5 A CHALLENGE TO DEMOCRACY’S DOMINANCE

IN KENYA, THE CAMPAIGN POSTERS have come down. The polling booths have closed. Following a hard-fought election in 2013, the country’s new president, Uhuru Kenyatta, has taken the oath of office and is preparing to leave on his first major foreign trip. For newly elected leaders in emerging countries, this represents a high-profile rite of passage. They visit the country that is, for them, a beacon of progress, a partner in prosperity, and a model to emulate. With a wave from the tarmac, President Kenyatta boards his plane and takes off—not west, toward the White House, but east, toward China’s Great Hall of the People.

To billions in the developing world, the value of free peoples and free markets—ascendant in the aftermath of the Cold War—is no longer axiomatic. Instead, under intense pressure to deliver more, better, and faster growth, governments in the developing world are being drawn down an alternative path. Embodied by the meteoric rise of China—though hardly limited to it—this new paradigm of a less democratic, more authoritarian state capitalism promises a sure path to success.

On the surface, this model’s embrace of greater state intervention in the economy purports to solve many of the immediate economic and demographic challenges dogging the world’s emerging nations. It promises rapid economic growth for disaffected youth, massive reduction of poverty, badly needed infrastructure improvements on an epic scale, and solutions to social problems such as the provision of health care and education. But while this economic and political model holds tantalizing promise in the short term, it places the world on a dangerous path in the longer term. For all of its seductive, immediate appeal, the alternate path to prosperity that is sweeping the developing world is decidedly inferior to Western liberal ideology, liberal democracy, and market capitalism.

When the state eschews a robust private sector in favor of tightly gripping the reins of the national economy, protectionism rises, innovation suffers, and in the long run growth can stagnate. State capitalism encourages just the sort of protectionism and preference for national champions that, as the previous chapter showed, can harm growth. Emphasizing the correlation between trade and economic growth, the IMF’s economic advisor Maurice Obstfeld stated that the backlash against globalization “threatens to halt or even reverse the post-war trend of ever-more open trade.” ¹

Emerging markets are turning to this new approach to put out the fires of social and political unrest that are smoldering around the world. Paradoxically, this model will only fan the flames. With authoritarian state capitalism, individual rights and freedoms are deprioritized in favor of collectivism, which curtails innovation and in turn damages long-term economic growth. While China’s state-centric economic approach is well documented, less well-known is the fact that this tectonic ideological shift toward state capitalism has accelerated across emerging markets in recent years. This alternative path is specifically appealing to emerging economies that are hungry for economic growth.

FOR TWENTY-FIVE YEARS AFTER THE end of the Cold War, democracy flourished and spread across the world. On the back of glasnost, perestroika, and the fall of the Berlin Wall, democracy created nascent liberal states. This trend toward democracy was an undoubted win for liberal ideals and flew in the face of authoritarian values. It seemed to mark the end of the schisms that had divided East and West, and developing and developed countries, since World War II. History had delivered its answer to the question British prime minister Harold Macmillan posed in his seminal 1960 speech, “Wind of Change”: “As I see it, the great issue in this second half of the 20th century is whether the uncommitted peoples of Asia and Africa will swing to the East or the West. Will they be drawn into the Communist camp? Or will the great experiments in self-government that are now being made in Asia and Africa, especially in the Commonwealth, prove so successful and by their example so compelling, that the balance will come down in favor of freedom and order and justice?” Free market capitalism and liberal democracy were, it seemed, the only path toward prosperity.

Yet today, for many in the emerging economies, where 85 percent of the world’s population lives, the Western insistence on political rights as a prerequisite for economic growth seems misplaced. Hundreds of millions of people in the developing world live on less than a dollar a day. For them, the choice between food and freedom is a debate between the urgent and the merely important—something difficult for many in the richer West to understand. Political freedom may be desirable, but placing food on the table and a roof over heads takes precedence over all else. At its core, sequencing food ahead of freedom is about postponing, not rejecting, democratic capitalism. After all, people in poor countries do understand democracy and why it might matter, and in theory they would love to choose their leaders. But when it comes to the reality of daily life, many people worry a lot less about how the government came to power and a lot more about whether that government can provide jobs, education, and health care.

The debate on whether democracy and market capitalism are prerequisites for economic growth has taken on new urgency now that people around the world see a credible alternative challenging Western economic and political ideology. Across the world, more and more citizens believe democracy and capitalism need not be the answer. Many prefer the economic and political approach of China, a model of state capitalism in which the state steers production and the economy. Democracy is de-emphasized, at least in the short term, as economic rights supersede political rights. This economic and political approach is gathering momentum and increasingly being seen by many across the developing world as the system that can deliver the greatest improvements to the human condition in the fastest period of time.

Several factors place Western economic models at a disadvantage in this scenario. First, China’s model has gotten results. China has delivered record economic growth and made a significant dent in poverty. In just one generation, China has moved over three hundred million of its citizens out of poverty—that’s roughly equal to the entire population of the United States. And whereas in 1970, Chinese secondary school attendance was at 28 percent, today that figure is at 94 percent. To be sure, the country faces a multitude of challenges—from pollution, environmental concerns, and overpopulation to a corporate debt overhang that many financial market traders worry could derail the economy. But no one can dispute that real strides have been made toward economic prosperity. By some estimates, China now ranks as the largest economy in the world in GDP terms, pumping billions of dollars of capital investment and trade into the global economy. Chinese global investment is estimated to exceed US$1.6 trillion. ² The United States has been estimated as representing 15.5 percent of world GDP, compared with China at 17.8 and the Eurozone at 11.8 percent. And whereas the United States has a 10.8 percent share of world exports, China has 10.7 percent, and the Eurozone 26.3 percent. ³

Second, China has shown that it is possible to meaningfully reduce income inequality without changing its economic (or for that matter, political) system. The United States and China, as has been mentioned in previous chapters, have approximately the same Gini coefficient of 0.47, and unlike the United States—where income inequality has been getting worse over time—China has markedly improved. For example, the income distribution plan released by the Chinese State Council in February 2013 explicitly seeks to raise the minimum wage to at least 40 percent of average salaries. It also aims to increase spending on education and affordable housing and requires state-owned enterprises to contribute a greater share of their profits to reducing inequality. The intention of these government-led policies is to ensure that income inequality at best continues to decrease. However, some reports suggest that the results of these efforts is mixed, and progress toward reducing income inequality may have even slowed.

Third, China has delivered a now-legendary infrastructure campaign. Today, China has more paved roads than the United States, having constructed an extensive network of highways in just fifteen years—even going beyond China itself. In Africa, for example, Chinese largesse has paved much of the distance from Cape Town to Cairo. With these types of achievements, it is perhaps no wonder that majorities of people across ten African countries in a 2007 Pew survey believe that the Chinese had at least a fair amount of influence over their countries, with majorities of over 90 percent holding a favorable view of China in some countries. The Heritage Foundation China Investment Tracker shows just how influential China has become—making a mark globally by increasing trade and foreign direct investment across South America, Africa, and much of the world and becoming an important lender of capital. It is investments and trading opportunities like these monitored by the China Investment Tracker that fund infrastructure, schools, and health care in partnering countries. These considerable investments and prospects for ever closer trading ties are central to why the leaders of many countries are prioritizing stronger connections with the Chinese government. In the last few years the leaders of Argentina, Brazil, India, Russia, Malaysia, and South Africa, to name a few, have all visited China and pledged to forge stronger diplomatic and trade relations. China has also been a significant lender to the US government—the largest lender in decades.

Finally, China is actually following through on providing innovative solutions to age-old social challenges. For example, logistics have long posed a major stumbling block to the eradication of diseases in remote parts of the world. Travel just hours outside Mumbai, Mogadishu, or Mexico City, and you will likely find severe shortages of medicine and health care services. By leveraging the delivery expertise and network of their state-owned companies, China is helping to deliver medicines to some of the world’s most far-flung places. In the US system, the delineations among public, private, and NGO sectors are starker, and the opportunity to cross-pollinate in knowledge and expertise is much more limited. By blurring the lines between state control and private industry, the Chinese state capitalist system is legitimately able to resolve some issues that defy the American system.

Under private capitalism, the bedrock of many Western economies, there is generally a clear delineation between public and private sectors. Government is charged with delivering public goods such as education, infrastructure, and national security; providing regulatory oversight; and setting sound economic policies. Businesses are supposed to maximize their profits by selling whatever goods the market demands for more than the cost of production. Under state capitalism as practiced in China, by contrast, the roles of the state and commercial sectors are far more closely aligned, as the government controls much of the domestic economy through an extensive network of state-owned enterprises. In this system, the social and political goals of the government tend to take priority over strictly commercial concerns. Thus, the government can leverage the delivery expertise of a state-owned mining company—for example, by instructing it to transport and distribute medicines in distant areas.

Both paradigms have their costs and benefits. While private capitalism has shown an unmatched ability to create wealth, it also tends to create extreme income inequality and a myopic focus on quarterly results at the expense of long-term growth. In theory, state capitalism gives companies the freedom to invest for the future rather than obsessing about immediate profits. For instance, China has shown that it is willing and able to ride out difficult economic times with trade and investment partners and retain focus on longer-term strategic goals. One example was its ability to resist any temptation to pull out or reduce its commitments to Brazil as recession and political turmoil took hold in 2016. ⁴ Among the key strategic investors in Brazil are China Three Gorges and China State Grid, a leader in electricity transmission. On the other hand, China’s large state-backed enterprises often use their privileged access to capital via state-owned banks to crowd out private competitors that might generate far more value on a level playing field. And although China’s state-based model offers useful lessons on how a symbiotic relationship between the public and private sectors can improve the delivery of social goods and services, private capitalism hardly needs to be jettisoned to achieve a higher level of public-private cooperation.

Quite clearly, China has made spectacular progress when viewed within the capital-labor-productivity growth framework. In terms of capital, China has accrued an enormous amount of money (at the time of this writing the Chinese economy boasted foreign exchange reserves of over US$3 trillion—among the highest in the world); in terms of labor, China has invested in quality by focusing on education and leveraging its large population; and in terms of productivity, over the last decade China has recorded the largest increases in the world, including becoming a leader in ideas. The World Intellectual Property Organization recorded large increases in patent filings by China-based innovators in 2015. ⁵ Between 1999 and 2006, China’s total factor productivity (TFP) increased by 4.4 points; between 2007 and 2012, TFP increased by 2 points. Globally during the same time periods, average TFP increased by 1.3 and 0.5 respectively. For many across the globe, China’s accomplishments translate into tangible, visible, on-the-ground improvements in people’s lives. This visible evidence of economic progress is what prompts many people around the world, and particularly in poorer, emerging countries, to believe China’s economic model can transform the arc of their lives in the shortest period of time.

In light of China’s meteoric rise, people in emerging economies have grown to doubt the importance of prioritizing democracy in the quest for economic growth. In July 2014, the recently reelected prime minister of Hungary, Viktor Orban, admitted, “the new state that we are constructing in Hungary is an illiberal state, a non-liberal state. It does not reject the fundamental principles of liberalism such as freedom—and I could list a few more—but it does not make this ideology the central element of state organization, but instead includes a different, special, national approach.” Hungary is still democratic, in that Orban was elected; he has, however, rejected the “liberal” part of “liberal democracy.” Orban cited China, Russia, and Turkey—all illiberal states—as his models and pointed to the 2008 financial crisis as proof that “liberal democratic states cannot remain globally competitive.” He is not the only democratically elected leader skeptical that the free market system can deliver sustained growth and reduce poverty. If we look back further in history, we find examples of countries like Chile, Singapore, and Taiwan—not just China—that have made it abundantly clear that democracy is not a prerequisite for economic growth. In fact, overwhelming evidence shows that economic growth is a prerequisite for democracy, not the other way around.

The poorer a country is, the less likely it is to sustain democracy. Economists have found that income is the greatest determinant of how long democracy lasts. In a study entitled “What Makes Democracies Endure,” a group of scholars concluded that “poor democracies, particularly those with annual per-capita income of less than $1,000, are extremely fragile.… A democracy can be expected to last an average of about 8.5 years in a country with per-capita income under $1,000 per annum, 16 years in one with income between $1,000 and $2,000, 33 years between $2,000 and $4,000, and 100 years between $4,000 and $6,000.” It is no wonder therefore that across the world many countries with per capita incomes below the US$6,000 hurdle are plagued by political instability, with Thailand, Argentina, and Nigeria as just a few examples. ⁶

A middle class capable of holding government accountable must be created before democracy can take hold and thrive. Prematurely shoehorning democracy into poor countries runs the risk of creating illiberal democracies that can be as bad—or worse—than the authoritarian systems they replaced. This could, in part, explain why it is that although almost 50 percent of the countries in the world can be considered democratic, the majority of them are illiberal. For example, the elections of Egyptian president Morsi in 2012 and Venezuelan president Maduro in 2013 have proven that voters will accept less freedom (for example, worsening press freedoms in Egypt and a hostile media environment in Venezuela) for promises of more security and jobs. Morsi was removed from office in a military coup in 2013, but there is evidence that successful illiberal leaders can last. In Russia, Vladimir Putin retains high approval ratings, having been elected into political office continually since 1999. Turkey’s Erdogan has won successive elections since 2003 both as prime minister and as president. Furthermore, the Financial Times has reported that public opinion polling reveals that “authoritarian leaders are seen as far more trustworthy than politicians in more openly democratic countries across the emerging world.” ⁷

These cases are in line with broader statistics indicating that freedoms have declined over the past decade. Seventy percent of the world’s democracies have become so illiberal that they’re indistinguishable from authoritarian regimes, according to a 2015 Freedom House report that described global freedom as being in decline for the ninth consecutive year. “Nearly twice as many countries suffered declines as registered gains—61 to 33—with the number of gains hitting its lowest point since the nine-year erosion began.” ⁸ These trends tell us one of two things: either the majority of people are willing to live without these freedoms, or the authoritarian governments are able to satiate pressing economic needs that their citizens value more than the political freedoms they are losing.

There are rational reasons behind doubts and skepticism toward liberal democracy and free market capitalism. Over the past decade, those living in emerging markets point to increased geopolitical uncertainty (Brexit, the election of Trump) and economic volatility (the 2008 financial crisis) as both coming from the West. Moreover, structural problems such as slowing economic growth and worsening income inequality serve to highlight fundamental weaknesses with Western democracy and market capitalism that are deemed unappealing and unacceptable. Therefore, as discontent stretches across the world, middle-class citizens in countries like Pakistan and Taiwan, traditional supporters of reform, have turned against democracy. The governments in Hungary and the Czech Republic have cracked down on political freedoms. Countries like Honduras, Thailand, and Fiji have undergone military coups, while the quality of democracy has deteriorated in Russia, Kenya, Argentina, and Nigeria, among others. ⁹ Prime Minister Orban of Hungary is part of a trend of a political form of recidivism, whereby citizens through democratic process are freely choosing to elect authoritarian leaders and regimes. There is increasing anecdotal evidence from academics and journalists in Eastern Europe that many people in the region feel that they were better off under the pre-1989 regimes, which they regard as having provided security and progress through industrialization. Free citizens are going so far as to vote for politicians who are antithetical to market values—for example, candidates affiliated with Hamas in Palestine and Syriza in Greece.

Meanwhile, there is a growing acceptance that when it comes to economic progress, market precepts only go so far toward making a nation prosperous. In many countries, policymakers bemoan how, despite concerted market-oriented efforts in the preceding thirty years, the economic situation has markedly deteriorated over time. In 2013, South Korea’s Park Geun-hye was sworn in as president, having won her mandate on a platform of greater state intervention and increasing welfare support, seen as a move away from South Korea’s previous policy stance. (She would be impeached in 2016 on allegations of corruption and charges of excessive meddling that enabled her associates to commit extortion.) A similar pattern of doubt exists in places as disparate as Malaysia, South Africa, and Brazil. Despite early progress after adopting market doctrine, Malaysia is battling entrenched pockets of poverty unresponsive to market interventions. Meanwhile in South Africa, over twenty years into the postapartheid era, market policies like trade liberalization and capital market integration have done virtually nothing to alter the grim unemployment picture in the country. And twenty years after Brazil’s thirty-fourth president, Fernando Henrique Cardoso, the architect of the country’s economic turnaround, instituted free market reforms, there are real questions about how much economic success free markets can deliver, and increasing doubts about whether such policies can create economic well-being across all segments of Brazil.

These countries, along with many other emerging economies, are grappling with stubbornly high unemployment especially among the young, pockets of poverty, and regressing economic growth, all adding up to worsening living standards. The emerging world is, of course, an incredibly dynamic place, each nation possessing vastly different cultures and unique local challenges. But even taking into consideration the diversity of problems each nation faces on its own, there are uncanny similarities across countries and continents. Throughout the emerging world, the pattern is striking: larger economies like Brazil, South Africa, and Argentina—with populations of around fifty million and higher—face stubborn poverty, stagnant wages, debilitating income inequality, and intractable unemployment. Emerging economies like South Africa and Brazil are not only growing weary and wary of free markets but actively turning toward the Chinese economic model, in which state policies become more interventionist and China becomes a preferred economic partner. The challenges are exacerbated by the global headwinds outlined in Chapter 3, all of which serve to further worsen the global economic growth picture.

AT THE SAME TIME THAT state-led capitalism is enjoying a surge in credibility in emerging markets, governments in developed countries have also dramatically expanded the state’s role in the economy in the quest to restore growth. The German chancellor Angela Merkel is known to cite three numbers: 7, 25, 50. These numbers reflect the fact that Europe is roughly 7 percent of the world population, has 25 percent of world GDP, and represents 50 percent of world welfare payments (government social spending). The United States and Europe together account for roughly 12 percent of the world population, approximately 55 percent of world GDP, and 90 percent of world welfare payments. Not only is the welfare commitment growing across democratic capitalist states, but so too is the role of government in the broader economy. In Britain, for example, roughly 60 to 70 percent of average household spending on housing, education, health care, and transportation is subsidized by the government. Both of these developments pose potentially dangerous consequences for growth. ¹⁰

Today, seven of the ten largest employers in the world are governments. The US military employs approximately 3.2 million personnel, closely followed by the Chinese army, with roughly 2.3 million workers. The British National Health Services, China NPC, State Grid Corp., and Indian Railways follow closely behind with 1.7 million, 1.6 million, 1.5 million, and 1.4 million, respectively. The highest-ranked private-sector company is Walmart, the US retailer, which comes in third overall, with approximately 2 million employees worldwide.

The burgeoning size of government across the world raises grave concerns, particularly as government debt burdens appear increasingly unsustainable. Moreover, it is the private sector, and not the government, that is the engine of growth, job creation, and improvements in living wages. In 2010, the UK Department of Business, Innovation and Skills expressed concern in a white paper evaluating the economy since 2000 that “too many parts of the country became over dependent on the public sector.” Of course, the question of the ideal size of the state is an age-old debate. However, the argument of big government versus small government is somewhat of a distraction, as in practice the key issue is a government’s level of effectiveness.

In fact, according to the Millennium Challenge Corporation (MCC), “countries with more effective governments tend to achieve higher levels of economic growth by obtaining better credit ratings and attracting more investment, offering higher quality public services and encouraging higher levels of human capital accumulation… accelerating technological innovation, and increasing the productivity of government spending.” Moreover, the MCC finds that “on average, countries with more effective governments have better educational systems and more efficient health care.” Crucially, this reflects how government’s effectiveness, and not political freedom or democracy, ultimately determines economic growth. ¹¹

Central to the government’s effectiveness is its discipline to resist reaching beyond its core remit. At a very basic level, government has three roles: providing public goods (such as education, national security, health care, and infrastructure), enforcing and regulating laws, and acting as financier of last resort that steps in when the markets fail (for example, in the government bailouts around the financial crisis of 2008). When government reaches beyond these roles, it is inimical to a country’s long-term economic growth.

The state is expected to deliver a suite of (quality) public goods—including national security, infrastructure (such as physical roads and electricity), education, and health care. Of course, the most effective governments are able to deliver public goods in such a way that their debt burden remains sustainable. Where government takes the lead in setting out these public goods, the private sector will follow, forming the basis for job creation and economic growth. In the United States, for example, the government has jump-started private-sector investment in at least four noteworthy areas: the Manhattan Project of 1942–1946, which led to a massive wave of scientific innovation; the US interstate highway system, which created a road network crucial for commerce and communication in the country; the NASA-led Apollo landings; and the development of the Internet, which evolved from the US Defense Advanced Research Projects Agency (under the Department of Defense), responsible for the development of emerging technologies for military use.

Second, government enforces the nation’s laws, regulates the economy and society, and metes out punishment when the legislature and judicial system deem it warranted. This role, inasmuch as it relates to business and the economy, has reached fever pitch in the wake of the financial crisis, with governments under pressure to support their banking systems and stave off longer-lasting recessions.

Finally, government is expected to act in times of crisis. At a minimum, the state will act if a crisis is of sufficient scale to disrupt the normal workings of the economy and poses a systemic risk. No other entity (for example, the private sector) can step in to remedy the situation if markets fail to clear—that is, if buyers struggle to find people to sell to, and vice versa. Catastrophic situations, whether they take the form of disease epidemics, natural disasters, or financial crises, warrant state redress. For example, the Brazilian government had to contend with lost incomes and the threat to farmers’ livelihoods when, as the Independent described it in July 1994, “the price of coffee soared by 25 percent after a second frost damaged Brazilian coffee plants and led to fears that as much as half of the crop could be destroyed.” ¹² More recently, in the 2008 global financial crisis, governments had to step in to stabilize the financial system and the wider economy by buying financial institutions and automotive companies. Even with such aggressive involvement, global GDP slumped by 3.4 percent (according to IMF estimates), and the recovery nearly ten years on is lackluster. Global GDP contracted 1.1 percent from 2008 to 2009, which “masks the shocking depth of the crisis in the winter of 2008–09, when GDP was contracting at an annual rate over 6 percent.” ¹³

Trouble arises when government policy steps outside these boundaries, however. For example, the “Housing for All” policy in the United States transformed the government from merely an overseer of the financial markets into an active market participant—as an investment adviser that not only encouraged but also incentivized American households to tie their wealth into housing and real estate rather than stocks, bonds, commodities, cash, and so forth. Through Fannie Mae and Freddie Mac, the government became a de facto mortgage lender, providing inexpensive mortgages that made housing investments look artificially cheap when compared to other asset classes. Worse still, this intervention ensured that many people borrowed in excess, owning property when ostensibly they should not have. This was the kernel of what would become the 2008 financial crisis leading to the Great Recession. As of 2014, Fannie Mae ($3.25 trillion of assets) and Freddie Mac ($1.9 trillion) had between them more than $5 trillion of assets—nearly 30 percent of US GDP. In short, the US government’s overreach (in financing private-sector housing) contributed to its own burgeoning debt burden as well as to the broader financial crisis.

To take stock thus far, the world is heading in a direction of greater government control and intervention. China’s state-led model has a growing appeal and following across developing markets, and Western economies are themselves adopting more state interventionist tendencies. What is clear is that any shift toward an expanding role for the state in an economy poses a risk to government effectiveness and ultimately the prospects for economic growth.

As a practical matter around the world, countries have different views and traditions on where and how a state should intervene. In the United Kingdom, for example, its national health system contrasts with that of the United States, where medicine is largely—even after the Affordable Care Act (which may yet be repealed)—in the purview of the private sector. The Russian government controls protected strategic sectors such as oil and banking, while Canada protects its mining sector (the government blocked a foreign investment into its potash sector in 2010). And despite its commitment to free market values, even the United States places constraints on outside investment in key sectors. Through CFIUS, which reviews and vetoes foreign investment, the United States vetoed a Chinese investment in a lighting technology company in 2016, and the Dubai Ports investment in a US ports facility was scrapped in 2006.

As developed countries are becoming more interventionist in their economies, one has to wonder if they, too, are drawing on the success of the Chinese model, or at least trying to compete with it. Whatever the case, emerging countries in particular should heed this warning: the China model has its limitations and is not necessarily replicable. In the face of an unquestionably impressive track record in China, there are several important reasons to question the viability of the Chinese model when applied to the emerging world and beyond. It is not only difficult for other countries to adopt China’s model but also undesirable.

China’s economic system contains significant structural inefficiencies of a kind that are baked into any system that dislocates markets. A state-centric system, in which the government is the arbiter of an economy’s factors of production, creates mispricing of assets—from goods and real estate to the key inputs necessary for long-term, sustained economic growth such as capital and labor. This can create supply and demand imbalances, in turn leading to inflation rates so high they are inimical to economic growth, development, and living standards. Inflation is less of a threat amid the current economic malaise, but at the height of China’s growth phase, and just before the financial crisis, when oil prices were close to US$140 a barrel, this was a real challenge. Moreover, such policy approaches can distort prices and interest rates, increasing the cost of doing business. This can be seen in instances when state-owned enterprises suck up capital and crowd out private-sector capital and investment.

What is more, the Chinese model simply is not viable for many emerging markets. Driven largely by exports to markets in the West, the Chinese economy has little in common with emerging markets that primarily produce and depend on agriculture commodities. As it happens, the United States and Europe have practically prohibited importation of these precise commodities through subsidies for domestic producers. And while state-centric policies may yield artificial employment in the short term, state-centric inefficiencies create enormous dead-weight losses in the longer term that can be so deeply entrenched as to undermine economic progress and prosperity.

Indeed, China itself is now grappling with massive debt problems that are plaguing the financial sector, a property bubble that market actors fear could burst at any time, and pollution that acts as a drag on GDP growth. All of these raise the possibility that a more severe economic slowdown in China could turn out to be inevitable. Whether China’s political class will overcome these challenges—whether its system of economics ever can—is still an open question.

Nevertheless, as China moves past the United States to become the world’s largest economy in GDP terms—something that experts such as the IMF now predict will happen as soon as 2022—the Chinese model will only continue to gain admirers. The momentum toward state-led capitalism should prompt calm reflection on the future of democratic capitalism and, ultimately, the need for reform. US Supreme Court justice Stephen Breyer’s book, Making Our Democracy Work, reminds us it took nearly 170 years from the signing of the US Constitution to establishing equal education under the law (this was enshrined in the landmark 1954 Supreme Court case Brown v. Board of Education). It would take another eleven years for the Voting Rights Act of 1965 to guarantee universal suffrage for all United States citizens.

If it took the United States over a century and a half to embed free and democratic rights for all its citizens, should China not be afforded similar consideration with respect to the evolution of its own political and economic system? We should perhaps find reassurance in the fact that the Chinese political and economic model is not static but rather in a constant state of flux toward improvement. Its imperfections are not reason for quickly tossing it aside.

Against the backdrop of failing economic growth, leaders across the emerging world are making policy based on daily practical realities rather than ideology. In this regard, the spread of the Western model should come from its appeal, not from strong-arming developing countries into falling in line. Leaders and citizens everywhere should feel that liberal systems will help solve their immediate (economic) problems. Put another way, rather than force people to embrace liberal democracy and free market capitalism, the way to get them to adopt it is to demonstrate that it can work, create growth, and end poverty in an equitable fashion. What could be more compelling for the rest of the world than an economic system seen to create sustainable economic growth and lift people out of poverty and despair?

At its best, the Western model speaks for itself. This is the approach that put food, refrigerators, and televisions in millions of homes. It has fostered and nurtured the innovative spirit that won the space race and put a man on the moon. These are the kinds of concrete, tangible results people want: what they saw, what they envied, and what they believed in. But in this generation, concrete, tangible results are what they are getting from China and are certainly no longer guaranteed from liberal democracy and market capitalism.

IN LATE 2013, KATERYNA ZHEMCHUZHNYKOVA, a twenty-five-year-old journalist leading protests in eastern Ukraine, was asked why she had taken to the streets. “I want to live in a country where the law is not just a word in the dictionary,” she explained, but in a country “where people are free to tell what they think; to do what they want; to go where they dream.” ¹⁴

Until recently, the world has been on a path that assumed that liberal democracy and free market capitalism were the only real path to economic prosperity. The rise of China has led many to revisit these assumptions. What if Zhemchuzhnykova’s dream, a dream shared by many, is not achievable along the paths of liberal democracy and free market capitalism? After all, there are other political and economic policy routes to establishing a middle class, a precursor to a democracy, and a market economic system that lasts. As the twentieth century gives way to a world of slower economic growth, ideology takes a backseat. The world is shifting from pursuing the ideals of freedom to grappling with the reality of earning a living.

International institutions such as the World Bank—purveyors of the famed Washington Consensus that argued that a suite of free market policies were the enlightened path to free markets and free peoples—are changing their tune. Jim Yong Kim, the president of the World Bank, appeared to give a nod to more state-led systems when he proclaimed, “There is more than one path to shared prosperity. One path is through increased opportunities driven by greater economic growth. Another is through a stable social contract, which focuses on raising the living standards of the poor and the disadvantaged.” ¹⁵ It has been estimated that by 2025 over 80 percent of the world’s poor people will be in fragile, mainly low-income states. This emerging backdrop underscores the urgency of getting the economic and political approach right. ¹⁶

Twenty-five years after Francis Fukuyama argued in The End of History and the Last Man that democracy and capitalism had emerged victorious over any other form of government, the picture looks quite different. In the United States, our democracy has been unable to address critical problems, including infrastructure, immigration, tax reform, education, and entitlements. Democratically elected leaders in Russia, Turkey, and elsewhere have perverted the system and become autocratic leaders determined to maintain power at all cost. The Panama Papers exposed how many democratic leaders have used the system for personal financial gain.

What went wrong? Is democracy still the best form of government? Can it be salvaged, or have we reached the end of the road? There is certainly a debate to be had as to whether, in a highly globalized world with frictionless communication, the nation-state is becoming obsolete as a way of organizing government. There is a more fundamental question, however, about the behavior of those in power: namely, whether political leaders, particularly in liberal democracies, are capable of looking beyond the short term in order to create long-run economic and social progress.

NOTES

Introduction

1. Greg R. Lawson, “A Thirty Years’ War in the Middle East,” National Interest, April 16, 2014, nationalinterest.org/feature/thirty-years-war-the-middle-east-10266.

2. “Ripe for Rebellion?” Economist, November 18, 2013.

3. “Brazil,” World Bank, data.worldbank.org/country/brazil (accessed July 29, 2017).

4. “In U.S., 67% Dissatisfied with Income, Wealth Distribution,” Gallup, January 20, 2014, www.gallup.com/poll/166904/dissatisfied-income-wealth-distribution.aspx.

5. “Inequality Is a Threat to American Democracy; Who Will Ring the Bell?” Challenges to Democracy, December 17, 2013, www.challengestodemocracy.us/home/inequality-is-a-threat-to-american-democracy-who-will-ring-the-bell/#sthash.EB6SYGib.dpbs.

6. “GDP Ranking,” The World Bank, July 1, 2017, data.worldbank .org/data-catalog/GDP-ranking-table.

7. Thom Patterson, “Why Does America Have So Many Hungry Kids?,” CNN, June 15, 2017; Alemayehu Bishaw, “Poverty: 2000–2012,” US Census Bureau, September 2013.

8. Charles Murray, “Trump’s America,” Wall Street Journal, February 12, 2016.

9. “Reinvention in the Rust Belt,” Economist, July 11, 2015.

10. “Unemployment Statistics,” Eurostat: Statistics Explained, October 2, 2017, ec.europa.eu/eurostat/statistics-explained/index.php/Unemployment_statistics.

11. “The American Middle Class Is Losing Ground,” Pew Research Center, December 9, 2015, www.pewsocialtrends.org/2015/12/09/the-american-middle-class-is-losing-ground.

12. Betsy McKay, “Life Expectancy for White Americans Declines,” Wall Street Journal, April 20, 2016.

13. J. Bradford Delong and Lawrence H. Summers, “Fiscal Policy in a Depressed Economy,” Brookings Papers on Economic Activity, Brookings, Spring 2012, www.brookings.edu/wp-content/uploads/2012/03/2012a_delong.pdf; Paul Krugman, “The Simple Analytics of Monetary Impotence,” New York Times, December 19, 2014.

14. Glenn Kessler, “Trump’s Claim That the US Pays the ‘Lion’s Share’ for NATO,” Washington Post Fact Checker, March 30, 2016, www.washingtonpost.com/news/fact-checker/wp/2016/03/30/trumps-claim-that-the-u-s-pays-the-lions-share-for-nato/?utm_term=.f5bc64e5b8e2.

15. Lawrence H. Summers, “The Age of Secular Stagnation,” Foreign Affairs, February 15, 2016.

16. “2013 World Population Data Sheet,” Population Reference Bureau, 2013, www.prb.org/pdf13/2013-population-data-sheet_eng.pdf.

Chapter 1: The Imperative Is Growth

1. “GINI Index—World Bank Estimate,” data.worldbank.org/indicator/SI.POV.GINI (accessed March 4, 2017).

2. David L. Bevan, “Aid, Fiscal Policy, Climate Change, and Growth,” WIDER Working Paper 2012/077, UNU-WIDER, Helsinki, 2012.

3. “World Economic Outlook, April 2016,” International Monetary Fund, www.imf.org/external/pubs/ft/weo/2016/01 (accessed March 3, 2017).

4. “Small and Medium-Sized Enterprises: Local Strength, Global Reach,” Policy Brief, OECD Observer, 2000, www.oecd.org/cfe/leed/1918307.pdf.

5. Joseph S. Pete, “U.S. Steel Starts Layoffs of up to 323 Workers at Gary Works,” Northwest Indiana Times, April 24, 2015.

6. James Manyika, Jonathan Woetzel, Richard Dobbs, Jaana Remes, Eric Labaye, and Andrew Jordan, “Global Growth: Can Productivity Save the Day in an Aging World?” McKinsey Global Institute, January 2015.

7. Rosemary D. Marcuss and Richard Kane, “U.S. National Income and Product Statistics,” Bureau of Economic Analysis, February 2007, www.bea.gov/scb/pdf/2007/02%20February/0207_history_article.pdf.

8. John Helliwell, Richard Layard, and Jeffrey Sachs, eds., World Happiness Report 2017, Sustainable Development Solutions Network, 2017, worldhappiness.report/wp-content/uploads/sites/2/2017/03/HR17 .pdf.

9. “Human Development Index,” United Nations Development Programme, hdr.undp.org/en/content/human-development-index-hdi (accessed November 15, 2017).

10. Michael E. Porter and Scott Stern, Social Progress Index 2017 Findings Report, Social Progress Imperative, 2017, www.socialprogressindex .com/assets/downloads/resources/en/English-2017-Social-Progress-Index-Findings-Report_embargo-d-until-June-21-2017.pdf.

11. “Working Time Required to Buy: Who Works Harder to Buy a Big Mac?” UBS, www.ubs.com/microsites/prices-earnings/edition-2015.html (accessed March 3, 2017).

Chapter 2: A Brief History of Growth

1. Jared M. Diamond, Guns, Germs, and Steel: The Fates of Human Societies (New York: Norton, 1999).

2. “What Dutch Disease Is, and Why It’s Bad,” Economist, November 5, 2014.

3. The Maddison-Project, 2013, www.ggdc.net/maddison/maddison-project/home.htm.

4. Ben Carter, “Is China’s Economy Really the Largest in the World?” BBC News, December 16, 2014.

5. American Enterprise Institute, “China Global Investment Tracker,” www.aei.org/china-global-investment-tracker (accessed March 4, 2017).

6. “The Demographic Timebomb Crippling Japan’s Economy,” National Interest, March 25, 2015, nationalinterest.org/feature/the-demographic-timebomb-crippling-japans-economy-12479; Danielle Demitriou, “Japan’s Population to Shrink by a Third by 2065,” Telegraph (London), April 11, 2017; “Population Projections for Japan (2017),” National Institute of Population and Social Security Research, www.ipss.go.jp/pp-zenkoku/e/zenkoku_e2017/g_images_e/pp29gts01e.htm (accessed November 15, 2017).

7. G. P. Thomas, “Argentina: Mining, Minerals, and Fuel Resources,” Azomining, June 7, 2012, www.azomining.com/Article.aspx?ArticleID=21.

8. “The World Factbook: Argentina,” Central Intelligence Agency, October 6, 2017, https://www.cia.gov/library/publications/resources/the-world-factbook/geos/ar.html.

9. David S. Landes, The Wealth and Poverty of Nations: Why Some Are So Rich and Some So Poor (New York: Norton, 1998).

10. Niall Ferguson, Empire: The Rise and Demise of the British World Order and the Lessons for Global Power (New York: Basic Books, 2004).

11. Dani Rodrik, ed., In Search of Prosperity: Analytic Narratives on Economic Growth (Princeton, NJ: Princeton University Press, 2003).

12. Paul Collier and Anke Hoeffler, “Conflicts,” in Global Crises, Global Solutions, ed. Bjorn Lomborg (Cambridge: Cambridge University Press, 2004).

13. “Rwanda,” World Bank, data.worldbank.org/country/rwanda (accessed March 4, 2017).

14. “Global Peace Index 2015,” Institute for Economics and Peace, economicsandpeace.org/wp-content/uploads/2015/06/Global-Peace-Index-Report-2015_0.pdf (accessed March 3, 2017).

Chapter 3: Hurricane Headwinds

1. Tom Brokaw, The Greatest Generation (New York: Random House, 1998).

2. Richard Dobbs, Susan Lund, Jonathan Woetzel, and Mina Mutafchieva, “Debt and (Not Much) Deleveraging,” McKinsey Global Institute, February 2015.

3. “The World Factbook: Country Comparison: World Debt,” Central Intelligence Agency, www.cia.gov/library/publications/the-world-factbook/rankorder/2186rank.html (accessed March 3, 2017).

4. “Report on the Municipal Securities Market,” US Securities and Exchange Commission, July 31, 2012.

5. Carmen M. Reinhart and Kenneth S. Rogoff, “Growth in a Time of Debt,” American Economic Review: Papers & Proceedings 100, no. 2 (May 2010): 573–578.

6. Andrea Pescatori, Damiano Sandri, and John Simon, “Debt and Growth: Is There a Magic Threshold?” International Monetary Fund, February 2014, www.imf.org/en/Publications/WP/Issues/2016/12/31/Debt-and-Growth-Is-There-a-Magic-Threshold-41352.

7. Charles Roxburgh et al., “Lions on the Move: The Progress and Potential of African Economies,” McKinsey Global Institute, June 2010, www.mckinsey.com/global-themes/middle-east-and-africa/lions-on-the-move.

8. “How Much Water Does It Take to Grow a Hamburger?,” USGS Water Science School, water.usgs.gov/edu/activity-watercontent.html (accessed March 3, 2017).

9. “ODNI Releases Global Water Security ICA,” Office of the Director of National Intelligence, March 22, 2012, www.dni.gov/index.php/newsroom/press-releases/press-releases-2012/item/529-odni-releases-global-water-security-ica.

10. “Mongolian Government Under Pressure to Resolve Mining Dispute Before End of Year,” PGI Intelligence, pgi-intelligence.com/news/getNewsItem/Mongolian-government-under-pressure-to-resolve-mining-dispute-before-end-of-year/499 (accessed March 4, 2017); Terrance Edwards, “Mongolia Votes to Nationalize Former Russian Copper Mine Stake,” Reuters, February 16, 2017.

11. Worldometers, www.worldometers.info/world-population (accessed March 4, 2017).

12. Patrick Gerland et al., “World Population Stabilization Unlikely This Century,” Science 346, no. 6206 (October 2014): 234–237.

13. The World’s Cities in 2016: Data Booklet, Population Division, Department of Economic and Social Affairs, United Nations, 2016, www.un.org/en/development/desa/population/publications/pdf/urbanization/the_worlds_cities_in_2016_data_booklet.pdf.

14. Natural Resources in 2020, 2030, and 2040: Implications for the United States, National Intelligence Council Report, Chatham House for the National Intelligence Council, May 2015, www.dni.gov/files/documents/NICR%202013-05%20US%20Nat%20Resources%202020,%202030% 202040.pdf.

15. Adam Pasick, “Japan Is Rapidly Losing Population—and Half the World Is About to Join It,” Quartz, January 2, 2014, qz.com/162788/japan-is-rapidly-losing-population-and-half-the-world-is-about-to-join-it; “World Population Prospects: The 2015 Revision,” Department of Economic and Social Affairs, United Nations, July 29, 2015.

16. Welfare Trends Report 2016, Office of Budgetary Responsibility, United Kingdom, October 2016, budgetresponsibility.org.uk/docs/dlm _uploads/Welfare-Trends-Report.pdf.

17. “A Slow-Burning Fuse,” Economist, June 25, 2009.

18. “Implementing the 2030 Agenda for Sustainable Development,” United Nations Research Institute for Social Development, www.unrisd.org/80256B3C005BCCF9%2F%28httpAuxPages%29%2F92AF5072673F924DC125804C0044F396%2F%24file%2FFlagship2016 _FullReport.pdf (accessed July 13, 2017).

19. World Population Prospects: The 2015 Revision, Department of Economic and Social Affairs, United Nations, July 29, 2015, www.un.org/en/development/desa/publications/world-population-prospects-2015-revision.html.

20. World Employment Social Outlook: Trends for Youth, 2016, International Labour Organization, 2016, www.ilo.org/wcmsp5/groups/public/—dgreports/—dcomm/—publ/documents/publication/wcms _513739.pdf.

21. Drew DeSilver, “U.S. Students’ Academic Achievement Still Lags That of Their Peers in Many Other Countries,” Pew Research Center, February 15, 2017, www.pewresearch.org/fact-tank/2017/02/15/u-s-students-internationally-math-science.

22. Elena Kvochko, “Five Ways Technology Can Help the Economy,” World Economic Forum, April 11, 2013, www.weforum.org/agenda/2013/04/five-ways-technology-can-help-the-economy; “What Is the Impact of Mobile Telephony on GDP Growth?,” Deloitte, November 2012.

23. Carl Benedikt Frey and Michael A. Osborne, “The Future of Employment: How Susceptible Are Jobs to Computerisation?,” Technological Forecasting and Social Change 114 (January 2017): 254–280.

24. Joel Lee, “Self Driving Cars Endanger Millions of American Jobs (and That’s Okay),” Make Use Of, June 19, 2015, www.makeuseof .com/tag/self-driving-cars-endanger-millions-american-jobs-thats-okay; “Reports, Trends & Statistics,” American Trucking Association, www.trucking.org/News_and_Information_Reports_Industry_Data.aspx (accessed November 14, 2017).

25. Rex Nutting, “No, ‘Truck Driver’ Isn’t the Most Common Job in Your State,” Market Watch, February 12, 2015, www.marketwatch.com/story/no-truck-driver-isnt-the-most-common-job-in-your-state-2015-02-12.

26. Carl Benedikt Frey, Michael A. Osborne, Craig Holmes, et al., “Technology at Work v2.0,” Oxford Martin School, Citi, January 2016, www.oxfordmartin.ox.ac.uk/downloads/reports/Citi_GPS_Technology _Work_2.pdf.

27. “As Wages Rise, China’s Robot Army Set to Swell,” Today Online, April 11, 2016, www.todayonline.com/chinaindia/china/wages-rise-chinas-robot-army-set-swell; Steven Johnson, “China’s Robot Army Set to Surge,” Financial Times, April 8, 2016.

28. Frey et al., “Technology at Work v2.0.”

29. “Digital Disruption: How FinTech Is Forcing Banking to a Tipping Point,” Citi GPS, March 2016, ir.citi.com/SEBhgbdvxes 95HWZMmFbjGiU%2FydQ9kbvEbHIruHR%2Fle%2F2Wza4cRvOQUNX8GBWVsV.

30. Brent Neiman, “The Global Decline of the Labor Share,” Quarterly Journal of Economics 129, no. 1 (2014): 61–103.

31. Darren Acemoglu and David Autor, “Skills, Tasks and Technologies: Implications for Employment and Earnings,” chapter 12 in Handbook of Labor Economics, vol. 4b (2011): 1075, economics.mit.edu/files/5571.

32. “Cybersecurity: Actions Needed to Strengthen U.S. Capabilities,” Government Accountability Office, February 14, 2017, www.gao.gov/assets/690/682756.pdf.

33. Patricia A. Daly, “Agricultural Employment: Has the Decline Ended?,” Monthly Labor Review (November 1981).

34. Dani Rodrik, “The Past, Present, and Future of Economic Growth,” Global Citizen Foundation, June 2013, www.gcf.ch/wp-content/uploads/2013/06/GCF_Rodrik-working-paper-1_-6.17.131.pdf.

35. S. Basu and J. Fernald, “Information and Communications Technology as a General Purpose Technology: Evidence from US Industry Data,” German Economic Review 8, no. 2 (2007): 146–173.

36. Frey et al., “Technology at Work v2.0.”

37. Deborah Hardoon, “Wealth: Having It All and Wanting More,” Oxfam International, January 2015; Deborah Hardoon, “An Economy for the 99%: It’s Time to Build a Human Economy That Benefits Everyone, Not Just the Privileged Few,” Oxfam International, January 2017, www.oxfam.org/en/research/wealth-having-it-all-and-wanting-more.

38. Alan Dunn, “Average America vs the One Percent,” Forbes, March 21, 2012, www.forbes.com/sites/moneywisewomen/2012/03/21/average-america-vs-the-one-percent/#59ee67212395.

39. Chuck Collins and Josh Hoxie, “Billionaire Bonanza: The Forbes 400 and the Rest of Us,” Institute for Policy Studies, December 1, 2015, www.ips-dc.org/billionaire-bonanza.

40. J. A. Cheshire, “Lives on the Line: Mapping Life Expectancy Along the London Tube Network,” Environment and Planning A 44, no. 7 (2012).

41. Derek Thompson, “Get Rich, Live Longer: The Ultimate Consequence of Income Inequality,” Atlantic, April 18, 2014.

42. “What’s Gone Wrong with Democracy,” Economist, February 27, 2014, www.economist.com/node/21596796.

43. Nicholas Confessore, Sarah Cohen, and Karen Yourish, “The Families Funding the 2016 Presidential Election,” New York Times, October 10, 2015.

44. “Productivity Brief 2015,” The Conference Board, 2015, www.conference-board.org/retrievefile.cfm?filename=The-Conference-Board-2015-Productivity-Brief.pdf&type=subsite.

45. Edoardo Campanella, “Age and Productivity,” Foreign Affairs, April 20, 2016.

46. “Productivity Brief 2015.”

47. “Labour Productivity: Jan to Mar 2016,” Office for National Statistics, United Kingdom, July 2016, www.ons.gov.uk/employment andlabourmarket/peopleinwork/labourproductivity/bulletins/labour productivity/jantomar2016.

48. Chris Giles, Ferdinando Giugliano, and Sarah O’Connor, “Professional Services at Heart of UK Productivity Problem,” Financial Times, April 19, 2015.

49. Jennifer Ryan, “Robots Can’t Replace IT Workers, Doctors, Dentists, Haldane Says,” Bloomberg, December 16, 2015.

50. “The World Factbook,” Central Intelligence Agency, www.cia .gov/library/publications/the-world-factbook (accessed March 4, 2017).

51. Adam Szirmai, “Is Manufacturing Still the Main Engine of Growth in Developing Countries?” WiderAngle (blog), United Nations University–Wider, May 2009, www.wider.unu.edu/publication/manufacturing-still-main-engine-growth-developing-countries.

52. Robert J. Gordon, “Is U.S. Economic Growth Over? Faltering Innovation Confronts the Six Headwinds,” Working Paper, National Bureau of Economic Research, August 2012.

53. James Manyika, Jonathan Woetzel, Richard Dobbs, Jaana Remes, Eric Labaye, and Andrew Jordan, “Can Long-Term Global Growth Be Saved?,” McKinsey Global Institute, January 2015.

Chapter 4: The False Promise of Protectionism

1. John Williamson, ed., Latin American Adjustment: How Much Has Happened?, Institute for International Economics, March 1990.

2. “The Battle of Smoot-Hawley,” Economist, December 18, 2008.

3. Pankaj Ghemawat and Steven A. Altman, DHL Global Connectedness Index 2014, DHL, October 2014, www.dhl.com/content/dam/Campaigns/gci2014/downloads/dhl_gci_2014_study_low.pdf.

4. Ibid.

5. “Real Wages in Germany: Numerous Years of Decline,” DIW Berlin Weekly Report No. 28/2009, German Institute for Economic Research, October 23, 2009, www.diw.de/sixcms/media.php/73/diw _wr_2009-28.pdf.

6. Elise Gould, “2014 Continues a 35-Year Trend of Broad-Based Wage Stagnation,” Economic Policy Institute, February 19, 2015, www.epi.org/publication/stagnant-wages-in-2014.

7. Drew Desilver, “For Most Workers, Real Wages Have Barely Budged for Decades,” Pew Research Center, October 9, 2014, www.pewresearch .org/fact-tank/2014/10/09/for-most-workers-real-wages-have-barely-budged-for-decades.

8. Shawn Donnan, “Global Trade: Structural Shifts,” Financial Times, March 2, 2016.

9. John W. Miller and William Mauldin, “U.S. Imposes 266% Duty on Some Chinese Steel Imports,” Wall Street Journal, March 1, 2016; Shawn Donnan, “US to Hike Duties on Chinese Steel to Over 500%,” Financial Times, June 22, 2016.

10. “U.S.-China Trade: Eliminating Nonmarket Economy Methodology Would Lower Antidumping Duties for Some Chinese Companies,” Government Accountability Office, January 10, 2006, www.gpo.gov/fdsys/pkg/GAOREPORTS-GAO-06-231/html/GAOREPORTS-GAO-06-231.htm; Joshua P. Meltzer, “Deepening the United States–Africa Trade and Investment Relationship,” Brookings, January 28, 2016, www.brookings.edu/testimonies/deepening-the-united-states-africa-trade-and-investment-relationship.

11. “October 2015 Capital Flows to Emerging Markets,” Institute of International Finance, October 1, 2015.

12. Larry Elliott, “IMF Says Economic Growth May Never Return to Pre-Crisis Levels,” Guardian (London), October 7, 2014; “Legacies, Clouds, Uncertainties,” International Monetary Fund, October 2014, www.imf.org/external/pubs/ft/weo/2014/02.

13. “The Australian Economy and the Global Downturn,” Treasury, Government of Australia, www.treasury.gov.au/PublicationsAndMedia/Publications/2011/Economic-Roundup-Issue-2/Report/Part-1-Reasons-for-resilience (accessed July 17, 2017).

14. Global Employment Trends for Youth 2015: Scaling Up Investments in Decent Jobs for Youth, International Labour Organization, 2015, www.ilo.org/wcmsp5/groups/public/—dgreports/—dcomm/—publ/documents/publication/wcms_412015.pdf.

15. Russell Shorto, “The Way Greeks Live Now,” New York Times Magazine, February 13, 2012.

16. Shawn Donnan, “Obama Blocks Takeover of Tech Group Aixtron,” Financial Times, December 2, 2016.

Chapter 5: A Challenge to Democracy’s Dominance

1. Maurice Obstfeld, “Global Growth: Too Slow for Too Long,” IMFBlog, April 12, 2016, blogs.imf.org/2016/04/12/global-growth-too-slow-for-too-long.

2. China Global Investment Tracker, American Enterprise Institute Database, www.aei.org/china-global-investment-tracker (accessed November 15, 2017).

3. “World Economic Outlook,” International Monetary Fund, April 2017, www.imf.org/en/Publications/WEO/Issues/2017/04/04/world-economic-outlook-april-2017.

4. FT Confidential Research, Financial Times, May 2016, next .ft.com/content/c33c6854-2351-11e6-aa98-db1e01fabc0c.

5. “Global Patent Applications Rose to 2.9 Million in 2015 on Strong Growth from China,” World Intellectual Property Organization, November 23, 2016, www.wipo.int/pressroom/en/articles/2016/article_0017.html.

6. J. A. Cheibub, A. Przeworski, F. P. Limongi Neto, and M. M. Alvarez, “What Makes Democracies Endure?,” Journal of Democracy 7, no. 1 (1996): 39–55.

7. Steven Johnson, “Strongman Leaders More Trusted Than Democrats in Emerging World,” Financial Times, October 16, 2016.

8. Discarding Democracy: A Return to the Iron Fist, Freedom House, 2015, freedomhouse.org/sites/default/files/01152015_FIW_2015_final.pdf.

9. Joshua Kurlantzick, Democracy in Retreat: The Revolt of the Middle Class and the Worldwide Decline of Representative Government (New Haven, CT: Yale University Press, 2013).

10. “World Population,” Worldometers, www.worldometers.info/world-population/#region (accessed July 17, 2017); “GDP (Current US$),” World Bank, data.worldbank.org/indicator/NY.GDP.MKTP .CD (accessed July 17, 2017).

11. “Government Effectiveness Indicator,” Millennium Challenge Corporation, www.mcc.gov/who-we-fund/indicator/government-effectiveness-indicator (accessed March 4, 2017).

12. Peter Torday, “Coffee Price Soars After Brazilian Frost Damage,” Independent (London), July 11, 1994.

13. The Economic Report of the President, 2010, Cosimo Reports, 2010, 91.

14. David M. Herzsenhorn, “Ukraine in Turmoil After Leaders Reject Major E.U. Deal,” New York Times, November 26, 2013.

15. “World Bank Group President Jim Yong Kim’s Speech at George Washington University: The World Bank Group Strategy: A Path to End Poverty,” The World Bank, October 1, 2013, www.worldbank.org/en/news/speech/2013/10/01/world-bank-group-president-jim-yong-kim-speech-at-george-washington-university.

16. Homi Kharas and Andrew Rogerson, Horizon 2025: Creative Destruction in the Aid Industry, Overseas Development Institute, July 2012.

Chapter 6: The Perils of Political Myopia

1. “Beyond Distrust: How Americans View Their Government,” Pew Research Center, www.people-press.org/2015/11/23/1-trust-in-government-1958-2015 (accessed July 17, 2017).

2. “Turbulence Ahead: Renewing Consensus Amidst Greater Volatility,” McKinsey Global Institute, September 2016.

3. Dominic Barton, Presentation at Pi Capital, October 2013.

4. Dominic Barton and Mark Wiseman, “The Cost of Confusing Shareholder Value and Short-Term Profit,” Financial Times, March 31, 2015.

5. Barry Ritholtz, “Where Have All the Public Companies Gone?” Bloomberg View, June 24, 2015.

6. Teresa Kroeger, Tanyell Cooke, and Elisa Gould, “The Class of 2016,” Economic Policy Institute, April 21, 2016, www.epi.org/publication/class-of-2016.

7. “Investing in Britain’s Future,” Her Majesty’s Treasury, June 2013, www.gov.uk/government/publications/investing-in-britains-future.

8. “2015 Income and Poverty Census Report,” US Census, 2016, documents.latimes.com/2015-income-and-poverty-census-report; “GDP per Capita (Current US$),” The World Bank, data.worldbank.org/indicator/NY.GDP.PCAP.CD?locations=XC (accessed July 17, 2017).

9. “GDP (Current US$),” The World Bank, data.worldbank.org/indicator/NY.GDP.MKTP.CD (accessed July 17, 2017).

10. John Elliott, “Democracy Has Become a Fig Leaf to Cover India’s Failures,” Economic Times (India), March 30, 2014.

11. “Global Infrastructure Investment: Timing Is Everything (and Now Is the Time),” Standard & Poor’s Rating Services, January 13, 2015, www.tfreview.com/sites/default/files/SP_Economic%20Research_Global%20 Infrastructure%20Investment%20(2).pdf; Klaus Schwab, Global Competitiveness Report 2016–2017, World Economic Forum, 2016, www3.weforum.org/docs/GCR2016-2017/05FullReport/TheGlobalCompetitivenessReport 2016-2017_FINAL.pdf.

12. “Lobbying Database,” Open Secrets, www.opensecrets.org/lobby (accessed November 14, 2017).

Chapter 7: Blueprint for a New Democracy

1. “What’s Gone Wrong with Democracy,” Economist, February 27, 2014, www.economist.com/node/21596796.

2. Andreas Becker, “French Elections: Who Finances the Candidates?” DW, May 5, 2017, www.dw.com/en/french-elections-who-finances-the-candidates/a-38704682.

3. “US Business Cycle Expansions and Contractions,” National Bureau of Economic Research, www.nber.org/cycles.html (accessed October 23, 2017).

4. Philip Cowley, “Arise, Novice Leader! The Continuing Rise of the Career Politician in Britain,” Politics 32, no. 1 (2012): 31–38.

5. Chrysa Lamprinakou, “‘The Profession I Chose Was Politics’: The New Generation of Political Insiders,” Parliamentary Candidates UK, November 27, 2014, parliamentarycandidates.org/news/the-profession-i-chose-was-politics-the-new-generation-of-political-insiders.

6. Drew DeSilver, “House Seats Rarely Flip from One Party to the Other,” Pew Research Center, September 7, 2016, www.pewresearch .org/fact-tank/2016/09/07/house-seats-rarely-flip-from-one-party-to-the-other.

7. “End Gerrymandering Now,” endgerrymanderingnow.org/why-reform (accessed July 17, 2017).

8. “Global Voter Turnout Declining,” press release, International IDEA, archive.idea.int/press/pr20020419.htm (accessed October 23, 2017).

9. “Results of the 2014 European Elections,” European Parliament, www.europarl.europa.eu/elections2014-results/en/turnout.html.

10. Costas Panagopoulos, “The Calculus of Voting in Compulsory Voting Systems,” Political Behavior 30, no. 4 (December 2008): 455–467.

11. Elliot Frankal, “Compulsory Voting Around the World,” Guardian (London), July 4, 2005.

12. Lisa Hill, “What We’ve Seen in Australia with Mandatory Voting,” New York Times, November 7, 2011.

13. “Want to Make Me?” Economist, May 20, 2015.

14. Stefan Hansen, “Democracy of the Future—Nothing Less,” Scenario, May 19, 2011.

15. Michael Safi, “Have Millennials Given Up on Democracy?” Guardian (London), March 18, 2016.

Chapter 8: Retooling for Twenty-First-Century Growth

1. “Country Status Distribution, 1972–2016,” 2016, Freedom House, freedomhouse.org/report-types/freedom-world.

2. Freedom in the World 2017, Freedom House, 2017, freedomhouse .org/sites/default/files/FH_FIW_2017_Report_Final.pdf.

3. Monty G. Marshall, “Polity IV Project: Political Regime Characteristics and Transitions, 1800–2013,” Political Instability Task Force, June 5, 2014, www.systemicpeace.org/polity/polity4x.htm.

4. Homi Kharas and Andrew Rogerson, Horizon 2025: Creative Destruction in the Aid Industry, Overseas Development Institute, July 2012, www.odi.org/sites/odi.org.uk/files/odi-assets/publications-opinion-files/7723.pdf.

5. “Global Terrorism Index 2016,” Institute for Economics and Peace, November 2016, economicsandpeace.org/wp-content/uploads/2016/11/Global-Terrorism-Index-2016.2.pdf.

6. Aaron Reeves, Martin McKee, and David Stuckler, “Economic Suicides in the Great Recession in Europe and North America,” British Journal of Psychiatry (June 2014); “Depression: A Global Crisis,” World Federation for Mental Health, October 10, 2012, www.who.int/mental _health/management/depression/wfmh_paper_depression_wmhd_2012 .pdf.

7. Chris Weller, “Jeff Bezos Could Be the World’s First Trillionaire by 2042,” Business Insider, July 28, 2017.

8. Raghuram G. Rajan, “Has Financial Development Made the World Riskier?,” NBER Working Paper No. 11728, National Bureau of Economic Research, November 2005, www.nber.org/papers/w11728.

4 THE FALSE PROMISE OF PROTECTIONISM

NEARLY SIXTY YEARS AGO, A mechanical engineer named Keith Tantlinger left his job as vice president of a company in Spokane, Washington, that manufactured trailers for trucks. He set out to improve the shipping container, which was then built in a multitude of sizes, could not be lifted by crane or easily transferred to trucks and trains, and could not be stacked too high, for fear that rough waves would knock cargo overboard. He set out to build a better box.

What Tantlinger did was simple enough: he developed a corner mechanism that locked the containers together, making easy stacking possible. But the consequences of his innovation were enormous: millions of ships now carry tens of millions of containers of goods that reach hundreds of millions of consumers around the world, all thanks to Tantlinger’s design. The history of globalization is hung on a timeline of stories like Tantlinger’s, reminding us that though today’s global economy feels inexorable, it grew out of many events, big and small, each a prerequisite for making our lives more interconnected, globalizing our world.

The principles of globalization are enshrined in the Washington Consensus, codified in 1990 by economist John Williamson. ¹ Williamson focused on free trade in goods and services, cross-border capital flows, the movement of people, and the preeminence of the private sector as an engine for economic success. These became the template for economic policy for more than twenty-five years.

Brexit and the election of Donald Trump in 2016 represent a profound challenge to the Washington Consensus. Much of the criticism leveled against globalization today is related to the idea that it enriches the few, leaving the many behind. Those making this argument frequently advocate the wholesale abandonment of globalization, putting the very existence of an international agenda at risk.

This challenge to the Washington Consensus has been a long time coming. Politicians today are paying the price for decades of expedient short-term policymaking that has run counter to the thesis of globalization. While politicians have been advocating open-door trade policies over the last several decades, in reality trade and immigration policies with a more protectionist stance have prevailed over genuinely free trade. This diluted form of globalization failed to create equitable growth, permitted the economy to stagnate, and left politicians vulnerable to the millions of disaffected voters who blame globalization itself for their deteriorating circumstances.

Rather than make the increasingly difficult case for globalization, the leaders of leading nations are pivoting toward greater isolationism. Leaders who once embraced globalization, as well as new leaders standing on a platform of isolationism, are moving toward protecting local industries through higher trade tariffs and their labor markets, along with increased immigration control, in attempts to boost domestic employment. However, this fresh cycle of short-term thinking further undermines long-term economic growth.

History has shown that when developed countries start on a path of protectionist policies that lead to greater isolationism, other countries are forced to follow suit. The risk is a great unraveling of globalization. This chapter seeks to reckon with protectionism’s consequences on trade, capital flows, and immigration and to highlight the perils of the deglobalized world that myopic policymakers are constructing.

TO UNDERSTAND THE FATES WE potentially face, it’s worth exploring what globalization means in practice. Globalization can be seen as a spectrum—at one end of the spectrum is a world with no globalization, where states exist in total isolation from one another, while at the other end is full globalization, characterized by unfettered movement of goods, services, capital, and people. In practice, full isolation and full globalization are abstract ideals; neither exists in pure form in reality. In general, most countries operate in between these extremes, adopting a middle-of-the-road approach to openness and internationalism—a globalization-lite regime, as it were.

Theoretically, under a fully isolationist approach, policies are nakedly protectionist, limiting global trade (through the imposition of higher trade tariffs and quotas, and competitive currency devaluations), capping cross-border capital flows, and curbing immigration. In each case, the goal is to strengthen the domestic economy by protecting jobs and shielding the local economy from the costs of global competitive forces. However, history shows that protectionism causes economic weakness, costs jobs, and slows economic growth. One of the clearest examples can be seen in the almost nine hundred import duties raised by the Smoot-Hawley regime in the 1930s, which led to dire consequences for employment and GDP. ² Strict and high capital requirements (aimed at making banks stronger) can drastically limit international lending, significantly cap cross-border flows, and thereby constrain investment in the real economy. Ultimately this isolationist stance of higher erected national borders is to the detriment of growth and living standards.

The other extreme is an ideal of complete globalization, in which trade, capital, and even labor flow freely across national borders as if they do not exist. This pure form of globalization rests on the idea of comparative advantage—whereby one country carries out a particular economic activity (such as making a specific product) more efficiently than others. Trade, capital, and labor then flow to where they can derive the greatest economic benefit. As everyone grows and produces the goods and services for which they have the greatest comparative advantage, not only do their wages rise, but by earning more they have more opportunity to buy more and higher-quality goods and services from across the world. The promise of globalization, according to this ideal, is that “everyone wins,” with notable economic gains flowing to citizens across the world—whether based in developed or developing countries, or provider of labor or capital. In the view of some globalization advocates, if this has not happened in practice, it is not because the idea of globalization itself is problematic; it is because its implementation has not gone far enough.

What prevails instead is a middle ground of partially implemented globalization. Indeed, it is unclear whether full globalization can ever truly be implemented under current conditions. The real world is characterized by a mishmash of bilateral (as opposed to global) trade agreements that reflect national interests and political expediency. Despite efforts to the contrary, capital flows and immigration decisions are made by national authorities. This middle ground of globalization is a direct product of zero-sum thinking—the idea that in key policy decisions and their implementation, nations are essentially winners or losers. It is also a product of the short-term mentality of policymakers who are oblivious to the true costs and consequences, borne tomorrow, of the policy decisions they make today. In effect, policymakers are paying the price for not pursuing and implementing a purer form of total globalization.

The unavoidable conclusion of the Brexit vote and the election of Donald Trump is that globalization has failed to deliver all things to all people. Instead of benefiting from a globalizing world, many millions of people are instead suffering under worsening living standards and falling real wages, groaning under mounting personal debt and lack of opportunity. Rather than lifting all boats as promised, greater globalization and global integration in trade, capital flows, and immigration have created pockets of losers whose objections to a global world order have seeped into political discourse.

Globalization’s success seemed almost inevitable until just a few years ago. As recently as 2014, experts predicted that “trade would grow twice as fast as GDP while international investment and information flows scaled new peaks.” ³ Yet according to the Financial Times just two years later, “flows of finance, goods and services have slowed—falling from a peak of 53 percent of global output in 2007 to 39 percent in 2014”—evidence that in the aftermath of the global financial crisis, trade and capital flows have been hit hard. While globalization helped to improve living standards and foster growth in a number of developed companies beginning as early as the 1990s, it also created new economic problems. In the case of Mexico, and Latin America more generally, globalization and greater market openness led to greater government indebtedness, recession, and banking-sector stress, and efforts to address these aspects intensified the costs and accentuated cycles of economic booms and busts. The North American Free Trade agreement (NAFTA) opened trade to Mexico, granting the country access to capital investment. As a result, the Mexican government was able to increase its borrowing in US dollars. Political instability led to the devaluation of the Mexican peso in late 1994, precipitating capital flight and a spike in inflation to over 50 percent. Mexico’s so-called Tequila Crisis proved to be an early warning of the risks that came with globalization and the opening of free trade. It prompted the International Monetary Fund (IMF) to reexamine its efforts to promote open capital markets and integration. It also prompted other countries to question the benefits of free trade.

With recent declines in trade and reverses in globalization, we have entered an age of ambiguity. Established measurements suggest that globalization is now slowing or, worse, receding. The DHL Global Connectedness Index describes itself as providing “the most comprehensive and timely account of the world’s global connectedness… covering 140 countries that encompass 99 percent of the world’s GDP and 95 percent of its population. It focuses on 12 types of trade, capital, information, and people flows (or stocks cumulated from past flows).” Drawing from more than one million data points that stretch back to 2005, this measurement reveals that some aspects of globalization appear to have gone into reverse. The 2014 DHL Global Connectedness Index reveals “only a very modest increase in the overall level of globalization from 2011 to 2013. While information and capital flows are growing, flows of people remain stable, and trade connectivity is trending downward.” What we are seeing may amount to the biggest drop-off in the overall level of globalization since World War II. ⁴

In the run-up to the financial crisis, the mantra of many economists and politicians was that globalization was good for growth. But now there is a rising din of concern that globalization might be not only correlated with worsening living standards (declining real wages in the United States and across Europe, widening income inequality) but also a catalyst for these economic ills.

Therefore, as the world settles into a period of low growth, politicians and policymakers are grasping at politically expedient policy measures to attempt to salvage their economies in the short term, such as pulling out of trade deals (such as the United States did with the Trans-Pacific Partnership) and imposing new trade tariffs. Protectionism is on the rise. Led by the United States, the G20 imposed 644 discriminatory trade measures on other countries in 2015, according to Global Trade Alert. In the wake of intensified capital controls on banks, cross-border capital flows have been in decline.

Many of these threaten longer-term economic prospects. Bad policy leads to the misallocation of scarce resources. Not only does this have a negative effect on GDP in the long term, but it kills off economic growth and foments political instability in the short term, further discouraging much-needed investment. As these phenomena worsen economic growth, additional bad policy decisions aimed at short-term gain will only worsen the cycle. As we attempt to overcome the headwinds preventing us from achieving growth, we must avoid misguided solutions that attempt (sometimes in good faith) to save us from chaos but will end up pushing us over the edge instead.

The rising disaffection with globalization cannot be ignored. The concerns are valid; many people have lost out and been left behind as internationalization has gathered momentum. Millions of emerging market farmers have been shut out of trade zones, while many workers, particularly in the manufacturing sector of developing countries, have seen their wages fall as globalization has taken hold. Protectionist, multibillion-dollar programs—such as the European Union’s Common Agricultural Policy (just under 40 billion euros per annum) and farm subsidies in the United States (around US$20 billion a year)—prop up domestic producers at the expense of emerging economies. These unfair trade practices not only are antithetical to the ideals of globalization but also have a devastating impact on the income and living standards of farmers in South America, Africa, and Asia, who are unable to compete with subsidized rivals in the West. The result is a dramatic drop in the amount of proceeds from trade available for much-needed investment in infrastructure in emerging economies. And this has resulted in slower growth across the developing world, home to more than 80 percent of the world’s population.

The protectionism around farming in developed countries is an example of how globalization has been compromised. Essentially, as stated above, these shortcomings identified here are not of globalization so much as of globalization’s incompleteness. People’s concerns around globalization are valid; however, their concerns are not with globalization per se as much as they are about the halfhearted and skewed way globalization has unfolded. Put another way: they think they are objecting to globalization when in fact they are objecting to an incomplete and impure form of globalization that has benefited too few people. To be sure, some in developed and developing economies have benefited from globalization, but it is also true that large pockets of society—such as farmers in the developing world and manufacturing and industrial workers in the West—have suffered in an increasingly integrated international regime.

The results of a University of Chicago study harden the resolve of those who believe globalization has had limited benefit. In a presentation entitled “What Future for Capitalism?” University of Chicago professor Luigi Zingales has compared the economic growth performance of developed and developing nations in what he terms the preglobalization period (1950–1980) versus the globalization period of 1980–2007. As Zingales reveals, developed economies such as France, Italy, Japan, and Sweden all registered declines during the globalization era, and no discernible increase in economic growth. The study shows that at the macro level, only large emerging market economies have benefited. These include India, which nearly doubled from 2 percent to 3.8 percent, and China, which grew from 3.2 percent to 8.8 percent in the preglobalization and globalization periods, respectively.

The last three and a half decades have offered the potential for broad-based wage growth, but the vast majority of people have seen few of these economic gains. Real wages have suffered, hurting living standards for many workers in developed economies and around the world. For example, German real wages declined by 4.5 percent from 2000 to 2009. ⁵ And, according to the Economic Policy Institute, “ever since 1979, the vast majority of American workers have seen their hourly wages stagnate or decline. This is despite real GDP growth of 149 percent and net productivity growth of 64 percent.” ⁶ A 2015 Pew survey notes that, “after adjusting for inflation, today’s average hourly wage has just about the same purchasing power as it did in 1979, following a long slide in the 1980s and early 1990s and bumpy, inconsistent growth since then. In fact, in real terms the average wage peaked more than 40 years ago: The US$4.03-an-hour rate recorded in January 1973 has the same purchasing power as US$22.41 would today.” ⁷ Whatever the cause of these trends—whether jobs moving offshore to lower-cost countries or automation replacing workers—they are serving as a catalyst for protectionism and more aggressive deglobalization.

Although there are real frustrations prompting the rising antiglobalization chorus, these flaws ultimately have less to do with the ideal of globalization itself than with the inferior form of globalization that policymakers have implemented over recent decades—a kind of globalization lite.

Given the unsettling political portents, it is understandable that politicians and policymakers today are responding to the electorate’s grievances against globalization. But regrettably, across the world—in emerging and developed economies alike—politicians are pivoting toward inferior political and economic models that offer quick wins but are guaranteed over the long term to reduce economic growth, increase poverty, and spur more political and social unrest. Rather than address globalization’s shortcomings, their policy choices will only entrench the inferior model of globalization, guaranteeing a descent into an economic equilibrium of higher barriers and even lower growth.

ON MARCH 4, 1933, IN his first presidential speech, Franklin Roosevelt stated: “Our international trade relations, though vastly important, are in point of time and necessity secondary to the establishment of a sound national economy.” Roosevelt’s protectionist approach is a common one among politicians when their economies are under pressure and they themselves feel pressed to act. A protectionist stance may be appealing and even understandable in the immediate term. Such an approach can appear to protect jobs in an economic down cycle. But in the long term, it not only harms the nation’s economy but can diminish growth globally as well. Today, dismantling our globalized economy in an uncoordinated and unilateral fashion, nation by nation, is having devastating effects on trade, capital, and labor.

Certainly since the 2008 global financial crisis, trade, a central pillar of globalization, has deteriorated. As nations erect trade barriers and avoid new free trade agreements to try to stop the bleeding in their own economies, billions of dollars are blocked from entering the veins of global commerce. Many nations are employing tariffs and quotas to raise the prices of imported goods and services, in favor of local producers. In the European Union, tariffs, quotas, export bans—from bananas to rare earths—have weighed down global trade. Already there is considerable evidence that global trade is diminishing. In 2013, the World Trade Organization revised its forecast for global trade growth down from 4.5 percent to 3.3 percent—a striking decline from the average 5.3 percent growth of the previous twenty-five years. According to the Financial Times, “[2015] saw the biggest collapse in the value of goods traded around the world since 2009, when the impact of the global financial crisis was at its worst.” ⁸

But it is not just naked protectionism that is driving this trend. Loose monetary policies such as quantitative easing and ultra-low interest rates weaken the home currency, so that a country becomes more trade competitive at the expense of its trading partners. In what are termed “beggar thy neighbor” approaches, other economies follow suit with the view to becoming even more competitive, by increasing global demand for their goods and reducing home demand for imports. Ultimately, such tit-for-tat policy responses, in which one country attempts to fix its economic woes in a way that damages other economies, make the whole global economy suffer.

Of course, this retrenchment in global trade is not new—it is an all-too-common response to economic difficulties. As we have seen, the American Smoot-Hawley Tariff is the classic example of this protectionist sentiment. By imposing an effective tax rate of 60 percent on more than 3,200 products imported into the United States, Smoot-Hawley accomplished the impressive feat of decreasing GDP by more than $47 billion, from $104.6 billion in 1929 to $57.2 billion in 1933 according to the US Bureau of Economic Analysis. Similarly shortsighted policies were common across the West at the time, constricting economic growth in a time of profound uncertainty. Yet they continue to have appeal today. As of 2016, the United States has raised its tariffs on imports of cold rolled steel from China to 522 percent from 266 percent. ⁹ Other recent examples of goods under US trade protection and associated tariffs are paper clips (at roughly 130 percent), peanuts (at 163.8 percent), and tobacco, facing a staggering 350 percent tariff. ¹⁰ Although intended to protect the economic welfare of its own people, a nation’s trade tariffs are anathema to liberal market-friendly thinking. As politically appealing as they may be in the short term, they tend to hurt economic growth in the long term.

The turn to protectionism now is merely the latest in a series of shortsighted decisions that began in the early years of globalization and would go on to undermine it. First, leaders squandered the windfall from trade and failed to invest in longer-term, economic growth–enhancing projects. Far-sighted US politicians in the 1980s would have backed a big investment agenda in infrastructure, schools, and skills to usher in a new economic era on the back of the wealth earned from globalization, thereby avoiding declines in wages and employment. However, this did not occur.

Second, rather than end protectionist policies protecting their farmers, Western governments instead kept farm subsidies in place and sought to compensate emerging countries for lost income through billions of dollars of foreign aid flows. However, foreign aid programs have been a catastrophe, fueling corruption, leading to inflation, killing off export sectors, supporting political factions, and fostering dependency. Moreover, the United States has provided low-interest loans to Middle America, especially to support home ownership. These debt programs (particularly through Freddie Mac and Fannie Mae) gave people the illusion that their livelihoods were improving even as their wages were falling and debt obligations were rising. This debt was a direct cause of the financial crisis that many are yet to emerge from. In both instances economic growth has, over the long term, suffered.

Finally, national interests remained paramount, despite the emergence of a global world order. Today’s form of globalization is one in which no one is responsible for the global economic interest. To give effective globalization a chance, national governments would need to cede real power and authority to global institutions. Such international agencies do exist: for example, the World Trade Organization is supposed to preside over trade, and the IMF maintains oversight over international capital flows. But even these institutions are answerable and superseded by policy agendas of national governments, and thus struggle to implement a truly global agenda that benefits all.

Politicians, especially those in political systems with short electoral cycles that force them to vie constantly to win the next near-term election, are unlikely to cede power and authority to a supranational agency. Therefore the question becomes whether policymakers can take any action to limit the costs that globalization imposes on the losers without jettisoning the whole globalization agenda and letting nation-states become more protectionist. Put another way: Can public policy mitigate the costs to the losers in a globalization-lite world? Historical evidence to this effect is not encouraging.

This new wave of protectionism in trade builds on a phenomenon that has been entrenched in the developed world for decades. Even at the best of economic times, countries such as the United States (via its farm subsidy program) and those in Europe through the Common Agricultural Policy engage in trade protectionism. This goes some way to explain why the United States, despite touting the virtues of free market economics and capitalism, is ranked by the Fraser Institute’s index on economic freedom as only the sixteenth most economically free country in the world.

Nor is it just trade that is under protectionist siege. Capital is also facing new barriers to free movement. Capital is money targeted for investment in physical plant and equipment and in infrastructure, such as roads, railways, ports, and factories—all crucial for increasing growth. All countries, but poorer countries in particular, rely on capital inflows to fund their economic growth and development. For our purposes here, in addition to foreign direct investment (FDI), capital flows encompass short-term payments and cash movements. This refers, for example, to hedge funds trading in stocks across different countries, or global companies needing to shift cash around to pay salaries across borders.

Recently, capital flows to emerging economies have been in decline. In October 2015, the Institute of International Finance reported that for the first time since 1988, the amount of money flowing out of emerging economies would, in 2015, exceed the quantity of money flowing in. Worse still, with only around US$550 billion of foreign investor capital expected to flow to emerging countries (at its peak in 2007 it was closer to US$1.2 trillion), capital flows to the developing region in 2015 would be lower than those registered in 2008 and 2009 in the depths of the global financial crisis. ¹¹

In recent years, much of the movement of capital away from the developing world occurred in response to tightening monetary policy by the US Federal Reserve after a period of loose policy to stave off the financial crisis. The program of reducing quantitative easing, known as the “Taper Tantrum” of summer 2013, combined with a subsequent fever pitch of speculation over interest rate increases, contributed to the withdrawal of capital. In February 2017, the Institute of International Finance reported that capital flows to emerging markets remained flat, at around US$680 billion, with high downside risks for FDI. Financial market expectations for interest rate hikes in the United States are a contributing factor to weakness in capital flows destined for the emerging markets, as investors look to gain from higher-interest-rate environments. However, the anemic economic growth conditions across the developing world also lower the opportunity for returns and hurt capital inflows. The softness in capital flows to emerging economies could prove more damaging in the long term as the prospects for economic growth continue to wane. Already the world’s largest and most strategically vital emerging nations—such as Argentina, Brazil, Colombia, India, Indonesia, Mexico, South Africa, and Turkey—are only growing at 3 percent or less a year. Ever more damning is the implication of the IMF’s October 2014 “World Economic Outlook” that the world will never again see the rates of growth witnessed prior to 2007. ¹² This weak economic backdrop comports with a weak capital inflow story. According to the Reserve Bank of Australia, the movement of money through the financial system has been stagnant over the past decade. In dollar terms, cross-border capital inflows among the G20 economies have fallen nearly 70 percent since mid-2007. ¹³ Ultimately, slow economic growth leads to decreased investment, which in turns leads to even slower growth.

Exogenous factors are not the only force driving down capital cross-border flows. Feeding off the fervor for trade protectionism, public policy has turned decidedly protectionist on capital flows too. Capital controls (particularly in developed nations), especially those imposed on banks and other large financial institutions in the wake of the financial crisis, effectively increased the cost of higher-risk lending—which affected emerging economies disproportionately. Deepening the problem has been protectionist tendencies within developing markets. In India, Brazil, Cyprus, and elsewhere, choke points are appearing in cross-border capital flows. For example, in 2013, Cyprus became the first Eurozone country to apply capital controls, limiting credit card transactions, withdrawals, and transfers abroad. All of these policies were intended to prevent an outflow of capital. Although the capital controls were subsequently reversed two years later, many economists see Cyprus’s capital control measures (and the tacit endorsement of them by international organizations such as the IMF and the European Union) as a tipping point away from the globalization agenda that had governed the global economy for three decades, and indication of growing support for deglobalization, if even just for short-term rebalancing reasons.

Capital flows serve as the lifeblood of an economy, and they are slowing not just as a result of investment decisions in the wake of worsening global growth prospects but also because of deliberate protectionist policies by governments. As such, it is no surprise that economic growth rates in emerging countries have continued to stall. Protectionist measures on capital flows—although precipitated by policymakers’ desire to stabilize and strengthen the financial infrastructure in the wake of the 2008 financial crisis—have inadvertently contributed to lower growth by reducing the capital available for investment. The problem has been made worse by the way countries have reacted to other nations’ policies by imposing additional capital controls of their own, further limiting cross-border investment and forcing global growth even lower.

The globalization agenda was designed to integrate countries by easing the trade in goods and services, the flow of capital, and the movement of people across borders. Over the last thirty years, and despite recent retrenchment, globalization has succeed to some extent on the first two scores. But it has done much less with regard to the movement of people. And if anything the 2016 Brexit vote and the election of Donald Trump on an anti-immigration platform have shown that national governments seem to be moving further away from globalization’s aspirations. The 2015 European refugee crisis exemplifies how the movement of people has never fully been integrated into a global regime, despite it being a key pillar of the globalization agenda. Because immigration has remained the purview of individual nation-states, rather than coordinated across borders, this backdrop has led to a disorderly movement of people and ultimately moments of crisis, as in 2015.

The over one million refugees who have arrived in Europe since 2015 make up just a small part of the over sixty-five million people displaced by war or persecution—the largest number in recorded history. But the present refugee crisis marks the first time in history that the European Union has been tasked with accommodating so many people from outside the continent, including new arrivals from Libya, Syria, Iraq, and Afghanistan, particularly in such a disruptive and disorderly fashion.

Although labor quality and quantity are key inputs of all canonical economic models of economic growth, there remains no globally integrated approach to migration to correspond to the international frameworks, agencies, rules, and regulations that govern capital, in the form of trade and cross-border flows, and productivity, largely driven by the spread of ideas. Labor policy remains the purview of nation-states, whose approaches often differ dramatically. For example, whereas Canada and Australia make immigration decisions based on a point system (which grants weights to academic achievement, work experience, and so forth), the United States does not have as transparent a grading system for new immigrants.

The lack of a globally integrated immigration approach is a form of protectionism that hurts economic growth. According to the International Labour Organization, there are approximately 73.4 million young people between the ages of eighteen and twenty-four who are out of work around the world. The global labor imbalance is particularly pronounced when you consider the worsening demographic dynamics of an aging population in the “West” (including Japan), versus the skew to the young in the rest, where up to 70 percent of the population is under the age of twenty-five. ¹⁴ Deploying labor from countries of surplus to regions of deficit could serve to solve this imbalance. Countries that face a dearth of labor already tap the global talent pool in a unilateral way by attracting labor through guest worker programs and specialized visas. However, these unilateral approaches can be inefficient in that they impose caps on the movement of labor, thereby leaving pools of talent underutilized. A global policy that targeted an optimal migration level could capitalize on the pools of workers around the world.

Such a proposition is contentious. The debate on immigration is complicated by two factors: first, its impact on inequality, and second, its links to state-sponsored welfare systems. Immigration increases the labor pool and thereby reduces labor costs; thus it is seen as attractive to large businesses and wealthier individuals who might wish to employ cheaper labor in jobs ranging from caregiving for children and the elderly to construction. But lower-income workers often see immigration as increasing the competition for finite jobs, forcing their own incomes downward and reducing their living standards. As a general rule, the greater the proportion of lower-skilled workers within an immigrant population, the greater the downward pressure on wages, which in turn worsens income inequality. However, one study in the United States finds that immigration has only marginally affected income inequality over time, by less than half a percentage point change in the Gini coefficient scale. Similarly, UK studies have found only a small impact by immigration on wages—of approximately two pence an hour (or £40 a year). Meanwhile, local citizens worry that open-door migration adds considerable pressure to state provision of welfare and employment prospects. With more people coming into a country than leaving there is a concern that the state welfare system will come under strain, particularly if the newcomers are unable to find work. In an economic environment of slow and slowing growth, and with the mounting ferocity of the economic headwinds—rising population, widening income inequality, and higher (state) debt burdens—concerns about increased immigration become more biting and impossible for politicians to ignore.

Nevertheless, politicians are not immune or protected when public perception of immigration’s impact diverges from reality. When disorderly immigration is combined with both worsening income inequality and an unsustainable welfare state that cannot support a growing population, these factors can be a drag on growth.

This chapter has shown how policymakers are erecting new barriers to trade and to capital. While with regard to labor we are starting from a point of much less integration and coordination, backtracking exists there as well, whether with Brexit or Trump’s proposals. In essence, the anxieties of the low-global-growth era are leading to a retreat from even the most modest efforts at helping people find work across borders. Within the framework of capital, labor, and productivity—the three key drivers of economic growth—there has been a general acceptance under the rubric of globalization that the movement of capital and ideas (embedded in productivity) is acceptable. In contrast, the free movement of people is fraught with social, cultural, and economic resistance.

IN 2012, THE New York Times Magazine featured a report from Greece on how ordinary people were faring amidst a wrenching depression: “A quarter of all Greek companies have gone out of business since 2009, and half of all small businesses in the country say they are unable to meet payroll. The suicide rate increased by 40 percent in the first half of 2011.… Nearly half the population under 25 is unemployed.” ¹⁵ The reporter concluded: “Greece is devolving into something unprecedented in modern Western experience.”

At the time feverish Greek demonstrations against its economic collapse, austerity, and globalization were largely seen as a view from the fringe. Riots and protests across the country that started in 2008 were still continuing in 2017. Today, Brexit and Trump tell us these sentiments—once perhaps hidden—are now central to political debate. Whether it was debt or globalization or a combination of both that precipitated Greece’s economic woes is almost immaterial; the protests represented an outright rejection of globalization and the international bodies such as the European Union and the IMF that were imposing global policies in the national context. The demonstrations were not just about better public management; the austerity Greece faced was seen as objectionable also because it was deemed necessary by foreign (global) dictate. Meanwhile, at a macro level, Greece’s GDP per capita fell from US$32,000 in 2008 to US$18,000 in 2015, and with the exception of some weak growth in 2014, the economy has been contracting ever since it first shrunk in the final quarter of 2008. The country’s debt-to-GDP levels has risen to close to 180 percent—among the highest in the region. Living standards have deteriorated considerably, with more than 45 percent of young adults unemployed and more than a third of the country’s total population classified as being at risk of indigence or social exclusion.

For many policymakers today the fear of losing control of their economies to outside forces and becoming “another Greece” is tempting them to pivot toward quick-fix protectionist policies that in the long term are likely to inhibit economic growth and spark more turmoil. Trade protectionism, capital flow diminution, and restrictions on migration are all likely to reduce the investment needed to power growth.

First, a decidedly more siloed world—of higher trade barriers and more biting restrictions on capital repatriation—will force businesses to adopt more local and less global business models. In essence, businesses will be more likely to adopt a federal structure, relying on local and regional capital, and will be less likely to be centrally run from leading financial centers. This change will significantly alter how businesses fund themselves, how they structure costs, and how they view the long-term growth proposition.

Second, a world of greater protectionism and more fervent deglobalization has a significant bearing on inflation, which will come in two stages: first as short-term deflation and then as long-term inflation. Deflation is a natural artifact of protectionism as it cools economic activity through reduced trade. Already, a world of slowing economic growth and dragging global demand has lowered prices and subdued inflation in all manner of goods and services. This has been observed perhaps most starkly across the commodity composite from oil, copper, and iron ore; prices have fallen considerably alongside the weakness in global demand. Beyond low energy costs, low and declining wage growth and indeed the price of capital (money) itself—reflected in the decline in the price of money (the interest rate)—are all a reflection of a prevailing deflationary world.

Dambisa Moyo, EDGE OF CHAOS: HOW TO FIX POLITICS?

5

A CHALLENGE TO DEMOCRACY’S DOMINANCE

NOTES

4

THE FALSE PROMISE OF PROTECTIONISM

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