I was recently at a Capital Markets conference in Turkey where the main first day keynote speaker is Professor James A. Robinson from the University of Chicago and co-author of Why Nations Fail, a book that changed thinking about what makes for successful countries and what makes them fail.
I had assumed that James was going to be an American, but it turns out he’s a Brit like me. Good on ya Jimmy! Anyway, he summarised the book in a 40 minutes presentation that went from North Korea to Colombia via China, Russia and America on the way.
His first slide was pretty intriguing, and showed North and South Korea at night.
They’re a little bit different, as in South Koreans stay up, watch TV, make some coffee, drink some wine, entertain some friends and have a jolly good evening out. Meanwhile, their Northern country folks just go to bed.
James made it clear that this wasn’t a political statement, and that there are plenty of communist and capitalist countries that are failing and succeeding. It’s all to do with how government and the economy inter-operate, and he classified these as inclusive governments and economies, and extracted governments and economies.
An inclusive economy is one that encourages ideas and innovation, and the USA is a great example. It encourages people to file patents and discourages monopolies. It believes that monopolistic tendencies lead to anti-trust practices that are bad for the economy. That’s why the USA often takes entrepreneurs to task, and tests their mettle.
At this point, James pointed to Bill Gates as a great example. One of the world’s richest men was taken before the Senate Committee in 1998.
Meanwhile the world’s other richest man, Carlos Slim, runs a monopoly across Mexico that was gifted to him through his political connections. As a result, Mexico has lost almost $120 billion in lost opportunities due to the anti-trust practices of his empire, more than Mr. Slim’s total fortune. Or at least, that’s what James thinks.
The point he was making is that if you encourage innovation, patents, anti-trust practices and encourage entrepreneurialism, you will have a successful nation, and that’s what the USA illustrates well: inclusive government and an inclusive economy. If you discourage competition and innovation, and stifle ideas then you will have a nation that fails, like North Korea and Mexico.
The bit that intrigued me were James’ thoughts on China, and he wasn’t encouraging. He likened what is happening in China to Russia fifty years ago. Back then, the world’s leading economist Paul Samuelson wrote the best-selling book on economics called Economics (not much imagination there then).
It was regularly updated and in 1961 this chart appeared:
This is in the middle of the Cold War with Russia and, due to Russia’s investments in their economy, Mr. Samuelson predicted that their economy would grow faster than the USA’s and overtake America as the global superpower before the end of the century and maybe as soon as 1984. By 1970, it hadn’t happened and Samuelson’s book was updated with the dates slipping back. By 1980 the dates were 2002 to 2012.
Why hasn’t Russia achieved the predicted economic success that Sameulson predicted? Because of a lack of inclusive economy due to an extracted political structure where control, and therefore power and wealth, is held by the few and not distributed amongst the many. That is what James calls an inclusive government: one that offers access and opportunity for all, not just the few. For this reason, he thinks China will be similarly disappointing in the long-term, because China has an inclusive economy with an extracted government. He doesn’t think that works, long-term.
The example he gave is the scary tracking of citizens through data that has recently emerged (doubleclick image to see a bigger version).
China is monitoring the social, financial and commercial activity of everyone in real-time, and giving scores of your levels of trustworthiness as a result. The social credit score. Is this that scary? Through the NSA, America tracks most of our digital thoughts – is China so different? James seemed to imply that China is an extracted government, but I think that is legacy thinking. I’m not saying I wholly embrace all of the PRC’s policies, especially those on Tibet and human rights, but I think China is opening up to the world, as stated in a recent blog, and that thinking of the country as a narrow government is under-estimating what is happening in China.
We shall see, but perhaps the thing that most people believe could bring down China is debt. China has grown through massive subsidisation and that subsidisation is now slowing down. Total debt was 150% of GDP in 2008 and that has risen to 260% this year. U.S. billionaire investor George Soros has noted an “eerie resemblance” between conditions in China and those in America leading up to the 2008 financial crisis. “It’s similarly fuelled by credit growth and an eventually unsustainable extension of credit,” he told the Asia Society in April 2016.
According to Bloomberg Intelligence, corporate debt has seen the biggest increase, rising over the ten years to 2015 by 60 percentage points to reach 165 percent of GDP. Household debt climbed to more than 40 percent of GDP, up 23 percentage points, while government borrowings reached 22 percent of the economy.
Hmmm. We shall see but, all in all, an interesting presentation and I learned something new, namely that James’s great -great-grandfather built ships and his great-great-great-grandfather was a fisherman.
Chris M Skinner
Chris Skinner is best known as an independent commentator on the financial markets through his blog, TheFinanser.com, as author of the bestselling book Digital Bank, and Chair of the European networking forum the Financial Services Club. He has been voted one of the most influential people in banking by The Financial Brand (as well as one of the best blogs), a FinTech Titan (Next Bank), one of the Fintech Leaders you need to follow (City AM, Deluxe and Jax Finance), as well as one of the Top 40 most influential people in financial technology by the Wall Street Journal's Financial News. To learn more click here...