The Road to Global Prosperity
From THE ROAD TO GLOBAL PROSPERITY by Michael Mandelbaum.
The Top Priority in International Affairs
Economic growth isn’t dead. The recession and the euro crisis hit hard in the United
Statesand Europe, but the emerging markets of Brazil, Russia, India and China, that is, the
BRIC nations, grew. The global trend of economic growth from 1991 to 2008 took a break for
a time but then continued, as economic expansion proved the most likely path for world
markets. Prosperity must keep going – it governs the health and safety of the world’s seven
Pursuit of wealth can be a cooperative and mutually beneficial endeavor. Power struggles
end with winners and losers; economic expansion creates winners on all sides. The money
generated by international trade boosts living standards, fosters political stability andcreates
an incentive for adversaries to get along.
The 21st century will be an era of relative peace and democratic capitalism. A new mindset
of “war-aversion” avails; it’s better to trade and invest with your rivals than to make war.
Weaponry advances have also raised the stakes of war. Advanced nations can easily kill
many people and are less willing to do so. Yet war has not disappeared. Conflict in Congo
claimed five million people in the 1990s. Because Congo matters little to the world economy,
its war created no fiscal waves outside Central Africa. War would shock the economies of
North America, Europe and Asia – and so has become rare. The newly emergent powers of
Russia, India and China have less war-aversion than the West’s developed nations. Though
they are less skittish about war, they remain reluctant to engage in it. China, for instance,
would see a declaration of sovereignty by Taiwan as an act of war. Yet China is so
intertwined in the global economy that it can’t afford a conflict that might disrupt commerce
or invite sanctions from trading partners. Costs of war make invasions and fighting a poor
investment, especially compared to the alternative of vibrant trade. As the United States
emerged as the world’s policeman, spending by American consumers – not fighting by
American soldiers – has proven the most powerful driver of global prosperity over the past
International trade is a force for good, fostering cooperation and discouraging war. Yet many
governments still protect their economies from free trade. Protectionism, deeply embedded
in 20th-century nationalism, remains a powerful force in global politics. Nations recognizethat
globalism can be economically disruptive. A country that enters world markets runs the risk
that some of its citizens will lose their jobs because they can’t compete with those who
produce similar goods and services elsewhere. Governments respond to this threat by
creating barriers to foreign competitors, like high tariffs on imports. Political pressure also
can thwart cross-border investments. For instance, in 2005 a state-run firm from China tried
to buy Unocal, an American oil company. In 2006, Dubai Ports World sought to take over a
company that managed several US ports. India and Brazil struggle with opening their
borders to international trade.
The US Housing Bubble and the Euro Crash
The US housing bubble resembles a drinking binge. The reveler has a couple of drinks, then
a couple more. As euphoria builds, the partier drinks until he collapses. The American
housing market party’s driving force wasn’t alcohol, but cheap money and rising property
values that fed individual decisions to borrow in order to buy real estate. As the bubble
swelled, foreign capital flooded the US. As American consumption outpaced production and
investment outran savings, more-frugal nations – like China, Japan and Germany – sent
their surplus capital to the US.
The housing crash is in the rearview mirror, but the US economy still suffers trouble spots.
The US is the planet’s largest debtor, a position that’s unlikely to change. It must slash its
federal budget deficit and wean its appetite for foreign fossil fuels. While the US spends too
much, China spends too little. Its consumers save heavily because their nation lacks a social
or retirement safety net. China has become the world’s manufacturer, but consumes less
than it makes. Such imbalances provide a continued source of global economic tension.
The US housing bubble led the world economy into the 2008 recession, but the US holds no
monopoly on poor financial decisions. Consider the euro crisis: Europe created the euro to
reduce its exchange-rate risk and allay currency friction resulting from European countries
doing business with their neighbors. The new currency was supposed to foment European
political unity and economic prosperity. It yielded the opposite effect. The model of the US
was, in part, the idea behind the euro. If 50 states could share a currency, why couldn’t the
This overlooked several key distinctions. Sovereign monetary policy facilitates responding to
a recession. In the US, a common language and ease of movement across state borders
acts as a pressure valve for unemployment. If unemployment spikes in Michigan and stays
low in Texas, residents of Michigan can relocate to follow those Texan jobs. The federal
government provides unemployment compensation to residents of both states. The euro’s
major miscalculation was ignoring the reality that national borders and a currency area must
go hand in hand. The euro plan’s weaknesses became clear after the Greek meltdown. The
euro required member nations to have a deficit of less than 3% of GDP and total debt of no
more than 60% of GDP. Greece lied about its numbers to meet the requirements. The euro
bubble popped as southern European countries imported more than they exported.
In 2008 and 2009, the US government sprang into action to stop the damage from the
mortgage meltdown. The euro zone lacked a central government and lender of last resort,
and the public-sector rescue was slow to respond. The euro was meant to nurture unity, but
in crisis, old divisions surfaced. Germans chafed at bailing out their profligate neighbors.
Greeks and Spaniards balked at the imposition of austerity measures. The crisis and its
political hangover leave the euro zone with an uncertain future. Keeping the euro zone intact
has proven painful and contentious, but breaking it up might be even more costly and
The BRICs: A Shaky Building Block
Investors lavish attention on Brazil, Russia, India and China – the BRICs, as a Goldman
Sachs economist named them in 2001. Their combined GDP quadrupled from 2001 to 2011.
Dynamic and fast growing, these four nations offer a glimpse of the future global economy.
As the developed world fell into recession – first the housing crash in the US, then the euro
crisis in Europe – the BRICs posted impressive growth rates. For all their gaudy results,
though, the BRICs face political turmoil and economic fault lines. They illustrate the promise
and the problems of developing nations as a force in world commerce.
Brazil has long held the mantle of being the nation of the future. With its vibrant population
and huge landmass, it has been poised for greatness. For decades, Brazil followed a
strategy of populism. Its economy relied on “import-substituting industrialization,” as
government protections for the steel, aluminum and auto sectors propped up homegrown
industries by keeping out foreign competition. The government owned some companies,
paying generous wages and establishing a costly pension system.
Brazil borrowed and printed money – inflation soared, hitting 45% in the 1960s and 428% in
the 1990s. In 1993 alone, inflation hit 2,708%. In the course of 20 years, Brazil issued four
different currencies, hoping each new unit might keep prices in check. Brazil turned the
corner in 1994, after Finance Minister Fernando Henrique Cardoso introduced the real.
Reduced government spending, privatization of state-owned industries and lower tariffs
accompanied the new currency. Prices stabilized, and Brazil elected Cardoso president in
1994 and 1998. Brazil’s newfound stability is miraculous, but its economic growth is the least
impressive among the BRICs. From 1995 to 2006, Brazil grew a modest 2.25% a year.
Brazil remains saddled with large public expenses – pensions make up 13% of GDP.
Widespread poverty endures, but Brazil seems unwilling to invest in its weak education
Borrowing heavily after the collapse of the Soviet Union, Russia defaulted in 1998 on $70
billion in debt. That led to spending cuts and greater stability. Russia remains astonishingly
corrupt. Bribes eat 20% of GDP, leaving little for public investment in roads, ports and
schools. Russia’s crony capitalism only confirms who is in charge. Friends of Vladimir Putin
receive lucrative contracts while the government punishes his opponents. Mikhail
Khodorkovsky, owner of the oil company Yukos, faced politically motivated charges and lost
his company during a decade in jail.
Oil is Russia’s blessing and curse. Escalating oil prices created a “Potemkin economy” – a
facade of prosperity masking a harsher reality. Soaring oil prices are akin to steroids for the
Russian economy. The nation is a bulked-up “petro-state” that added 363,000 bureaucrats
during Putin’s first two terms. Adopting a classic petro-state approach, Putin made Russia
less democratic. Russia’s population continues to contract as low fertility cannot counteract
high death rates.
India is another economic miracle that isn’t so miraculous. The numbers look great. From
1988 to 2007, India grew 6.3% a year, a rate that surged to 7.7% a year from 2007 through
2011. The number of telephone subscribers soared from five million in 1991 to 960 million in
2012. A deeply flawed economy lies behind growth in GDP and communications. India is
overburdened with agricultural workers, a “lopsided configuration” that defies the usual trend
of workers leaving farms as an urbanized economy develops. India’s burgeoning service
sector gained attention as technology companies and call centers set up shop. However,
only a million of India’s 500 million employees work in information technology; the tech boom
has done little to lift India’s masses of poor people from poverty. India’s rickety power grid
remains deeply problematic. The country experienced a world-record blackout in July 2012,
when power failures left 670 million people without electricity. Schools go wanting. Many
villages have no teachers or only a part-time teacher.
India’s literacy rate is 75%, well below China’s 92%. As manufacturing jobs become more
sophisticated, they require basic literacy and numeracy; illiterate Indians cannot achieve
positions that could raise their incomes. India’s socialist-leaning government often hinders
economic activity. A huge, diverse nation, India features as many languages as the
European Union and twice as many people. The government’s weak commitment to roads,
schools, clean water and a reliable power grid undermine India’s vibrant economy.
China is the most resounding success among the BRICs, with sustained annual growth of
nearly 10% since the late 1970s. Hundreds of millions of Chinese people still subsist on $2 a
day or less, but China’s economic revolution has already lifted half a billion people out of
poverty. China’s rulers know that their authority relies on prosperity and therefore invest in
public works, schools, roads, ports, airports and power plants. Unlike India, China
successfully shifted farmworkers into low-wage manufacturing jobs.
China has fault lines of its own. Demographics pose one challenge. China’s aging population
means that retirees and children are on pace to outnumber workers. Developed nations
grew wealthy before their populations flatlined. China is unique in reducing its population
prior to enjoying widespread prosperity. Unlike Brazil, which is committed to pensions, China
offers little in the way of a Western-style safety net. China must address this to ensure its
long-term stability. Property rights are another problem area; individual ownership of real
property and intellectual property remains murky. Individuals own urban apartments; the
government owns the farmland. Firms split revenue with the government; their patents,
trademarks and other rewards for entrepreneurial risk taking have no legal protection, which
undermines innovation. China’s pollution poses huge health risks. Public dissent is rare, but
mass protests have erupted over China’s environmental degradation.
About the Author
Michael Mandelbaum, author of That Used to Be Us with Thomas Friedman, directs
American Foreign Policy at The Johns Hopkins School of Advanced International Studies.