This brings us back to China in 1993, and one of the rare
devaluations that worked. China had little foreign debt, it did not rely
too heavily on imported goods, and its already strong manufacturing
sector grew faster after Beijing devalued the renminbi. But this was
an exception that proves the rule; in general you can’t devalue your
way to prosperity.
Moreover, devaluation is increasingly less likely to work, even in
China, which has grown to command 13 percent of global exports,
the largest share any economy has reached in recent decades. It is
simply too big to expand much further, and if it does devalue, others
retaliate. In late 2015, China devalued the renminbi by 3 percent,
and many emerging nations responded immediately, erasing any
competitive gain that Beijing hoped to achieve.
China is also making increasingly advanced exports, which are
less price sensitive and gain less from a cheap currency. In the
1970s and ’80s, Germany and Japan enjoyed long runs of strong
growth, despite massive appreciation in their currencies, not least
because their customers were willing to pay more for quality goods
“made in Germany” or “made in Japan.” A similar evolution is under
way in Korea, Taiwan, and China, where technology and capital
goods make up a rising share of exports. The more advanced the
economy, the less of a boost it gets from devaluations.

The feel of the currency is the simplest real-time measure of how

effectively a country can compete for international trade and
investment. If a currency feels too expensive, a large and sustained
increase in the current account deficit can result, and money will
start to flow out of the country. The longer and faster a current
account deficit expands, the more risk there is of an economic
slowdown and a financial crisis. Traditionally, that warning light
flashed when the current account deficit had been growing at an
average rate of 5 percent of GDP for five years. But the recent
deglobalization of banking has made it more difficult to finance
current account deficits, so the new red line may be around 3
percent.
 To spot the beginning or the end of currency trouble, follow the
locals. They are the first to know when a nation is in crisis or
recovery, and they will be the first to move. If the local millionaires
are fleeing, so should you.
Once a crisis begins, watch for the current account to bounce back
to surplus, which usually means that a cheap currency is drawing
money back into the country. It helps if the financial environment is
stable, underpinned by low expectations of inflation, which further
encourages investors to return.
If the government tries to artificially cheapen the currency, markets
are likely to punish this meddling, particularly if the country has
substantial foreign debt or does not manufacture exports that can
benefit from a devaluation. Cheap is good only if the market, not the
government, determines the feel of a currency.

____________
* I focused only on large economies because the current account in smaller ones
can swing sharply with one big investment from abroad, skewing the results. Large
is defined as an economy representing at least 0.2 percent of global GDP, which in
2015 was an economy of more than $150 billion.
† I say “of some kind” because this definition includes banking, currency, inflation,
or debt crises as defined by Carmen Reinhart and Kenneth Rogoff. Data on these
kinds of crises is available for 34 of the 40 cases, and 31 of them, or 91 percent,
suffered at least one of these crises.
 9

DEBT

Successful Nations Avoid Debt Mania (and Phobia)

In recent decades, every new crisis seemed to hatch a new way of

thinking about debt, and there are thousands, depending on who is
lending, who is borrowing, for how long, and many other factors.
Mexico’s “tequila crisis” of the mid-1990s started with short-term
bonds, so explanations focused on the dangers of short-term debt.
The Asian financial crisis started with debt to foreigners, so foreign
loans became the new obsession.
But as that crisis approached in 1997, a brusque bank analyst
named Robert Zielinski had already begun to zero in on what was
later revealed as the best predictor of these meltdowns: five straight
years of rapid growth in private-sector debt. In October of 1997, with
the crisis already ravaging Thailand, Zielinski laid out his story in a
three-page play, The Kiss of Debt. Set in an unnamed Southeast
Asian country, it describes how everyone from the prime minister to
farmers gets swept up in the mania for cheap loans. A housewife
borrows to invest in “four million of anything.” Each step of the way, a
chorus sings: “Kiss of debt, kiss of debt.”
 A decade later, after the global financial crisis, the Bank for
International Settlements,1 the IMF,2 and other international
authorities began to look at the same question and came up with the
same basic answer as Zielinski. The most consistent precursor of
major credit crises going back to the “tulip mania” in seventeenth-
century Holland was that private-sector debt—borrowing by
corporations and individuals—had been growing faster than the
economy for a significant length of time.
The authorities also reached another surprising conclusion: the
clearest signal of coming trouble is the pace of increase in debt, not
the size of the debt. Size matters, but pace matters more.
Government debt plays a role but usually rises later, after trouble
starts in the private sector. A sharp increase in private debt is the
leading indicator.
The key issue is whether debt is growing faster or slower than the
economy. A country in which private credit has been growing much
faster than the economy for five years should be placed on watch for
a sharp slowdown in the economy and possibly for a financial crisis
as well.
By 1997, private debt amounted to 165 percent of GDP in
Thailand, but debts of that size would not necessarily have signaled
a crisis if the debt had not been growing at an unsustainable pace.
Over the previous five years, private debt had been growing at an
annual pace more than twice as fast as the roaring Thai economy,
and had risen by 67 percentage points as a share of GDP. To
anticipate coming trouble, that is the number to watch: the five-year
increase in the ratio of private credit to GDP.
Successful nations avoid debt manias and are often best
positioned for sustained growth after a period of retrenchment. The
upside of the rule is that if private credit has been growing much
slower than the economy for five years, the economy could be
headed for recovery, because banks will have rebuilt deposits and
will feel comfortable lending again. Borrowers, having reduced their
debt burden, will feel comfortable borrowing again.
That’s the normal cycle anyway. After particularly severe credit
crises, lenders and borrowers may be paralyzed for years by
debtophobia, which can be almost as destructive as debt mania.

The Point of No Return

My research over the past decade pushes the post-2008 findings
forward in two ways. It identifies a tipping point, past which private
credit has risen so fast that a financial crisis (like a collapse in the
stock market or currency) is very likely. It also shows that, beyond
the tipping point, the economy is virtually certain to suffer a sharp
economic slowdown—even if there is no financial crisis.
Looking back to 1960 for 150 countries, I isolated the 30 most
severe credit binges, from Japan in the 1980s to Thailand and
Malaysia in the late 1990s. For these cases, private credit grew over
a five-year period by at least 40 percentage points as a share of
GDP.* In 18 cases, the country went on to suffer a financial crisis
within the next five years.†
And in all 30 cases, the economy suffered a slowdown after the
increase in private credit hit the 40-percentage-point threshold. On
average, the GDP growth rate fell by more than half over the next
five years. This 30-for-30 result is unusually consistent, and hints at
what may be a law of economic gravity, at least based on patterns in
national economies over the last fifty years.
Below the 40-percentage-point threshold, the decay produced by
excessive debt growth is a progressive disease. If private credit grew
by 25 percentage points as a share of GDP, the annual GDP growth
rate slowed by a third over the next five years. If private credit grew
by 15 percentage points as a share of GDP over five years, the
slowdown was milder, with the annual GDP growth rate falling by 1
percentage point.

The Private Sector Leads

The investigations since 2008 have illuminated why financial crises
tend to start with private companies and individuals.3 Typically, some
new innovation persuades people that the economy is entering a
period of rapid growth. In the United States, credit booms have been
triggered by the invention of the diving bell, the opening of canals
and railroads, the advent of television and fiber-optic networks, and
the introduction of home equity loans—lending tools that allow
people to borrow against the value of their homes.
As new innovations boost growth, incomes rise and people feel
more confident borrowing. But this cycle of optimism can continue
long after the impact of the innovation has worn off. Many
businesses will keep borrowing to buy into the hot new thing, past
the point justified by underlying demand. Assuming the economy will
boom indefinitely, others start borrowing to build homes and offices.
When debt is growing significantly faster than the economy, even
well-run banks start making mistakes, doling out loans too fast. The
errors grow as dodgy private lenders get in the game, extending
credit to increasingly ill-qualified borrowers—those amateurs
described by Zielinski, like the housewife ready to borrow to invest in
“four million of anything.” When economic growth is powered by such
excesses, it is prone to crumble.
In the United States before the global financial crisis, private credit
grew from 143 percent of GDP in 2002 to 168 percent in 2007—a
25-percentage-point increase—and the average annual GDP growth
rate slowed by two-thirds, to less than 1 percent, over the next five
years.
As we know now, the US debt binge was driven in part by the rise
of “subprime” lenders, many of them pushing loans on deceptively
easy terms. Though only a small portion of home loans were
subprime, this was a concentrated backwater of the shady private
players who often appear late in a credit mania, offering loans with
no money down, no proof of employment, and no debt repayment
record required.

The State Follows

Typically, it is only after private lenders and borrowers get in trouble
that the government gets involved. As a mania builds, authorities try
to restrain the worst lending practices through regulation, but this
campaign degenerates into a game of whack-a-mole. If the
authorities ban subprime home loans, the credit moles start offering
mobile home loans, no income required.
The party ends in many cases when the central bank is forced to
raise rates to halt the credit excesses, triggering a financial crisis.
The economy slows, and authorities begin working to ease the crisis
by shifting the debt of bankrupt borrowers onto the government’s
books. Government debt rises, and rises even faster when politicians
start borrowing to raise public spending in an effort to soften the
economic downturn.
In a 2014 study of financial crises going back to 1870, economist
Alan Taylor and his colleagues concluded, “The idea that financial
crises typically have their roots in fiscal [government borrowing]
problems is not supported over the long sweep of history.”4 Normally,
they write, trouble begins in the private sector, though countries that
enter the crisis with heavy government debt will suffer a longer and
deeper recession, because the government will find it harder to
borrow to finance bailouts.
The private-sector root of debt crises is well established. The IMF
has identified more than 430 severe financial crises since 1970, and
it classifies fewer than 70 as primarily government or “sovereign”
debt crises. Those include Latin American crises of the 1980s, and
the notoriety of those meltdowns helps explain why many analysts
still look for a government to blame for every financial crisis.

The Record-Setting Binge in China

China’s historic debt binge illustrates many classic dynamics of debt
manias, but with distinctly Chinese characteristics.
When I visited Beijing in September 2008, the economy was
slowing. The Shanghai stock market had just crashed. Property
prices were weak. But Chinese officials were sanguine. They said
China was entering the middle-income rank of nations, so it was time
for it to slow down as previous Asian miracle economies, like Japan,
South Korea, and Taiwan, had. They talked about cutting back on
investment, downsizing large state companies, and letting the
market allocate credit, which at this point was not growing faster than
the economy. Between 2003 and 2008, credit had held steady at
about 150 percent of GDP.
Two weeks after I left China, Lehman Brothers filed for bankruptcy
in the United States, and global markets went into a tailspin.
Demand collapsed in the United States and Europe, crushing export
growth in China, where leaders panicked. By October, the
government had reversed course, redoubling its commitment to the
old investment-led growth model, this time by fueling the engine with
debt. From 2008 through 2018, total debts would increase by $80
trillion worldwide, as countries fought off the effects of the financial
crisis, but of that total, $35 trillion, or nearly half, was racked up by
China alone.
By the time I returned to Beijing in August 2009, the government
had launched an aggressive spending and lending program that kept
China’s GDP growth above 8 percent, while the United States and
Europe were in recession. That steadily high GDP growth had
convinced many Chinese that their government could produce any
growth rate it wanted.
Bank regulators were the only officials who expressed alarm, and
their main concern was increasingly reckless lending in the private
sector. “Shadow banks” had started to appear, selling credit products
with yields that were too high to be true. Big state banks responded
with “wealth management products” that bundled their loans together
with the higher-returning debts of the shadow banks. Many Chinese
figured that these offerings had to be solid investments, since they
were issued by big state banks. But outsiders compared them to the
complex American debt products that Warren Buffett had described
as “financial weapons of mass destruction”5 before their implosion
helped trigger the crisis of 2008.
By 2013, shadow banks accounted for half of the trillions of dollars
in new yearly credit flows in China. The game of whack-a-mole was
on. When Beijing began to limit borrowing by local governments,
local authorities set up shell companies to borrow from shadow
banks. Soon these “local government funding vehicles” became the
biggest debtors in the shadow banking system.
As the flow of debt accelerated, more lending went to wasteful
projects. By some estimates, 10 percent of the firms on the mainland
stock exchange were “zombie companies,” kept alive by government
loans. Before 2007, it took one dollar of new debt to generate one
dollar of GDP in China. Over the next five years, it took four dollars
of debt to generate one dollar of GDP growth, as the state doled out
loans to incompetent and failing borrowers.
Much of the lending started to flow into real estate, the worst target
for investment binges. Easy loans spurred the sale of about 800
million square feet of real estate in 2010, more than in all other
markets of the world combined. In big cities, prices were rising at 20
to 30 percent a year.
Caught up in the excitement, banks stopped looking at whether
borrowers had income and started lending on collateral—often
property. This “collateralized lending” works only as long as
borrowers short on income can keep making loan payments by
borrowing against the rising price of their property. By 2013, a third
of the new loans in China were going to pay off old loans. That
October, Bank of China chairman Xiao Gang warned that shadow
banking resembled a “Ponzi scheme,” with more and more loans
based on “empty real estate.”
At the March 2013 party congress, Li Keqiang came in as prime
minister. He was one of the Chinese leaders who appeared to accept
the reality that a maturing economy needed to slow down, which
would allow him to restrain the credit boom. Yet every time the
economy showed signs of slowing, the government would reopen
the credit spigot to revive it.
The cast of dubious creditors grew increasingly flaky, including
coal and steel companies with no experience in finance,
guaranteeing billions of dollars in IOUs issued by their clients and
partners. By 2014, lending entrepreneurs were shifting their sights
from property to new markets—including the stock market.
 Even the state-controlled media jumped in the game, urging
ordinary Chinese to buy stocks for patriotic reasons. Their hope was
to create a steady bull market and provide debt-laden state
companies with a new source of funding. Instead they got one of the
biggest stock bubbles in history.
There are four basic signs of a stock bubble: high levels of
borrowing for stock purchases; prices rising at a pace that can’t be
justified by the underlying rate of economic growth; overtrading by
retail investors; and exorbitant valuations. By April 2015, when the
state-run People’s Daily crowed that the good times were “just
beginning,” the Shanghai market had reached the extreme end of all
four bubble metrics, which is rare.
The amount that Chinese investors borrowed to buy stock had set
a world record, equal to 9 percent of the total value of tradable
stocks. Stock prices were up 70 percent in just six months, despite
slowing growth in the economy. On some days, more stock was
changing hands in China than in all other stock markets combined.
In June 2015 the market started to crash, and it continued to crash
despite government orders to investors not to sell.
This credit binge had some characteristics unique to China’s state-
run system, including the borrowing by local government fronts and
the Communist propaganda cheering on a capitalist bubble. But its
fundamental dynamics were typical of debt manias. It began with
private players, who assumed the government would not let them
fail, and devolved into a game of whack-a-mole. As the government
fitfully tried to contain the mania, more and more dubious lenders
and borrowers got in the game, blowing bubbles in stocks and real
estate. The quality of credit deteriorated sharply, into collateralized
loans and IOUs. These are all important mania warning signals.
The most important sign was, as ever, private credit growing much
faster than the economy. After holding steady before 2008, the debt
burden exploded over the next five years, increasing by 74
percentage points as a share of GDP. This was the largest credit
boom ever recorded in the emerging world (though Ireland and
Spain have outdone it in the developed world).
 Before China, the roster of extreme postwar credit booms included
two of the earlier Asian miracles—Japan and Taiwan—as well as
recent Asian Tigers such as Malaysia, Thailand, and Indonesia.
None had escaped a severe economic slowdown. This did not augur
well for China’s chances of avoiding the kiss of debt.
By mid-2019 China had, in fact, seen economic growth slow by
nearly half, from double digits to 6 percent, right in line with previous
extreme binges. To date then, no country has escaped this rule: a
five-year increase in the ratio of private credit to GDP that is more
than 40 percentage points has always led to a sharp slowdown in
economic growth.

Ten Biggest Debt Binges

Following the biggest debt binges, GDP growth has always slowed sharply.

5-Year Increase in Decline in GDP

Private Debt to Year Credit Binge Growth, Next 5
Country GDP Peaked Years
Ireland 107% 2,005 –5.4
Spain 90% 2,005 –2.7
China 74% 2,014 –2.4
UK 69% 2,007 –3.7
Malaysia 68% 1,995 –4.4
Thailand 67% 1,993 –8.2
UK 67% 1,986 –1.4
Denmark 65% 2,007 –2.7
Zimbabwe 65% 2,002 –7.8
Chile 64% 1,982 –5.8

Source: Haver Analytics, Goldman Sachs.

 China did, however, dodge the less consistent threat of a financial
crisis, aided by some unexpected strengths. One was the dazzling
boom in its tech sector, without which the economy would have
slowed much more dramatically. Another was the fact that Chinese
borrowers were in debt mainly to Chinese lenders, and in many
cases the state owned both parties to the loan. In short, China was
well positioned to forgive or roll over its own debts. And with strong
export income, vast foreign exchange reserves, strong domestic
savings, and still ample bank deposits, it had managed to avert the
financial crisis that often accompanies large, debt-driven economic
slowdowns.

The Shape of the Slowdown

When a credit boom goes bust, people lose faith in their future
income, and in their ability to take on debts. That uncertainty leads to
belt-tightening, further slowing the economy.
The path of the slowdown depends in large part on how quickly
the government can stabilize the debt-to-GDP balance, either by
slowing debt growth or by reviving GDP growth. In a maturing
economy like China, where GDP growth is slowing naturally, the key
question is how soon the government can fix the debt problem.
The other extreme credit binges offer possible scenarios. In
Taiwan, as the credit crisis hit in 1992, the government responded by
pulling back on lending and public investment and allowing more
private banks to compete with state banks. The economy’s trend
growth rate did slow in the five years after the crisis, but mildly, from
9 to 7 percent, which was still solid growth for a country with per
capita income around $15,000.
Another possible scenario is Japan. After its debt-fueled property
and stock market bubbles collapsed in 1990, the government didn’t
restrain lending. It bailed out troubled borrowers, covered bad loans
with new loans, and pressured banks to prop up faltering companies
and fund increasingly unproductive investments, including “bridges
to nowhere.”
 The result was rising debt and stagnant growth. Total debt rose
from 250 percent of GDP in 1990 to 405 percent today. The GDP
growth rate fell from nearly 5 percent before 1990 to less than 1
percent for the next quarter century. By 2019, Japan’s $4 trillion
economy was less than one-third as large as it would have been,
had it maintained its trend growth rate of the 1980s, when it was
being hyped as the next world superpower.
This is a possible future for China too, if for political reasons it
attempts to prolong the life of its aging economic boom with rising
debt.

The Upside: After the Bust

When massive credit binges start to unwind, and credit growth falls
below the rate of economic growth, the result is often a painful
recession. But that is a necessary cleansing step.
If credit has been growing slower than the economy, the banking
system is most likely healing. In fact, the more slowly debt has been
growing as a share of GDP over a five-year period, the more likely it
is that the economy will witness an increase in growth, boosted by
healthy credit, in subsequent years. Many countries have seen this
kind of recovery in recent decades, including Chile after 1991,
Hungary after 1995, and the Czech Republic after 2002.
Indonesia is a particularly dramatic case. Before the Asian
financial crisis, the Suharto dictatorship had allowed many industrial
conglomerates to establish their own banks, which came to operate
as slush funds. At some banks, more than 90 percent of loans were
“connected,” or doled out to a parent company, subsidiaries, or top
officials. By 1997, as many as 90 percent of these loans were
“nonperforming”; the borrower had not made a payment in at least
nine months.
Often, at the depths of a credit crisis, entrenched powers fight to
hold on to the banks that they have run into insolvency. In Indonesia,
the agency set up to restructure the banks started promisingly by
shutting thirteen institutions owned by friends and sons of Suharto.
But one son soon reemerged as head of a different bank, public
confidence collapsed, and Indonesians began moving their money to
foreign countries.
By early 1998 the Indonesian rupiah had lost 80 percent of its
value, and banks started to unravel. State banks held about half the
assets in the system, and many did not have enough deposits to
back up their loans. As the extent of the rot became known, the
stock market value of Indonesian banks collapsed to near zero in
1998; in the world’s estimation, the Indonesian banking system had
ceased to exist.
Bloody street protests broke out, forcing Suharto to resign. The
bank restructuring agency began to move faster, banning many
Suharto cronies from the industry for life. In a historically insular
country, the new government granted foreigners the right to buy 99
percent ownership stakes in banks and to replace the old bosses
with professionals.
In emerging countries, where, on average, banks still account for
80 percent of all lending (compared to 50 percent in the United
States), a shake-up of banking is a shake-up of society.
To restart a banking system from zero, authorities need to
recognize and dispose of bad loans, and inject new capital into
banks so that they can lend again. But any action involves a political
choice: who will suffer the pain? Authorities can force borrowers into
default and allow lenders to seize their cars or homes. Or they can
force lenders to forgive debts and ease repayment terms. Either way,
the crisis begins to end not when borrowers start to repay debt, but
when they are forced into default or forgiven.
Indonesia chose to punish the discredited lenders. The
government took control of some $32 billion in bad bank loans, to be
sold for pennies on the dollar, and forced many to merge or close.
Within two years the number of banks in Indonesia had fallen from
240 to 164. Four of the worst state banks were folded into a stronger
one, Bank Mandiri. Nine failed private banks were merged into Bank
Danamon, whose original owner, a close Suharto associate, fled the
country, owing more than $1 billion to crony banks.
 Another signal that a debt crisis is bottoming out can be found on
the banks’ books. When banks don’t hold enough deposits to cover
their loans, they can face trouble, particularly if they rely on foreign
funding to fill the gap. If bank loans amount to more than 100 percent
of deposits, the system enters a risky zone. Past 120 percent, the
system faces a crisis warning—even if the banks don’t depend on
foreign funding.
After the crisis hits, the ratio of loans to deposits will fall, as the
bank curtails lending, writes off bad loans, and begins to attract
deposits again. In general, when loans fall back under 80 percent as
a share of deposits, banks will be poised to restart lending.
This return to banking-system balance has marked the revival in
many postcrisis countries, including Indonesia. As crisis loomed in
1997, the average loan-to-deposit ratio hit 110 percent. After the
crisis, that ratio fell to 35 percent within a year.
This drop in the loan-to-deposit ratio set the stage for a
transformation. Indonesian bankers emerged from the crisis badly
burned, with a sense of caution that remains today. The banks that
were created from failed banks—Danamon and Mandiri—have since
emerged among the best-run and most respected banks in Asia.

Debtophobia
There is a fine line, however, between healthy caution and
debtophobia. After some severe crises, bankers and borrowers
seem to suffer a form of posttraumatic stress. Their fear slows credit
growth sharply, retarding the pace of recovery. Even in Southeast
Asia, where the 1998 crisis passed quickly, it took several years for
the recovery to gain momentum.
The crisis of 2008 triggered a new bout of debtophobia, and
widespread fear that capitalism would grind to a halt. For many
years, debt had been growing faster than the global economy,
helping to spur growth. After the crisis, debt continued to grow
rapidly only in China and a handful of other countries, while it slowed
in the rest of the world. Many nations succumbed at least for a time
to debtophobia, including the United States, where debt growth
plummeted as households started to retrench and their savings rates
went up.
Researchers assessing this shift found many historical cases in
which economies began to grow again after a crisis, even if
debtophobia reigned and credit remained stagnant. The catch is that
these “creditless recoveries” tend to be very weak, with GDP growth
rates around one-third lower than in a credit-fueled recovery.6
Mexico knows this pain well. After the 1994 crisis destroyed
Mexican banks, their owners managed to delay any cleanup of bad
loans, and the banks lacked the deposits to make new loans.
Mexicans came to distrust bankers, and to this day many don’t keep
a bank account. Between 1994 and 2018, Mexico saw private bank
credit shrink as a share of GDP from 38 to 20 percent, and growth
stagnated. During this period, neighbors like Chile and Brazil
surpassed Mexico in terms of average per capita income.
Mexico’s debtophobia has now lasted nearly as long as the case
suffered by the United States after the crash of 1929. For the next
twenty-five years, as British economist Tim Congdon has argued,
Americans’ traditional optimism gave way to doubt, marked by
“extreme caution” toward new lending.7
Normally, debtophobia is less persistent. Looking at financial
crises back to the 1930s, Empirical Research, a New York–based
consulting firm, found that on average, credit and economic growth
remained weak for about four to five years.8 In Asia, credit fell in the
five years after 1997 by at least 40 percentage points as a share of
GDP in Indonesia, Thailand, and Malaysia. But within about four
years, the gloom had started to lift as debts fell, government deficits
declined, and global prices for the region’s commodity exports rose.
Credit growth picked up, and the average GDP growth rate in these
three Southeast Asian economies rose from around 4 percent
between 1999 and 2002 to nearly 6 percent between 2003 and
2006.‡
Thus, the upside of the credit rule is that five-year runs of weak
credit growth often lead to a stronger run of economic growth.
 How Paying Off Debt Pays Off
Before 2000, many emerging countries had never seen a period of
real financial stability, or a healthy credit boom. Inflation was high
and volatile, and when prices for big-ticket items are unpredictable,
banks won’t dare make loans that extend for more than a few
months. In emerging countries, many cornerstones of American
consumer culture and middle-class existence, including the five-year
car loan and the thirty-year mortgage, had been unimaginable
luxuries.
Then the new generation of emerging-world leaders began
controlling deficits and lowering inflation, and this newly stable
environment quickly led to a revolution in lending. Credit cards and
corporate bonds were introduced for the first time. Mortgages, which
barely existed in 2000, became a multibillion-dollar industry, rising
from 0 percent of GDP to 7 percent in Brazil and Turkey, 4 percent in
Russia, and 3 percent in Indonesia by 2013. For countries where
people cannot buy a car or a house unless they amass enough cash,
the introduction of these simple credit products is as important a step
into the modern world as indoor plumbing.
Periods of healthy credit growth bear no psychological
resemblance to the extreme exuberance of manias or the extreme
caution of debtophobia. In place of shady lenders and unqualified
borrowers, responsible lenders are widening the choice of solid loan
options, creating a more balanced economy. When the global
financial crisis hit in 2008, countries like the United States were
vulnerable because they had been running up debt too fast. In
Southeast Asia, however, the opposite story was unfolding.
Indonesia, Thailand, Malaysia, and the Philippines had
manageable debt burdens and strong banks ready to lend, with total
loans less than 80 percent of deposits. Over the next five years the
health of the credit system would prove crucial: nations such as
Spain and Greece, which had seen the sharpest increase in debt
before 2008, would post the slowest growth after the crisis; nations
such as the Philippines and Thailand, which had seen the smallest
increase in debt during the boom, would fare the best.
This is how the credit cycle works in brief: Rising debt can be a sign
of healthy growth, unless debt is growing much faster than the
economy for too long. The size of the debt matters, but the pace of
increase is the most important sign of change for the better or the
worse. The first signs of trouble often appear in the private sector,
where credit manias tend to originate.
The psychology of a debt binge encourages lending mistakes and
borrowing excesses that will retard growth and possibly lead to a
financial crisis. The crisis can inspire a healthy new caution, or a
paralyzing fear of debt. Either way, the period of retrenchment
usually lasts only a few years. The country emerges with lower
debts, bankers ready to lend, and an economy poised to grow
rapidly.

____________
* In most of these cases, GDP growth was strong during the five-year period when
credit was growing dangerously fast, so credit growth was the main reason the
credit/GDP ratio was rising.
† Here I use financial crisis to mean a banking crisis as defined by Carmen
Reinhart and Kenneth Rogoff in This Time Is Different (2009), which captures bank
runs that force a government to close, merge, bail out, or take over one or more
financial institutions.
‡ South Korea, another country at the center of the Asian financial crisis, is
excluded here because it followed a different pattern and never saw a decline in
credit growth.
 10

HYPE

Successful Nations Rise outside the Spotlight

For most of my career I have worked as a writer and an investor,

and I have come to see how differently Fleet Street and Wall Street
view time. The nature of their jobs requires investors to train their
eyes on the future; journalists, on the present. Market players make
money by being early to the next big trend, but the media consider a
trend credible only after it has been running for a few years. They
are often slower to see big shifts in the story.
A classic case is the rise and fall of hype for Japan. Even after
Tokyo markets crashed in 1990, the global media and political elite
kept talking up Japan as the superpower of the future. In early 1992,
Time magazine ran a cover touting predictions that Japan could
overtake the United States as the world’s largest economy within a
decade. In the US presidential race that year, candidate Paul
Tsongas declared: “The Cold War is over and Japan has won.”1
By 1994, Japan was deep in a slump and the media had dumped
it for the “Asian Tigers”—particularly Thailand, Indonesia, and
Malaysia. Countless articles linked their success to the “Asian
values” of thriftiness and hard work, right up until the crisis of 1997,
which exposed their taste for luxury goods and dollar debt.
Then the mood shifted from love to hate, as it often does. The
media began churning out exposés on Asian “crony capitalism,” the
corrupt fortune amassed by Indonesian leader Suharto, and so on.
By 2003, if the press mentioned the Asian economies, it was
dismissively, as in a Time cover that year titled “Tigers No More.”
Over the next five years, as if to prove the media wrong, Southeast
Asia took off amid a broad boom in emerging economies.
The longer an economic boom or bust lasts, the more likely it is to
end, but the media become more and more convinced it will never
end. Instead of recognizing the cyclical nature of economic trends,
they assume that long booms will become more deeply entrenched
and stable over time. Their admiring coverage, in turn, makes
national leaders too complacent to keep pushing reform, and
hastens the inevitable crisis.
When a crisis hits and media love turns to hate, the criticism is
often well founded: the stew of crony capitalist practices exposed
during the Asian financial crisis was very real. But a turnaround is
still far off. Messes take time to fix.
The next economic stars often emerge from among countries that
have fallen off the media radar, after the crisis has passed. They
start to recover momentum when left alone to put their economic
house in order, and it is only after they record several years of strong
growth that the media rediscover them. By then, the run may be
nearing exhaustion.
The reality is that successful nations often rise from the shadows,
and those getting the most hype are often the most likely to stumble
in coming years. Media love is a bad sign, and media indifference is
a good one.

A Brief History of Emerging-World Hype

In the early twentieth century, the few people who paid attention to
global economic competition were focused on Latin America and
particularly Argentina, which had attained first-world income levels
by taking advantage of a new British invention—the refrigerated
steamship—to export its beef and crops. Argentina was one of the
world’s richest economies in the 1950s, but it was failing to
modernize under the populist misrule of Juan Perón, and the hype
was shifting to Venezuela, which tapped its vast petroleum reserves
to prosper as oil prices spiked in the 1970s. Venezuela reached an
income level close to that of the United States in that decade and
was touted as a rising capitalist democracy on a continent where
dictators were taking over.
Pundits of the 1950s and ’60s largely ignored Asia, and when they
hyped any Asian country, they focused on the Philippines and
Burma, both rich in natural resources. They pitied China and India as
hopelessly mired in poverty, and dismissed Taiwan as a “basket
case” with a corrupt government presiding over a largely illiterate
population.2 They saw South Korea as a “rat hole” into which
Washington was dumping aid dollars with no visible effect.3
These predictions were wrong for both continents and countries.
Since the 1970s, Asia’s average income has been catching up to the
West, but Latin America has fallen behind. Argentina continued to
tread water, and Venezuela fell back as oil prices retreated in the
1980s. Within Asia, Burma faltered even before the 1962 coup
turned it into a failed military state. Burma was followed down the
tubes by the Phillipines, under the Marcos regime. Meanwhile,
Taiwan the “basket case” and South Korea the “rat hole” were on the
rise. In the 1980s and ’90s, when China and then India began their
transformations, they also took off outside the global media spotlight.

The Cover Curse

The backward-looking nature of journalism is captured in an old joke:
By the time a story reaches the cover of Time or Newsweek, it’s
dead.
To test that proposition, I reviewed Time covers published between
1980 and 2010 and found 122 featuring an economic take on a
country or region. (Newsweek got a pass for lack of access to its
archives.) If the Time cover was downbeat, economic growth picked
up over the next five years in 55 percent of the cases. In March
1982, Time invoked “Interest Rate Anguish” over US Fed chair Paul
Volcker’s decision to hike interest rates—a move now widely lauded
for ending a period of stagflation. In August 1999, Time’s cover
“Japan Returns to Nationalism” saw the country turning inward, but
Japan began to push reform and pick up some speed.
On the other hand, if Time’s cover was upbeat, the economy
slowed down over the next five years in 66 percent of the cases.
This happened thirty-seven times between 1980 and 2010. The May
2006 cover extolling “The French Way of Reform” was followed by a
five-year fall in the growth rate. Time would ask whether this is
“China’s Century—or India’s?” in November 2011, the year when the
big emerging economies started to slow dramatically.
There are exceptions, such as the Economist, perhaps thanks to
its deliberately contrarian worldview. On the basis of 209 covers
between 1980 and 2010 when the Economist’s take was optimistic,
the economy improved over the next five years in roughly two-thirds
of the cases. When the Economist’s take was gloomy, the economy
slowed more than half the time.

The Limits of Linear Thinking

The point here is not to pick on weekly newsmagazines, which are,
in any event, a dying breed in the internet age. It is to highlight the
problem of linear thinking, which is alive and well in journalism.
Reporters tend to follow the lead of authorities like the IMF, which
show a systematic tendency to hype hot economies. In 2013, former
US Treasury secretary Larry Summers and Lant Pritchett issued a
paper that pleaded with forecasters to recognize overwhelming
research showing that economies tend to “regress to the mean”—in
other words, fall to the historic mean GDP growth rate for all
countries. (That mean rate is about 3.5 percent, or 1.8 percent for
per capita income growth.)
 By assuming, in a linear way, that India and China would continue
to grow at roughly their current pace, the IMF forecasts had these
two economies quadrupling in size by 2030, for a combined
expansion of about $53 trillion. If India and China instead saw growth
regress to the mean, Summers and Pritchett wrote, they would only
double in size by 2030, for a combined expansion of $11 trillion.
That’s a $42 trillion gap.4 It is this kind of straight-line forecast that
induces “Asiaphoria”—a tendency to hype Asian economies.
Economists tend to change forecasts in small increments and miss
big shifts. By early 2008 there were warning signs, including a fall in
the stock market, that the Great Recession had already begun. But
none of the fifty leading forecasters who are surveyed quarterly by
the Philadelphia branch of the Fed saw it coming. Their average
forecast dropped a bit, but only two of the fifty predicted growth
below 1 percent for 2008, and not one predicted negative growth.
We now know that the Great Recession had started in 2007.
Similarly, in a study of IMF forecasts for 189 countries between
1999 and 2014, the Economist found 220 cases in which an
economy grew one year but shrank the next. In its April forecasts for
the coming year, however, the IMF never once saw the contraction
coming. Though economics was derided by historian Thomas
Carlyle as the “dismal science,” it is often prone to “optimism bias.”
I suspect the IMF and the World Bank are reluctant to offend high
officials in countries that are also their clients—hence their optimism
bias. But independent analysts face similar pressures. Economists
covering China have complained to me that if they question
government growth claims, they will get an earful from Beijing; but if
they don’t, they will hear it from skeptical investors.

Group Think, Group Hype

After 2002, the combination of easy money, rising trade, and high
commodity prices triggered an unprecedented boom. Over the next
five years, the 150 emerging countries tracked by the IMF saw
growth more than double, to an average rate of more than 7 percent.
Forecasters projected that large emerging economies, including
Brazil, Russia, India, and China, would continue to expand at a torrid
pace, and that their average incomes would eventually catch up with
those of the developed world.
Thus was born the myth of “mass convergence,” a worldwide
leveling of incomes. This scenario had a beguiling appeal to many
people, from NGOs rooting for the poor to global investors hoping to
make a fortune in emerging markets. It seemed plausible at the time.
Between 2005 and 2010, 107 of the 110 emerging countries in the
authoritative Penn Table database were gaining on the United States
in terms of average income. The three countries losing ground were
Niger, Eritrea, and Jamaica—small exceptions that appeared to
prove the rule of mass convergence.
The convergence boom, however, was freakishly unusual. In every
decade between 1960 and 2000, the per capita income of most
emerging nations fell relative to the United States. When the boom
began after the turn of the millennium, the narrative shifted and the
mass convergence story took hold, implying that most developing
nations were on track to reach the developed class. The optimism
didn’t last long.
In 2010, growth started to slow in the emerging world as global
capital flows and trade ebbed, and commodity prices weakened. By
mid-decade, the average growth rate in emerging nations had fallen
from the 2010 peak of 7.5 percent to its long-term average of 4
percent, and to around 2 percent excluding China. The United States
was growing faster than the average for emerging economies. Far
from converging, many of the most hyped emerging economies,
including Russia, Brazil, and South Africa, were falling behind the
United States.

The Myth of Mass Convergence

Before 2000, most emerging countries were falling behind the United States in average
income—or deconverging—most of the time.

Number of Number of EM Deconvergence

Emerging-Market Countries Rate
 Countries Deconverging
1950s 37 15 40.5%
1960s 77 46 59.7%
1970s 95 51 53.7%
1980s 97 75 77.3%
1990s 120 83 69.2%
2000s 112 12 10.7%
2010-18 111 28 25.2%

Source: World Bank, Haver Analytics.

The Special Problem of Hype for Commodity

Economies
Blanket hype for emerging markets makes no distinction between
manufacturing economies that grow by making things, such as
China, and commodity economies that grow by pumping stuff out of
the ground, like Brazil. This distinction makes a huge difference.
Most emerging economies are driven by commodity exports and
tend to rise and fall with global prices for those exports.
In the 1970s, when a standard index of commodity prices rose 160
percent, 28 nations saw their average income converge rapidly with
incomes in the West.* But when commodity prices stagnated in the
1980s and ’90s, the number of rapidly converging nations fell to 11;
as commodity prices doubled after 2000, the number bounced back
up to 37.
The erratic path of commodity economies was demonstrated in
stark relief by a commission that the World Bank assembled in 2008,
under Nobel laureate Michael Spence, to unravel the secrets of long,
steady growth booms that had appeared only in the postwar era. The
Spence Commission identified thirteen economies that had posted
average growth of more than 7 percent over at least a quarter
century, but these stories had very different endings.5 Only six
reached a high income level, and five of those six were export-
manufacturing powers, with the quirky exception of Malta. Of the
seven economies that stalled before reaching a high income level,
six were commodity-rich: Botswana, Indonesia, Malaysia, Oman,
Thailand, and Brazil. Rising and falling with prices for iron ore and
soybeans, Brazil’s per capita income is just 16 percent of per capita
income in the United States, basically the same as it was in 1914.
Raw materials often play an outsize role in shaping an economy’s
future. Income from natural resources accounts for 8 percent of
GDP, on average, in low- and middle-income countries, compared to
1.4 percent in developed countries. This 8 percent share may sound
small, but it can determine an economy’s fate if it accounts for a
significant portion of exports or government revenues. Rapid
commodity price shifts can suddenly pinch revenues and trigger a
crisis—particularly if the country needs foreign revenue to service
foreign debts. Oil accounts for only 10 percent of Russian GDP, but
also for half of exports and a third of government revenue, making
the economy hugely vulnerable to oil prices.
In 2014, several magazines feted President Putin as “the most
powerful man in the world” following the Russian invasion of
Crimea.6 But that same year oil prices collapsed, cutting the average
Russian income by a third. This was a classic case of hype peaking
at the end of a trend.

The Rosy Disaster Scenarios

One of the stranger forms of hype is the Malthusian disaster
scenario, inspired by early-nineteenth-century English scholar
Thomas Malthus. Ever since Malthus predicted that population
growth would outpace farm output, experts have been periodically
echoing his warning. They forecast that rising food prices will bring
famine to huge swaths of the world, and potentially huge fortunes to
farm regions.
 But Malthusians make the same mistake that Malthus made: they
underestimate how quickly farmers respond to prices. As prices rise,
farmers invest some of the profit to increase production, thus
keeping prices down and ensuring that people can afford food. In
fact, studies show that farmers respond faster to market forces than
do other big commodity suppliers, such as multinational oil
companies.
Since World War II, global food prices adjusted for inflation have
fallen at an average annual pace of 1.7 percent. In many countries,
there is room to boost supply further. Crop yields are about half as
high in China, Brazil, and the former Soviet countries as they are in
the United States, so output could rise radically if these countries
copy foreign methods.
In 2011, Malthusians were on red alert. Prices had surged 66
percent in the previous two years, and Oxfam was warning that
inflation would drive millions more people into hunger by 2030.
Between 2000 and 2010, however, the world had invested $1 trillion
in the production of raw materials, including soybeans and other
foods. As production rose, food prices fell 30 percent between 2011
and 2013. The Malthusian pessimism about famine—and optimism
about food exporters like Brazil—vanished, at least for the time
being.

The Income Traps

One reason to be wary about hype for the future of hot economies is
the harsh reality of income traps, which can spring on countries at
every step of the development ladder.
The conventional view is that there is one trap, which trips up
economies when they reach the middle-income level. A poor nation
can grow rapidly by making simple improvements, such as paving
roads and moving farmers into more productive factory jobs. But it
becomes much more difficult to sustain growth when the country
reaches the middle-income level and it needs to develop more
advanced industries.
 The middle-income trap is real, but it is not the only one. The
challenges of generating sustainable growth and productive industry
—underpinned by solid institutions and steady infusions of
investment and credit—do not accumulate and confront an economy
all at once. They hound nations that are extremely rich, extremely
poor, and everything in between.
World Bank researchers coined the phrase “middle-income trap” in
2007, but in 2013 a different team at the bank found “very little”
evidence that the trap exists.7 Economies get bogged down at all
income levels, not just the middle. The researchers cited countries,
like Bangladesh, that had stalled at a very low income; and others,
like Japan, Ireland, and the United Kingdom, that had suffered
prolonged slowdowns when they were quite rich.
In any decade, more nations on average fall back to a lower
income level than advance to a higher one. Since the late 1940s,
many nations have experienced this downward mobility, including
the Philippines in the 1950s and Russia, South Africa, and Iran in the
1980s and ’90s.
Development traps can drag newly rich countries back to the
middle-income ranks, as has happened at least three times in the
last century. Venezuela made the round trip from middle class to rich
and back within the last 100 years. Argentina’s average income fell
from 65 percent of the US level in the 1930s to less than 20 percent
by 2010. Most recently, Greece was demoted from developed to
emerging-market status after its financial crisis in 2010.
It’s also common to fall back into poverty. In a 2012 study, the
World Bank identified 13 emerging countries that, over the last half
century, managed to rise from the poor or middle class into the high-
income class, and they include the famous Asian “miracles.” But the
same study identified a much larger group of countries, 31, that, over
the same period, fell from middle income to low income, including
Iraq, Afghanistan, and Haiti.
The way economists put it is that strong growth shows little
“persistence.” Summers and Pritchett analyzed all twenty-eight
nations that, since 1950, have experienced periods of “super rapid
growth,” defined as an average annual per capita GDP growth rate
of 6 percent for at least eight years. They found that these booms
tend to be “extremely short lived,” dying out after a median duration
of nine years, and “nearly always” ending in a significant slowdown.
Typically, the economy returned to per capita growth of just over 2
percent, a rate that is “near complete regression to the mean” for all
nations.8 That’s worth keeping in mind, when reading stories touting
countries in the midst of long booms as the economies of the future.

Why the Opposite of Love Is Indifference

The fastest-growing economies are almost always found among the
poorer nations, because it is easier to grow rapidly from a low
income base. And these rising economies also tend to be ignored by
the global media until they have been booming for many years.
In the decades between 1950 and 2010, per capita income in the
ten fastest-growing economies was, on average, less than $3,000 at
the start of their hot decade. Those cases include Nigeria and Israel
during the 1960s, Indonesia and Mexico during the 1970s, Korea
and China during the 1980s, Poland and China again in the 1990s.
Today’s developed countries rarely made the list, outside the
postwar recovery decade of the 1950s, when Germany, Japan, and
Italy were all in the top ten.
The rate of churn on my top ten lists* has been remarkable. Three
of the ten fastest growing economies from the 1950s repeated the
feat in the ’60s, but none from the 1960s repeated in the ’70s. Only
one from the 1970s, South Korea, returned to the top ten list in the
’80s. Just two from the 1980s—South Korea and China—made the
top ten in the ’90s. And one from the ’90s, China, returned the
following decade. In addition, many countries have hit the top ten for
one decade and never appeared again, including Jamaica, Bulgaria,
Hungary, Mexico, Cameroon, Angola, and Kazakhstan.
When booms go bust, the media conduct an autopsy, laying bare
all the spending and debt excesses racked up in the late stages of
the boom. The government sets up commissions to close banks and
dispose of bad loans, replace corrupt and incompetent figures at
leading state companies, and push reform designed to make sure
the same crisis doesn’t recur.
The housecleaning can take several years, so expecting a fast
turnaround can be costly. Acting on the advice of Baron de
Rothschild, who said the best time to buy is when there is “blood in
the streets,” many global investors bought into Thailand in the
summer of 1997, only to see Thai stocks fall another 70 percent.
Economies are most likely to turn for the better not during the
period of hate but after the media have moved on. By the year 2000,
the global media had turned its back on Thailand and emerging
markets in general. It was during this period that new leaders in
Russia, Turkey, South Korea, and Brazil began working out of the
limelight on the dull reforms—bringing current accounts back into
balance and debts under control—that would set the stage for the
next emerging-world boom.
Economic growth lacks persistence, but media negativity often
shows tremendous persistence. The Philippines, for example, had
been an Imelda Marcos joke for so long that few journalists took
seriously its revival under President Benigno “Noynoy” Aquino, who
took power in 2010. Under him, the Philippines became the world’s
fastest-growing economy, but journalist friends continued to laugh
when I touted its prospects. Straight-line pessimism is as misleading
as straight-line optimism.
In any five-year economic cycle, the competitive landscape can
change completely. As some nations reach the peak of a debt binge,
others will be busy paying off debts, setting themselves up for strong
growth. Even commodity countries are poised to boom like a clock
every time commodity prices begin an upward swing. In September
1998, Time put the crisis-wracked Russian economy on a cover that
said “Help!” but over the next five years Russia’s growth accelerated
from negative 5 percent to positive 7 percent, as oil prices rose—and
the government began wisely saving the profits for a rainy day.
The hype rule comes down to a few simple observations: Wise
national leaders try not to let hype go to their heads and keep
pushing reform even when the economy is roaring and the world is
applauding. Good forecasters know to look for the next big success
stories not among the nations most loved or hated by the markets
and media, but among the forgotten and ignored. As the writer and
Holocaust survivor Elie Wiesel has said, the opposite of love is not
hate; it is indifference.9

Ten Rules, One Goal

Mainstream opinion typically gets the future wrong, because it
extrapolates recent trends in a straight line and grows more
enamored of a country the longer its growth run lasts. The way to
avoid falling for the hype is to monitor the ten rules outlined in this
book.
Rarely will any country look good on all ten. But together, the rules
sketch the ideal habits of successful nations. First, nations in this
elite class battle the global slowdown in working-age population
growth by recruiting women, immigrants, the elderly, and even robots
into the labor force. If the labor force is stagnating or shrinking, the
economy probably will be too.
Successful nations have a strong sense of urgency, often inspired
by a recent crisis, and they choose political leaders who are willing to
push tough economic reform. Ideally, they are democracies and pick
their leaders in fair elections: autocrats can force rapid growth, but it
tends to be erratic, and prone to collapse.
Leaders of successful nations tend to be politicians with a broad
following who can rally public support for reform. They listen to
experts, but are rarely technocrats themselves, and are usually new
to office. Even great reformers grow stale with time.
Successful nations build governments that are right-sized: neither
bloated and smothering, nor too small to provide the basics of
commercial life—police, schools, roads, telephone networks. Their
government spending is not excessively high or low, compared to
other nations in their income class.
Led by their private entrepreneurs, successful nations invest at a
healthy rate, roughly in the range of 25 to 35 percent of GDP.
Investment spending is more volatile than spending by government
or consumers, and a much better predictor of economic booms and
busts—but it matters where the money is going. Investment binges
in real estate and commodities tend to fuel empty bubbles; booms in
technology and manufacturing tend to leave behind productive
assets, even after they go bust.
Successful nations tend to have a healthy balance of wealth, even
at the top. The total wealth of their billionaires is generally neither too
far above the average for large countries (10 percent of GDP) nor
too far below. Healthy economies should generate billionaires,
preferably good billionaires in productive and widely popular
industries such as consumer goods. If billionaire wealth is
concentrating in the hands of tycoons who inherited their wealth, or
who made fortunes in unproductive and corruption-prone industries
like real estate and commodities, it can provoke populist revolts
against the process of wealth creation itself.
Successful nations also make the most of their geographic
location, investing heavily in roads, ports, and communication
networks to connect themselves to global and regional markets.
Rather than hoarding wealth and power, the nation’s capital works to
ensure that these investments bring its second cities into the global
commercial mainstream. Again, balance is key. The luckier ones are
already located on existing global trade routes, where export
manufacturing and global service hubs are most likely to flourish.
The investment habits of successful nations help contain inflation,
by building supply networks that can meet demand when the
economy accelerates. As a result, their inflation rates rarely exceed
the current averages of 2 percent for developed and 4 percent for
emerging economies. More important, their central banks manage
the supply of credit with an eye to inflation in financial markets, as
well as in consumer prices. Increasingly, modern recessions follow
from bubbles in stocks, bonds, and other financial assets.
Paradoxically, successful nations feel cheap, particularly to
foreigners. Their currencies are inexpensive, making local prices
attractive to international tourists and investors. The best test is how
cheap a cup of coffee or other local goods “feel” to outsiders,
because the technical measures of currency value are flawed.
Cheap is good, unless the currency is also unstable, which can
trigger a financial crisis.
Crisis warnings start to ring if the country has been borrowing
heavily abroad to live beyond its means, a habit that will generate a
steady increase in the current account deficit. My research shows
that today, if the current account deficit has been above 3 percent of
GDP for five years running, the nation faces a serious risk of crisis.
To anticipate such crises, follow the locals; in most currency crises,
locals and not big global investors are the first to spot signs of
trouble, and to start moving money abroad.
Successful nations insulate themselves from these crises in two
ways. First, they borrow abroad to buy factory equipment rather than
consumer goods, which is investing in future growth, not living
beyond their means. If investment is strong, a current account deficit
is much less alarming. Second, they do not manipulate the price of
the currency—a habit that in today’s alert global markets only
provokes rival nations to retaliate in kind.
They also avoid both debt mania, and debtophobia. A mania is
brewing when debts are growing significantly faster than the
economy, for an extended period. The level of debt as a share of
GDP matters, but the pace of increase matters more. Typically,
manias start in the private sector, and public debt rises later, as the
government steps in to rescue private debtors, and starts borrowing
to stimulate the floundering economy.
My research shows that if private debt increases by more than 40
percentage points as a share of GDP over five years, an economic
downturn has always followed. Typically, the downturn was severe,
and in three out of every five cases it was accompanied by a
financial crisis. Afterward, caution often reigns, and a long period of
falling debts puts the nation in position to start borrowing—and
growing—again. Following severe crises, however, caution can
devolve into fear. Debtophobia paralyzes the economy, and hampers
recovery for many years.
Often, quietly reforming nations fall off the radar of the global
markets and media, which is right where they want to be. The most
loved nations rarely have the best economic prospects in the next
five to ten years. The most hated nations, on the other hand, are
often under fire for good reason, after a crisis has exposed flaws that
will take time to fix. It is after these crisis-struck nations fade from the
media glare that they are most likely to emerge as economic
success stories.
An obvious question, though, is, How do we define success? That
definition has changed dramatically since the global financial crisis,
owing to the four Ds: depopulation as labor forces shrink, declining
productivity, the deglobalization of trade and capital flows, and a
global debt burden that is now at a record 320 percent of global
GDP.
As a result, global growth has slowed from 4 percent, its average
annual pace from 1950 through 2008, to less than 3 percent. Given
the staying power of the four Ds, there is little prospect of a return to
pre-2008 growth rates in the foreseeable future. This is a major
downshift, and it means that every class of countries needs to reset
its economic ambitions at a lower, more realistic level. The
benchmark definition of rapid growth should come down from 3
percent to between 1 and 2 percent for developed countries; from 5
percent to between 3 and 4 percent for middle-income countries
such as China; and from 7 to 5 percent for emerging countries such
as India.
Remember, too, that the longer a growth spurt lasts, the less likely
it is to continue, which is why I constantly update where countries
rank on the rules and limit forecasts to five years. To those who thirst
for longer-range forecasts, it is worth recalling that very few countries
ever rise steadily for many decades, and those precious few
generally stay within the sweet spots and out of the red zones
outlined in the rules, one year at a time.
That was the case with the East Asian “miracles”: they grew for
decades because, for the most part, they stayed within the
boundaries set by the rules. They kept pushing reform and grew in a
balanced way, without serious violations of the rules on leadership,
inequality, investment, inflation, credit, currency, or hype. They chose
serious reformers over charming demagogues, generated billionaires
mostly of the good kind, invested more in factories than frivolities,
kept inflation and debts in check, avoided manic run-ups in their
currencies, and didn’t fall for their own hype or lose their zest for
reform.
Eventually, even miracles fade, however. Every nation will go
through periods of expansion and decline, and none are destined to
rise, or fall, forever. In an impermanent world, the only constant is
the turning of the economic and political cycles that govern the
future.

____________
* “Rapid convergence” defined: I looked at growth in 173 nations going back to
1960 and then ranked these nations by how much their per capita GDP rose
compared to per capita GDP in the United States, in each decade. The top quarter
of all these observations were designated as “rapid convergence” cases. In these
cases, per capita GDP rose by at least 2.8 percentage points, as a share of US
per capita GDP, over the decade.
† See the appendix for my list of the top ten fastest-growing economies by decade,
back to 1950.
 ACKNOWLEDGMENTS

For the first two decades of my alternative career as a writer, I was

resigned to author Christopher Hitchens’s advice: “Everybody does
have a book in them, but in most cases that’s where it should stay.” I
was comfortable writing op-eds, but the thought of writing a book
seemed much too daunting. All that changed thanks to Tony
Emerson, who left his job as the editor of Newsweek International in
2010 to help me pen Breakout Nations. He has since become my
partner for all my writing ventures. Once the book-writing bug gets
you, there is no letting the ideas stay inside. The 10 Rules of
Successful Nations, abridged and adapted from The Rise and Fall of
Nations (W. W. Norton, 2016), is my latest project made possible
with Tony’s help.
I am fortunate to have one of the best research teams in the
business, led by Jitania Kandhari. I have interacted with Jitania since
1998 and can only marvel at her boundless energy and enthusiasm
for economic research. I am eternally grateful to her for being there
for me whenever I have needed any guidance or assistance. I’d also
like to thank Steven Quattry, an anchor of the team who may be the
most well-read person I have ever met. His interests go well beyond
the field of economics and politics, and his lateral thinking has
contributed significantly to my understanding of the world. I would
also like to extend my gratitude to former team members Soham
Sengupta for his rigorous research on Rise and Fall, and Karen
Leiton for her extensive work updating that research for 10 Rules. It
is hard to imagine, though, how I could get anything done without
Paul Weiner. He has been the team’s quartermaster and more for
over a dozen years and has been involved in all my endeavors.
Quick-thinking Christine Dsouza plays a similar role in Mumbai.
Ever since I started writing in 1991, my sister, Shumita Deveshwar,
has been there to constantly support me, from storing relevant
newspaper clippings to reviewing all my pieces. Before Tony arrived
on the scene, Shumita would drop everything to edit my articles. I
can’t possibly repay the unconditional support I have received from
her and from my parents, who have indulged my idiosyncrasies from
the get-go.
My close friend and mentor Simran Bhargava has probably had
the biggest influence on my thinking and writings over the years. She
taught me how, in Rudyard Kipling’s words, to keep your head when
all about you are losing theirs, and instilled in me the basic lesson
that if you can’t explain something simply, you haven’t understood it
well enough.
There are few acts as selfless as reading someone else’s book
line by line and offering detailed feedback. I have been incredibly
fortunate to find many people who spent long hours offering
invaluable insights on the original Rise and Fall manuscript. Sincere
thanks to Dorab Sopariwala, one of India’s most respected
researchers; to writer and editor Rahul Sharma; to my friend Sabah
Ashraf; to Pierre Yared of Columbia University; and to my colleagues
Ashutosh Sinha, Paul Psaila, Jim Upton, Swanand Kelkar, and Amay
Hattangadi.
I would like to thank colleague Amy Oldenburg for all her support
in my writing endeavors, and to many colleagues who made
significant contributions on specific chapters and topics: Tim Drinkall,
Eric Carlson, Cristina Piedrahita, Gaite Ali, Pierre Horvilleur, Vishal
Gupta, Jorge Chirino, Samuel Rhee, Munib Madni, May Yu, and
Gary Cheung. Cyril Moulle-Berteaux has long been my intellectual
sparring partner, and I brainstormed with him on many ideas for this
book. He has the best analytical mind of anyone I know.
I am also lucky to work with two of the sharpest editors in
publishing, and would like to thank Stuart Proffitt at Allen Lane and
Brendan Curry at Norton for the time they take promoting my
projects and streamlining my prose. I am also obliged to my agent,
the legendary Andrew Wylie, and his London associate James
Pullen, for supporting this venture.
As both an investor and a writer, I am fortunate to have access to
top-notch research firms and analysts across the world. While I can’t
list everyone I spoke to in connection with this book, I would like to
particularly thank Dan Fineman.
Fareed Zakaria is an inspiration to many people involved with
current affairs, and I have been lucky enough to have him as a close
friend. He has often emphasized to me the role that writing books
plays in “deepening one’s intellectual capital,” and his constant
encouragement has been vital for me to put pen to paper.
When I look back at all the people who have helped me in writing
Rise and Fall, and refining it in the 10 Rules, I am struck by the
generosity of so many people. While grateful to all of them, I am
reminded of the story of two politicians who graduated from the
same college: At their reunion, the first signed the yearbook, “I am
who I am because of this college.” To which the second wrote, “Why
blame the college?” Similarly, the people acknowledged here are not
to blame if my book does not appeal to you in the end.
 APPENDIX

The Fifty-Six Postwar Success Stories

This is the list used for my studies of the impact of population, inflation,
investment, and commodities on GDP growth. It uses a ten-year rolling window to
smooth our yearly noise in real GDP growth, and data for the years between 1960
and 2010.

Country Period Real GDP (Average

Growth)
1 Algeria 1963–1981 7.5
2 Angola 1994–2010 9.5
3 Azerbaijan 1995–2010 7.2
4 Bahrain 1998–2008 6
5 Belarus 1996–2010 7.1
6 Brazil 1961–1981 6.8
7 Cameroon 1969–1987 7
8 Chile 1984–2001 6.3
9 China 1962–2010 9
10 Costa Rica 1961–1979 6.2
11 Dominican Republic 1961–1981 6.6
12 Ecuador 1964–1981 6
13 Egypt 1968–1986 6.1
14 Estonia 1995–2008 6.3
15 Guatemala 1968–1977 6.2
 Country Period Real GDP (Average
Growth)
16 Hong Kong 1961–1995 8.4
17 Hungary 1966–1975 6.3
18 India 1994–2010 7.1
19 Indonesia 1964–1997 6.6
20 Iran 1966–1978 8.9
21 Ireland 1989–2007 6.1
22 Israel 1961–1978 7.4
23 Japan 1961–1977 7.6
24 Kenya 1961–1981 6.3
25 Korea 1961–2000 7.8
26 Lebanon 1976–1987 6.2
27 Malaysia 1961–1985 6.8
28 Mexico 1961–1982 6.5
29 Morocco 1967–1977 6.8
30 Myanmar 1990–2010 8.5
31 Nigeria 1997–2010 6.3
32 Oman 1961–1993 11.8
33 Pakistan 1961–1973 6.2
34 Panama 1961–1975 6.9
35 Paraguay 1967–1985 6.2
36 Portugal 1961–1974 6.7
37 Qatar 1991–2010 10.4
38 Romania 1971–1984 7.8
39 Russia 1999–2008 6.9
40 Saudi Arabia 1969–1982 10.6
41 Singapore 1961–2002 8.2
42 Spain 1961–1974 7.2
43 Sudan 1996–2010 6.4
 Country Period Real GDP (Average
Growth)
44 Syria 1961–1984 7
45 Taiwan 1961–2000 8.4
46 Tanzania 1998–2010 6.3
47 Thailand 1961–1998 7
48 Tunisia 1963–1981 6.5
49 Turkey 1963–1973 5.8
50 Turkmenistan 1995–2010 9.3
51 Uganda 1987–2010 6.8
52 Ukraine 1999–2008 6.2
53 United Arab 1971–1985 12
Emirates
54 Uzbekistan 1999–2010 6.5
55 Vietnam 1984–2010 6.9
56 Yemen 1971–1985 7.4

The Fastest Countries

These are lists of the top ten fastest-growing economies in each decade going
back to the 1950s, cited in chapter 10.

In US Dollars

Growth 1950s 1950s Real GDP Nominal GDP per

Ranking per Capita CAGR* Capita** in 1950
1 Iraq 7.9% —
2 Libya 7.9% —
3 Germany 7.7% —
4 Japan 7.5% —
5 Jamaica 7.0% —
6 Italy 6.7% —
7 Austria 6.4% —
 8 Bulgaria 5.8% —
9 Guinea-Bissau 5.6% —
10 Greece 5.5% —
Growth 1960s 1960s Real GDP Nominal GDP per
Ranking per Capita CAGR* Capita** in 1960
1 Libya 17.4% —
2 Oman 15.1% —
3 Japan 9.5% 479
4 Nigeria 7.6% 93
5 Cyprus 7.4% —
6 Montenegro 7.1% —
7 Greece 7.1% 534
8 Hong Kong 7.0% 429
9 Israel 6.8% 1,229
10 Iran 6.8% 192
Average 493
Growth 1970s 1970s Real GDP Nominal GDP per
Ranking per Capita CAGR* Capita** in 1970
1 Malta 8.7% 828
2 Korea 8.2% 279
3 Iraq 7.9% 331
4 Norway 7.4% 3,306
5 Gabon 7.3% 549
6 Malaysia 6.8% 358
7 Indonesia 6.6% 80
8 Algeria 6.3% 336
9 Mexico 6.1% 690
10 Congo, Repub. of 5.8% 207
Average 696
Growth 1980s 1980s Real GDP Nominal GDP per
Ranking per Capita CAGR* Capita** in 1980
 1 Botswana 10.3% 1181.6
2 Korea 8.4% 1704.47
3 Mongolia 6.8% —
4 Mauritius 6.0% 1171.58
5 Dominica 5.5% 966.68
6 Hong Kong 5.2% 5700.41
7 Barbados 5.0% 3408.91
8 Laos 4.6% —
9 Cyprus 4.6% 4232.02
10 Lesotho 4.1% 322
Average 2,336
Growth 1990s 1990s Real GDP Nominal GDP per
Ranking per Capita CAGR* Capita** in 1990
1 Equatorial Guinea 17.3% 267
2 Bosnia and 11.5% —
Herzegovina
3 Ireland 8.3% 14,048
4 Kuwait 7.3% 8,795
5 Malta 6.7% 7,192
6 Lebanon 6.2% 1,013
7 Korea 6.1% 6,516
8 Luxembourg 6.1% 34,645
9 Norway 6.1% 28,243
10 Poland 5.9% 1,731
Average 11,383
Growth 2000s 2000s Real GDP Nominal GDP per
Ranking per Capita CAGR* Capita** in 2000
1 Azerbaijan 17.4% 655
2 Angola 14.6% 557
3 Equatorial Guinea 12.6% 1,726
 4 Kazakhstan 12.0% 1,229
5 Iraq 11.6% —
6 Mongolia 10.6% 474
7 Jordan 10.5% 1,652
8 Georgia 9.2% 750
9 Myanmar 9.0% 191
10 Iran 8.9% 1,670
Average 989
Growth 2010s 2010s Real GDP Nominal GDP per
Ranking per Capita CAGR* Capita** in 2010
1 Myanmar 6.1% 979
2 Kyrgyz Rep 6.0% 880
3 Laos 5.3% 1,141
4 Ethiopia 4.7% 342
5 Namibia 4.7% 5,325
6 Mongolia 4.0% 2,643
7 Iraq 4.0% 4,657
8 Lithuania 3.6% 11,985
9 Indonesia 3.6% 3,122
10 Cambodia 3.6% 786
Average 3,186

Total Average 3,304

*Source: Maddison.
**Source: World Bank.
 NOTES

On Methodology

For the various GDP growth analyses in the book, I used different
data sources depending on the time period I was looking at. For
example, if the analysis went back only as far as the 1980s, I tended
to use the IMF WEO database, as it is updated twice a year and is
standard in academic research. If the analysis looked farther back in
time, I tended to use the World Bank data set, which has data back
to the 1960s. In examining real per capita growth, which is
necessary for work on convergence, I tended to use the Penn World
data tables, which have data going back to 1950. For some of the
pre-1950 GDP data, I used the Maddison database. Also, throughout
the book, figures for debt as a share of GDP are based on data that
excludes debts in the financial sector, in order to avoid possible
double counting.

Introduction: Impermanence
1. Sujata Rao, “BRIC: Brilliant/Ridiculous Investment Concept,” Reuters,
December 7, 2011.
2. Harry Wu and Conference Board China Center, “China’s Growth and
Productivity Performance Debate Revisited—Accounting for China’s Sources
of Growth with a New Data Set,” Economics Program Working Paper Series
no. 14-01, January 2014.
3. Andrew Tilton, “Still Wading through ‘Great Stagnations,’” Goldman Sachs
Global Investment Research, September 17, 2014.
 4. Philip E. Tetlock and Dan Gardner, Superforecasting: The Art and Science of
Prediction (New York: Crown, 2015).
5. Ned Davis, Ned’s Insights, November 14, 2014.

Chapter 1: Population
1. Charles S. Pearson, On the Cusp: From Population Boom to Bust (New York:
Oxford University Press, 2015).
2. Rick Gladstone, “India Will Be Most Populous Country Sooner Than Thought,”
New York Times, July 29, 2015.
3. Tristin Hopper, “A History of the Baby Bonus: Tories Now Tout Benefits of
Program They Once Axed,” National Post, July 13, 2015.
4. Nick Parr, “The Baby Bonus Failed to Increase Fertility, but We Should Still
Keep It,” The Conversation, December 5, 2011.
5. Andrew Mason, “Demographic Transition and Demographic Dividends in
Developing and Developed Countries,” United Nations, Expert Group Meeting
on Social and Economic Implications of Changing Population Age Structures,
August 31–September 2, 2005.
6. Christian Gonzales et al., “Fair Play: More Equal Laws Boost Female Labor
Force Participation,” International Monetary Fund, February 23, 2015.
7. Simone Wajnam, “Demographic Dynamics of Family and Work in Brazil,”
United Nations, Expert Group Meeting on Changing Population Age Structure
and Sustainable Development, October 13–14, 2016.
8. David Rotman, “How Technology Is Destroying Jobs,” MIT Technology
Review, June 12, 2013.
9. John Markoff, “The Next Wave,” Edge, July 16, 2015.

Chapter 2: Politics
1. Association Thucydide, “Citations sur l’histoire (2/3),”
http://www.thucydide.com.
2. Fareed Zakaria, The Post-American World and the Rise of the Rest (New
York: Norton, 2008).
3. Global Emerging Markets Equity Team, “Tales from the Emerging World: The
Myths of Middle-Class Revolution,” Morgan Stanley Investment Management,
July 16, 2013.
4. “The Quest for Prosperity,” Economist, May 15, 2007.
5. William Easterly, The Tyranny of Experts: Economists, Dictators, and the
Forgotten Rights of the Poor (New York: Basic Books, 2014).

Chapter 3: Inequality
1. See, for example, Robert Peston, “Inequality Is Bad for Growth, Says OECD,”
BBC News, May 21, 2015.
 2. Andrew G. Berg and Jonathan Ostry, “Inequality and Unsustainable Growth:
Two Sides of the Same Coin,” International Monetary Fund, 2011.
3. “Judicial Supervision of Graft Cases Hindering Decision-Making: Arun Jaitley,”
Economic Times, April 27, 2015.
4. Berg and Ostry, “Inequality and Unsustainable Growth.”
5. “Global Wealth Report 2014,” Credit Suisse, 2014.

Chapter 4: State Power

1. Jonathan Chaat’s Compendium of World Wit and Wisdom,
https://worldwitandwisdom.com.
2. Ahmed Feteha, “Welcome to Egypt’s Fake Weddings: Get High, Leave Lots of
Cash,” Bloomberg, June 23, 2015.
3. Jong H. Park, “The East Asian Model of Economic Development and
Developing Countries,” Kennesaw State University, Faculty Publications,
December 2002.
4. Ronald Coase and Ning Wang, How China Became Capitalist (London:
Palgrave Macmillan, 2012).
5. Jun Ma, Audrey Shi, and Shan Lan, “Deregulation and Private Sector
Growth,” Deutsche Bank Research, September 13, 2013.

Chapter 5: Geography
1. Jonathan Anderson, “How to Think about Emerging Markets (Part 2),” EM
Advisors Group, September 4, 2012.
2. Daron Acemoglu, Simon Johnson, and James Robinson, “The Rise of
Europe: Atlantic Trade, Institutional Change, and Economic Growth,”
American Economic Review 95, no. 3 (2005): 546–79.
3. S. Kasahara, “The Flying Geese Paradigm: A Critical Study of Its Application
to East Asian Regional Development,” United Nations Conference on Trade
and Development, Discussion Paper 169, April 2004.
4. Victor Essien, “Regional Trade Agreements in Africa: A Historical and
Bibliographic Account of ECOWAS and CEMAC,” NYU Global, 2006.
5. Moisés Naím, “The Most Important Alliance You’ve Never Heard Of,” Atlantic,
February 17, 2014.
6. Ibid.
7. “The World’s Shifting Center of Economic Gravity,” Economist, June 28, 2012.
8. Peter Zeihan, The Accidental Superpower: The Next Generation of American
Preeminence and the Coming Global Disorder (New York: Twelve, 2014).
9. Sumana Manohar, Hugo Scott-Gall, and Megha Chaturvedi, “Small Dots, Big
Picture: Is Trade Set to Fade?” Goldman Sachs Research, September 24,
2015.
Chapter 6: Investment
1. James Manyika et al., “Manufacturing the Future: The Next Era of Global
Growth and Innovation,” McKinsey Global Institute, November 2012.
2. Louis Gave, “A Better Class of Bubble,” Daily Research Note, Gavekal
Dragonomics, December 1, 2014.
3. Dani Rodrik, “The Perils of Premature Deindustrialization,” Project Syndicate,
2013.
4. Jonathan Anderson, “How to Think about Emerging Markets (Part 2),” EM
Advisors Group, September 4, 2012.
5. Ejaz Ghani, William Robert Kerr, and Alex Segura, “Informal Tradables and
the Employment Growth of Indian Manufacturing,” World Bank Policy
Research Working Paper no. WPS7206, March 2, 2015.
6. See, for example, Ejaz Ghani and Stephen O’Connell, “Can Service Be a
Growth Escalator in Low-Income Countries?” World Bank, Policy Research
Working Paper no. WPS6971, July 1, 2014.
7. Ebrahim Rahbari et al., “Poor Productivity, Poor Data, and Plenty of
Polarisation,” Citi Research, August 12, 2015.
8. See, for example, Tom Burgis, The Looting Machine: Warlords, Oligarchs,
Corporations, Smugglers, and the Theft of Africa’s Wealth (New York:
PublicAffairs, 2015).

Chapter 7: Inflation
1. Helge Berger and Mark Spoerer, “Economic Crises and the European
Revolutions of 1848,” Journal of Economic History 61, no. 2 (June 2001):
293–326.
2. Martin Paldam, “Inflation and Political Instability in Eight Latin American
Countries 1946–83,” Public Choice 52, no. 2 (1987): 143–68.
3. Marc Bellemare, “Rising Food Prices, Food Price Volatility, and Social
Unrest,” American Journal of Agricultural Economics 97, no. 1 (January 2015):
1–21.
4. “World Bank Tackles Food Emergency,” BBC News, April 14, 2008.
5. Neil Irwin, “Of Kiwis and Currencies: How a 2% Inflation Target Became
Global Economic Gospel,” New York Times, December 19, 2014.
6. Jim Reid, Nick Burns, and Seb Barker, “Long-Term Asset Return Study:
Bonds: The Final Bubble Frontier?” Deutsche Bank Markets Research,
September 10, 2014.
7. Irving Fisher, “The Debt Deflation Theory of Great Depression,” St. Louis
Federal Reserve, n.d.
8. David Hackett Fischer, The Great Wave: Price Revolutions and the Rhythm of
History (New York: Oxford University Press, 1996).
9. Claudio Borio et al., “The Costs of Deflations: A Historical Perspective,” Bank
for International Settlements, March 18, 2015.
 10. Òscar Jordà, Moritz Schularick, and Alan Taylor, “Leveraged Bubbles,”
National Bureau of Economic Research, Working Paper no. 21486, August
2015.
11. “Toward Operationalizing Macroprudential Policies: When to Act?” in Global
Financial Stability Report, chap. 3, International Monetary Fund, September
2011.

Chapter 8: Currency
1. Ed Lowther, “A Short History of the Pound,” BBC News, February 14, 2014.
2. Caroline Freund, “Current Account Adjustment in Industrialized Countries,”
Federal Reserve System, International Finance Discussion Papers no. 692,
December 2000.
3. Rudi Dornbusch, interview by Frontline, PBS, 1995.
4. Kristin Forbes, “Financial ‘Deglobalization’?: Capital Flows, Banks, and the
Beatles,” Bank of England, 2014.
5. Robert E. Lucas Jr., “Why Doesn’t Capital Flow from Rich to Poor Countries?”
American Economic Review 80, no. 2 (May 1990): 92–96.
6. Paul Davidson, “IMF Chief Says Global Growth Still Too Weak,” USA Today,
April 2, 2014.
7. Oliver Harvey and Robin Winkler, “Dark Matter: The Hidden Capital Flows
That Drive G10 Exchange Rates,” Deutsche Bank Markets Research, March
6, 2015.

Chapter 9: Debt
1. Claudio Borio and Mathias Drehmann, “Assessing the Risk of Banking Crises
—Revisited,” Bank for International Settlements Quarterly Review, March 2,
2009.
2. “Toward Operationalizing Macroprudential Policies: When to Act?” in Global
Financial Stability Report, chap. 3, International Monetary Fund, September
2011.
3. The definitive description is in the updated edition of Charles Kindleberger
and Robert Z. Aliber, Manias, Panics, and Crashes: A History of Financial
Crises, 6th ed. (London: Palgrave Macmillan, 2011).
4. Alan M. Taylor, “The Great Leveraging: Five Facts and Five Lessons for
Policymakers.” Bank for International Settlements, July 2012.
5. Warren Buffett, “Berkshire Hathaway Annual Letter from the Chairman,”
February 2003, https://berkshirehathaway.com.
6. See, for example, Abdul Abiad, Giovanni Dell’Arrica, and Bin Li, “Creditless
Recoveries,” International Monetary Fund, 2011.
7. Tim Congdon, “The Debt Threat,” Economic Affairs 9, no. 2 (January 1989):
42–44.
8. Michael Goldstein, Laura Dix, and Alfredo Pinel, “Post Crisis Blues: The
Second Half Improves,” Empirical Research Partners, November 2011.

Chapter 10: Hype

1. Barry Hillenbrand, “America in the Mind of Japan,” Time, February 10, 1992.
2. John F. Copper, Historical Dictionary of Taiwan (Republic of China), 4th ed.
(Lanham, MD: Rowman and Littlefield, 2015).
3. Young-lob Chung, South Korea in the Fast Lane: Economic Development and
Capital Formation (New York: Oxford University Press, 2007).
4. Lant Pritchett and Lawrence Summers, “Asiaphoria Meets Regression to the
Mean,” National Bureau of Economic Research, Working Paper no. 20573,
October 2014.
5. Commission on Growth and Development, “The Growth Report: Strategies for
Sustained Growth and Inclusive Development,” World Bank, 2008.
6. “Russian President Vladimir Putin Tops Forbes’ 2015 Ranking of the World’s
Most Powerful People,” Forbes, November 4, 2015.
7. Fernando Gabril Im and David Rosenblatt, “Middle Income Traps a
Conceptual and Empirical Survey,” World Bank Operations and Strategy Unit,
Working Paper no. 6594, September 2013.
8. Pritchett and Summers, “Asiaphoria Meets Regression.”
9. Elie Wiesel, US News and World Report, October 27, 1986, cited in “Elie
Wiesel,” Wikiquote.
 INDEX

Page numbers listed correspond to the print edition of this book. You
can use your device’s search function to locate particular terms in
the text.

Note: Page numbers in italics indicate charts and tables.

Abe, Shinzo, 25–26, 27

Acemoglu, Daron, 87
Afghanistan, 20, 190
Africa, 92. See also specific countries
inequality in, 63
intraregional trade and, 90
investment and, 115, 119
“lost decades” in, 48
population growth and, 19
populists in, 63
“renaissance” in, 115
trade and, 92, 100
trade routes in, 92
agriculture sector, 103, 187. See also food prices
al-Assad, Hafez, 47
Alibaba, 59
Amazon, 109
“anchoring bias,” 16–17
Andean region, 70, 94, 100. See also specific countries
Anderson, Jonathan, 85–86, 105
Anderson, Thomas, 23
Angola, 191
anti-immigrant backlash, 25
Apple, 58, 74
Aquino, Benigno “Noynoy,” 41, 192
Arab Spring, 20, 126
Argentina, 37
business-friendly conservative government in, 41
commodities and, 116
crisis of 2002, 145
currency crises and, 155
development traps and, 189
foreign debt and, 155
goverment spending and, 69, 70
hype and, 180–81
inflation and, 126
intraregional trade and, 90
political unrest in, 39, 41
populists in, 51
second cities in, 94
technocrats in, 43
artificial intelligence, 29–31. See also robots
Asia. See also specific regions and countries
currency crises and, 35, 151–53, 152
debtophobia in, 174–75
dismissal of, 180–81
economic growth in, 50
hype and, 182–83
recovery from crisis of 1997–98, 151, 152
trade and, 99
Asian Development Bank (ADB), 2
Asian financial crisis of 1997–98, 72, 134, 148, 151, 152, 158, 171,
179
Asian “miracle” economies, 45, 85, 86. See also specific countries
autocracies in, 45, 72
debt and, 168
fading of, 198
falling back into poverty, 190
 government spending and, 69–70
hype and, 178–79
inherited billionaire wealth in, 62
investment and, 117
reform/reformers in, 48
slowdowns in, 164, 168
ten rules and, 197–98
welfare systems in, 83
“Asiaphoria,” 183
asset price bubbles, inflation and, 133–36
Australia
baby bonuses and, 23
government spending and, 67
population growth and, 25
second cities in, 94
Austria, 67
authoritarianism. See autocracies
autocracies, 43, 44–47
advantages of, 44
disadvantages of, 45–46
economic growth and, 44–45, 46
economic slumps under, 45–47, 46
technocrats and, 42
automation, 29–31. See also robots

“baby bonuses,” 17, 22–24

baby boom, 16
balance, 13–14
balance of payments, 149–50
Bangladesh
income traps and, 189
intraregional trade and, 89–90
manufacturing sector in, 108
population growth and, 18
as rising manufacturing power, 91
trade and, 99
Bank Danamon, 172, 173
Bank for International Settlements (BIS), 132–33, 140, 159
Bank Mandiri, 172, 173
Bank of China, 166
banks. See also central banks; state banks; specific banks
bank loans, 147
bank regulators, 165
debt crises and, 171–73
deglobalization of banking and, 147–48, 156, 197
emerging nations and, 172
loan-to-deposit ratio and, 172–73
politics and, 76–77
“Beijing Consensus,” 74
Belarus, 20
Belgium
democracy in, 47
government spending and, 67
Bell, Bernard, 43
Bellemare, Marc, 126
Berg, Andrew, 50
“Berkeley mafia,” 43
Berkshire Hathaway, 58
billionaire index, 52–53, 52, 54, 64
billionaires
bad, 53, 54, 56–60, 63, 64
billionaire index, 52–53, 52, 54
corruption and, 53, 54
family empires and, 60–62
good, 53, 56–60, 194
good versus bad, 56–60
rise of billionaire rule, 62–64
share of wealth and, 52, 53–56
tracking wealth of, 51–64
vulnerability to political attack, 53–54, 59–60
binges, 164–69. See also specific kinds of binges
bad, 113–15, 117–19
blahs as opposite of, 119–20
good, 117–19
 when good go bad, 117–19
birth rates, falling, 22–23. See also demographic decline
black economy, 71–72
BNDES, 77
Bolivia, intraregional trade and, 90
Bolsonaro, Jair, 87
bonds, 7, 136
booms, 5. See also specific kinds of booms
Botswana, 186
Brash, Don, 128
Brazil, 2–3, 146, 151, 174
business-friendly conservative government in, 41
closed economy in, 86–87
commodities and, 115, 186
crop yields in, 188
currency crisis in, 35
debt in, 176
foreign debt and, 154
GDP and, 3, 124
goverment spending and, 68, 70
hype and, 184–85, 192
inflation and, 121, 124, 126, 128
inflation targets and, 128
intraregional trade and, 90
investment and, 102–3, 119
political unrest in, 39
population growth and, 18, 22
populists in, 41
private economy and, 81
productivity decline and, 76
protests in, 39, 41
reform/reformers in, 35, 37
second cities in, 96
state banks and, 77
state companies in, 81
trade and, 86–87
2014 recession in, 77
 welfare system in, 73
working women in, 29
Brazilian Institute of Planning and Taxation, 69
Brazilian real, 138, 151
Brexit, 95
BRICs, 2–3
Britain, 92, 129. See also United Kingdom
currency devaluation and, 154
deglobalization of banking and, 147
inflation targets and, 128
inherited billionaire wealth in, 60, 61
population growth and, 22
productivity growth in, 24
reform/reformers in, 34, 35, 47
“reserve currency status” and, 140
rise of billionaire rule in, 62
second cities in, 94–95
stale leaders in, 38
trade and, 87
Buffett, Warren, 58, 165
Bulgaria, 61, 191
Burma, 180, 181. See also Myanmar
Burundi, 90
business cycles, 4
busts, upside of after, 170–73

Cambodia, 85, 89, 91

Cameroon, 191
Canada
baby bonuses and, 23
inflation targets and, 128
population growth and, 22, 25
productivity growth in, 24
second cities in, 94
working women in, 27
capital, lending of, 81
capital flight, locals and, 148–50
capital flows, 147, 197
flashing a green light, 151–54
how to read, 141–43
capitalism, 55
creative destruction and, 64
crony capitalism, 54
reform and, 47–48
state capitalism, 73–75
Cardoso, Fernando Henrique, 37
Carlyle, Thomas, 183
Castro, Fidel, 45, 50
Central America, 86, 92. See also specific countries
Central Asia, 78. See also specific countries
central banks, 121, 127–28, 130, 133, 136, 195. See also state
banks
currency crises and, 153–54
currency devaluation and, 154
forced to raise interest rates, 163
forecasters at, 135–36
inflation and, 121, 127–29
Chanel, 62
change, rhythms of, 2
Chávez, Hugo, 37, 40–41, 51
Chiang Kai-shek, 44
Chile, 174
business-friendly conservative government in, 41
currency crises and, 155
economic recovery in, 171
foreign debt and, 155
government spending and, 70
inequality in, 54
inflation targets and, 128
intraregional trade and, 90
population growth and, 18
protests in, 41
state banks and, 129
tech booms and, 111–12
 working women in, 29
China, 2–3, 4, 38, 86, 87
autocracy in, 44, 45, 72–75
billionaire class in, 58–59, 62
binges in, 164–69
birth control policies in, 16, 21, 22
capital flows and, 147
closed economy in, 86
“collateralized lending” in, 166
credit binge in, 164–69
crop yields in, 188
currency devaluation and, 155–56
currency devaluation in, 144
debt and, 140, 164–69, 170, 174
deflation in, 133
dependency ratios and, 26–27
dismissal of, 180
easing of grip on economy, 73
economic data in, 6
economic zones in, 98
exports and, 108, 155–56, 164
on fastest-growing economies list, 190, 191
forecasts and, 182–85
GDP growth in, 3, 5, 182–85
geographic destiny of, 91–93
geography and, 85
hype and, 184–85
IMF forecasts and, 182–83
inequality in, 53
inflation and, 125, 127
inherited billionaire wealth in, 60–61
intraregional trade and, 89
investment and, 105, 117–19
long boom in, 44
manufacturing sector and, 108
misreading lessons of, 72–75
population growth and, 17, 19, 20–21, 22, 31
 private companies in, 73–74
productivity decline and, 76
protests in, 38
real estate binges in, 113, 118, 166
reform/reformers in, 34, 35
resiliency of, 169
rise of, 4, 181
robots in, 31
second cities in, 97–99
“shadow banks” in, 165
slowdowns in, 168–69
stale leaders in, 38
state banks and, 77
state capitalism and, 73–74
state companies in, 79
stock market in, 166–67
tech booms and, 110–11
technocrats in, 43–44
tech sector in, 169
trade and, 87, 91–93, 99, 100
trade routes and, 92–93
as world’s “center of economic gravity,” 91, 100
“zombie companies” in, 165
Chinese renminbi, 144, 155–56
circle of life, 47–48
democracies and, 47–48
inflation and, 125–27
cities
first, 95
industries concentrated in 50 global, 99
second, 93–99
Citigroup, 128
Clemenceau, Georges, 66–67
“collateralized lending,” 166
Colombia, 116
government spending and, 70
intraregional trade and, 90
 populists in, 40–41
second cities in, 94
trade and, 99–100
working women in, 29
commodities, 104, 186–87, 194
binges in, 113–15, 114, 120
commodity markets, 7
commodity economies, 86, 115–16
erratic path of, 186
hype and, 185–87
companies
politics and, 78–79
private, 79–81
state meddling in, 79–81
state-owned, 78–79
competition, manufacturing sector and, 108
Congdon, Tim, 174
Congress Party (India), 42, 126
conspiracy theories, 148
consumer price inflation, 120–21, 124, 127–33. See also inflation
financial management and, 127
focus on, 123, 133
inflation and, 125–26
weapons against, 127–29
consumption, 101–2
copper, 7
corporate bonds, 175–76
corruption, 9, 36, 49, 53, 54, 57, 71, 194. See also crony capitalism
Costello, Peter, 23
creative destruction, 64
credit. See also debt
availability of, 130
credit crises. See debt crises
credit cycle, 176–77
credit market products, 7, 175–76
credit markets, 7
Credit Suisse, 62
Crimea, Russian invasion of, 187
crony capitalism, 54, 179
Cuba, 45, 50
currency, 137–57. See also currency crises; inflation
accurately valuing, 138
anatomy of a currency contagion, 145–46
anatomy of a currency crisis, 143–45
deglobalization and, 147–48
devaluation of, 154–56, 157
feel of, 138–39, 156–57, 195
fixed exchange rates, 152–54
manipulation of, 139, 195–96
printing of, 130, 154
“reserve currency status,” 140
currency crises
anatomy of, 143–45
blame for, 148–49
currency contagion, 145–46
emerging nations and, 145–46, 149, 150–51
locals and, 148–51, 156–57, 195
signs of passing, 151–52, 157
current account deficits, 142–43, 144, 147–48, 153, 156, 195
current accounts, 141–43, 144, 151–52, 156, 195
cycles, 4. See also circle of life
Czech Republic
economic recovery in, 171
as rising manufacturing power, 85, 86
state banks and, 129
technocrats in, 42

debt, 158–77. See also debt mania; debtophobia

Asian “miracle” economies and, 168
China and, 164–69
debt binges, 159–60, 162–63, 164–70, 168
defaulting on, 172
emerging nations and, 168, 175–76
financial crises and, 158, 159, 160, 163, 171–73, 177, 196
 foreign, 154–55
forgiveness of, 172
GDP and, 159, 160–61, 162, 168, 169, 170–71, 173–74, 175–77,
197
government debt, 163–64
innovation and, 161–62
pace of increase in, 159–62, 168–69, 174, 175, 176–77
paying off, 175–77
point of no return, 160–61
private-sector, 158–60, 161–62, 176, 196
public, 75–76
real estate and, 104, 120
recessions and, 135, 169–73
size of, 176
spending and, 75–76
the state and, 163–64
ten biggest binges of, 168
debt crises, 158, 159, 160, 163, 171–73, 177, 196
debt mania, 159–60, 162, 163, 164–69, 176, 177, 196
debtophobia, 160, 173–75, 176, 177, 196
deflation, 121–22
deflationary spirals, 131
GDP growth and, 131, 132–33
good and bad, 129–33
recessions and, 134–36
de Gaulle, Charles, 34
deglobalization, 147–48, 156, 197
demagogues, 40–41, 50–51, 63
demand shocks, 124
democracies, 44–47, 193
circle of life and, 47–48
economic growth and, 47
demographic decline, 15–31, 197
demographic dividend, uncertain, 19–20
Deng Xiaoping, 34, 38, 41, 43–44, 45, 91
Denmark, 67, 79
dependency ratios, 26–27
depopulation, 197. See also demographic decline
Deutsche Bank, 130
developed countries. See specific countries
development traps, 189
dictatorships. See autocracies
digital manufacturing techniques, 4–5
disaster scenarios, rosy, 187–88
Doha Round, 88
Dolce & Gabbana, 61
dollar, importance of, 139–41
Dornbusch, Rudiger, 145
dot-com crash of 2000–2001, 134. See also tech booms
downward mobility, 189–90

East African Community, 90

East Asia. See also specific countries
economic miracle in, 27
government spending and, 69–70
intraregional trade and, 89
manufacturing sector in, 108
small government in, 79
welfare systems in, 72–73
Easterly, William, 45
eastern Europe, 4, 85, 188. See also specific countries
East Germany, technocrats in, 42
Echeverría Álvarez, Luis, 50
economic data, forecasts and, 5–7. See also forecasts; specific
kinds of data
economic growth
autocracies and, 44–45
definition of rapid, 197
democracies and, 47
difficulty of sustaining fast, 3–4
of emerging nations, 2–3
formula for calculating, 101
investment and, 103–4, 119, 195
lack of persistence and, 190, 192
 manufacturing sector and, 103–4, 120, 195
resetting ambitions, 197
slowing of, 197
trends in government attempts to manage, 65–81
economics, “optimism bias” in, 183
economic trends, impermanence of, 2
economies, open versus closed, 86–87
Economist, 182, 183
Big Mac index, 138–39
ECOWAS, 90
Egypt, 87
black economy in, 71–72
political unrest in, 39
protests in, 39
small government in, 71
state companies in, 78
elections, 45. See also democracies
electricity consumption data, manipulation of, 6
emerging nations, 110, 127. See also specific countries
banking and, 172
currency contagion and, 145–46
currency crises and, 145–46, 149, 150–51
currency depreciation and, 154
debt and, 168, 175–76
economic data from, 5–6
falling back into poverty, 189–90
fastest-growing economies and, 190–91
financial crisis of 2008 and, 75–76, 147
foreign debt and, 154
GDP growth rates of, 2–3, 101–2
government spending and, 68, 69
growing middle class in, 38–39
hype and, 2–3, 180–81, 184, 196
incentive to diversify investments and, 148
inequality in, 54–55
inflation and, 121, 126, 128–29
inflation targets and, 128–29
 inherited billionaire wealth in, 52, 60–61
investment in, 101–2
laws limiting opportunities for women in, 29
manufacturing sector and, 108–9
myth of “mass convergence” and, 184–85
population growth and, 16, 17
protests in, 38–39
public debt and, 75–76
relapses in, 32–33
second cities in, 93–94, 95–96
service sector in, 106–7
spending and, 68–70
stale leaders in, 38–39
state banks and, 76–77
state capitalism and, 73–75
stock markets in, 74
trade and, 85–86
welfare systems in, 72–73
Emerson, Ralph Waldo, 37
Empirical Research, 174–75
energy subsidies, 78
England, 132. See also Britain; United Kingdom
English sterling, 138
Erdoğan, Recep Tayyip, 33, 35, 36, 38, 39
Eritrea, 184
Ethiopia, autocracy in, 46
euro crisis of 2010, 42
Europe. See also specific countries
average income in, 87
consumer markets in, 86
currency crises and, 151–53, 152
debt in, 140
deflation and, 131
dependency ratios and, 27
financial crisis of 2008 and, 164–65
good luck and good policy in, 87
government spending and, 67, 68
 inflation and, 126
“internal devaluation” in, 153
intraregional trade and, 89
investment and, 118
private economy and, 79
real estate binges in, 118
reform/reformers in, 47
Revolutions of 1848 and, 126
rise of, 87
success of, 87–88
trade routes and, 92
European Commission, 20, 25, 42
European Union, 90, 95. See also Eurozone; specific countries
Eurozone, 82, 128, 154
exports, 85–87, 99–100, 154, 164. See also trade
currency devaluation and, 155–56
financial crisis of 2008 and, 107–8
manufacturing sector and, 105, 108–9
service sector and, 106–7

Facebook, 58
family empires, 60–62
farmers, 187–88. See also agriculture sector
fastest-growing economies, emerging nations and, 190–91
Federal Reserve Bank, 55, 140, 181, 183
financial assets, 133–36, 175–76
financial crises. See also currency crises; recessions; specific crises
debt and, 158, 160, 163, 177, 196
four Ds, 197
hype and, 179
private sector and, 161–64
warnings of, 195
financial crisis of 2008, 1, 3, 5, 17, 51, 73–74, 88, 121, 134, 139,
154, 159, 164, 176, 183, 196–97
debtophobia after, 173–74
emerging nations and, 75–76, 147
exporting and, 107–8
 fears of deflation and, 131
financial markets, inflation and, 123
Finland, government spending and, 67
first cities, 95
Fischer, David Hackett, 131
Fischer, Jan, 42
Fisher, Irving, 131
fixed exchange rates, 152–54
“flying geese” model of development, 89
food prices, 125–27, 187–88
Forbes
billionaires list, 52–53, 52, 54
data on “self-made” and “inherited” fortunes, 60–61
Ford, Martin, 29–30
forecasts, 182–83, 192–93, 197
economic data and, 5–7
by markets, 5–7
of recessions, 6
refocusing on practical time frame, 4
reliability of, 5
timing and, 5
foreign debt, 154–55
France
baby bonuses and, 23
billionaire class in, 57
democracy in, 47
dependency ratios and, 27
fertility rates in, 23
government spending and, 66–67
“great stagnations” in, 3
inherited billionaire wealth in, 60, 61–62
population growth and, 22
“reserve currency status” and, 140
second cities in, 95
Freund, Caroline, 141–42
futurists, 5
Gates, Bill, 58, 61
Gave, Louis, 104
Gazprom, 79
GDP (gross domestic product), 186–87. See also economic growth
current account and, 141–43, 195
debt and, 159, 160–62, 168–71, 173–77, 197
deflation and, 131–33
formula for calculating, 101–2
growth and, 3, 124–25, 132–33, 182, 190
investment and, 101–5, 117, 119–20, 124–25, 194
“rapid convergence” and, 186n
“super rapid growth,” 190
Genghis Khan, 4
geography, 84–100, 194
Georgia, population growth and, 20
Germany
anti-immigrant backlash in, 25
companies in, 86
dependency ratios and, 27
exports and, 156
fertility rates in, 23
government spending and, 67
“great stagnations” in, 3
immigration and, 25
inherited billionaire wealth in, 60, 61
Mittelstand companies in, 61
population growth and, 17, 22, 25
private economy and, 79
productivity growth in, 24
reform/reformers in, 47
robots in, 31
second cities in, 94
trade and, 100
Ghana, autocracy in, 45
Gini coefficient, 51
Global Financial Database, 129
globalization, 4, 127, 133, 135–36
goal, 193–98
Goldman Sachs, 3
gold standard, end of, 130
goods, availability of, 130
Google, 58, 109
governments
government debt, 163–64
government spending, 65–68, 68, 69, 70, 82
misusing state companies, 66, 78–79
restraining growth in private companies, 66, 79–81
right-sized, 65–83 193–94
too small, 71–72
government spending, 68, 70
emerging nations and, 68, 69
problematic, 66–68
productivity of, 65–68
as share of GDP, 65–68
trends in, 65–66, 82
Great Depression, 135, 174
Great Recession, 1, 183. See also financial crisis of 2008
“great stagnations,” 3
Greece, 151–53
debt and, 176
development traps and, 189
financial crisis in, 82, 189
government spending and, 67
“internal devaluation” in, 153
technocrats in, 42
group think, hype and, 184–85

H&M, 58
Haiti, 190
Henry I, 138
Hindu nationalist party, 127
Holland. See Netherlands
Hong Kong, 130, 131
hot economies
 hype and, 188–89
inflation and, 124–25
“hot money,” 147
housing bubbles, 113, 123, 134–36. See also real estate
Hungary
economic recovery in, 171
on fastest-growing economies list, 191
as rising manufacturing power, 85
trade routes and, 92
Hussein, Saddam, 46
hydrocarbons, 9. See also oil
hype, 2–3, 178–93, 196
commodity economies and, 185–87
cover curse and, 181–82
emerging nations and, 180–81
group think and, 184–85
history of, 180–81
income traps and, 188–90
linear thinking and, 182–83
rosy disaster scenarios and, 187–88

IKEA, 58
immigration, 17, 24–26, 193
impermanence, 1–14, 198
imports, 147–48, 155
income inequality, 51. See also inequality
income traps, 188–89
incremental capital output ration (ICOR), 76
India, 2–3, 4, 87
closed economy in, 86
corruption in, 54
currency contagion and, 146
dismissal of, 180
economic data in, 5–6
economic zones in, 98
fertility rates in, 22–23
GDP growth in, 3
 “great stagnations” in, 3–4
hype and, 184–85
IMF forecasts and, 182
inequality in, 53–54, 55
inflation and, 126–27
intraregional trade and, 89–90
investment and, 106, 119
IT services in, 106–7
loose respect for laws in, 82
manufacturing sector in, 104, 106
political unrest in, 39
population growth and, 19, 20
productivity decline and, 76
rapid growth in, 5
rise of, 181
rise of billionaire rule in, 62
second cities in, 97–99
service sector in, 106–7
tech booms and, 109, 110
technocrats in, 42
trade and, 87
welfare system in, 73, 83
indifference, 190–93
Indochina, 89. See also Southeast Asia; specific countries
Indonesia, 151
bank restructuring agency in, 171–72
closed economy in, 86
commodities and, 115, 186
currency contagion and, 146
current account deficits and, 153
debt crisis and economic recovery in, 171–73
debt in, 168, 171–73, 176
on fastest-growing economies list, 190
government spending and, 69
hype and, 178–79
inequality in, 64
land acquisition laws in, 81
 reform/reformers in, 33, 64
slowdowns in, 168
small government in, 72
technocrats in, 43
Indonesian rupiah, 171
inequality, 49–64
economic impact of, 51
populism and, 50–51, 53–54, 59–60, 63–64
reform and, 63–64
tracking, 51–64
inflation, 121–36, 195
asset prices and, 133–36
circle of life and, 125–27
consumer price inflation, 127–33
800-year history of, 130
emerging nations and, 126, 128–29
financial assets and, 133–36
high, 124–25
hot economies and, 124–25
inflation targets, 128–29
new inflation threat, 123
protests and, 125–27
social unrest and, 125–27
state banks and, 121, 127–29
weapons against, 127–29
infrastructure, 120
innovation, 161–62
Institutional Revolutionary Party (Mexico), 42
interest rates, 121, 123, 136, 163
“internal devaluation,” 153
International Center for Monetary and Banking Studies, 134
International Labour Organization (ILO), 79
International Monetary Fund (IMF), 34, 50, 78, 145, 159, 182–84
internet, 4–5
intraregional trade, 88–89
investment, 101–20, 194
bad binges, 103–4, 112–15
 economic growth and, 103–4, 119
in emerging nations, 101–4
GDP and, 101–5, 117, 119–20, 124–25, 194
good binges, 103–4, 112–13, 117–19
good versus bad binges, 103–4
ideal level of, 116–17
infrastructure left behind by, 110
intelligence and, 6
point of excess and, 116–17
service sector and, 106–7
in strong supply networks, 195
virtuous cycle of, 104–6
Iran
autocracy in, 45, 46
closed economy in, 86
income traps and, 189
population growth and, 22
state companies in, 78
Iraq
autocracy in, 46
falling back into poverty, 190
population growth and, 19–20
state companies in, 78
Ireland, 18, 153, 189
Israel, 87, 110, 111, 190
Italy, 134
billionaire class in, 57
dependency ratios and, 27
government spending and, 67
inherited billionaire wealth in, 61–62
“internal devaluation” in, 153
rise of billionaire rule in, 62
second cities in, 94
technocrats in, 42
IT services, 106–7

Jaitley, Arun, 54
Jamaica, 184, 191
Japan, 86, 134
“bad egalitarianism” in, 56
currency devaluation and, 154
debt and, 140, 160, 168, 170
deflation in, 121, 130–31, 132, 133, 134, 135
exports and, 85, 156
housing bubble in, 130–31
hype and, 178–79
immigration and, 25–26
income traps and, 189
inequality in, 56
inherited billionaire wealth in, 60
intraregional trade and, 89
manufacturing sector in, 107
meltdown in 1990, 134, 135
population growth and, 18, 22
post–World War II miracle in, 4
private companies in, 88
productivity growth in, 24
rapid growth in, 5
real estate binges in, 113
reform/reformers in, 47, 48
robots in, 31
second cities in, 97
slowdowns in, 164, 168, 170
small government in, 79
stock market bubble in, 130–31
“womenomics” in, 27
working women in, 27–28
Johnson, Simon, 87
Jokowi government (Indonesia), 82
Jospin, Lionel, 23
journalism
backward-looking nature of, 181–82
linear thinking and, 182–84
negativity and, 190–93
Juncker, Jean-Claude, 42

Kahneman, Daniel, 31
Katz, Lawrence, 30
Kaunda, Kenneth, 63
Kazakhstan, 191
Kenya, 4, 18, 90, 111
Keynes, John Maynard, 75
Kim (North Korean political dynasty), 45
Kim Dae-jung, 35–36, 127
Kim Jung-ju, 62
Kirchner, Néstor, 37, 51
Kohler, Hans-Peter, 23
Kremlin, 32, 59, 80
Kudrin, Alexei, 36

labor, 16–17, 18, 21, 28–29, 31, 81, 193

land, 81
land acquisition laws, 63–64, 81
Laos, 89
Latin America, 134. See also specific countries
currency crises and, 155
economic growth in, 50
financial crises of 1980s, 163–64
foreign debt and, 155
government spending and, 70
hype and, 180–81
inequality in, 50
inflation and, 125–26
“lost decades” in, 48
populists in, 50–51
trade and, 99
working women in, 29
laws
land acquisition laws, 63–64, 81
scrapping outdated, 29
leaders. See also specific leaders
fresh, 34–37
stale, 37–40
Lee Kuan Yew, 37
Lehman Brothers, 164
life span, 26–27
Li Keqiang, 166
linear thinking, limits of, 182–83
loan-to-deposit ratio, 172–73
locals
capital flight and, 148–50
currency crises and, 148–51, 156–57, 195
location, making the most of, 84–100
Lucas, Robert, 148
Lula da Silva, Luiz Inácio, 35, 37, 39, 151
LVMH, 62

Ma, Jack, 59
“machine learning,” 30
Maddison database, 15
Malaysia, 148
autocracy in, 118–19
commodities and, 186
current account deficits and, 142, 153
debt and, 160, 168, 176
hype and, 178–79
inequality in, 54
investment and, 117, 118–19
population growth and, 18
reform/reformers in, 33
as rising manufacturing power, 86
slowdowns in, 168
Malta, 186
Malthus, Thomas, 187–88
Malthusian disaster scenario, 187–88
manufacturing sector, 103, 106, 107, 115
as “automatic escalator,” 105
 binges in, 120
competition and, 108
economic growth and, 103–4, 120
emerging nations and, 108–9
exporting and, 105
exports and, 108
in larger economies, 104
productivity growth and, 105, 194
protectionism and, 108–9
Marcos, Ferdinand, 2, 181
Marcos, Imelda, 192
markets. forecasting by, 5–7. See also specific kinds of markets
Marx, Karl, 47
Mason, Andrew, 27
“mass convergence,” myth of, 184, 185
Mayhew, Nicholas, 138
McKinsey & Company, 31, 91
McKinsey Global Institute, 104
the media, negativity and, 190–93. See also journalism
Menem, Carlos, 43
Mercosur, 90
Mexico
billionaire class in, 59–60
currency crises and, 155
currency crisis in, 35
debtophobia in, 174
on fastest-growing economies list, 190, 191
fertility rates in, 22–23
foreign debt and, 155
government spending and, 70
inequality in, 64
inflation and, 126
investment in, 102–3
Mexican peso crisis, 145
peso crisis in, 145
populists in, 50
reform in, 64
 as rising manufacturing power, 86
second cities in, 96
small government in, 71
tech booms and, 111
technocrats in, 42
“tequila crisis” of 1994, 149, 158, 174
trade and, 99, 100
working women in, 29
Microsoft, 58
Middle East, 78. See also specific countries
middle-income trap, 188–89
migrants. See immigration
“miracles,” post–World War II, 3–4. See also Asian “miracle”
economies
Modi, Narendra, 126–27
Mohamad, Mahathir, 33, 118–19, 148
money flows. See capital flows
monopolies, 45, 58, 59
Monterrey Institute of Technology, 111
Monti, Mario, 42
Morocco, 92, 100
mortgage finance, 134, 175–76
Mugabe, Robert, 45, 63
Myanmar, 92

Naím, Moisés, 90
National Bureau of Economic Research (US), 6
National People’s Congress (China), 59
natural resources. See commodities; specific commodities
Ned Davis Research, 6
Nehru, Vikram, 43
Netherlands
deflation in, 133
“reserve currency status” and, 140
trade and, 87
“tulip mania” in, 159
working women in, 27
New Silk Road, 92–93
Newsweek magazine, 181
New Zealand, 128
Nicaragua, 50–51
Niger, 184
Nigeria, 116
autocracy in, 45, 46
closed economy in, 86
on fastest-growing economies list, 190
GDP in, 5–6
government spending and, 69
intraregional trade and, 90
investment and, 102–3, 115, 119
investment in, 102–3
population growth and, 17, 18
small government in, 71
North Africa, 78, 92. See also specific countries
North America, 89. See also specific countries
North Korea
autocracy in, 45
closed economy in, 86
government spending and, 66
populists in, 50
Norway, 47, 79, 142
Nyerere, Julius, 63

oil, 9, 104, 114, 115–16

Oman, 114, 186
OPEC (Organization of the Petroleum Exporting Countries), 34. See
also oil
“optimism bias,” 183
Oracle, 58
Organisation for Co-operation and Development (OECD), 27
Ortega, Daniel, 50–51
Ostry, Jonathan, 50
Oxfam, 188
Pakistan
black economy in, 71
intraregional trade and, 89–90
IT services in, 107
population growth and, 18
populists in, 50
service sector in, 107
small government in, 71
trade routes and, 92
Paldam, Martin, 126
Papademos, Lucas, 42
Paraguay, 90
parental leave policies, 27
Penn Table database, 184
People’s Daily, 167
Perón, Juan, 180
Peru, 116
business-friendly conservative government in, 41
closed economy in, 86
foreign debt and, 154
government spending and, 70
intraregional trade and, 90
populists in, 50
protests in, 41
second cities in, 94
working women in, 29
PetroChina, 74
Philippines, 2
cities in, 99
current account deficit and, 142
debt and, 176
dismissal of, 180
faltering of, 181
income traps and, 189
media pessimism and, 192
population growth and, 17, 19
populists in, 41
 second cities in, 96
service sector in, 107
tech booms and, 109
physical goods, 84
Poland
on fastest-growing economies list, 190
government spending and, 69
inequality in, 56
private economy and, 79, 80–81
as rising manufacturing power, 85, 86
state banks and, 129
state companies in, 79, 80–81
trade routes and, 92
politics, 32–48
banks and, 76–77
companies and, 78–79
cycles of, 4
population(s), 15–31. See also demographic decline
impact of population growth on economy, 15–17
“replacement rate,” 22
shrinking, 20–22, 21
populism/populists, 40–41, 50–51, 53–54, 59–60, 63–64
Portugal
current account deficit and, 142
dependency ratios and, 27
“internal devaluation” in, 153
population growth and, 20
“reserve currency status” and, 140
power grids, 120
Prada, 61
Pritchett, Lant, 182–83, 190
private banks, 76, 77
private companies, 66, 73, 74, 79–81
private sector, 161–64. See also private companies
productivity growth
dependency ratios and, 27
manufacturing sector and, 105
 slowing, 24, 197
property rights, 45, 87
protectionism, 108
protests, 125–27
public debt, 75–76
Putin, Vladimir, 32, 33, 36–37, 38, 39, 80, 187

“rapid convergence,” 186, 186n

raw materials, 186–87
Reagan, Ronald, 34, 37–38
real effective exchange rate (REER), 138
real estate
binges in, 112–13, 118, 120
debt and, 104, 120
real estate bubbles, 134–36, 168, 170, 194
recessions, 1, 6
debt and, 135
deflation and, 134–36
economists and, 6
forecasts of, 6
housing bubbles and, 135
as necessary cleansing step, 170–73
real estate booms and, 134–36
recovery from, 170–73
stock market and, 6–7
Reddy, Y. V., 6
reform/reformers, 32, 193
capitalism and, 47–48
inequality and, 63–64
rallying around, 32–48
“structural,” 81
structural reform, 81
technocrats and, 42–43
regional trading communities and common markets, 88–89
regulation, 50, 80, 81, 163, 193
Reinhart, Carmen, 142n, 161n
research & development, 110–11
“reserve currency status,” 140
retirees, 17, 26–27
Revolutions of 1848, 126
roads, 120
Robinson, James, 87
robots, 17, 29–31, 103, 193
Rockefeller, John D., 58
Rodrik, Dani, 105
Rogoff, Kenneth, 142n, 161n
Romania, 45
rosy disaster scenarios, 187–88
Roubini, Nouriel, 5
Rouseff, Dilma, 41, 77
rules, sensible, 81–82
Russia, 2–3, 87, 187
billionaire class in, 59
black economy in, 71
commodities and, 187
corruption in, 54
currency crises and, 35, 149–50
debt in, 3, 176
environment for wealth creation in, 59
foreign debt and, 154
GDP growth in, 3
government spending and, 69
hype and, 184–85, 187, 192
income traps and, 189
inequality in, 54
inflation and, 121, 126, 128
inflation targets and, 128
inherited billionaire wealth in, 60–61
investment and, 114
media pessimism and, 192
oil and, 114, 187
political unrest in, 39
population growth and, 18, 22
private economy and, 79–80
 productivity decline and, 75, 76
protests in, 39
reform/reformers in, 32, 33, 35–37
second cities in, 96
stale leaders in, 38
state banks and, 77
state companies in, 79–80
stimulus campaigns and, 75
trade routes and, 93
Russian ruble, 141
Rwanda, 90, 100

Samuelson, Paul, 6
Saudi Arabia
autocracy in, 45
commodities and, 116
investment and, 114
oil and, 114, 116
population growth and, 17, 18
state companies in, 78
scale, 53–56
“second-term curse,” 37–38
Seo Jung-jin, 62
service sector, 103, 106–7
“shadow banks,” 165
shale energy boom, 116
Shining Path, 94
Silk Road, 4
Singapore, 34, 37
baby bonuses and, 22–23
export growth and, 85
inflation and, 125
Singh, Manmohan, 39
slowdowns, shape of, 169–70. See also financial crises; recessions
Social Democrats (Sweden), 55
social unrest, inflation and, 125–27
South Africa, 151
 foreign debt and, 154
income traps and, 189
political unrest in, 39
productivity decline and, 76
protests in, 39
state banks and, 129
South America, 90–91, 92, 99–100. See also specific countries
South Asia, 89–90. See also specific countries
Southeast Asia, 134. See also specific countries
debt and, 175, 176
debtophobia after 1998 turmoil, 173
economic miracle in, 27
hype and, 178–79
as rising manufacturing power, 85
trade routes and, 92
South Korea
autocracy in, 44
cities in, 99
crisis of 1997–98 in, 26
current account deficits and, 153
dependency ratios and, 27
dismissal of, 180
exports and, 85, 108, 156
on fastest-growing economies list, 190, 191
government spending and, 69
hype and, 192
immigration and, 26
inequality in, 56
inflation and, 125
inherited billionaire wealth in, 62
intraregional trade and, 89
investment and, 117
manufacturing sector and, 108
manufacturing sector in, 107
population growth and, 26
post–World War II miracle in, 4
reform/reformers in, 35–36, 48
 rise of, 181
robots in, 31
slowdowns in, 164
small government in, 79
tech booms and, 110, 111
welfare system in, 72–73, 83
working women in, 27–28
“sovereign” debt crises, 163–64
Soviet Union. See also Russia
economy of, 2
inflation and, 126
investment and, 105–6
technocrats in, 42, 44
Spain
current account deficit and, 142
debt and, 176
“internal devaluation” in, 153
population growth and, 22
“reserve currency status” and, 140
second cities in, 94
Spence, Michael, 186
Spence Commission, 186
spending, 193–94. See also investment
debt and, 75–76
emerging nations and, 68–70
problematic, 66–68
Sri Lanka
intraregional trade and, 89–90
service sector in, 107
trade routes and, 92
stability, 107–9
stagflation, 34
Stanford University, 111
state, the. See also governments
debt and, 163–64
meddling by, 66, 79–83
sensible role for, 81–82
 state power, 65–83
state banks, 76–77, 165
state capitalism, emerging nations and, 73–75
state companies, 66, 73, 74, 78–79
state monopolies, 45
state power, 65–83
stifle biases, 7–9
Stiglitz, Joseph, 73
stimulus campaigns, 74, 75–76
stock market crash of 1929, 135, 174
stock markets
in emerging nations, 74
populists and, 41
recessions and, 6–7
stock market bubbles, 123, 134–36, 166–67, 168, 170
turning on stale leaders, 39–40
Studwell, Joe, 73
“subprime” lenders, 162
success, definition of, 196–97
Suharto, 33, 43, 171–72, 179
Summers, Larry, 182–83, 190
supply networks, 119, 124, 125, 136, 195
supply shocks, 124
Sweden, 129
billionaire class in, 57–58
democracy in, 47
government spending and, 67
inequality in, 55
inflation targets and, 128
inherited billionaire wealth in, 60
state companies in, 79
Switzerland, 67–68, 71
Syria, 20, 45, 46, 47

Taiwan, 4
autocracy in, 44
debt and, 154, 168–70
 dismissal of, 180
exports and, 85, 156
government spending and, 69
inequality in, 55
inflation and, 125
intraregional trade and, 89
real estate binges in, 113
reform/reformers in, 48
rise of, 181
slowdowns in, 164, 168, 169–70
small government in, 79
tech booms and, 110, 111
welfare system in, 72–73, 83
Tanzania, 63, 90
Taylor, Alan, 134, 135, 163
tech booms
dot-com boom in US, 112–13, 134
microbooms, 111–12
research & development and, 110–11
upside of, 109–12, 194
technocrats, 42–44, 193
technology, 169. See also tech booms
binges in, 120
cycles of, 4
emergence of new, 4–5
internet, 4–5
IT services, 106–7
Tetlock, Phiip, 5
Thai baht, 143–44
Thailand
bailed out by IMF, 145
commodities and, 186
currency crises and, 143–45, 152–53, 158
current account deficits and, 144, 153
debt and, 159–60, 168, 176
deflation in, 133
exports and, 108–9
 hype and, 178–79, 191, 192
intraregional trade and, 89
investment and, 115, 117, 118
manufacturing sector and, 108–9, 118
private debt in, 159–60
as rising manufacturing power, 86
second cities in, 93
slowdowns in, 168
state banks and, 77
Thatcher, Margaret, 34, 38
Tianamen Square, 38
time frame, refocusing on practical, 4
Time magazine, 178, 179, 181–82, 192
trade, 84–100. See also exporting; trade routes
closed economies and, 86–87
deglobalilization of, 197
emerging nations and, 85–86
exporting, 85–87
firing on three fronts, 99–100
global, 85–87, 91, 99–100, 107–8, 127. See also globalization
intraregional, 88–91, 93–100
openness to, 87, 127
physical goods and, 84
shift in global trade patterns, 91
trade channels, 87
trade routes, 85–87, 88, 91–92, 99, 194
Trump, Donald, 51, 154
Tsongas, Paul, 178
“tulip mania,” 159
Tunisia, 19–20
Turkey
billionaire class in, 59
currency crises and, 35, 145–46, 148, 150, 151
currency devaluation and, 155
current account deficits and, 142
debt in, 154, 176
foreign debt and, 154
 hype and, 192
imports and, 155
inflation and, 126, 128
inflation targets and, 128
inherited billionaire wealth in, 60
political unrest in, 39
population growth and, 19
protests in, 39
reform/reformers in, 33, 35, 36–37
stale leaders in, 38
Turkmenistan, 78
2 percent population pace test, 18–19

Uganda, 90
United Kingdom, 94–95, 189
United Nations, forecasts for global population, 15, 17, 21
United States, 17, 31, 88, 91, 110, 178, 186
banks in, 139–40
billionaire class in, 58
black economy in, 71
capitalism in, 55
consumer markets in, 86
crop yields in, 188
currency devaluation and, 154
debt and, 161–62, 174
debtophobia in, 174
deflation and, 131, 132, 135
deglobalization of banking and, 147
dependency ratios and, 27
dot-com boom in, 112–13, 134
dot-com crash of 2000–2001, 134
financial crisis of 2008 and, 164–65, 176
government spending and, 67, 70
Great Depression and, 174
housing boom in, 113
immigration and, 24–25
inequality in, 53, 55
 inherited billionaire wealth in, 60, 61
investment and, 102, 105, 114, 118
manufacturing sector in, 104, 108
myth of “mass convergence” and, 184–85
oil and, 114
population growth and, 22, 24–25
populists in, 51
private debt and, 161–62
productivity growth in, 24–25
railroad spending booms in, 105
real estate binges in, 112–13, 118
reform/reformers in, 34, 35
rise of billionaire rule in, 62
second cities in, 97
self-made entrepreneurs in, 58, 61
shale energy boom in, 116
stale leaders in, 37–38
stock market crash of 1929, 135, 174
tech booms in, 109–10, 112–13
trade and, 99–100
working women in, 27
University of California, Berkeley, Machine Intelligence Research
Institute, 30
Úribe, Álvaro, 41
US dollar, 138, 139–41
Uzbekistan, 78

Velasco Alvarado, Juan, 50

Venezuela, 37
autocracy in, 45
black economy in, 71
development traps and, 189
expelled from Mercosur, 90
government spending and, 70
hype and, 180, 181
populists in, 40–41, 51
Vietnam
 good luck and good policy in, 87–88
intraregional trade and, 89
manufacturing sector in, 108
as rising manufacturing power, 85, 86, 91
second cities in, 94
trade and, 87–88, 99
Volcker, Paul, 181

Walmart, 58
Washington Consensus, 74
water systems, 120
wealth
billionaire shares of, 53–56
families and, 60–62
inequality and, 49–64
welfare state, 47–48, 68
West Africa, 90, 115. See also specific countries
Widodo, Joko, 72
Wiesel, Elie, 193
women
“baby bonuses” and, 17
delaying or avoiding childbirth, 16, 23
population growth and, 16, 17
in the workforce, 17, 28–29, 193
working-age population, 16–17, 18, 21, 31, 193
World Bank, 29, 42, 43, 183, 186, 189
World Trade Organization, 88

Xiao Gang, 166

Xi Jinping, 38, 92

Zambia, 63
Zielinski Robert, 158–59, 162
Zimbabwe, 50, 63
Zoellick, Robert, 126
Zuckerberg, Mark, 58, 61
 ABOUT THE AUTHOR

Ruchir Sharma is head of emerging markets and chief global

strategist at Morgan Stanley Investment Management. He travels
widely, spending one week every month in a different country, where
he meets leading politicians, top CEOs, and other local characters.
Sharma has been a writer for even longer than he has been an
investor, and he is a contributing opinion writer at the New York
Times. Over the past decade he was a frequent contributor to the
op-ed pages of the Wall Street Journal and the Financial Times, and
his essays also appeared in Foreign Affairs, Time, Foreign Policy,
Forbes, Bloomberg View, and other publications. Before 2010 he
contributed a regular column to Newsweek International.
Sharma’s first book, Breakout Nations: In Pursuit of the Next
Economic Miracles, debuted as the number one bestseller in India,
was a Wall Street Journal bestseller, and was chosen by Foreign
Policy as one of its “21 Books to Read in 2012.” His 2016 book, The
Rise and Fall of Nations: Forces of Change in the Post-crisis World,
was a New York Times bestseller.
Bloomberg named Sharma one of the “Fifty Most Influential”
people in the world in October 2015. In 2012, he was selected as
one of the “Top Global Thinkers” by Foreign Policy; and in June
2013, India’s premier weekly magazine, Outlook, named him as one
of the “World’s 25 Smartest Indians.” The World Economic Forum in
Davos selected Sharma as one of the world’s “Young Global
Leaders” in 2007.
 A committed runner, Sharma competed for India in the sprint
relays at a world masters championship and still trains regularly in
Central Park.
 Also by Ruchir Sharma

The Rise and Fall of Nations:

Forces of Change in the Post-Crisis World

Breakout Nations:
In Pursuit of the Next Economic Miracles
 Copyright © 2020, 2016 by Ruchir Sharma

Previous edition published under the title The Rise and Fall of Nations: Forces of
Change in the Post-Crisis World

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