Book Review

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.

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.

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.

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.

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.

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.

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.

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.

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.

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?

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.

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.

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.

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 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.

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.

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.

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.

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.

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.

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.

Rising trade tariffs alone will increase the prices of imports. But beyond these trade effects, wages in a relatively closed economy with reduced movement of labor could also force wages higher. This confluence of trends will have an inflationary effect in the longer term. In regard to timing, classical canonical models of economics estimate a roughly five-year boom-to-bust business cycle for the shift from deflation to inflation. However, the fact that aggressive policy interventions have thus far done little to raise prices, and in fact are correlating with deflation, suggests that traditional models and timing expectations are out of kilter with the unpinning of the economy. In essence, although the basic mechanics of prices and the global economy still hold sway, the timing horizons have shifted—perhaps because of the advent of technology that may be forcing prices downward—so that these protectionist forces will still play out, but more slowly than in previous cycles.

Already, many countries protect their key industries and companies. In 2013, Russia was ranked as the most protectionist country in the world by Global Trade Alert, an independent trade-monitoring think tank. Russia has a list of forty-five industries, including finance, oil/energy, broadcasting, and publishing, where foreign investment is subject to government approval. In the United States, the Committee on Foreign Investment in the United States (CFIUS) serves a similar function, though the turn toward protectionism may lead it to take a more aggressive role. CFIUS made headlines in late 2016, when then-President Obama blocked the Chinese acquisition of a German computer chip manufacturer with US subsidiaries. Though the Obama administration explained that its actions were motivated by national security concerns, the Financial Times reported on calls by members of Congress of both parties to broaden CFIUS’s mandate, permitting it to apply a more stringent economic benefits test to prevent foreign acquisitions of US companies. ¹⁶

Greater capital requirements and restrictions to repatriate capital will invariably limit the ability to invest across borders and will thus limit growth for companies, countries, and the global economy as a whole. These trends are inimical to economic development and progress, placing global investment and commerce in grave danger in terms of profits and returns. They threaten to upend equity and bond markets, foreign exchange, commodity prices, corporate investment decisions, and global trade. Left unchecked, the result will be more destruction of the global economy, greater despair and unrest, conflict, corruption, and a sense of utter hopelessness.

ACROSS THE WORLD, CITIZENS ARE angry and chalk their frustrations up to globalization. Although their worsening economic realities justify their angst, in reality globalization is not to blame. Public policy has settled for a globalization lite, rather than allowing full globalization a genuine chance to “lift all boats.” Globalization makes markets more efficient, increases competition, and spreads wealth more equally around the world. Such is the promise of full globalization.

2

A BRIEF HISTORY OF GROWTH

UNDERSTANDING WHY SOME NATIONS GROW and others don’t holds the key to creating growth in the future. Simon Kuznets, the godfather of GDP measurement, opined that there are four kinds of countries in the world: developed countries, underdeveloped countries, Japan, and Argentina. What lay behind Kuznets’s categorization of countries in the middle of the twentieth century was at least in part an inability to explain Japan—nobody knows why it grows—and Argentina—nobody knows why it doesn’t.

Kuznets’s historical framing remains broadly relevant in explaining many countries today. His list sums up the categories most worthy of our attention: countries that have successfully grown, countries that have not grown enough to become wealthy, countries that defy growth expectations and succeed against all odds, and countries that should grow but end up squandering their rich resources and endowments.

Despite the rapid evolution of economic thinking since the 1930s, the same growth questions continue to confound economists. Even for such an authority as Kuznets, economic growth was a puzzle and remains so for today’s policymakers. Crafting solutions for slow growth requires an understanding of history and the paths trodden by the economic winners and losers of the past.

Geographical determinists, for instance, believe that a country’s environment and terrain drive its wealth. In Guns, Germs, and Steel, Jared Diamond argues that the ability of nations to feed themselves (and export surplus) lays the foundation for prosperity. ¹

On its face, this is an appealing theory. As a practical matter, however, natural resource endowments are not an unambiguous blessing when it comes to economic growth. In many cases, they can be a curse. Economies based on exploiting natural resources—from oil, gold, copper, and iron ore to cotton, sugar, and other agricultural products—have long struggled with managing the windfalls they earn from selling their commodities into the international marketplace. For example, during the 1970s commodity boom, many countries (particularly across the developing world in Africa and South America) lost their newfound wealth through poor investment decisions and corruption.

There are also more insidious effects of bountiful resources. One of these is a phenomenon known as Dutch Disease. This term was coined by the Economist in 1977, when the Netherlands enjoyed a boom in foreign currency revenues from its natural gas reserves. The effect of this windfall was to devastate the Dutch export, manufacturing, and industrial sectors and to increase joblessness, which more than quadrupled in the 1970s. By selling commodities on the international marketplace, countries earn vast sums of foreign currency, generally in US dollars. As the dollars flood in, local currency becomes relatively scarce. Because shopkeepers and tradespeople can only take local legal tender, those with US dollars convert them to the local currency. The local currency becomes more valuable relative to US dollars; as a result, export prices rise on the international market, making the traded-goods sector uncompetitive. The only way to stay competitive is to cut wages and jobs. ²

Dutch Disease effects can be seen even in countries where the exchange rate remains fixed by policy diktat. In these cases, the surfeit of foreign money flowing into the country expands domestic demand, raising the prices of goods and services. Foreign currency inflows push up the prices of local goods and services, fueling broader inflation and making local industries less competitive.

Given that poorer countries depend on exports to kick-start growth, anything that harms exports can harm the overall economy as well. Moreover, because the export sector is so crucial to productivity gains (such as on-the-job learning) anything that hurts it will hold back economic growth and the economy as a whole.

Worse still, policy interventions to tackle the adverse effects of Dutch Disease can themselves compound the problem and further damage economic growth. For example, raising interest rates to combat inflation or “sterilizing” foreign currency inflows (a practice in which the government absorbs excess cash from the economy by issuing bonds or IOUs) makes investment less attractive, and therefore growth becomes harder to achieve.

Delving into the growth stories of developing countries, developed countries, and Kuznets’s enigmas of Argentina and Japan can help us better understand the complex combination of ingredients that is critical for economic growth and success. Why, for instance, did China, the largest economy in GDP terms in the early 1800s, come to be among the poorest countries in the world in terms of both GDP and GDP per capita, only to bounce back over the last forty years? How did Japan go from economic oblivion to an advanced industrialized economy? How did Argentina, an economic powerhouse a hundred years ago, fall into cycles of economic despair within a generation? And how did the industrial revolution catapult Western economies to the economic dominance they retain today?

CHINA HAD GONE FROM BEING the richest economy in the world in the nineteenth century to one of the poorest by 1950, only to reemerge over the last four decades as an economic powerhouse while shifting the balance of global power toward the East. No one was more vital to tracing China’s rise, fall, and rise than Angus Maddison, who in 1995 published an economic database calculating growth, population, and breadth of infrastructure dating back to 1820 and comparing Europe, China, India, and the United States. In that year, China’s share of world GDP exceeded all other regions combined, standing at 32.9 percent, thanks to Western demand for its exports. India, too, held a remarkably strong position in the 1800s, with a 23 percent share of GDP, likewise thanks to a strong export base. ³

Yet the subsequent decades witnessed a dramatic shift in the balance of world economic power. By 1890 the West had taken over. The industrial revolution pushed Europe to the lead, with a 40 percent share of world GDP. Meanwhile, China experienced a rapid decline, while America was ascending; the two countries briefly held the same share of 13 percent.

By 1950, the transition seemed to be all but over. The United States and Europe were booming, together representing a massive 60 percent of world GDP—America alone at close to 30 percent. After falling to 5.2 percent, China would spend the following twenty-five years treading water around the same share of approximately 5 percent of world GDP. From the vantage point of 1950, China’s future economic rebound seemed very unlikely. Indeed, following the victory of Mao Tse Tung’s People’s Liberation Army in 1949, US secretary of state Dean Acheson saw little cause for concern. In his view, China was “not a modern centralized state,” and he saw no sign that Mao and the communists would find a way to turn the corner.

As of 1978, Maddison’s log appears to confirm Acheson’s analysis. At 3.4 percent, China had fallen further behind the dominant West than ever before. Yet changes were afoot. Japan was already beginning to reap the rewards of industrialization, and as America deindustrialized, its consumers began to feed Japanese growth by purchasing products from abroad. Now, just forty years later, China is the second largest economy in the world. As of December 2014, when adjusting for purchasing power parity (how much you can buy for your money in different countries), the Chinese economy was worth US$17.6 trillion—just ahead of the US$17.4 trillion estimate for the United States. ⁴

China has emerged to dominate the economic landscape over the last four decades, becoming deeply involved in trade, foreign direct investment, and capital markets across the globe. According to the International Monetary Fund, China contributed about one-third of the world’s total growth in 2013, and even with slower growth it will continue to add at least 1 percentage point to world growth in the coming years. Trade, exports, and more recently an explicit policy pledge to move to a consumption-led economy are at the heart of China’s success. Chinese overseas investment is expected to reach over US$3 trillion worldwide by 2025. ⁵

Much has changed since the 1800s, when China was the world’s largest economy. The intervening years saw the economy crater through to the middle of the 1900s, then rise to a position of relative strength today. China’s economic success was interrupted by a spate of natural disasters and plagues, political fragmentation, and rebellion, which together weakened its ability to enact policies that promoted growth and development. The country was effectively sidelined while other regions such as the United States and Europe were making rapid progress. For example, the Taiping Rebellion, which lasted fourteen years, from 1850 to 1864, was enormously disruptive, destroying over six hundred cities and leaving over twenty million people dead. It did so much damage that the government of the Chinese Qing Dynasty had to rely on aid from Britain and France to defeat it.

More recently, China masterfully executed a carefully choreographed plan for achieving long-term growth. Many aspects of how the Chinese political class manages its economy are antithetical to the Western values of democracy and free markets. But this stance has not put off foreign investors, who are attracted to the government’s willingness to prioritize physical infrastructure, political security, and stability over the health of the population, transparency in decision making, and transparency in the rule of law (if not necessarily the system of governance). In essence, the pursuit of economic growth overrides any views on the political system they invest in.

Currently China’s political class has a strategy to evolve from an investment-led exporting economy to one more in line with Western economies, relying on domestic consumption. The transition to this new economic equilibrium will not be linear. China will likely experience significant economic volatility and market gyrations as the structure of its economy shifts. There is also mounting skepticism about China’s ability to manage its debt levels, and the country’s lack of individual political freedoms will continue to hamper its growth prospects. But Chinese policymakers will, no doubt, be focused on continuing to show economic progress in advance of two target dates: 2021—one hundred years after the formation of the Communist Party—and 2049, one hundred years after the formation of the People’s Republic of China.

Japan’s program of reform was built on the modernization of all elements of government and society. Education, administration, and the military were all profoundly changed in the process, as were economic, social, and legal policies. Economically, the country transformed from an agrarian feudal system to an industrial economy. Taxation and land reform contributed to modernization and industrialization. The government also funded an infrastructure rollout of railroads, shipping lines, ports, spinning mills, munitions, textiles, chemical plants, and iron smelters, later transferring ownership to the private sector. The Meiji period was also a period of financial development marked by the emergence of the banking sector. Together, these reforms and expenditures jump-started capitalism in Japan.

In a search for a path back to economic growth, Japan’s demographic trajectory offers little help. If the country’s fertility rate continues to remain low—it was 1.4 in 2016—the population will fall to approximately 87 million by 2065 and dip as low as 50.5 million by 2115, causing a shortage of labor and declining living standards resulting from reduced economies of scale. As the economic gap narrows between Japan and potential sources of migration—such as China, where the largest share of Japan’s guest workers come from—it will become ever more difficult for the Japanese workforce to sustain even current levels of labor. Experts have referred to Japan’s demographic prospects as a “time bomb crippling Japan’s economy,” noting that it currently averages “less than three people of working age for each retiree. By 2030, it will have less than two.” ⁶

Optimists hold out hope for a more aggressive structural reform agenda that would, for example, coalesce around greater agricultural reform and further land liberalization. Such a shift could jump-start Japan’s renewal and place the economy on a path toward resurgent growth. For now, and until Japan develops a credible growth plan, the risks grow that its population will disengage from the economy—choosing to hoard money and reduce spending on economic and social activities. Naturally, these trends have even further dire consequences for the country’s prospects for economic growth.

It is difficult to pinpoint the precise origins of Japan’s recent decline. Nevertheless, we have seen in Japan’s economic rise the unquestionable importance of political stability and credible institutions, and in China’s rise the necessity of executing wise public policy decisions with an eye toward the long term. In contrast, the case of the Argentine economy reveals the dangers of political instability, short-term thinking, and a growth-harming agenda, including inconsistent trade policy.

Argentina’s is a story of political and economic starts and stops, peaks and troughs. In 1913, Argentina was the world’s tenth wealthiest nation per capita. The following year it ranked among the richest countries, behind Australia, the United States, and the United Kingdom, but ahead of France, Germany, and Italy. Yet by the 1930s the economy was on a path of steep decline; today it is among the slowest-growing economies on Earth. Over a fifty-year period, between 1930 and the mid-1970s, Argentina had six military coups; three periods of hyperinflation in which inflation exceeded 500 percent per year between 1975 and 1992 (peaking in March 1990 at over 20,000 percent); numerous debt defaults; and an economic growth rate that has, since 1970, dropped below zero (that is, regressed) on seven different occasions. Through it all, protectionism has remained a central feature of Argentine trade policy, rendering many of the nation’s industries globally uncompetitive.

Argentina is endowed with abundant resources. Not only is the portion of Argentina alongside the Andes among the most metal-rich areas in the world, but it is also estimated that the country may contain four-fifths of the world’s reserve of lithium brine. In addition, Argentina is ranked third in the world as an exporter of biofuel, producing more than any other country. ⁷ Yet, even with its natural resource endowments of fertile and arable land and a coast linking to global trade, policy ineptitude and political instability have prevailed, squandering the opportunity for economic success. ⁸

Among the biggest policy errors occurred when Argentina failed in 1944 to align itself with the United States, which was beginning its economic ascendancy. Instead, its leaders chose to align with Britain, just then commencing its economic decline. Argentina’s wealthy landowners also neglected investment in manufacturing and industrialization, favoring a cheap, uneducated agricultural labor force. That attitude prevailed throughout the 1940s, when Argentina failed to invest in education, suffering one of the lowest rates of secondary-school attendance internationally. Lacking an educated population, Argentina would struggle to innovate and be competitive. Argentina’s elites were also reluctant to upend their economic status quo, preferring instead to protect and defend safe monopolies rather than take risks in competitive enterprise. So when industrialization did come, it was limited and late.

If China, Japan, and Argentina offer a narrative of economic booms and prolonged busts, the countries of the industrialized West—the United States and Europe—present a virtually uninterrupted trajectory of economic progress. Over the past fifty years, income levels in the United States have risen thirty times, and poverty levels have fallen by 40 percent. Between 1950 and 2000, Europe’s per capita GDP tripled. For over a century, the combination of liberal democracy and market capitalism has created economic growth, reduced poverty, expanded infrastructure, extended life expectancy, and buttressed innovation. Unfettered political freedoms, strong, trusted institutions such as the British and French parliaments, as well as the continual shifts toward private ownership and tradable property rights, the backbone of market capitalism, all drove the economic success whose fruits we witness today.

What lessons can we glean from this brief history of growth? A common thread running through the stories of Japan, China, Argentina, the United States, and Europe is the importance of strong and trustworthy institutions. Over an expansive body of scholarship, historians, political scientists, and economists have concluded there is a correlation between a country’s economic growth and the strength of its institutions. Without a civil service, police, and judiciary that can be relied on, poor economic outcomes will almost certainly ensue. As David Landes has argued, strong political institutions that protect the rule of law, individual freedom, and private property underpin development and economic growth. ⁹

The United Kingdom presents one such example. Niall Ferguson has stressed how the British common-law legal system and civil service were central to economic development across the regions it colonized. Like Landes, Ferguson highlights the central importance of political institutions, the enforcement of the rule of law, constraints on the executive, and avoiding excessive government expenditure. These provide a vital foundation for investment, innovation, and ultimately growth. ¹⁰

The absence of these features can impede growth. In Search of Prosperity, edited by Dani Rodrik, cites Indonesia and Pakistan as countries that have over time struggled to achieve sustained economic growth owing to ineffective public institutions. For Pakistan since its inception in 1947 and for Indonesia since 1997, economic progress has been inconsistent, and both countries have found it difficult to deliver high levels of good schooling and health care. ¹¹

In keeping with this analysis, China’s contemporary economic success is largely attributable to its political system, which has been capable of defending and enforcing property rights. China’s law explicitly allows owners to reap economic benefits from property ownership, including the right to make a profit. Furthermore, the owner has the right to possess, utilize, and obtain profits from the real properties owned by others. China’s example shows that what is important for investment and, ultimately, economic growth is policy predictability and institutions that preserve and defend property rights—not necessarily democratic institutions per se.

Institutional strength is not simply about the ability to deliver sound policy in peacetime and normal economic conditions. It is also about the adaptability of these institutions and their capacity to stand firm even under the pressure of exogenous economic volatility and political upheaval. Poorly fashioned bureaucracies and inherited institutions that fail to keep up with current population makeup and a modern economic and political construct leave themselves vulnerable. History is littered with examples of this path to political downfall—from the French Revolution to the end of the Soviet bloc to the 2016 populist discord threatening the existence and future of the European Union, catalyzed by the referendum vote by Britain to exit the community.

Civil war can be an economically destructive event to a country as well as to its neighbors. Paul Collier and Anke Hoeffler estimate that the typical civil war costs a country around four years of its annual GDP. ¹² In Rwanda’s case, it suffered a 63 percent drop in GDP per capita as a result of its 1990 conflict. ¹³ Furthermore, Collier and Hoeffler estimate that countries on the border of a dispute can lose as much as 50 percent of their own GDP, and clusters of smaller states are particularly vulnerable to this phenomenon.

War can destroy the institutions, capital, and frameworks that provide the support necessary for society and the economy to function. In 2014, violence cost the global economy US $14.3 trillion—or 13.4 percent of world GDP. If violence were to decrease by 10 percent globally, an additional US$1.43 trillion would effectively be added to the world economy each year. To put this in perspective, this number is roughly eight times the US federal expenditure on education and more than six times the total cost of the Greek bailout to date. ¹⁴

Culture itself has also been posited as a factor in the rise or decline of nations. The work of German political economist and sociologist Max Weber explored cultural norms, social conventions, and religious beliefs as the reasons for differences in economic development. In particular, Weber argued that a Protestant work ethic and advancement through hard work fostered innovation that would drive productivity and buttress economic success in nineteenth-century Britain and Europe.

THUS THE ECONOMIC IMPACT OF factors ranging from geography to colonialism to culture must be acknowledged. However, tracing Kuznets’s four growth scenarios through the rise and fall of economies makes it clear that economic and political decisions are the primary drivers that accelerate or decelerate economic success. This is not to say that creating growth is simple. The economic advance and stagnation of Japan over the past century, the rise and fall and rise of China, Argentina’s faltering progress, and the steady growth and recent slowdown in the United States and other advanced economies all reveal that there is no off-the-shelf recipe for growth. Moreover, given that historical, geographic, and cultural factors can also influence the trajectory of an economy, policymakers need to be both vigilant and open-minded in designing growth-enhancing policy strategies.

One clear lesson from the past two hundred and fifty years, however, is that political and social stability plays a vital role in long-term economic success, as do free peoples and free markets. Yet even if freedom is necessary for long-term economic success, the current growth malaise (particularly in the freest nation-states) and the startling economic success of politically stable but nonfree nations like China together suggest that freedom of markets and citizens alone is not sufficient. History shows that winners in the growth race were led by long-term thinkers with an appetite for risk taking and investment. The policies of the losers in this race were easily swayed by short-termism, complacent in the belief that the prevailing conditions today would continue well into the future. This stance has proved foolhardy in the past and risks tomorrow’s economic future, particularly given the sheer breadth and scale of the headwinds the global economy faces today.

1

THE IMPERATIVE IS GROWTH

FOR THREE SUN-DRENCHED DAYS IN April 1994, millions of South Africans formed lines that stretched for miles to participate in the first truly democratic election in the nation’s history. Children cheered from the tops of billboards that featured a picture of Nelson Mandela and his call to action: “Vote for jobs, peace, and freedom.”

Today, more than twenty years since the end of apartheid, South Africa has changed profoundly. All citizens, regardless of race, now have the right to vote and thus help shape the country’s future. But living standards remain dreadful. Unemployment still fluctuates around the 1994 rate of 20 percent, and nearly half the population lives below the poverty line. Average life expectancy has gone from 62 to 57.4, mainly as a result of South Africa’s dubious distinction of having the world’s highest incidence of HIV and AIDS. Meanwhile, the income gap is widening. According to the Gini coefficient, a measurement of inequality in which 0 represents perfect equality and 100 perfect inequality, South Africa measures 63.38—a massive gap between rich and poor. (For comparison, Brazil and Colombia have coefficients around 53, the United States and China are at 41 and 42, respectively, and Norway and Denmark are both at 27.) Two decades after its first democratic election, South Africa ranks as the most unequal country on Earth. ¹ A host of policy tools could patch each of South Africa’s ills in piecemeal fashion, yet one force would unquestionably improve them all: economic growth. ²

Diminished growth lowers living standards. With 5 percent annual growth, it takes just fourteen years to double a country’s GDP; with 3 percent growth, it takes twenty-four years. In general, emerging economies with a low asset base need to grow faster and accumulate a stock of assets more quickly than more developed economies in which basic living standards are already largely met. Meaningfully increasing per capita income is a critical way to lift people’s living standards and take them out of poverty, thereby truly changing the developmental trajectory of the country. South Africa has managed to push growth above a mere 3 percent only four times since the transition from apartheid, and it has remained all but stalled under 5 percent since 2008. And the forecast for growth in years to come hovers around a paltry 1 percent. Because South Africa’s population has been growing around 1.5 percent per year since 2008, the country’s per capita income has been stagnant over the period.

The slow-growth story we see in South Africa is common among developing countries. Even the largest and most strategically important of these economies (by population size and economic influence) are generating a meager annual growth rate of 2–3 percent a year. ³ At the time of this writing, Brazil, Russia, India, and China (grouped together by the moniker BRICs) all have growth forecasts far below the “magic” 7 percent number. Brazil and Russia are expected to struggle and possibly contract, with some forecasts projecting negative economic growth.

The virus of slow growth has spread across borders, with even the world’s richest economies falling victim. For instance, between 1970 and 1990 average growth rates in the OECD (Organisation for Economic Co-operation and Development) were consistently around 3.4 percent per annum, compared to around 2 percent today, with the Eurozone emerging from a minor recession in 2012. Moreover, in the first quarter of 2017, larger developed economies such as France and Italy posted annual growth rates around 1 percent. While economists and analysts assert that the United States may be back on a path of stable growth, for instance, as GDP has ranged between 1.5 and 2.5 percent since 2010, US GDP growth has never exceeded 2.5 percent since the financial crisis. The last time the country recorded a GDP above 5 percent was in 1984.

Even so, the benefits of this limited growth are spread unevenly across the population. From poorly educated workers to a glaring lack of infrastructure, many of the variables that have dimmed American prospects for decades still remain unaddressed and will continue to drag growth downward in the years to come.

This chapter reveals why the growth forecasts of many developing countries and developed economies alike are so dire. It explains why growth matters so much for living standards and human progress, and why permanently diminished growth threatens to translate into permanently lower living standards. And because we cannot understand the importance of growth without discussing how we measure it, the chapter explains GDP, its shortcomings, and why it remains the definitive tool by which economists, politicians, and policymakers gauge a country’s progress, establish new public policy, and set benchmarks for comparison and improvement.

The linkages among deteriorating economic growth, worsening living standards, and increasing poverty and instability are well established. A classic historical example is the 1789 French Revolution, which was touched off by rioting prompted by a decade of deteriorating living conditions, including tax hikes and food shortages. The lack of progress and ensuing economic crisis ultimately led to a political revolution.

Second, growth in income can allow an individual to have an impact on the wider community. They can hire others or invest their windfall. Through everyday purchases, the individual has the opportunity to support other businesses and individuals, and help others increase their own standards of living. By investing or making their capital available to be borrowed, they enable others to grow their incomes, improve their lives, and better society. Many small and medium enterprises in particular rely heavily on this type of individual investment. Given that over 90 percent of businesses in the OECD are small and medium-sized enterprises of fewer than 250 employees (and 60–70 percent of employment), and that in developed countries a large percentage of a nation’s overall economic growth comes from such companies, an individual’s investments can meaningfully affect the economy. ⁴

Conversely, the absence of growth in the wider community can have a profound effect on the individual. Economic contraction can foster political and social unrest and a breakdown in social cohesion. The town of Gary, Indiana, symbolizes this kind of industrial decline. Once a thriving steel town, it has seen its population tumble to less than 80,000 from 180,000 in the 1960s. The town’s steelworks employed 5,000 people in 2015, a fraction of the 30,000 who worked there forty years earlier. ⁵ Gary has a poverty rate of 38 percent, high crime, and poor levels of education attainment. The lack of growth in the city’s overall economy has had meaningful negative effects on individual quality of life.

The relationship between growth in income and human progress (or conversely between a growth slump and a reduction in living standards) is explained by the multiplier effect. Additional income earned by an individual will be transmitted across the economy in multiples of its original value. This theory was originally devised by the British economist John Maynard Keynes to show that increases in government spending would result in increased income for the population. However, the original source of new capital need not be the government.

Germany in the 1920s and 1930s offers the classic example of this sort of breakdown. Germany faced an enormous reparations bill from the First World War, high levels of debt, hyperinflation, surging unemployment, and the 1929 cratering of world financial markets. The country’s subsequent economic collapse enabled the rise of Nazi extremism. More recently, in the aftermath of the 2008 financial crisis, Spain’s economy faced a growth contraction of approximately 6 percent, while unemployment soared to 26 percent by 2013. Amid these conditions, momentum grew for the breakup of the country through Catalonian independence. The clamor for Catalonian secession has intensified since the end of the financial crisis and aggravated ill feelings among Catalans, who are concerned that they are being forced to pay more into Spain’s coffers than they should. An unofficial poll held by the Catalonian regional government in 2014 revealed that 80 percent of voters backed independence. The breakaway of Catalonia from Spain would be costly, as the region contributes 19 percent to Spain’s GDP, produces 45 percent of Spain’s high-tech exports, and is the gateway for 70 percent of the country’s exports. The consequences of a Catalonian secession for government revenue, jobs, and the broader Spanish economy would be considerable.

How does economic growth help in resolving these seemingly intractable challenges? First, it enables a government to fund and enhance public goods—education, health care, national security, and physical infrastructure. In a climate of rising economic growth, governments (and businesses through increased sales and revenues) gain marginal dollars that they can earmark for these purposes. Without economic growth, governments are forced to reduce resources in one area in order to fund budgetary needs in another.

Certainly there are limits to what growth can do. It is inescapably true that certain phenomena are immune to being solved by growth. Even if economic growth can meaningfully undermine the ability to recruit for extremist movements, there will always be ideologues immune to any economic success. Terrorism thus represents one phenomenon beyond the reach of growth alone. Economic improvement can ameliorate the situation but not eradicate it in its entirety. Likewise, economic growth alone cannot solve income inequality. After all, we have seen countries where income inequality worsens even as they grow. Growth can even become a problem in its own right, as poorly managed economic growth spurts can leave a damaging legacy of debt and inflation. Economic growth alone is no panacea, but without it long-term societal progress is impossible.

Productivity is thought to account for more than 50 percent of why one country grows and another does not. Transparent and reliable laws, clearly defined property rights, and advances in technology all contribute to higher productivity and thus catalyze economic growth. ⁶ Drags on productivity, such as debt and demographics, can limit growth. In the aftermath of the 2008 financial crisis, many developed countries have suffered under the weight of mounting debts and deficits. Demographic shifts have also proven taxing, as they have taken the form of a decline in the working-age, economically active population and a rise in an aging, economically inactive, increasingly expensive population. Subsequent chapters will analyze these factors in greater detail, but for now, suffice it to say that these levers act to dampen economic growth.

To be sure, high-level growth statistics can be misleading. Over the past three decades, aggregate growth numbers in the United States (and elsewhere) increased, suggesting that living standards were increasing. However, these growth gains accrued more to the owners of capital rather than to the ordinary working populace who depend on labor for their income. This disparity can be seen in a comparison between capital’s record returns—between 1970 and 2017 the Dow Jones stock index has risen by more than 4.5 times in value, and S&P 500 annual average real returns have been around 8.7 percent—and the performance of real wages, which have flatlined over the same period. Moreover, American workers have found themselves much more in hock to lenders, having amassed burdensome debt in mortgages and student and car loans, further eroding their living standards. The split between gains to capital holders and losses to labor providers is echoed in the 2016 US electoral map. It is no coincidence that the two states—New York and California—that are home to the great pools of American capital, Wall Street, Hollywood, and Silicon Valley, saw voters heavily endorse the status quo, whereas the voters in America’s industrial heartland overwhelmingly voted for change.

IN 1085, WILLIAM THE CONQUEROR, the reigning monarch of England, commissioned the Domesday Book to estimate the value of his domain. It was among the earliest attempts to measure the economic standing of a country. William’s surveyors calculated that the total value of England’s land was approximately £73,000. A formidable undertaking, the survey relied on subjective individual judgment. The bulk of the survey was devoted to calculating the value of rural estates, the primary sources of national wealth. The tally also included arable land, the number of plough teams, river meadows, woodland, watermills, and fisheries. Observers at the time marveled at how comprehensive the survey was, noting that “there was no single hide nor yard of land, nor indeed… one ox or cow or pig which was left out and not put down in his record.”

It ultimately took the Great Depression to expose how badly such comparisons were needed. Lacking comparative economic data, policymakers were hard-pressed to design policies that would steer the United States out of crisis. The solution finally came in the form of the National Income and Product Accounts produced in the early 1930s by the Russian-American Nobel laureate Simon Kuznets. Kuznets collated and analyzed statistical indicators of economic growth across fourteen European countries, the United States, and Japan over sixty years. This provided the basis for cross-country comparison of national wealth. First presented in a report to the Senate in 1934, “National Income, 1929–32,” and then further developed during and after World War II, Kuznets’s work laid the groundwork for calculating gross domestic product (GDP)—defined as the value of all goods and services produced within an economy over a specified time period. It is the sum of private consumption and investment, government spending, and net exports—that is, the value of what the country exports less what it imports. Applying consistent measurement standards of these variables allows economists to compare economies across the world. Whereas GDP measures the value of income created, say, in a year, the Domesday Book captured the full value of the inventory of assets, or the wealth of England at that moment in time. For policymakers to this day, GDP remains the definitive yardstick for economic performance, permitting them to assess the health and progress of a nation’s economy and, by extension, people’s lives. ⁷

Yet GDP’s dominance has brought criticism. It fails to capture changes to an economy’s structure, such as the shifts to a service-led or technology-based economy. Some have protested that it fails to capture the unofficial or black market economy. Others have asserted that any purely economic indicator by itself may be inadequate to truly measure society’s progress. It is therefore no surprise that over the last several decades, economists, sociologists, and other academics have devised other metrics for tracking happiness, well-being, and social progress, some of which have garnered a substantial following.

Implicit in these metrics is a challenge to GDP as the dominant measure of human progress—despite the fact that these measures sometimes themselves rely on GDP or some variance of GDP and come with limitations of their own. Even so, GDP remains a compelling measure of economic as well as social progress inasmuch as improvements in economic GDP translate into social progress. Policymakers have nevertheless become interested in these alternative measures, which, even if they do not displace GDP as the most prominent measure of economic growth, have value in complementing GDP in future assessments for economic and living standard progress. Furthermore, these proposed additions to GDP remind us that the endgame for public policy is progress and improved living standards rather than GDP growth for growth’s sake. Nonetheless, these rankings reveal that consistently richer countries (in terms of GDP) rank at the top of the indices and poorer ones at the bottom.

For example, happiness indices reflect a demand that happiness be recognized as a criterion for government policy. First published in 2012, the World Happiness Report measures happiness by indexing GDP per capita alongside social support, life expectancy, freedom, generosity, and the absence of corruption. Of the 155 countries collated in the 2017 World Happiness Report, the ten happiest countries, in descending order, are Norway, Denmark, Iceland, Switzerland, Finland, the Netherlands, Canada, New Zealand, Australia, and Sweden. The ten least happy countries, beginning with the least happy, are the Central African Republic, Burundi, Tanzania, Syria, Rwanda, Togo, Guinea, Liberia, South Sudan, and Yemen. While the United States is the largest country in GDP terms, it ranks fourteenth on the 2017 happiness index. ⁸

A more traditional measure that goes beyond GDP alone is the United Nations’ Human Development Index (HDI). First published in 1990, the HDI assesses longevity, education, and income across each nation’s population, on the premise “that people and their capabilities should be the ultimate criteria for assessing the development of a country, not economic growth alone.” ⁹ The HDI reveals how two countries with the same level of gross national income (GNI)—that is, the total domestic output (GDP) plus foreign GDP generated by citizens abroad, minus domestic output created by foreigners—can end up with such different outcomes. In this way, it allows observers to compare the relative effectiveness of different policy choices and capital investments. In this index, Norway, Australia, and Switzerland rank at the top, with GNIs above US$40,000, and the Central African Republic, Niger, and Chad are at the bottom of the index, all with GNIs of less than US$2,000 per capita.

Some of these measures move beyond individuals and attempt a holistic assessment of the health of society. Since its founding in 2012, the Social Progress Imperative has offered a Social Progress Index that examines a range of social and environmental indicators beyond GDP, from access to electricity to religious tolerance, to measure three distinct dimensions of social progress: Basic Human Needs, Foundations of Wellbeing, and Opportunity.

The 2017 Social Progress Index covers 133 countries and 94 percent of the world’s population. The world as a whole would score 64.85 in Social Progress based on an average of all countries. On average, the top cluster of fourteen countries ranked as having “very high social progress”—including Denmark, Finland, Iceland, Norway, and Switzerland among others—scores 94.92 on Basic Human Needs, Foundations of Wellbeing at 89.68, and Opportunity at 84.04. The cluster of seven countries described as having “very low social progress” include the Central African Republic, Afghanistan, Chad, Angola, Niger, Guinea, and Yemen. For this cluster the average dimension scores of Basic Human Needs, Foundations of Wellbeing, and Opportunity are 42.67, 45.42, and 27.74. ¹⁰

The Legatum Prosperity Index is distinctive in that it is the only global measurement of prosperity that combines objective and subjective data to measure both wealth and well-being. Countries are ranked according to their performance across eight equally weighted subindices, with New Zealand, Norway, and Finland ranked the top three, and Yemen, Afghanistan, and Central African Republic as the bottom three in the 2016 rankings. These include Economic Quality, Business Environment, Governance, Education, Health, Safety & Security, Personal Freedom, and Natural Environment.

What can we learn from these various indices? While noneconomic factors such as health, well-being, and quality of life matter to humanity, economic measures such as GDP generally correlate to success in the other areas, with a small amount of variation among those who are awarded the top spot. In a nutshell, economic growth underpins all else; a country needs economic growth to achieve happiness, well-being, and ultimately human progress.

To be sure, GDP estimates provide a snapshot of GDP at a single point in time, but nothing more. A large GDP can indicate that a country is rich yet mask that its economy might be struggling and scarcely growing. For example, in the aftermath of the financial crisis, France has barely grown—with 2016 GDP growth of a paltry 0.8 percent. The fact that French GDP in 2015 was US$2.4 trillion may suggest that the country is ranked among the richest in the world, yet the economy has declined from US$2.9 trillion in 2008 and has seen a 20 percent decline in the country’s per capita income in the same period.

The Economist’s Big Mac index attempts to capture just this. It offers a lighthearted yet nevertheless intriguing estimate of the number of minutes of work needed to afford a McDonald’s Big Mac sandwich. At the low end, in Copenhagen a worker needs to work just 20 minutes to afford the hamburger. Someone in Mexico City requires 280 minutes, making Mexico among the most work-intensive of the countries in the index. This metric can quickly capture the impact of policy changes. In the United Kingdom, new minimum wage legislation came into effect in April 2016, with the result that the amount of work required to afford a Big Mac shrunk from 26 minutes to 18 minutes. ¹¹

Beyond these limitations, GDP and GDP per capita are vulnerable to the critique that they are imprecise. GDP measures also fail to show distributional effects of income or wealth and therefore mask inequality. In essence, they say nothing about who the winners are when GDP is rising and conversely do not say who the losers are when GDP is falling.

8

RETOOLING FOR TWENTY-FIRST-CENTURY GROWTH

THE PICTURE THAT THIS BOOK has offered thus far is fairly bleak.

Yet positive change in the democratic political realm is possible. After all, change to the democratic political structure has happened before. Economists may never resolve their debate over the origin of the factors engulfing the current global economy, but the fact is the economic malaise warrants intervention—and soon. Democratic reform that tackles political myopia promises the biggest payoff, and arguably it is the only hope to steer for a better economic outcome. This is because democratic reform is a critical prelude for the sorts of long-term economic policies that will reset the global economy’s trajectory. Democratic reform will ensure that politicians and policymakers institute long-term thinking that tackles the long-term challenges currently besetting the global economy, and this will, in turn, drive sustainable economic growth over time. This book thus proposes solving the problem of a lack of economic growth by overhauling our democratic political systems, rather than reforming capitalism or economic models. While there are barriers to further progress, implementing the reforms described in the previous chapter would allow us to make the policy choices required to avoid the worst economic possibilities.

By many metrics—social, political, and economic—the world has seen remarkably positive changes in the last fifty years. Across the globe, citizens are more connected. The health of the average person has improved. Tens of millions now live without fear of the diseases and high rates of infant mortality that were common in the recent past. People are living longer, and millions enjoy better access to education, potable water, and health care. The fall of the Soviet empire and the end of the Cold War brought liberty to many tens of millions across the globe. Despite recent retrenchment, more people live in countries that are deemed “free,” and the prevailing long-term trend worldwide has been toward more democracy, greater press freedom, and improved transparency. According to Freedom House, only 29 percent of all countries in the world were truly free as of 1973. ¹ Following the collapse of colonialism, oppressive regimes such as apartheid in South Africa, and the Iron Curtain, the number now stands at 45 percent free (although global freedom has nevertheless declined for eleven consecutive years). ²

As violence has decreased, more nations and peoples live in security and peace—many decades have passed since the last world war. In The Better Angels of Our Nature, Steven Pinker argues that all forms of violence have decreased over time, and to the extent that violence does exist, it has also dissipated in terms of scale and magnitude. These trends, Pinker shows, are true for incidences of violence such as homicide, domestic violence, animal cruelty, and child abuse, as well as for more extreme forms. Genocide and wars, whether international or civil, have been on the decline for many decades. With a few exceptions, such as Russia in Ukraine and Crimea, Syria, and Yemen, wars between states—by far the most destructive of all conflicts—have notably decreased over time.

The past half century has been good for developing and developed country citizens alike. Households in advanced countries have seen their living standards improve as a result of technological innovations and access through globalization to better and cheaper products. Global GDP is higher, GDP per capita is greater, and inequality between countries has lessened as the world’s poorest economies have converged to higher levels of income. Despite the many challenges and headwinds this book has enumerated, 70 percent of world GDP (encapsulated in the United States, China, Europe, and Japan) continues to grow economically, even if not at the heady double-digit growth rates of previous years. Moreover, technological innovations are transforming all manner of goods and services with the promise of a future of declining health and energy costs and improving living standards. Although there remain considerable levels of indigence and suffering, today’s world is more secure, more prosperous, and freer than it has ever been. By most data-driven accounts, there has never been a better time to be alive.

Although statistics show the world is more democratic than it has ever been, over 70 percent of these democracies are deemed illiberal. A democracy in which the press is not free and the elections are not fair is ultimately indistinguishable from authoritarian nondemocratic states. Furthermore, although the quantity of newly democratic states has risen over the past thirty years, there are now signs of recidivism; authoritarian capitalism, particularly that of China, continues to have appeal. ³

The world has enjoyed a notably long period marked by relative peace and security. Nevertheless, the forecasts of increasing fragile states, mounting conflicts born of natural resource scarcity, and the rising risk in the incidence of terrorism around the world all point to an increasingly politically volatile world, one that is worsened by economic uncertainty. The Horizon 2025: Creative Destruction in the Aid Industry report cautions that within the next decade more than 80 percent of the world’s population will live in fragile states, susceptible to civil wars that could spill into cross-border conflicts. ⁴ The US National Intelligence Council has published a similarly dire forecast of more clashes in decades to come. While this study focuses largely on the prospect of natural resource conflicts, water especially, it underscores the political vulnerability of many economies. A 2016 report by the Institute for Economics and Peace concludes 2014 was the worst year for terrorism in a decade and a half, with attacks in ninety-three countries resulting in 32,765 people killed; 29,376 people died the year before, making 2013 the second worst year. ⁵

To compound these geopolitical challenges, we continue to face a stagnant global economy. At the time of this writing, total global debt stood at $217 trillion (327 percent of global GDP), as unemployment rates across Europe hovered in double digits—higher still for the young. Net capital flows for global emerging markets were negative in 2015, a first since 1988. They have remained volatile ever since, underscoring the feeble global investment environment. In 2016 the WTO registered a fifth consecutive year of trade growth below 3 percent. During the full year of 2016, the United States grew just 1.6 percent. With major emerging economies such as Russia and Brazil in recession in 2016, the global growth picture remains so anemic that the United Nations projects that, lacking a change to the growth trajectory, 35 percent of the population in the least developed countries are likely to remain in extreme poverty by 2030.

Meanwhile, economic depression has left hundreds of millions homeless and jobless, causing more than ten thousand suicides, according to the British Journal of Psychiatry. According to the World Health Organization, by 2030 more people will be affected by depression than any other health problem, at which point depression will be the leading contributor to the world’s disease burden. ⁶ Moreover, progress has come at a price. Economic gains have accrued to those with capital, but not laborers. Technology advances are creating a jobless underclass, radical demographic shifts alter both the quality and quantity of labor, natural resource scarcity and widening income inequality contribute to the hollowing out of the middle class in advanced economies, and mounting debt and declining productivity act as a drag on economic growth.

A reasonable person may ask: How is this slow and slowing stagnation in economic growth different from the series of recessions the world economy faced over the last century? And how does the current economic malaise differ from the stagnation and inflation of the 1980s that followed the oil spike of 1973, ushering in a lost economic period in many countries? Chapter 3 addressed these questions by detailing how the scale and strength of the current headwinds to economic growth are unprecedented and how the economic policy tools of global policymakers are proving impotent in the face of these challenges.

Mounting social, political, and economic problems add to the heavy burdens faced by policymakers. To be sure, the global economy has always faced challenges. The problem is that the classical models of economics—the basis of prevailing policymaking—are proving shortsighted, archaic, and inadequate. Nearly ten years after the 2008 financial crisis, the world economy continues to struggle to gain a firm economic footing. There is a broad consensus emerging across the globe that despite arguments about the root of the problems, the global economy is in a precarious situation, facing unprecedented risks.

Across the world, panicked politicians are pivoting to inferior political and economic models: more trade protection, less globalization, more capital controls, fewer capital flows, more siloed corporations, and more state control. These models and policies are leading to a misallocation of resources, notably capital and labor. This in turn is likely to exacerbate military as well as economic conflict over scarce resources—pressuring politicians to make even worse decisions, fomenting a vicious downward cycle. Crucially, these policies are taking nations not only off the path toward democratic capitalism, but also away from solid economic growth. What has emerged is a vicious cycle where a weak, myopic democratic process yields myopic policymaking, which weakens economic growth and creates political vulnerability with dissention and rising populism, which further hurts the democratic process and continues to destroy the prospects for growth. We must break the vicious cycle and create a virtuous cycle, in which a stronger and reformed democracy delivers economic resurgence, which in turn bolsters democracy.

The economic policies that would result would prioritize long-term economic challenges and take into account the intergenerational tension between the demands of today’s voters for benefits and perks and those of future generations, who face a future debt burden and lower living standards. Unencumbered by myopia and the immediate desire to win votes, politicians more focused on the long term would invest more heavily in sectors that are the backbone of a successful economy, such as infrastructure (including roads, ports, railways) and quality education. These sorts of sustainable investments would raise a country’s productivity and significantly improve a country’s growth prospects.

The best indication of where the world might end up if it continues on its current precarious path is provided by Japan. That country has spent the last decade and a half drawing on old, well-trodden economic interventions (mainly monetary, such as historically low interest rates) to little effect. There is a lesson here for the world’s largest advanced economies (and developing countries) about the way tried-and-true policies can eventually cease to deliver and even more so about why the suite of economic policies must be aggressive and not piecemeal if we are to register any economic gains. For instance, Japan has invested enormously in infrastructure, building scores of bridges, tunnels, highways, and trains, as well as new airports. In general, such investments are wise, but poor planning has meant that much of the infrastructure it has built is barely used. Japan has spent a staggering US$6.3 trillion on “construction-related public investment” to little positive effect. Although Japan has shown engineering feats through its infrastructure investments, and some people have remained employed, there is little evidence that Japan’s growth has increased. Worse still, the country continues to suffer under a crushing public debt.

ALL OF THE TEN PROPOSED reforms in this book seek to address two central concerns: first, fixing and removing the myopia embedded in the democratic process, and second, improving the effectiveness and quality of policymaking, so as to tackle the headwinds that are threatening the global economy today by enacting long-term policies that drive economic growth. By binding the government, extending political terms, and increasing pay, politicians’ outlooks are better aligned to achieving long-term goals, thus addressing the myopia problem. Restricting campaign contributions similarly limits the influence of outside interests that could discourage politicians from taking a longer-term view. Creating minimum standards for voters and politicians alike addresses the need for greater quality in the democratic process. Intensified political competition and fewer safe seats mean more politicians have to demonstrate their quality to their electorate. Minimum voter standards lead to more discerning voters who are better able to parse economic arguments and select the candidate most capable of delivering high-quality policy. Term limits further enhance quality by ensuring politicians avoid complacency and long-term decline. Upending our way of life in the most catastrophic ways and transformational democratic political reform are the only way to halt the erosion and reset the global economy on a firmer footing.

Those within the existing political system lack the political courage and strength to take reform on. Therefore, the impetus for democratic reform will have to come from outside the system, rather than within it. Specifically, politically minded individuals and those perhaps with a political leadership pedigree (such as retired politicians) who have been put off by the entrenched divisions of traditional party politics and the complex web of career politicians that has locked them out could lead the reform change. So too could nonpartisan institutions such as think tanks.

The private sector—both wealthy individuals and corporations—also has an important role to play in the renewal of the democratic process. As discussed earlier, the prevailing trend has been for wealth and power to be transferred away from the state and toward nonstate actors like philanthropists. This has not only reduced the amount of cash available to government but also pushed many aspects of the state’s mandate to provide public goods such as health care and education into the hands of private individuals. According to Oxfam, if he is not outpaced by Amazon founder Jeff Bezos, Bill Gates is due to become the world’s first trillionaire by 2042—essentially a personal fortune greater than the governments of many countries. The World Bank estimates that there are fifty-five countries whose wealth is less than that of Bill Gates. ⁷ As of 2015, only fifteen countries had GDP in excess of a trillion dollars. His scale of wealth also sets him on the world stage in terms of power, allowing him access to and influence over political leaders around the world.

The point here is that the shift of power and wealth toward wealthy individuals and away from the government weakens the state. In a similar vein, private corporations have seen their wealth and influence grow over time and importance in lobbying and influencing public policy decisions. Their leverage has increased not only because of the vast taxes they pay toward the government purse but also because of the enormous numbers of people they employ and their involvement in the rollout of infrastructure—such as through public-private initiatives.

The proposals to overhaul democracy detailed here will undoubtedly face opposition from certain corners. The largest opposing din will likely come from those with the most to lose and the most vested in the current system, including the incumbent politicians who thrive in a myopic, ideological world and enjoy the daily attention of media; career politicians with a lack of work experience; parts of the media, since the short-termism feeds its cycle; political activists who cling to tidbits of the latest news, reaction, and polls to feed their campaigns; and of course, democratic purists, who believe that anyone should be allowed to stand for office and vote regardless of qualifications. For the most part, these objections lack legitimacy in that they serve the narrow interests of the objectors and are not in the broader interest of improving democracy at large.

SOME DEMOCRACIES ALREADY POSSESS SOME version of one or more of the proposals offered here but have nevertheless struggled to successfully navigate the problem of myopia and therefore remain on a precarious economic path. Realizing these reforms’ benefits will require avoiding a piecemeal approach and instead committing to at least half of the reform proposals on the menu, drawing from initiatives that tackle managing the politician and the voter so that the vicious cycle becomes a virtuous one. To do one without the other creates an imbalance.

IN 1995, VETERAN FBI AGENT and counterterrorist expert John P. O’Neill immersed himself in the operations of international terrorism—investigating, in particular, the 1993 bombing of the World Trade Center. By most accounts, more than anyone else at the FBI, O’Neill was at the forefront of investigating the links between state sponsors of terrorism, Al-Qaeda operatives, and attacks on US interests around the world during the 1990s. In the summer of 1998, two US embassies in Nairobi and Dar es Salaam were attacked simultaneously, and in 2000, the USS Cole was bombed while stationed in Yemen.

In 2005, Raghuram Rajan, the chief economist for the IMF, presented a paper at an annual Federal Reserve meeting held in Jackson Hole, Wyoming, of prominent economists and bankers from around the world. Rajan’s paper, “Has Financial Development Made the World Riskier?,” charged that financial managers were encouraged to take risks trading complicated, underregulated securities in return for “generous compensation,” while their banks were in no position to provide the liquidity that financial markets would need to cover losses should those risks materialize. At a time when investors were enjoying high returns and global financial markets seemed more stable than ever, Rajan was arguing that “the interbank market could freeze up, and one could well have a full-blown financial crisis.” ⁸

His argument was rebuked. In his own presentation, former secretary of the treasury Lawrence Summers criticized Rajan’s premise as “misguided” and dismissed him as a “luddite.” Two years later, the prices of those securities went south, triggering the 2008 financial crisis, bringing the global economy to the brink of collapse, and proving that the world’s top economists and bankers were not as well guided as they thought.

In a similar vein, the current path of protectionism and isolationism pursued by the United States and other countries (such as the United Kingdom post-Brexit) spells greater economic and geopolitical volatility and substantially raises the risk of war. The deeper entrenchment of the economic malaise and deglobalization across the world sets the stage for the unraveling of Pax Americana—a state of relative international peace, and the free exchange in trade and capital flows that the US and its allies built after World War II. Moreover, an economically weakened West (and United States in particular) provides a gateway for political upstarts and powers to challenge and undermine the American-led international order.

A more isolationist America creates a vacuum at a time when the European Union has grown precarious, facing escalating extremism among the anti-Europe left-wing and right-wing populist parties and the disintegration of the Eurozone. An aggressive Russia (which threatens stability across Eastern Europe and beyond, including Syria and Ukraine), a fractious Middle East (including Turkey, Saudi Arabia, and Iran), rising terrorism spawned by religion, and the risk of expanding nuclear and cyber-warfare capacities all threaten to worsen as the United States ceases to serve as a stabilizing force. Furthermore, a more isolationist America in effect provides an opening for China to continue to assert its economic and political dominance across Asia, Africa, and Latin America. America’s economic and political imprimatur on the globe is under threat, and so too is the global order. The market-oriented regimes of trade liberalization and capital mobility are being unwound in favor of populist, antiglobalization, and protectionist policies that hinder trade, restrict the movement of labor and capital, and act against the deeply interconnected world. As history has shown, these errant economic choices can spill over into political chaos and warfare.

All the easy choices are behind us. What is left is messy and hard, and proponents of reform are likely to be pilloried and vilified. Evolving to a new democratic structure will be challenging in the extreme. But reform will help ensure that Western democracies retain their position as economic leaders and credible vanguards of the democratic process.

Appendix

Comparison of Leading Democracies

Minimum Qualifications for Office 1 : No

Design of Electoral Districts to Incentivize Competition: No. Districts drawn up by public servants or independent commissions.

Mandatory Voting: Yes

Minimum Voting Requirements ² : No

Weighted Voting System: No

Number of Reforms in Place (Out of a Possible 10): 1

Brazil

Ability to Commit to Long-Term Agreements: No

Campaign Finance Restrictions: Yes. Outright ban on corporate contributions, spending caps on campaign outlays.

Restrictions on Ability to Take on High-Pay Opportunities: Cooling-off period, but no permanent ban.

Extended Electoral Cycles (More Than 5 Years): No

Term Limits: Legislative: No

Term Limits: Executive: Yes. Presidents may serve a maximum of two consecutive terms but may serve unlimited nonconsecutive terms.

Minimum Qualifications for Office: No

Design of Electoral Districts to Incentivize Competition: No senators elected per state, other representatives based on party list.

Mandatory Voting: Yes. Ages 18–69; not mandatory for illiterates.

Minimum Voting Requirements: No

Weighted Voting System: No

Number of Reforms in Place (Out of a Possible 10): 4

Canada

Ability to Commit to Long-Term Agreements: No

Campaign Finance Restrictions: Yes, caps on contributions and expenditures by candidates.

Restrictions on Ability to Take on High-Pay Opportunities: Cooling-off period (5 years).

Extended Electoral Cycles (More Than 5 Years): No. Maximum 5-year term.

Term Limits: Legislative: No

Term Limits: Executive: No

Minimum Qualifications for Office: No

Design of Electoral Districts to Incentivize Competition: No. Districts redrawn to reflect population shifts by independent commissions.

Mandatory Voting: No

Minimum Voting Requirements: No

Weighted Voting System: No

Number of Reforms in Place (Out of a Possible 10): 2

France

India

Italy

Russia

United States

1 Not including citizenship requirements.

² Not including age, citizenship requirements, or past felony convictions.

Copyright

Copyright © 2018 by Dambisa Moyo

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Basic Books

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First Edition: April 2018

Published by Basic Books, an imprint of Perseus Books, LLC, a subsidiary of Hachette Book Group, Inc. The Basic Books name and logo is a trademark of the Hachette Book Group.

The publisher is not responsible for websites (or their content) that are not owned by the publisher.

Library of Congress Control Number: 2018935202

ISBNs: 978-0-465-09746-3 (hardcover), 978-0-465-09747-0 (ebook)

E3-20180307-JV-NF

INDEX

Page numbers in italics refer to appendix table.

accountability, 7, 119, 153, 172, 174, 184, 185, 186, 192

Acheson, Dean, 26

advance warning, 223–225, 225–227, 228

advertising, political, restricting, 179

Affordable Care Act, 127–128

affordable housing, 94, 114, 123, 126–127, 150

Afghanistan, 17, 99

Africa, 22, 46, 51, 56, 89, 114, 115, 227

African National Congress, 159

aging populations, xviii, 11, 30, 41, 53–56, 76, 100, 138, 140, 142, 144, 147, 200–201

agricultural sector, 31–32, 40, 62, 64–65, 88–89, 94, 95, 129, 157

Al-Qaeda, 223–224

alternative energy, 48

alternative metrics, 14–17

American Society of Civil Engineers, 148–149

Angola, 17

apartheid, end of, 1, 210

Apollo landings, 125, 131

Arab Spring, xi–xii

arbitrage, 146

Argentina, xvii, 21, 24, 25, 30–32, 34, 37, 97, 115, 119, 121, 122, 194

“Arise, Novice Leader!” (Cowley), 187

Arthur Andersen, 158

artificial intelligence, 59

Asia, xii, 51, 56, 89, 227

Atlantic (magazine), 69

austerity, xi, xii, 46, 102, 103

Australia, 15, 16, 97, 100, 169, 175, 176, 193, 194, 205, 229

Austria, xiii, 174

authoritarianism, xviii, 111, 119, 120, 121, 136, 184, 212, 213

See also state capitalism

auto loans, xv

automation, 59, 60–61, 62, 63, 64, 78, 91, 142

Bahrain, xii

bailouts, 37, 46, 125

Bank for International Settlements, xix

banking/finance, 29, 62, 73, 86, 128, 129

Basic Human Needs dimension, 16–17

BBC, 204

beggar-thy-neighbor policies, 92–93

Belgium, xii, 193, 194

Berlin Wall, fall of, xi, xviii, 111

Better Angels of Our Nature, The (Pinker), 211

Bezos, Jeff, 220

Big Mac index, 18

bilateral trade agreements, 85

bioterrorism, 64

bipartisan commission, 154–155, 172–173

bipartisanship, need for, 154, 158, 164, 189

birthrate/fertility, 29, 50, 54–55, 56

black market economy, failure to capture, 14

Bloomberg View, 145

blue-collar jobs, 59

Bolivia, 194, 195

bonds, 24, 43, 45, 106, 147–148

Brazil, xii, xvii, 2, 3, 55, 73, 97, 115, 116, 121, 122, 126, 183, 194, 214, 229

Brexit, xiii, xvi, 36, 82, 85, 99, 102, 120, 141, 174, 205, 226

Breyer, Stephen, 130

BRICs. See Brazil; China; India; Russia

Britain. See United Kingdom

British Journal of Psychiatry (journal), 214

Brokaw, Tom, 39

Brown v. Board of Education, 130

Budget Control Act, 141

Burundi, 15

Bush, George H. W., 202

business cycles, 105, 163, 182–183

Business Environment subindex, 17

business loans, 40

buybacks, 144, 146

Byrd, Robert, 184

Cameron, David, 140

Campaign Against a Europe of Capitalism and War, xii

campaign finance

income inequality and, 69, 158

restrictions on, 177–179, 218–219, 229–234

Canada, 15, 70–71, 100, 128, 169, 176, 180, 229

capital, as a key factor, 10

See also specific aspects of capital

car loans, xv, 12

Cardoso, Fernando Henrique, 122

career politicians, 186, 187–188, 219

Caribbean, 56

cash transfer payments, 70–71

Castro, Fidel, 184

Catalonia, 8

Central African Republic, 15, 16, 17

Chad, 16, 17

Chadha, Rahul, 61

charitable foundations, 153

checks and balances, 176, 184, 203

Chiang Kai-shek, 184

Chile, xxi, 118

China

acquisitions by, blocking, 106

aging population of, 54

appeal of, 109, 112, 113–115, 117, 122, 127, 131, 213

army of, 26, 123

continued dominance of, opening for, 227

currency reserves of, 117

and debt, 28, 113, 129

education in, 113, 114, 117

employment/jobs in, 129

evolution of improvement in, allowing for, 130

exports and, 25, 26, 113, 129

forecasts for economic growth in, 3

foreign direct investment and, 26, 27, 113, 114–115, 211

formidable economic performance of, xx–xxi, 9, 24, 25, 26, 38, 110, 113, 117, 129–130, 211

and GDP, 24, 25, 26, 75, 113, 129, 212

and globalization, 90

guest workers from, 29–30

health care in, 27

history of economic growth in, 25–28, 32, 37

and housing, 114

illiberalism of, 118

income inequality in, 2, 70, 113–114

inflation in, 128–129

infrastructure in, 27, 114, 156

innovation in, 115, 117

institutional strength of, 34, 35

investment veto, 128

long-term focus in, 27–28, 116

multitude of challenges facing, 113

and natural resource scarcity, 46–47

political party of, 26, 35

political upheaval in, 26

pollution in, 113, 129

and population growth, 55, 113, 117

poverty in, 9, 113, 211

productivity in, 73, 117

prospects for, 28, 129

public-private sector alignment in, 116

question surrounding, 24

targets set for economic growth in, 28

tariffs on imports from, 93

technological advances in, 60, 61

tenure of political leaders in, 184

and trade, 26, 113, 114–115

unemployment in, 61

urbanization in, 51

using, as a model, issues with, 128–129

wages in, 114

China Investment Tracker, 114

China model. See state capitalism

China NPC, 123

China State Grid, 116, 123

China Three Gorges, 116

Chinese State Council, 114

Churchill, Winston, 135

Citi Research, 66

Citigroup, 62

civic responsibility, enhancing, as a goal, 168

civics tests, 197, 199–200

civil rights, xviii, 194, 197

civil war, 36, 211, 213

class discrimination, 197, 199

climate change, challenge of, 52, 53

Clinton, Hillary, xvi, 178

Club of Rome, 52

Cold War, xi, 109, 111, 210

Collier, Paul, 36

Colombia, xvii, 2, 97

colonialism, 36, 210

Committee on Foreign Investment in the United States (CFIUS), 106, 128

commodity marketplace, 22, 46

commodity power buyer, 47

commodity prices, 44, 50, 104, 106

commodity scarcity, xviii, 46–53

commodity-based economies, 22, 23, 43–44

Common Agricultural Policy, 95

common law, 176

communism, predictions about, xi

Communist Party of China, 28, 35

comparative advantage, 84–85

competitiveness

Dutch Disease and, 23

education and, 57

of elections, 157, 158–159, 181, 190, 191–192, 219

globalization and, 107, 154

infrastructure and, 156–157

of liberal democracies, questioning, 118

protectionism and, 31, 84, 89, 92–93, 105, 139

and risk aversion, 32

in salaries, for officeholders, 179

under state capitalism, 116–117

complacency, 38, 184, 186, 223

compliance issues, 170, 171, 173

computing, 40, 59, 61, 63, 73

conflicts, xix, 36, 48, 52, 106, 211, 213, 215, 227

connectedness, 210

consumption, 14, 27, 28, 66

corporate leaders, 142–143, 180

corporate monopolies, 105

corporations, influence of, 143, 151, 153, 220–221

corruption, xi, xiii, xxi, 15, 22, 94, 106, 121, 132, 156, 158, 179, 195–196

cost cutting, 66

Côte d’Ivoire, 18

countries, categorization of, framing used for, 21

Cowley, Philip, 187

credit card debt, xv

credit ratings, 42, 124, 185

crime, 6

Crimea, 211, 212

crisis response, responsibility for, 125, 126

cross-border capital flows, xix, 45, 82, 83, 84, 85, 86, 87, 88, 94–98, 99, 102, 103, 106, 213–214, 215

Cuba, 184

cultural impact, 37

currency reserves. See foreign exchange reserves

currency values, 23, 32, 44, 84, 86, 92

cyber-terrorism, 63–64, 227

Cyprus, 97–98

Czech Republic, 120

debt

agreed levels of, compliance with, issue of, 170, 171, 173

as a factor in growth, 10

and globalization, 86

and government effectiveness, 125

government overreach leading to, 127

government size and, 124

and immigration, 101

persistent issues surrounding, 163, 164

personal/household, xv, 12, 86

protectionism and, 94

ramifications of, xix, 7, 11, 28, 31, 33, 40, 42, 43–46, 103, 113, 129, 213, 214, 218

short-term thinking and, 142, 146

debt ceiling, 42, 141

debt clock, 42

debt crisis (1980s), 41

decentralization, 103–104

decision making, enhancing, as a goal, 168

de-equitization, 145–147, 148

default, 31, 45, 46, 102, 182

deferred pay, 181

deficits, 33, 154, 173

democracy

debate over, 133

deterioration of, 121

durability of, examples of, 155

evangelists for, 159, 164

income needed to sustain, 118–119

ineffectiveness of, to address key issues, 132

liberal vs. illiberal, xxi, 119

prematurely shoehorning, consequence of, 119

prerequisite for, 118

recidivism of, signs of, 213

skepticism toward, 118, 136, 168, 204–205

transformation of, responsibility for, 169, 207

See also specific aspects of democracy

democratic capitalism

accomplishments of, 155

alternative to, as inferior, 110

benefits derived from, 32–33, 155

characteristics of, xviii

core strengths of, preserving, importance of, 160

delineation between private and public sectors in, 115–116, 117

dominance of, challenge to, xx–xxi

ideological shift in, 151, 152

and income inequality, 70

power shift in, 151, 153, 220

promise of, belief in, xxi

retreat of, xviii, 132

rise of, xi, 33, 111–112

skepticism toward, xx, 118, 120–123, 155–160

spread of, appeal needed for, 130–131

and state intervention, 123

Democratic Party of Japan (LDP), 159

democratic purists, 222

democratic reform

agenda for, 164–165

benefits of, 207, 209–210, 216–217, 218–219

as a challenging task, 222

extent of, comparison of, among leading democracies, 223, 229–234

goal of, 168, 218

ignoring, risk in, 204–205, 206–207, 223, 227

leading, recommendations for, 219–220

monitoring implementation of, vigilance in, 222

need for, xx, xxi, 130, 155, 160–161, 162, 164, 168, 206, 215–216, 227–228

opposition to, 221–222, 227

piecemeal approach to, avoiding, reasons for, 222–223

proposals for, considerations in, xx, 170–204

role of media in, 203–204

targets and purposes of, 168–169, 169–170, 193, 205–206

Democratic Republic of the Congo, 194

Democrats, xvi, 159

demographic shifts, xvii–xviii, xix, 11, 29–30, 33, 40–41, 76, 142, 164, 214

See also aging populations; younger populations

Denmark, 2, 15, 16, 18

dependency ratio, rise in, 54

depression (economic), xviii, 7, 13, 39, 41, 102, 152, 214, 225

depression (mental), 214

desalination, 47

despair, 106

DHL Global Connectedness Index, 87

Diamond, Jared, 22

Díaz, Porfirio, 185

Dingell, John, 184

diplomatic relations, 115

diseases/epidemics, xxi, 1, 126, 210, 212, 214

disenfranchisement, 191, 194, 197

distributional effects, failing to show, 19

dividends, 144, 146, 147

divorce rates, xv

dogmatic thinking, 158, 164, 203–204

Domesday Book, 12–13, 14

Dow Jones, 11

drug use, xv, 175

duopolies, 158–159

Dutch Disease, 23–24

e-commerce, 60

economic collapse, 7

See also financial crisis; Great Depression

economic database, 25

Economic Forum, 153

economic growth

evaluating, complexity of, 11–12

importance of, xvi–xvii, 4–9

key drivers and drags on, overview of, 10–11

limitations of, 9–10

measurement of, issues surrounding, 12–18

purpose of, reminder for, 15

visibility of, 19

See also specific aspects of growth

economic ideology, shift in, 151, 152

Economic Policy Institute, 90

economic policy models/tools, conventional, inadequacy of, 29, 41–42, 105, 163, 215, 218, 227

Economic Quality subindex, 17

Economic Report of the President, 59

economic structure, failure to capture changes to, 14

economic uncertainty/instability, 3, 4–5, 28, 35, 80, 120, 168, 213, 215, 225

economics profession, 163, 164

Economist (magazine), 18, 23, 69, 175, 176, 196

Edelman Trust Survey, 135

education

access to, 210

assessing, 15, 57, 76

China funding, in partnering countries, 115

debt and, 43

equal, establishing, 130

erosion of, xvii, 3, 6, 32, 56, 132

funding/investing in, 8–9, 40, 43, 114

and government effectiveness, 124

income inequality’s impact on, 68

and institutional strength, 34

leveraging, 117

long-term approach to, 94, 217

of officeholders, requirements for, 189–190

performance gap in, 57–58

priority of, in daily life, 112

privatization of, 220

responsibility for, 116, 125

shift in, ramifications of, 56–58

short-term approach to, 140, 217

and social mobility, 72

and state capitalism, 110, 113

state intervention in, 123

voting and, 196–197, 198, 201

willingness to prioritize, impact of, on foreign investors, 27

Education subindex, 17

educational outcomes, 57–58, 217

educational testing, 57, 58

Egypt, xii, 119, 155, 194

elections

belief in, flaws in democracy obstructed by, 159–160

competitiveness of, 157, 158–159, 179, 181, 190, 191–192, 219

corruptibility of, 179, 195–196

cost of, 186

in illiberal democracies, 119, 212

importance of, 164

electoral cycles

extended, 182–183, 185–186, 218, 229–234

short, 95, 136–137, 139–140, 160, 190

electoral districts, design of, to incentivize competition, 190–193, 219, 229–234

electoral map, 12

Elliott, John, 156

Elop, Stephen, 63

employment

artificial, yielding, 129

competition for, immigration and, 101

connection between economic growth and, 9, 58

education and, 58

government leading in, shift from, 152, 154

growth in, xvii, 61, 75

industrial, decline in, failing to address, 153–154

infrastructure investment and, 149, 150, 151, 157

priority of, in daily life, 112

and protectionism, 83, 94, 139

small firms leading in, 145

technological advances and, 41, 61

See also unemployment/underemployment

employment status, weighted voting by, 201

En Marche movement, 159, 178

End of History and the Last Man, The (Fukuyama), 132

energy, 31, 46, 47, 48, 52, 104, 212

England. See United Kingdom

Enron, 158

entitlements, inability to address, 132, 175

environmental degradation, 79, 113

environmentalism, 52–53, 156, 157

epidemics/diseases, xxi, 1, 126, 210, 212, 214

Erdogan, Recep Tayyip, 119

EU Common Agricultural Policy, 88–89

Europe

aging population of, 56

during China’s decline, 27

Eastern, threats facing, 226

economic growth in, xvii

first economic cross-country comparison involving, 13–14

and GDP, 25, 32, 123, 155, 212

history of economic growth in, 32–33, 37

inflation in, 104

and institutional strength, 34

and population growth, 55

population share of, 123

and prohibited imports, 129

and protectionism, 95

social and political unrest in, xi, xii

as a target of recommended reforms, reason for, 169

term limits in, 183

unemployment in, xiv–xv, xvii, 62, 213

urbanization in, 51

voter turnout in, 193

welfare payments of, 123

European Union (EU)

capital controls in, 98

compliance with agreements in, 170, 171, 173

and debt, 45

employment trends in, xiv–xv, xvii

and GDP, 45

mandatory voting in, 194

number of members, 173

and population growth, 55

protectionism and, 88–89, 92

refugee crisis in, 99

signing on to, 176

skepticism toward, 174

social and political unrest in, xii, xiii, 103

standard of living in, decline in, xiv–xv

technological advances in, 62

threats facing, 226

voter turnout in, 194

See also Brexit

Eurozone, xix, 3, 98, 113, 174, 226

exports, 8, 14, 22, 23, 25, 26, 28, 31, 92, 113, 129

See also trade

Facebook, 203

failure, fear of, 161

Fannie Mae, 94, 127

Federal Bureau of Investigation (FBI), 223, 224

Ferguson, Niall, 34

fertility/birthrate, 29, 50, 54–55, 56

Fiji, 120–121

finance/banking, 29, 62, 73, 86, 128, 129

financial collapse (1929), 7

See also Great Depression

financial crisis (2008)

aftermath of, xi, xv, xvii, 3, 7–8, 9, 11, 17–18, 33, 42, 43, 44, 45, 86, 92, 96, 98, 104, 118, 120, 125, 126, 173, 215

causes of, 94, 127, 180–181, 225

failure to predict, 163

productivity levels before and after, 72

run-up to, view of globalization in, 87

unheeded warning of, 224–225

Financial Times (newspaper), 61, 73, 86, 92, 106, 119, 143

Finland, 15, 16, 17, 70–71

food, priority of, in daily life, 112

food production, natural resources and, 47

Forbes (magazine), 68

Forbes 400, 68

foreign acquisitions, preventing, 106

Foreign Affairs report, 72

foreign aid, 94

foreign currency exchange, 23, 106

foreign currency revenues, boom in, issue with, 23, 24

foreign direct investment, 26, 27, 96, 106, 113, 114–115, 128, 211

See also cross-border capital flows

foreign exchange reserves, 46, 117, 154

Foundations of Wellbeing dimension, 16–17

France, xv, 4–5, 17–18, 27, 31, 33, 42–43, 90, 159, 174, 176, 178, 194, 230

Fraser Institute, 95

Freddie Mac, 94, 127

free markets, ranking countries on, 95

free time, increased, question over, 66

freedom

assessing, 15, 17

declining, 120

under democratic capitalism, xviii, 33, 112

economic, ranking, 95

as a factor in growth, 34

as a fundamental principle, 118, 160, 167

global, 210, 212

of the media, 210, 212

under state capitalism, 28, 111, 118

unfettered, necessary constraints on, 169

value of, as no longer axiomatic, 109–110, 112, 119, 131, 132, 168

vital role of, 38

Freedom House, 120, 210

French Revolution, 4–5, 36

Frey, Carl Benedikt, 62

Fukuyama, Francis, 132

G20, xix, 88, 97, 139

Gates, Bill, 220

Gaza, 212

generosity, assessing, 15

genocide, 211

geographical determinism, issue with, 22, 24

geopolitical unrest, xx, 107, 120, 226

See also social and political unrest/instability

Germany, xii–xiii, 7, 31, 54, 90, 106, 123, 135, 176, 180, 230

gerrymandering, 191, 192–193

G.I. Bill, 40

Gini coefficients, 1–2, 70, 101, 114, 185

global debt, 42, 43, 213

global economy

China’s role in growth of, 26, 113

continued stagnation of, xvii, 163, 213–214, 215

erosion of, xxii

forces threatening, xvii–xviii, xix, 40–41, 106, 107

forecasts for growth in, xvii, 3, 79, 214, 215

size of, growth in, 155, 211

slow-growth in, 2–3, 40

threats to, and unheeded advance warnings, 226, 228

violence’s impact on, 36–37

global exports, 113

global financial crisis. See financial crisis (2008)

global freedom, 210, 212

global GDP

aftermath of the 2008 financial crisis and, 126

asset management and, 147

current estimates of, 43

growth of, 155, 211, 212

predictions about, 78–79

ratio of debt to, 42, 213

shares of, xiv, 15, 24, 25–26, 113, 123, 129, 212

global life expectancy, 55, 69

global pension fund, 147

global population

aging, 54–55, 56

growth in, resource scarcity and, 48–50, 51–52

shares of, xix–xx, 112, 123, 213

global productivity, 65, 72–73, 76, 148

global reserve currency, 46

global social progress, 16

global stock markets, 144, 145, 146–147

global trade, 80, 92, 106, 107, 113, 214

Global Trade Alert, xix, 88, 105

global unrest/instability, xi–xiii, 225, 226–227

global wealth, 67, 75

global welfare payments, shares of, 123

global world order, xi, 86, 94, 226, 227

global/international community, erosion of, xxi, xxii

globalization

connection between economic growth and, 80

criticisms of, problem with, 82–83, 89, 91, 106, 110

full, ideal of, 83, 84–85, 107

gains from, misallocation of, 153–154

history of, 81–82

living standards under, 85, 86, 87, 90, 212

opposition to, 83, 91, 206, 212, 227

overall level of, drop-off in, 87

partially implemented, consequences of, 82–83, 83–84, 85–91, 106–107, 163

period of, vs. preglobalization period, 90

principles of, 82

proponents of, promise from, xiii, 84–85, 87, 107

protests against, xii, xiii, 102–103

purpose of, succeeding in, extent of, 98–99

tipping point away from, 98

unraveling of, problem with, xx, 79, 83, 88–91, 92, 93–94, 98, 104, 107, 206, 215, 226, 227

Gordon, Robert, 76–77

Governance subindex, 17

government

basic roles of, 125

binding the, to policies/agreements, 170, 171, 173–174, 175–176, 177, 218

effectiveness of, 124, 125–126, 127

as employer, rise of, xix, 123–124

expansion of, xix, 124

failure of, rebuke of, xiii

power shift away from, 151, 153, 220, 227

trust in, low level of, 135–136

Government Accountability Office, 64

government overreach, 126–127, 175–176

government shutdowns, 140, 141

government spending, 6–7, 8–9, 14, 29, 41, 124

Great Depression, 7, 13, 39, 41, 152, 225

Great Recession. See financial crisis (2008)

Greatest Generation, The (Brokaw), 39

Greece, xv, 5, 37, 43, 44, 102–103, 121, 167

green growth, 52–53

gridlock, 139–140, 141, 154, 156, 158

gross domestic product (GDP)

alternative metrics beyond, 14–17

and Bill Gates, 220

bonuses tied to, for officeholders, 180, 181, 182

civil war impacting, 36

correlation of, to success, 17

criticisms of, as a measure, 14, 17–19, 77–78

defined, 14

dominance of, as a measurement tool, 4, 14, 19

doubling, growth needed for, xvii, 2

and globalization, 86

groundwork laid for calculating, 13–14

income inequality and, 67

measurement standards for calculating, 14

protectionism and, 88

ratio of debt to, rules for, 45

role of the Internet in, 60

sectors comprising largest share of, 75

share of labor accruing to, 62–63

short-term approach to, 137

See also global GDP; specific countries

gross national income (GNI), 16

Growth in a Time of Debt (Reinhart and Rogoff), 44–45

Guardian (newspaper), 204–205

guest worker programs, 100

Guinea, 15, 17

Guns, Germs, and Steel (Diamond), 22

Haldane, Andy, 73–74

Hamas, 121

happiness indices, 15

“Has Financial Development Made the World Riskier?” (Rajan), 90

health care

access to, 210

China funding, in partnering countries, 115

cost of, 212

demand for, 61

funding/investing in, 8–9, 43

and government effectiveness, 124

and institutional strength, 34

intergenerational tradeoffs in, 201

priority of, in daily life, 112

privatization of, 220

responsibility for, 125

short-term approach to, 140, 141

and state capitalism, 110

state intervention in, 123, 127–128

strain on, 41, 55

and voting decisions, 137

willingness to prioritize, impact of, on foreign investors, 27

health improvement, 210

Health subindex, 17

Henry, Patrick, 167

Heritage Foundation, 114

high-pay opportunities, restrictions on ability to take on, 179–182, 229–234

Hill, Lisa, 195

HIV/AIDS, 1

Hoeffler, Anke, 36

Hollywood, 12

homelessness, 195, 214

Honduras, 120–121

hopelessness, 106

Horizon 2025, 213

How the West Was Lost (Moyo), 61

Human Development Index (HDI), 15–16

human progress

alternative metrics for tracking, 14–17

connection between economic growth and, 4, 9

period of, positive changes reflecting, 210–212

prospects for, challenges dampening, 212–216

Hungary, 118, 120, 121

Iceland, 15, 16

ideas, new. See innovation

illiberal democracies, xviii, 118, 119, 120, 132, 184, 212

See also state capitalism

immigration, xii, xiii, xxi, 29–30, 42, 82, 83, 84, 85, 86, 87, 98, 99–101, 102, 103, 105, 132, 137, 200, 212, 227

imports, 14, 84, 92, 93, 105, 139, 225

See also trade

In Search of Prosperity (Rodrik), 34

inaction, 140, 142, 154

income inequality

absolute vs. relative, debate over, 71

between countries, improved status of, 67–68, 212

under democratic capitalism, 158

under globalization, 87, 163

highest, xiii

and immigration, 100, 101

in an interconnected world, xxi

limitations of economic growth solving, 10

masking, 19

measuring, 1–2, 70, 101, 114, 185

protests against, xi, xii, xiii

skepticism toward free markets due to, 122

under state capitalism, 113–114

widening, ramifications of, xviii, 41, 58, 67, 68–72, 120, 158, 164, 214

income levels, xvii, xxi, 5–6, 7, 16, 32, 51, 70, 118–119, 155

income redistribution, 70–71

incumbent politicians, 170, 175, 185, 191, 192, 196, 204, 221

Independent (newspaper), 126

India, xvii, 3, 25, 49, 90, 97, 115, 156–157, 176, 231

Indian Railways, 123

Indonesia, xvii, 34, 97, 231

industrial decline, 6, 23

industrial heartland, 12

industrial revolutions, 25, 33, 64, 77

industrial sector, 23, 65, 89

industrialization, 26, 29, 31, 32, 41, 53, 121, 153–154

industry protections, 105–106

infant mortality, 210

inflation, 7, 10, 23, 24, 31, 32, 41, 94, 104–105, 128–129, 137, 163, 176, 214–215

information flow, 86, 87

infrastructure

corporate role in, 221

database calculating, 25

under democratic capitalism, 32

dominate player in, 114–115

erosion of, xvii, 3, 132, 148–149, 150

funding/investing in, 8–9, 29, 39–40, 43, 149, 150–151, 157, 218

long-term approach to, 94, 149, 150–151, 152, 172, 175, 216–217

money targeted for, defining, 95

political changeability involving, 172–173

political wrangling over, 156

protectionism and, 89

ranking countries on, 156–157

responsibility for, 116, 125

short-term thinking and, 140, 143, 144, 148–149, 150, 151, 175

special interest groups and, 157

under state capitalism, 110, 156

willingness to prioritize, impact of, on foreign investors, 27

infrastructure commission, 154–155

innovation

connection between economic growth and, 9

cultural impact on, 37

under democratic capitalism, 33, 131

disruptive, 59

as a factor in growth, 10

foundation for, providing, 34

and globalization, 81–82, 99, 102

in health care, 115

leader in, 117

and productivity gains, 73, 76

and resource scarcity, 48, 52

scientific, government-led, 125

short-term thinking and, 148

and state capitalism, 110, 111

See also technological advances

Institute for Economics and Peace, 213

Institute for Policy Studies, 68

Institute of International Finance, 96

institutional breakdown, 7

Institutional Revolutionary Party (PRI), 185

institutional strength, impact of, 34, 35–36

interconnectedness, issues arising from, xxi

interest payments, 44

interest rates, 24, 29, 41, 92, 94, 96–97, 104, 129, 146, 149, 154, 218

International Institute for Democracy and Electoral Assistance, 193

International Labour Organization, 100

international law, 177

International Monetary Fund (IMF), xvii, 26, 45, 87, 94–95, 97, 98, 103, 110, 130, 176, 223

Internet, 60, 125

investment, xx, 6, 9, 14, 16, 22, 24, 27, 34, 35, 38, 43–44, 86, 97, 113, 170, 221

investment bank scandals, 158

investment horizon, 143–148

investment vetoes, 128

“invisible hand,” 70

Iran, 227

Iraq, 99

Ireland, 43, 44

Islamic State, 212

isolationism

current path of, continuing on, risks of, 225–227

full, ideal of, 83

issues with, xxi–xxii, 83, 84

See also protectionism

Italy, xv, 31, 43, 44, 54, 90, 158, 180, 183, 195, 232

Japan, xvii, 13–14, 21, 24–25, 26, 28–30, 29, 32, 34, 37, 54, 61, 90, 159, 169, 180, 212, 217–218, 232

job creation/opportunities. See employment

joblessness. See unemployment/underemployment

Jordan, xii

Karabarbounis, Loukas, 62–63

Kenya, 109, 121, 223

Kenyatta, Uhuru, 109

Keynes, John Maynard, 6–7, 58, 66

Keynesian economic thinking, 152

Kim, Jim Yong, 132

Kim Il-sung, 184

knowledge flow, 115

Krugman, Paul, xviii

Kuznets, Simon, 13–14, 21, 22, 24, 37

Kvochko, Elena, 60

labor, as a key factor, 10

See also specific aspects of labor

labor productivity. See pure productivity

laissez-faire capitalism. See market capitalism

land, arable, 12, 31, 46–47

land reform, 29

land value, use of, as a measure, 12–13

Landes, David, 34

Latin America, 56, 86, 227

laws, 10, 34, 35, 125–126, 176, 177, 193–195

Lee Kuan Yew, xxi

Legatum Prosperity Index, 17

legislative supremacy, principle of, 176–177

liberalism, xxi, 33, 111, 118, 136

See also democratic capitalism

Liberia, 15

Libya, xii, 99

Liechtenstein, 193

life expectancy, xv, 1, 9, 15–16, 32–33, 55, 69

living standards

connection between economic growth and, 2, 4–7, 8, 9, 15, 19, 29, 79, 103, 163

under globalization, 85, 86, 87, 90, 212

immigration and, 101

improved, period of, 211–212

income inequality and, 68–69

innovation improving, 59

under isolationism, 84

and misleading statistics, 11–12

nonmonetary forms of economic progress and, 18

raising, path focused on, 132

skepticism toward free markets due to, 122

technology improving, 64, 66, 77, 211

trends in, xiv–xv, 71

lobbying, 69, 157, 173, 182, 220

longevity, 15, 53–54, 142, 210

long-term agreements, ability to commit to, 170–177, 218, 229–234

long-term thinking, xx, 38, 42, 79, 94, 116, 133, 137, 155, 162, 168, 210

See also democratic reform

Lowry Institute for International Policy, 205

Luxembourg, 194

Ma, Jack, 153

Maastricht Treaty, 45, 171, 173

Macmillan, Harold, 111

Macron, Emmanuel, 159, 178

Maddison, Angus, 25, 26

Madero, Francisco I., 185

Maduro, Nicolás, 119

Making Our Democracy Work (Breyer), 130

Malaysia, 115, 121

Malthus, Thomas, 51–52

Mandela, Nelson, 1

Manhattan Project, 125

manual-labor jobs, 59

manufacturing sector, xiv, 23, 31, 33, 40, 47, 62, 64, 66, 73, 74–75, 76, 78, 88, 89

Mao Tse Tung, 26

market capitalism, 33, 70, 95, 151, 152, 162, 168

See also democratic capitalism

market efficiency, 160

market failure, responding to, role of government in, 125, 126

McDonald’s, xiii

McKinsey Global Institute, 42, 57, 78–79, 139

media, 151, 152–153, 160, 203–204, 210, 212, 221–222

mediocrity, 57

Meiji Restoration, 28–29

men in the workforce, xiv

Merkel, Angela, 123

Mexico, xvii, 18, 86, 97, 115, 183, 184, 185, 194, 195, 223, 232

Microsoft, 63

middle class, xv, xvi, 119, 120, 131, 211, 214

Middle East, xi, xii, 52, 226

migration. See immigration

military conflicts. See war/military conflicts

military coups, xii, 31, 119, 120–121

Millennium Challenge Corporation (MCC), 124

minerals/metals, 31, 46, 48, 104

minimum wage, 18, 70, 114

mining, 48, 128

misallocation, xx, 40, 43–44, 79, 88, 107, 144–148, 153–154, 156–157, 206, 215

modernization, 28–29

Mongolia, 48

Morsi, Mohamed, 119

mortgage loans, 12, 94, 127

multiplier effect, 6–7

Murray, Charles, xiv

NASA, 125

Nation at Risk, A (report), 57

National Bureau of Economic Research (NBER), 182–183

national champions, 105, 110

National Commission on Fiscal Responsibility, 154–155

National Environment subindex, 17

National Health Service, 123, 141

National Income and Product Accounts, 13–14

National Infrastructure Commission, 172

national journalistic champion, 204

National People’s Congress, 35

national security, 4, 8–9, 106, 116, 121, 125

nationalism, rise of, xxii, 174, 212

natural disasters, 126

natural resources, xix, 22–24, 31, 40, 46–53, 164, 213, 214

Navy SEAL training, 161–162

Nazism, 7

Neiman, Brent, 62–63

Netherlands, 15, 71, 174

New Deal, 150

New York Stock Exchange, 143

New York Times Magazine, 102

New York Times (newspaper), 69

New Zealand, 15, 17

Niger, 16, 17

Nigeria, 119, 121, 139

No Child Left Behind, 57

Nokia, 63

nongovernmental organizations (NGOs), role for, 221

nonstate actors, power shift toward, 151, 153, 220, 227

North Africa, xii

North American Free Trade agreement (NAFTA), 86, 176

North Atlantic Treaty Organization (NATO), xviii, 173, 176

North Korea, 184

Norway, 2, 15, 16, 17, 67

nuclear war, 227

Obama, Barack, 106, 140, 171, 178

Obstfeld, Maurice, 110

Occupy Wall Street, xi

office holding, qualifications for, minimum, 186–190, 219, 229–234

Office of the Director of National Intelligence (ODNI), 47–48

officeholder compensation, 179–182, 218, 229–234

offshoring, 91

oil, 41, 52, 128, 129, 157

oil spike (1973), 214–215

Oliver, Alex, 205

Olson, Eric, 161

O’Neill, John P., 223, 224

one-party dominance, 159

Opportunity dimension, 16–17

Orban, Victor, 118, 121

Organisation for Economic Co-operation and Development (OECD), 3, 6, 57, 67, 68, 76, 193–194

Osborne, George, 150

Osborne, Michael, 62

overpopulation, 113

Oxfam report, 67, 220

Oxford Martin School, 60

Pakistan, 34, 120

Palestine, 121

Panama papers, 132

pandering, 137, 138, 140

paradox, 41, 78, 111, 135

Paris Climate Change Agreement, 171, 173

Park Geun-hye, 121

parliamentary supremacy, principle of, 176–177

Parmalat, 158

“Past, Present, and Future of Economic Growth, The” (Rodrik), 64–65

Pax Americana, xxii, 226

pay gap, public-private, issues with, 180–181

peace and security, xi, xxii, 155, 211, 212, 213, 226

pensions, 41, 55, 61, 137, 140, 142, 144, 147, 149, 157

performance-based incentives for politicians, 179, 180, 181–182

Personal Freedom subindex, 17

Peru, 194, 195

Petty, William, 13

Pew Research Center, xv, 90, 114, 135–136, 191, 203

Philippines, 155, 183

PIIGS. See Greece; Ireland; Italy; Portugal; Spain

Pinker, Steven, 211

Pinochet, Augusto, xxi

Poland, 195–196

policy changeability, 170, 171

policy uncertainty, 139, 170

policymaking

current path of, continuing on, risks of, 225–227

interest in alternative measures for, 15

previous template for, challenge to, 82

reliance on GDP for, 14, 19

strength and adaptability of, 35

understanding needed for, 22

political activists, 222

political inequality, 69, 195

political logjam. See gridlock

political myopia. See short-term thinking

political promises, making, 140–141

political stability, vital role of, 37–38

See also military coups; political upheaval; social and political unrest/instability

political structures/systems, 10, 34–35

political terms. See electoral cycles; term limits

political upheaval, xii, 4–5, 7–8, 26, 35–36, 227

pollution, 113, 129

popular vote, xvi

population database, 25

population growth

declining, 6, 29, 54

excessive, 113

and immigration, 101

leveraging, 117

natural resources and, 48–50, 51–52

shifts in, ramifications of, 54–55

See also aging populations; younger populations

population meter, 49

Population Reference Bureau, 49

populism, xi, 36, 153, 168, 196, 205, 207, 212, 216, 226, 227

Portugal, 43

poverty, xiv, xvii, xx, xxi, 1, 2, 4–5, 6, 9, 32, 68, 79, 91, 103, 110, 113, 122, 131, 132, 155, 211, 214, 227

power shift, 151, 153, 220, 227

price distortions, 48, 128, 129

private sector

delineating between public and, 115–116, 117

highest-ranked employer in, 123–124

importance of, focus on, 82

shift toward, away from state intervention, 151, 152, 153, 154

professional qualifications, weighted voting by, 201

Programme for International Student Assessment (PISA), 57, 58, 76

property rights, 10, 33, 34

protectionism

appeal of, 91–92

catalyst for, 91

as central trade policy, example of, 31

classic example of, 84, 93

consequences of, xxi–xxii, 42, 82–83, 98, 103–106, 215

current path of, continuing on, risks of, 225–226

different sectors subject to, 128

entrenched, 139

in full isolationism, 84

immigration approach as a form of, 100

new wave of, 95, 97

rise of, xix, xxii, 80, 88–89, 212

under state capitalism, 110

Protestant work ethic, 37

public opinion polling, 157

pure productivity

declining, ramifications of, 58, 72–79

surge in, 40

Putin, Vladimir, 119

Qing Dynasty, 27

quantitative easing, 92, 96, 104

quarterly earnings, pressure to meet, 143

quotas, 84, 92, 139

racial discrimination, 197, 199

Rajan, Raghuram, 223–224

ratification process, 170, 171

RBS, 62

Reagan, Ronald, 19

real estate bubble, 129

real-world experience, requiring, of politicians, 186–187, 188–189

recession, xvii, 3, 57, 73, 79, 86, 116, 121, 126, 127, 145, 214

See also financial crisis (2008)

red tape, problem of, 156

redistribution of income, 70–71

refugees, xiii, 99, 212

regulations, 10, 105, 116, 125–126, 181, 224

Reinhart, Carmen, 44–45

Republicans, xvi, 159

research and development (R&D), 62, 143, 144

retired politicians, role for, 219–220

retirement age, 142

revolving-door issue, addressing, 180–181, 182

Ricardian equivalence proposition, 138

Ricardo, David, 137–138

Rio Tinto, 48

risk aversion, 32, 142, 144–145, 147

risk taking, 38, 181, 224

robotics, 59, 61, 62, 65

Rodrik, Dani, 34, 64–65

Rogoff, Kenneth, 44–45

Roosevelt, Franklin, 40, 91, 150

Russia, 3, 55, 73, 105–106, 115, 118, 119, 121, 128, 132, 155, 211, 212, 214, 226, 233

Rwanda, 15, 36

S&P 500, 11, 143, 144

Safety & Security subindex, 17

Saudi Arabia, 24, 47, 226

security. See national security; peace and security

service sector, 14, 61, 62, 66, 74–75, 75–76, 78

short-term thinking, xix, xx, 38, 79, 85, 116, 136–137, 138, 139–150, 152–153, 160, 162, 206, 207, 215–216, 221–222

See also democratic reform; protectionism

Silicon Valley, 12, 62

silos, 103–104, 215

Simpson-Bowles, 154–155, 172–173

Singapore, xxi, 118, 179–180, 193, 194–195, 233

small businesses, 145

Smoot-Hawley Tariff, 84, 93, 225

social and political unrest/instability, xi–xiii, xvi, xvii, xx, xxi, 4–5, 6, 9, 48, 52, 56, 88, 91, 102-103, 106, 107, 111, 116, 119, 139–140, 168, 213, 215, 216, 225, 226

See also military coups; political upheaval

social cohesion, breakdown in, xv–xvi, 6, 227

social exclusion, 103

social media, 78, 151, 152, 179, 203

social mobility, xv, xviii, 8, 9, 71–72

Social Progress Imperative, 16

Social Progress Index, 16–17

Social Security, 55

social stability, vital role of, 37–38

social support, assessing, 15

Somalia, 115

South Africa, xvii, 1–2, 97, 115, 121–122, 159, 210

South America, xii, 22, 56, 89, 115

South Korea, 121, 155

South Sudan, 15

Southern Africa, xii

Southern Rhodesia, 199

Soviet Union, end of, xi, 36, 210

Spain, xii, xv, 7, 8, 54, 70–71, 139, 194

special interest groups, 156, 157, 201

stagflation, 41, 214–215

Standard & Poor’s, 42

standard of living. See living standards

Stanford University, 143

state capitalism

appeal of, 110, 127, 130

corruption and, xxi

delineation between private and public sectors in, 115–116, 117

and income inequality, 70

problems also infecting, xxi, 110, 111

rise of, xviii, 110

shift toward, 109–110, 111, 112–113, 130, 132

viability of, as a model, questioning, 128–129

State Council, 35

state failure, 52

state intervention

different views and traditions on, 127–128

excessive, issue of, 126, 127

rise of, xix, 122, 123, 127, 128, 215

shift away from, toward private sector investment, 151, 152, 153, 154

statistics, misleading, 11–12

status quo, remaining wedded to, problem with, xxii, 32, 205

stock markets, 11, 143, 144, 145, 146–147

strategic horizon, 143

strategic thinkers, traits of, 161–162

See also long-term thinking

student loans, xv, 12

student performance, 57–58

subsidies, 48, 89, 94, 95, 105, 129, 157

Sudan, xii

suffrage, xviii, 130, 197–198, 201

suicide, xv, 102, 214

Summers, Lawrence, xviii, 223–224

Sweden, xiii, 15, 90

Switzerland, 15, 16, 24

Syria, 15, 99, 211, 226

Syriza Party, 5, 121

Szirmai, Adam, 75

Taiping Rebellion, 27

Taiwan, 118, 120, 179–180, 193, 194–195, 233

Tanzania, 15, 223

“Taper Tantrum,” 96

tariffs, 83, 84, 88, 92, 93, 105, 139, 225

tax breaks, 105, 138, 153, 157, 219

tax incentives, 71, 153

tax reform, inability to address, 132

tax-and-spend policies, 70

taxes, 29, 48, 137, 202, 220

technological advances

benefits of, 33, 59–60, 66, 211–212

as a factor in growth, 10

government role in, 124, 125

measurement issues involving, 14, 65–66, 77–78

predictions about, 58–59

and productivity, 73, 76, 77, 78

ramifications of, xviii, 33, 41, 58–67, 74, 75, 164, 214

and resource scarcity, 52

short-term approach to, 142

surge in, 40

in United States, 74

See also innovation

technology sector, 63, 65

telecommunication, 59, 73

tenure, 139, 142–143, 184

Tequila Crisis, 86

term limits, 183–186, 219, 229–234

terrorism, xxi, 9–10, 63–64, 175, 213, 223–224, 227

Thailand, xii, 119, 120–121

think tanks, role for, 220

third parties, viability of, 159

Time (magazine), 49

time inconsistency, problem of, addressing, 170–177

time lags, productivity and, 66, 77–78

tit-for-tat policy responses, 93

Togo, 15

total factor productivity (TFP), as a key factor, 10

See also specific aspects of total factor productivity

trade

authority over, issue of, 94

connection between economic growth and, 110

continued stagnation of, 214

dominate player in, 26, 113, 114–115

under globalization, 82, 84, 85, 86–87, 98, 154, 163

globally integrated approach to, 99

protectionist approach to, xix, 83, 84, 89, 91, 92–95, 102, 103–104, 105, 110, 139, 215, 227

reliance on, 26

special interest groups and, 157

windfalls from, squandered, 94

trade agreements, xiii, 85, 86, 88, 92, 170, 171, 173, 176

trade relations, 91, 115

trade wars, 225

training, 40, 57, 74, 94, 161

See also education

Transatlantic Trade and Investment Partnership (TTIP), xiii

Trans-Pacific Partnership (TPP), 88, 170, 171

transparency, 7, 10, 27, 35, 72, 100, 160, 178, 203, 210

treaties, xviii, 45, 170, 171, 173, 174, 175, 177

Treaty of Rome, 173

trucking sector, 60–61, 157

Trump, Donald, xiii, xvi, xvii, 82, 85, 99, 102, 120, 171, 178, 205, 226

trust level, 135–136

Tunisia, xi, xii

Turkey, xii, xvii, 97, 118, 119, 132, 226

UK Department of Business, Innovation and Skills, 124

UK Office for Budgetary Responsibility, 55

Ukraine, 131, 211, 226

UN Research Institute for Social Development, 56

unemployment/underemployment

continued high levels of, xiv–xv, xvii, 1, 213, 214

Dutch Disease and, 23

high, problem with, xx, 7, 32, 79

infrastructure investment and, 149, 150–151

and protectionism, xxi, 84, 225

short-term thinking leading to, 137, 174

skepticism toward free markets due to, 122

technological advances leading to, 58, 59, 60–61, 62, 63, 66, 78

younger populations and, xiv–xv, 56–57, 58, 63, 100, 102, 103, 149, 213

United Kingdom (UK)

aging population of, 55, 140

Argentina choosing to align with, 31

and Brexit, xiii, xvi, 36, 82, 85, 99, 102, 120, 141, 174, 205

career politicians in, 187–188

checklist of democratic reforms in, 223, 233

as a common-law country, 176

corruption in, 195–196

and debt, 42–43, 44

early attempts at measuring national wealth in, 12–13

education in, 57, 123, 189–190

elections in, 140–141, 191

employment/jobs in, 145

health care in, 123, 127, 141

history of economic growth in, 31, 33, 34, 37

and housing, 123, 150

immigration and, 101

income inequality in, 67, 68–69

infrastructure in, 150, 172

institutional strength of, 34

leader of, annual pay of, 180

life expectancy in, 69

media in, 204

political changeability and, 172

productivity in, 73–74

state intervention in, 123

and the Taiping Rebellion, 27

technological advances in, 62

term limits in, 183, 233

training in, 57

transportation in, 123

unemployment in, 56–57, 62

voter turnout in, 194, 196

wages in, 101

weighted voting and, 199, 233

work-intensive score for, 18

United Nations (UN), 15–16, 49, 50, 55, 56, 176, 214

United States (US)

aftermath of the 2008 financial crisis in, xi, 3, 33

aging population of, 55, 147

appeal of, as a model, xiv

Argentina choosing not to align with, 31

and campaign finance, 69, 158, 178

checklist of democratic reforms in, 223, 234

during China’s decline, 27

and China’s influence, 115

as a common-law country, 176

corruption in, 158

and currency issues involving the dollar, 23, 44, 154

current path of, continuing on, risks of, 225–227

debt in, xv, 12, 42, 43, 46, 94, 127, 141

defining challenge for, xix

deindustrialization of, 26

delineation between private and public sectors in, 115

economic freedom in, 95

economic stance of, 70

education in, 37, 40, 43, 57–58, 76, 94, 130, 132, 217

elections in, xiii, xvi, xvii, 12, 69, 82, 85, 99, 178, 191, 202

electoral cycles in, 140, 234

electoral districts in, design of, 191–192, 234

electoral map, 12

employment/jobs in, xiv, xvii, 61, 75, 94, 145, 149

and entitlements, 132

evolution of freedom and rights in, 130

exports and, 113

failure evident in, xiii–xiv, xv–xvi

first economic cross-country comparison involving, 13–14

foreign policy of, 226

and GDP, xiv, xvii, 3, 15, 25–26, 70, 75, 84, 90, 93, 113, 123, 127, 129, 212

and globalization, 90, 94, 153, 154

and government effectiveness, 125

and government overreach, 126–127

gridlock in, 140

happiness ranking of, 15

health care in, 43, 127–128

history of economic growth in, 31, 32–33, 37

and housing, 94, 126–127

immigration and, 101, 132

impact of, on other economies, xiv, xviii

impediments facing, xvii, xviii, 67

income inequality in, xiii, 2, 67, 68, 70, 101, 114

income levels in, 32, 155

inflation in, 104

infrastructure in, 39, 43, 94, 132, 148–149, 150–151, 153, 154–155, 157, 172–173

and institutional strength, 34

interest rates in, 96–97

key sectors in, constraints on, 128

largest sector in, 74

leader of, annual pay of, vs. CEO pay, 180

life expectancy in, xv

living standards in, xiv, xxii, 6, 9

manufacturing in, 40, 64, 75

massive depression in, 13, 39

military, 123, 125

misallocation and, 145

and misleading statistics, 11–12

office holding in, qualifications for, 189

political approach of, 70

political changeability and, 172–173

population of, 123

poverty in, xiv, 6, 9, 32, 155

productivity in, 40, 65, 90

and prohibited imports, 129

prospects for, xvii, 3, 168

and protectionism, xxi–xxii, 88, 93, 94, 95, 106, 128, 225–226, 227

ratification process in, 170, 171

rise of, tripartite surge leading to, 39–40

savings in, level of, xv

short-term thinking in, 141, 153–154

social and political unrest in, xi, xiii

social cohesion in, xv–xvi

social mobility in, xv, 71–72

stock market, 11, 143, 144, 145

as a target of recommended reforms, reason for, 169

tax reform in, 132

technological advances in, 40, 60–61, 62, 64, 74

term limits in, 183, 184, 234

terrorism and, 223–224

and trade, 84, 88, 91, 93, 94, 95, 154, 214

training in, 40, 94

trust level in, 136

unemployment in, xiv, 60–61

urbanization in, 51

voting and, 193, 197, 234

wages in, xiv, 11–12, 90–91, 94, 101

welfare payments of, 123

University College of London, 68–69

University of Chicago, 89–90

unskilled population, xvii, 57, 74, 149

See also younger populations

urbanization, 50–51

Uruguay, 167

US Bureau of Economic Analysis, 93

US Census Bureau figures, xiv

US Congress, xvi, 69, 141, 157, 170, 171, 172, 181, 183–184

US Constitution, 130

US Defense Advanced Research Projects Agency, 125

US Department of Education, 57

US Federal Reserve, xv, 96

US model. See democratic capitalism

US National Intelligence Council, 52, 213

US Supreme Court, 130

Venezuela, 119

vested interests, problem of, 156, 157, 201

See also campaign finance; lobbying

veterans, 40

vicious cycle, 215–216, 222–223

Vietnam, 55

violence, xv, 36, 211

See also terrorism; war/military conflicts

voter accreditation, 198–199, 201

voter apathy, 202

voter discrimination, 197, 199, 201

voter engagement, enhancing, as a goal, 168

voter tiers, 198

voter turnout, 140, 193–194, 195–196

voting

income inequality and, 69, 195

mandatory, 193–195, 196, 229–234

requirements for, minimum, 196–198, 219, 229–234

short-term thinking in, 137, 138, 160, 196, 197, 202

Voting Rights Act, 130

voting system, weighted, 198–202, 229–234

wages, xiv, 9, 11–12, 18, 23, 62, 68, 70, 71, 79, 84, 87, 90–91, 94, 101, 104, 105, 114, 122

Wall Street, 12

Walmart, xiii, 124

war on drugs, 175

war/military conflicts, 7, 36–37, 99, 153, 175, 211, 213, 215, 225, 226, 227

See also Cold War; World War II

Washington Consensus, 82, 132

water, 46, 47–48, 52, 210, 213

waterways, access to, 24, 31

wealth gap, 67, 158

See also income inequality

wealthier populations, 11, 12, 50, 67, 69, 196, 214

wealthy philanthropists, role of, 151, 153, 220

Weber, Max, 37

weighted voting system, 198–202, 229–234

welfare states, xix, 100, 101, 123, 140

white-collar jobs, 59

Wikipedia, 77

Williamson, John, 82

Willis Tower Watson fund, 147

“Wind of Change” (Macmillan), 111

women in the workforce, 40

Work Projects/Progress Administration (WPA), 150–151

work visas, 100

World Bank, 132

World Economic Forum, 60

World Economic Outlook, 97

World Happiness Report, 15

World Intellectual Property Organization, 117

world order. See global world order

World Trade Center attacks, 223, 224

World Trade Organization (WTO), 92, 94, 173, 176, 214

World War I, 7

World War II, 13–14, 33, 39, 40, 55, 87, 111, 135, 150, 152, 225, 226

WorldCom, 158

Worldometer, 49

Yemen, xii, 15, 17, 211, 224

younger populations, xiv–xv, xvii–xviii, xx, 56–58, 76, 100, 102, 103, 110, 122, 140, 149, 200–201, 203, 204–205, 213

zero-sum thinking, 85, 163

Zingales, Luigi, 90

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INTRODUCTION

ALMOST THREE DECADES AGO, THE Berlin Wall fell. A period of barely restrained chaos, turmoil, and stagnation across the Soviet bloc had come to an end, and new market capitalist democracies began to emerge not only in the former Soviet sphere but also throughout the developing world, promising economic prosperity and peace for their citizens. Analysts and economists believed the end of communism portended a new era of stability and growth. Yet less than thirty years later, all signs point toward a world once again on the edge of chaos.

Expressions of discontent with the post–Cold War order have been on the rise, particularly since the 2008 financial crisis. The crisis catalyzed a climate of dissent in the West—the source of the financial crisis—and beyond, in which populist movements challenged leaders and elites, from the Occupy Wall Street protests against inequality and corruption in the United States to anti-austerity marches in Europe and uprisings in the Middle East.

In December 2010, a poor Tunisian fruit vendor named Mohamed Bouazizi lit himself on fire to protest the arbitrary expropriation of his goods and his economic future. Within weeks Bouazizi’s act of self-immolation precipitated the Arab Spring revolutions, as under the slogan of “Ash-shab yurid isqat an-nizam” (“People demand removal of the regime”) protests spread throughout the Middle East and North Africa, from Tunisia to Bahrain, Egypt, Jordan, Libya, Sudan, and Yemen. Today, that region is in the midst of what some are likening to a modern Thirty Years War. ¹

Protests have also shaken South America, Asia, Eastern Europe, and Southern Africa, to the extent that by the beginning of 2014 nearly half of the world’s economies (65 out of 150) were expected to be at a “high” or “very high” risk of social unrest—the highest rate of risk registered over the past decade. ² Meanwhile, angry citizens—from Buenos Aires to Kiev and Sofia, from Bangkok to Cape Town and Ouagadougou—were rapidly confirming those predictions. Three million people protested in Istanbul’s Taksim Square and elsewhere throughout Turkey, demanding a voice in their political and economic futures; in Bangkok, two years of protests ended in a military coup; and massive demonstrations broke out in Brazilian cities, denouncing the billions spent staging the World Cup soccer matches in a country where one out of fifteen people is poor. ³

This wave of rising political anxiety has not been confined to developing nations, as campaigns against austerity, migration, income inequality, and globalization have also gripped developed countries. In November 2014, 100,000 people rioted in the streets, setting fire to vehicles in a march against EU-sanctioned austerity—in Brussels! Around the same time, 50,000 demonstrators organized by the Campaign Against a Europe of Capitalism and War swarmed Barcelona in a demonstration against globalization. In July 2016, Berlin crowds protested Germany’s open-door policy to refugees, which had reached 1.1 million in twelve months. In September 2016, around 200,000 rallied in Germany, Austria, and Sweden against the Transatlantic Trade and Investment Partnership (TTIP) between the European Union and the United States. In the United States, where workers at McDonald’s and Walmart have demonstrated against low wages, polls reveal widespread concern about “income inequality,” formerly a topic of interest mainly to economists and other academics. ⁴ The United States now has the highest level of income inequality in the industrialized world, a fact that some regard as “a threat to American democracy.” ⁵ Meanwhile, the public’s revolt against globalization, which many blame for the loss of jobs and the hollowing out of the middle class, culminated in the British vote to exit the European Union and the election of political neophyte and outsider Donald Trump as US president in 2016. Trump’s ascendancy, in particular, represented a rebuke of the deeply entrenched political establishment that had dominated US politics for decades.

At a glance all of this global unrest appears disparate; however, these movements are united by a common thread: average citizens expressing anger at the impotence and corruption of the ruling political elites. It is a rebuke of political decisions to embrace trade and internationalism, policies that did not in fact “lift all boats” as the proponents of globalization promised, but actually harmed the livelihoods of so many. And it is a rebuke of government’s failure to create economic growth.

No matter what government does, it seems to fail. This failure is perhaps most worrying in the United States—the world’s leading economy for most of the past century. Not only does much of the world rely on the US economy (which accounts for a greater share of global gross domestic product (GDP) than any other country’s, totaling approximately one quarter), but the United States is also an economic and political model that many other countries have viewed as a path to prosperity, and have thus sought to mimic. ⁶

The failure is evident across many measures of living standards: in deteriorating real wages, rising poverty rates and worsening poverty statistics, as well as stagnating employment numbers. In terms of income, between 1979 and 2014 the top 10 percent in the United States saw their wages rise by a third, while the median wage rose by just 8 percent and the bottom 10 percent flatlined. Today, twenty million Americans live in extreme poverty, members of one in twelve American households go hungry, and, according to the US Census Bureau, the proportion of US citizens living below the poverty line increased from 11 percent in 2000 to almost 16 percent in 2012. ⁷ Joblessness, in terms of both unemployment and underemployment, has systematically worsened over the past decades. As an example, Charles Murray reported in 2016, “for white working class men in their 30s and 40s… participation in the labor force dropped from 96 percent in 1968 to 79 percent in 2015,” meaning that, in essence, since the 1960s, one in six men of prime working age in this group has dropped out of the workforce. ⁸ Manufacturing employment accounted for about a third of the American labor force in 1970; as of 2010, that share had dropped to a tenth. ⁹ The European Union has not been spared from similar employment trends, with youth unemployment topping 40 percent in Spain and Greece and 37 percent in Italy, and nearly one in four youths in France unemployed. ¹⁰

Worse still, not only are US living standards declining, but also the prospects of achieving social mobility and escaping economic destitution have fallen over time. In the last thirty years the probability has more than halved that an individual born into the bottom 25 percent of the income distribution in the United States will end his life in the top 25 percent. Meanwhile, according to the Pew Research Center, “the middle class made up 50 percent of the US adult population in 2015, down from 61 percent in 1971.” ¹¹

Furthermore, American households continue to live a precarious financial existence, making it hard to plan or invest in a more prosperous future. According to US Federal Reserve data, Americans now owe $1 trillion in credit card debt, the highest level since the 2008 financial crisis, and US households owe a roughly equivalent amount in student debt and auto loans. A US Federal Reserve report notes that 47 percent of respondents said they either wouldn’t be able to cover an unexpected $400 expense through savings or their credit card, or would have to cover it by selling something or borrowing money. Furthermore, life expectancy—a barometer of economic and social success—has remained flat for all groups combined from 2013 to 2014, and has actually declined for white American men and women according to a 2016 report. ¹²

The confluence of these factors has contributed to the weakening of social cohesion (with rising rates of suicide, drug use, divorce rates, and violence in Middle America), culminating in the erosion of the middle class. It is the disaffected middle class that is at the heart of the rebellion against the political establishment in the United States and beyond.

Growth is imperative for fulfilling human demands and improving lives. Economically, growth promises to reduce poverty and raise living standards; politically, growth is the sine qua non for free markets, free people, and the rule of law; individually, growth is essential to allowing people to maximize their potential.

Three key drivers of growth—capital, labor, and productivity—have eroded under unprecedented headwinds. We face massive demographic shifts yielding too many young, unskilled, and disaffected workers in emerging economies, and aging populations already draining pension and health systems in developed economies. Widening income inequality, diminishing social mobility, commodity scarcity, and technological advances that enhance productivity at the cost of putting more people out of work all threaten to further dampen growth worldwide. The result of leaving these headwinds unanswered will be economic depression—a catastrophe for which existing policy tools are “impotent,” as the economists Lawrence Summers and Paul Krugman have both argued. ¹³

As much as the US economy will struggle to overcome these headwinds, other economies will likely struggle even more, particularly those that have depended on the United States for trade and foreign direct investment and as the largest bill payer of public goods and police of international sea-lanes. Moreover, at roughly 22 percent of the budget, the United States is the largest contributor to the North Atlantic Treaty Organization (NATO), a group of twenty-nine countries committed to mutual defense in the event of an external attack. ¹⁴

In the face of these economic headwinds, liberal democratic capitalism is in retreat. After the fall of the Berlin Wall, this political and economic model—characterized by universal suffrage, civil rights and personal freedoms, and the individual control of capital and labor—had seemed ascendant. But now alternative models, such as authoritarianism, state capitalism, and illiberal democracies, have proliferated, offering formidable challenges to liberal democratic capitalism’s model of achieving growth. Meanwhile, liberal democratic capitalism itself has become weak, corrupt, and oblivious to its own ailments.

As they confront these challenges, leaders of liberal democratic capitalist nations are hobbled by the quirks of their own political systems. Needing to satisfy the electorate in order to remain in political office, policymakers tend to favor short-term policy responses. In focusing only on the gains that can be won today, they ignore the costs and consequences borne tomorrow. The short-termism that clouds policymaking leads politicians to embrace inferior policies.

Protectionism, for example, is now on the rise. According to Global Trade Alert, the G20 imposed 644 discriminatory trade measures on other countries in 2015. And as a result of increased capital controls on banks, cross-border capital flows have declined—with international loans having decreased 9 percent from 2014 to 2016, according to the Bank for International Settlements. State intervention in the economy is increasing even in traditionally capitalist societies. This is evident in the growth of welfare states, the expansion of the public sector, and the rise of governments as employers and allocators of capital. In the long term, such policies are likely to exacerbate military as well as economic conflict over scarce resources—pressuring politicians to make even worse decisions and fomenting a vicious downward cycle. ¹⁵ Most importantly, such policies will only produce lower global growth.

The defining challenge of our time is to create solid and sustained economic growth that continues to meaningfully improve people’s lives. This is true in the United States, the Eurozone (countries using the euro), and other industrialized economies that are creaking under mounting debt, challenging demographics, and stagnating productivity. It is just as true in the developing world—home to 82.5 percent of the world’s people, 70 percent of them, on average, less than twenty-five years old. A period of unprecedented economic expansion has slowed in some places and has ended in others, and there can be no substitute for restoring growth everywhere. ¹⁶

Edge of Chaos argues that liberal democracies of the sort prevalent in the West simply cannot deliver this growth without substantial reform. Without fundamental changes, democratic politicians will struggle to address the numerous headwinds the global economy faces today. Indeed, the myopia within democracy leads to the misallocation of scarce resources, such as capital and labor, and shortsighted investment decisions by politicians and business. Ultimately, the myriad economic challenges are a manifestation of a corrosive problem in the democratic political process.

This book proposes ten far-reaching reforms to democracy that are designed to combat this myopia, overcome the headwinds challenging the global economy, and galvanize economic growth. The proposals transform the way elections are held, alter how politicians are judged, and ensure that both voters and politicians take a long-term view. To this end the proposals include lengthening political terms to better match long-term economic challenges, imposing minimum standards on both politicians and voters, and many more.

Stagnant growth, entrenched poverty, high unemployment, unwinding globalization, and geopolitical unrest have become the new normal. The skepticism among policymakers, politicians, and ordinary people about the capacity of democratic capitalism to deliver growth and reduce poverty over the long term is in fact very rational. The state capitalism of China, Lee Kuan Yew’s Singapore, and Chile under General Augusto Pinochet have all moved hundreds of millions of people out of poverty and in some cases delivered impressive advances. The formidable economic performance over recent decades of such nations and others that are not liberal democracies—64 percent of the world’s elected governments in all—seems to suggest that democracy is not a prerequisite of economic growth.

Above all, policymakers must face up to the facts of the twenty-first century. In an interconnected world of anemic growth, other countries’ crises will become our crises, whether they take the form of terrorism, income inequality, refugees, the resurgence of infectious diseases, or illegal immigration, and governments will grow ever more fragmented and weak, further undermining an already fragile international community. For Americans, and policymakers in the world at large, protectionism and isolationism are no remedy. Historical evidence makes clear that protectionism will be accompanied by higher unemployment, lower economic performance, and stagnating living standards in the United States and elsewhere. An economically weakened and isolationist America will call into question the Pax Americana, whereby the United States oversees international peace and security, and thus expose the world to the unpredictable whims and values of nondemocratic powers. These are not the solutions the world needs.

6

THE PERILS OF POLITICAL MYOPIA

SPEAKING BEFORE THE BRITISH HOUSE of Commons on November 12, 1936, just three years before the start of World War II, Winston Churchill lamented of the ruling government: “So they go on in strange paradox, decided only to be undecided, resolved to be irresolute, adamant for drift, solid for fluidity, all-powerful to be impotent.”

Churchill was speaking specifically to a pressing current issue, criticizing the Baldwin government for failing to rearm as Germany was investing heavily in its air force. But his skepticism regarding government’s ability to be efficient and even trustworthy transcends time.

According to the 2017 Edelman Trust Survey, only 41 percent of a general global population trusts the government. Meanwhile a 2015 Pew Research Center survey reported that “the public’s trust in the federal government continues to be at historically low levels. Only 19 percent of Americans today say they can trust the government in Washington to do what is right ‘just about always’ (3 percent) or ‘most of the time’ (16 percent).” The same study found that the share of Americans that trust the government in Washington to do the right thing nearly always or most of the time reached an all-time high of 77 percent in 1964 and has declined ever since. ¹ Together with the evidence that citizens in emerging markets see authoritarian leaders as more trustworthy than democratic politicians, it seems that people across the globe are skeptical of the ability of democratic governments to act effectively—including as good custodians of the economy.

The root cause of this skepticism about democracy is also the crux of the forces that have brought us to the edge of chaos: we have embedded in both business and the democratic political system a predilection for short-termism. And as we shall see in the chapters that follow, myopia in business and especially in politics is singularly detrimental to economic success—a key drag on the prospects of long-term economic growth. It is vital that policymakers and politicians act to address it before it grows still worse. Correcting just this one problem would do much to address virtually all of the specific challenges to economic growth that we confront today.

Short-termism is at the heart of liberal democracy—in its design and in practice. By design, Western politicians have relatively short political horizons: they are often in office for terms of fewer than five years. So they find their duties regularly interrupted by elections that distract from the job of addressing long-term policy challenges. As a result, politicians are naturally and rationally drawn to focus their efforts on seducing their electorates with short-term sweeteners—including economic policies designed to quickly produce favorable monthly inflation, unemployment, and GDP numbers. This approach takes focus away from the more insidious structural corrosion of the economy and the policies that might mitigate it. In order to achieve sustainable economic growth we need better-quality decision making by political and business leaders, as well as policy that prioritizes long-term prosperity over short-term political point scoring. Assessing the many facets of our system that we might reform to achieve such a shift is the task of this chapter.

In 1820, the economist David Ricardo came up with a hypothesis that consumers are forward-looking. While Ricardo’s assertion was ascribed to consumers, his thinking can be extended to voters, who are essentially the same group of people. Known in economics literature as the Ricardian equivalence proposition, this hypothesis claims that voters internalize the government’s budgetary constraints when making their consumption decisions. Essentially, even if the government grants the voters a tax break today, they recognize that today’s tax cut will need to be funded by a tax hike tomorrow in order to balance the government’s books, and therefore they do not spend the windfall from today’s tax cut. Both Ricardo and others, in numerous empirical studies, have found that in practice the Ricardian theory did not hold, and contrary to Ricardo’s assumption, consumers were in fact short-term thinkers. This orientation on the part of voters rewards short-term decision making by politicians, effectively pitting generations against each other. Voters will generally favor policies that enhance their own well-being with little consideration for that of future generations or for long-term outcomes. Today, for instance, the demographic shifts that have led to a large group of retiring baby boomers have had enormous economic implications not only because of capital asset allocation shifts (as seen in the move from equities to bonds) and changes in the real estate market (as aging citizens tend to downsize from large homes to smaller apartments and gain an equity release), but also because of this generation’s support for the unsustainable funding of retirees by future economic growth.

In short, politicians are rewarded for pandering to voters’ immediate demands and desires, to the detriment of growth over the long term. Because democratic systems encourage short-termism in this way, we are unlikely to solve many seemingly intractable structural problems responsible for our global growth lull without an overhaul of democracy.

Shortsightedness infects the body politic. According to a McKinsey Global Institute report, the average tenure of a political leader in the G20 plus Nigeria is at a record low, declining during the postwar era from 6 years in 1946 to a record low of 3.7 years today. ² The consequences have become increasingly evident. The myopia embedded in the democratic process creates a mismatch between short-term electoral incentives and the long-term economic challenges that need to be addressed. Worse still, this short-termism exacerbates the headwinds that are already dampening economic growth. This political myopia that regularly pits short-horizon politicians against far-seeing civil servants is evident in such policies as tariffs and quotas that limit trade liberalization. Some politicians find the near-term positive effects irresistible—especially if they protect the jobs of a vital constituency and thus ensure reelection. However, the short-term appeal of protecting jobs that are at risk because of competition from imports is offset by the long-term damage to growth.

The frequency of elections entrenches public-sector short-sightedness, which contributes to heightened policy uncertainty and political volatility. This is particularly true in parliamentary systems if a government is unable to complete its term as a result of a no-confidence vote or if the victorious party fails to form a government, thus triggering an additional election. Such was the case in Spain in 2015 and 2016, for example, when voters delivered two inconclusive electoral results, leading to ten months of political impasse. But these problems are not restricted to parliamentary democracies. During the Obama years, gridlock in the United States between warring political factions, forced to contest elections every two years, led to outright stasis in some major policy areas such as infrastructure and even to government shutdowns.

There is hard evidence of politicians offering welfare promises in order to win public favor. For example, in the 2015 UK election, then–Prime Minister David Cameron courted votes among the pensioner age group, which traditionally has had the highest voter turnout, by promising to increase Britain’s state pension by at least £1,000 per person (from just over £6,000 in 2015 to £7,000 in 2020). In the lead-up to the June 2016 referendum for Britain’s membership in the European Union, the Brexiteers—those in favor of leaving the Union—pledged, if they won, to redirect £350 million per week paid into the EU coffers toward the National Health System. So crucial to the Brexit campaign was this controversial promise that this message was emblazoned across their campaign bus in the months before the election. Once the election result for Brexit was confirmed, leaders of the “Leave” campaign quickly distanced themselves from the promise, claiming that they had never made the pledge and that the promise was a mistake in the first place. By September 2016, leaders of the pro-Brexit campaign dropped the pledge altogether.

The crucial point is this: political short-termism makes the economic headwinds we face worse, and it makes the challenges we confront harder to solve. Some of this is due to bad policies implemented for short-term gain. But in many cases policymakers today are guilty of policy omission rather than commission, in that they have opted to do nothing. They choose not to implement good but complex policies (such as a more robust form of globalization), instead preferring half measures or inaction that is less politically risky. For example, doing something about changing demographics, new technologies of automation, and declining productivity has long been on policymakers’ agenda. The fact that these challenges remain largely unaddressed even to this day reflects a lack of action for decades. Debt is another prime example. Politicians can be easily persuaded to load up on sovereign debt with little consideration of long-term repayment, especially since borrowing more today enables them to fund policies that might win votes. Reducing debt, on the other hand, may require them to make unpopular cuts to services, placing their reelection at risk. Thus, debt goes up but rarely down. In a similar vein, tackling demographic headwinds by raising the retirement age is a decision that, in hindsight, ought to have been made decades ago to help escape the pension crisis. After all, since the 1990s, economists have been warning of unsustainable pension deficits resulting from a shrinking working population and people living longer. But because this would be unpalatable to retirees, who vote in large numbers, the decision has been deferred.

Today, short-termism has spread beyond the halls of government into the power centers of finance and business. Here, too, it is a drag on economic growth. The tenure of CEOs is growing ever shorter, from an average of 10 years in 1990 to 6.6 years in 2011 to 4.4 years now. ³ Meanwhile, according to Yale executive-in-residence Richard Foster, the average lifespan of an S&P 500 company in 1935 was 60 years; in 2011, it was 18 years. And while the average length of time a stock in the New York Stock Exchange is held in a portfolio was 5 years and 3 months in 1970, in 2011 it was just 7 months. The Financial Times reports that researchers at Stanford University have found that “pressure to meet quarterly earnings targets may be reducing research and development spending and cutting U.S. growth by 0.1 percentage points a year.” On the other hand, private companies have been found to invest at nearly 2.5 times the rate of comparable public companies, perhaps reflecting the fact that they fear failing to meet the short-term demands of shareholders. By persistently investing at a lower rate, America’s largest companies may be cutting 0.2 percentage points from US growth yearly. As the investment horizon grows shorter, businesses are less likely to invest in infrastructure and other longer-term propositions. ⁴

CEO compensation is symptomatic of a cultural shift toward short-term thinking. According to the same report, “74 percent of remuneration is paid in cash, and tied to outperforming an annual stock market benchmark.” There is growing concern that managers today are incentivized to focus on short-term results, such as the next quarter, rather than the next five to ten years, thereby shifting and shortening the investment horizon. In response, there has been considerable effort by corporations to better match senior executive compensation with longer-term company performance.

Such trends are a manifestation of shortening strategic and investment horizons. According to research by WPP, a global communications firm, among companies listed on the S&P 500, share buybacks and dividends have exceeded retained earnings (that is, profits withheld by companies and generally earmarked for investment) in five of the six quarters to June 2016. Moreover, the ratio of payouts and buybacks to earnings rose from around 60 percent in 2009 to over 130 percent in the first quarter of 2016. Companies are choosing to scale back rather than grow, and to return money to shareholders instead of making capital investments, such as building new factories or increasing R&D, to lay foundations for future growth. These are troubling signs of growing risk aversion. Meanwhile pension funds—even public pension funds—are pivoting toward shorter-term investment in hedge funds and private equity. Even a medium-term investment of three to seven years, such as in private equity, is unlikely to flow to infrastructure, thus hurting economic growth.

Amid slowing growth, investors are increasingly pursuing stable income from their investments. This means committing ever greater proportions of their capital to safe, established companies and projects rather than backing smaller, riskier investments in more innovative firms. Small businesses are thus starved for capital, finding it hard to attract investment or borrow, even though they play a critical role in economies and job creation. In the United States, firms with fewer than 500 workers employed 48.5 percent of private-sector payrolls. Small firms have accounted for 63 percent of the net new jobs created in the last twenty years (14.3 million of the 22.9 million jobs created between 1993 and mid-2013). Moreover, since the recession, small firms accounted for 60 percent of the net new jobs, with firms with fewer than 500 employees leading job creation. In the United Kingdom, small and medium enterprises have proven equally important, with small firms accounting for 99.3 percent of all private-sector businesses and 60 percent (15.7 million people) of private-sector employment. Nevertheless, the scale and often short track record of many small businesses tend to make them more risky bets as compared to larger, more established enterprises.

The allocation of capital across portfolios around the world, but particularly in developed countries, is undergoing significant transformations that have implications for economic growth. There is notable evidence that global stock markets, including in the United States, are shrinking. According to Bloomberg, in 2015 the number of listed tradable stocks on US bourses was down almost by half, from a peak of 7,322 to 3,700. ⁵ Inasmuch as the stock markets represent a path for businesses to fund investment and job creation, this “de-equitization” trend is worrisome and could destabilize global debt and equity capital markets.

In addition to the investor behavior outlined above, there are short-term, tactical factors driving this de-equitization trend. Short-termism manifests itself not just by the behavior of investors in the stock markets but also by the behavior of managers of the companies themselves. For example, during 2015 and 2016, the notable mispricing between fixed income and stocks presented an opportunity for arbitrage—that is, opportunities to make short-term trading profits. When compared against historically low interest rates, the return on equities was markedly higher. Thus, the equity risk premium—that is, the excess return that investing in the stock markets offers over the risk-free rate—made a compelling argument for companies to borrow money cheaply and buy back the company stock. In essence, from a company financing perspective, companies are incentivized to buy back stock—the relatively expensive equity financing—and replace it with cheaper financing in the form of debt.

Essentially, every dollar used to either buy back company stock or pay out dividends is a dollar not used by the company to invest in long-term projects that could stimulate growth in the economy. As a consequence, capital earmarked for equity investments is taken out of stocks and the stock market, to be directed to low-yielding, safer fixed-income, or bond instruments. The trend of less money chasing the equity markets, and more money chasing bonds, diverts funds from equity risk investments and hurts productivity, reducing the capacity for innovation and damaging growth.

The trends of less money chasing the equity markets and more money chasing bonds have at least two effects. First, they hurt productivity, which is propelled by innovation and equity risk investments. This is particularly worrisome at a time when global productivity continues to stall. Second, these trends may not be all bad, in that they do present opportunities and more attractive returns for growth investors who are willing to tolerate a longer investment horizon. At the highest level, investors—so crucial to driving capital into infrastructure, innovation, and businesses that drive economic growth—are choosing income today over longer-term investment, to the detriment of growth tomorrow. Short-termism is built into the structure of both governments in liberal democracies and the private sector, with ill effects for long-term economic growth.

THE EXAMPLE OF INFRASTRUCTURE ENCAPSULATES the problem of both public and private myopia. Infrastructure remains woefully inadequate in the United States. Any modern economy needs, as its foundation, a solid infrastructure base: ports, roads, electricity, airports, telecommunications, and railways. While this might appear self-evident, the state of infrastructure in the United States suggests otherwise. A 2017 report by the American Society of Civil Engineers (ASCE) gave the country a grade of D+ for overall infrastructure, citing 2,170 high-hazard dams, 56,007 structurally deficient bridges (9.1 percent of the nation’s total), and $1 trillion in needed upgrades to drinking water systems over the next twenty-five years. The report card highlighted the urgent need for substantial funds earmarked for new infrastructure projects and maintenance of existing infrastructure. At a minimum the ASCE suggests that a $2 trillion investment is needed by 2020 to address the significant backlog of overdue maintenance and the pressing need for modernization. Without this much-needed investment, the US economy will certainly see a further erosion in growth.

The effects of increased infrastructure investment on the prospects of low-skilled labor could also be substantial. With the US unemployment and labor participation rates still of concern, and underemployment over 10 percent (and close to 12.6 percent for recent college graduates), a public commitment to a sizable infrastructure program could meaningfully transform the prospects of the American worker. ⁶

Despite these many benefits, political short-termism is contributing to underinvestment in infrastructure in that politicians tend to focus on short-term metrics such as unemployment, growth, and inflation and prefer to postpone longer-term infrastructure decisions. Investing in infrastructure would have all sorts of benefits, but the prevailing democratic political system discourages the sort of long-term thinking necessary to do so.

As a case in point, the former UK chancellor of the Exchequer George Osborne has overtly linked political short-termism and underinvestment in infrastructure in a 2013 government treasury report. In describing how Britain had fallen behind in infrastructure investment, he said, “it’s been the result of a collective national mindset that has privileged the short-term over the long-term, and has postponed difficult decisions.” Osborne pointed to congested roads, overcrowded trains, and a shortage of affordable housing as evidence of the infrastructure consequences of political short-termism. ⁷

Clearly there have been periods in the past when governments have chosen to undertake large infrastructure projects without succumbing to political myopia. In the United States, for example, the federal government drove the rollout of the Work Projects Administration (WPA). Launched under President Roosevelt’s New Deal to help address America’s chronic unemployment, the WPA was created in 1933 (as the Works Progress Administration, and renamed in 1939), and was America’s largest and most ambitious project dedicated to constructing public buildings, roads, bridges, schools, and courthouses. It was possible because short-term political incentives aligned with a long-term agenda of building and expanding infrastructure. Ironically, one of the most successful infrastructure programs in history was fueled by a desire to secure a shorter-term political goal of reducing unemployment. The key rationale for the politicians that set up the WPA was the creation of jobs. The enduring contribution to the nation’s infrastructure was simply a by-product of this policy approach, and the WPA was shut down in 1943, when there was a worker shortage in the economy. At that point workers were able to secure jobs mainly in war-related industries.

Nevertheless, despite the complex histories of programs like the WPA, there is a fundamental question that must be addressed: What has occurred to make endemic short-termism a greater problem in liberal democracy today? After all, liberal democracy has not itself changed radically from times of more robust economic growth in the past. Yet there are good reasons why America’s democratic politicians—even as late as the 1950s and 1960s—were able to implement large infrastructure projects without engaging in the extensive overhaul of the democratic process that this book will propose. Since then, three significant shifts have occurred that have changed the way in which Western democracies function: first, changes in economic ideology from largely state-centric to a more laissez-faire capitalism; second, the rise of the twenty-four-hour news cycle as well as the advent of social media; and third, a power shift away from the state and toward nonstate actors such as corporations and wealthy philanthropists that are increasingly taking on the role of government (including underwriting public goods), weakening the state in the process. These shifts are closely linked to the broader problem of why democratic governments of today have become less effective at delivering sustained, long-term growth.

A second change since the mid-twentieth century is the growth of media, including the development of the twenty-four-hour news cycle and the emergence of social media. These have intensified short-termism in both the public and private sectors. Politicians find themselves subject to constant short-term media scrutiny, and lured into a perpetual cycle of news and commentary at the expense of a focus on long-term policymaking. For business and political leaders alike, this constant media attention has led to decisions that emphasize the next quarter over the future in a way that was not previously the case.

The short-termism among US policymakers has meant that the gains from globalization have been misallocated in a way that frustrated millions of Americans and spurred the populist reaction witnessed in 2016. As Alibaba founder Jack Ma pointed out at the Economic Forum in 2017, by choosing to spend $14.2 trillion fighting thirteen wars over three decades, rather than investing in America’s infrastructure, industry, and jobs, policymakers misallocated the wins from globalization. What was clear is that even thirty years ago, industrial jobs in the United States were already on the decline and exposing the economy to greater competition inherent in open international trade, further harming the American worker. The outcome was a missed opportunity to distribute the gains of globalization more widely (and in particular to America’s Rust Belt) and to fund a longer-term infrastructure investment strategy to galvanize the US economy.

As a practical matter, and given the urgency and significance of the infrastructure challenge to the US economy, the federal government should create a bipartisan infrastructure commission to bypass the political strictures and logjam. This sort of commission would not be a Band-Aid solution to manage today’s political schisms but a permanent feature of the government to keep it focused on a long-term infrastructure agenda. Much like the bipartisan National Commission on Fiscal Responsibility and Reform, established in 2010 to address the nation’s fiscal challenges (though it ultimately did not succeed in getting its recommendations implemented), an infrastructure commission would be mandated to identify policies to improve US infrastructure in the medium term and address the challenges over the long run, while avoiding the sort of political wrangling that stymied Simpson-Bowles.

TO BE CERTAIN, THE ACCOMPLISHMENTS of democratic capitalism are unmistakable. It has proven itself, historically, to be a peerless tool for growth. During the past fifty years, US income levels have risen thirty times, and poverty has fallen by 40 percent; Europe’s per capita GDP tripled between 1960 and 2015, while hours worked declined by a third. ⁸ The global economy as a whole has tripled in size in twenty years, driven as much by the developed world as the developing one. ⁹ And with that prosperity came peace unprecedented in modern history. Even as we acknowledge the flaws in the current system, it is worth recalling that for every example of democracy being challenged (as, for example, in Russia and Egypt) there is another example of its durability (for instance, in South Korea and the Philippines, where despite scandals affecting their political leaders these democracies are strong and embedded). Nevertheless, the system urgently needs an overhaul if we are to jump-start the global economy. For beyond myopia, there are other substantial problems with democracy as it functions today.

For instance, democracies tend to misallocate assets. Political decisions for allocating assets should vary with a country’s level of development. Too often politicians in a system that follows the principles of democratic capitalism choose policies that limit rather than promote growth. The political system should instead direct available assets to the areas of the economy most in need of development and by extension will have the greatest impact on the country’s trajectory of economic growth. China and India, for example, needed roads to increase productivity. China built them, but India’s infrastructure programs got bogged down in red tape and political wrangling born of political fissures in its democratic system, suggesting that India’s democratic processes stifled decisions that could help drive economic growth. A veteran observer of India, John Elliott, notes that “democracy is also a drag on development [in India] because, while it has rightly opened the way for dissent and opposition to changes in land use and environmental concerns, no effort has been made to curb its misuse by vested interests who corruptly manipulate not only policies but their implementation. This has contributed to India becoming an increasingly unpredictable, unreliable, uncompetitive and difficult place to live and do business.” ¹⁰

As a result, India’s competitiveness has suffered from historical underinvestment in key infrastructure, including transportation. In 2016 it was ranked 68th of 140 countries for overall infrastructure, well behind China, which was ranked 42nd. India’s poor-quality infrastructure directly contributed to its relatively low competitiveness ranking at 39th versus China at 28th. The effects of underinvestment in infrastructure on the economy are real: for India, spending 1 percent of GDP on infrastructure is likely to boost the country’s GDP by 2 percent and create as many as 1.4 million jobs. ¹¹

Interest group lobbying is another feature of liberal democracy that tends to interfere with proper allocation of assets. In 2016, more than $3.15 billion was spent lobbying Congress, roughly double the amount spent in 2000. ¹² Across sectors, lobbying by special interest groups has a discernible impact on public policy decisions in ways that negatively affect trade, infrastructure, and ultimately economic growth. For example, environmental groups oppose pipelines and new exploration projects of the oil industry, agricultural interests lobby for farm subsidies, and American trucking interest groups oppose additional tolls earmarked for road maintenance. (This is one possible reason US infrastructure is graded a D+.)

The need to win reelection also impedes the effective allocation of resources by elected officials. Political cycles too often keep politicians beholden to the individuals and corporate interests that help fund their campaigns and to the vagaries of public opinion polling. Little wonder that there are questions about the correlation, and even causality, between liberal democracy and the incentive for people to be productive. In essence, in order to win competitive democratic elections politicians must offer more benefits to voters, such as generous pensions or tax breaks. The electorate becomes conditioned to demand more of the state over time (knowing that they can extract benefits from politicians) and can themselves become less incentivized to be productive.

Another crucial shortcoming of democratic capitalism, despite its vaunted successes, is that in its purer forms it can foster corruption. The scandals of the early 2000s of established, blue-chip US companies such as Enron and WorldCom as well as Italy’s Parmalat, along with the global accounting scandals of Arthur Andersen and top-tier investment banks uncovered during subsequent bankruptcy and investigations, proved that the capitalist system was not immune from systematic wrongdoing.

Finally, democracy is prone to party duopolies and gridlock. Democratic systems are supposed to encourage competitive elections, but for the most part we see advanced democracies locked into rigidly dogmatic political ideologies. Rather than feature a free-ranging competition that surfaces the best ideas, democratic elections often produce a stale collision between two rigid sets of beliefs. Many Western democracies are little more than duopolies, where two key parties dominate politics, with the United States being a prime example. No third party has come close to challenging the dominance of the Republicans and Democrats. Yet the 2017 French election of Emmanuel Macron’s En Marche movement proves that a long-standing and established political duopoly is vulnerable to challenge from a new third party, depending on local circumstances.

In some ways, the electoral process itself occludes deeper flaws in democracy. Voters take comfort in their ability to remove individual politicians when they err, yet this possibility leaves underlying structures largely free from critique, improvement, and enhancement. If anything, we are evangelists for democracy, happy to export it to other countries, content that rotating politicians via the electoral process is enough to sidestep any weaknesses democracy might harbor. Poor economic performance, in this view, can be directly traced to bad policy decisions by individual politicians, leaving aside the question of whether the systems need to evolve. Yet as we saw in the previous chapter, for all their flaws alternate political systems can nevertheless generate meaningful improvements in economic growth and living standards—sometimes precisely because they are unlike mature, liberal democracies. In a world where growth is flagging, it is therefore all the more important for us to acknowledge the weaknesses in the political and economic systems of mature, liberal democracies.

When democracy works, it delivers economic growth and fundamental freedoms in a way that no other system can. And when it fails, it is rarely, if ever, replaced by a system that can do a better job of delivering for its population. Therefore, creating growth requires that we preserve democratic capitalism’s core strengths—freedom, efficient markets, transparency, and correctly constructed incentives—and reform its weaknesses. Something must be done to remedy the political class’s severe case of myopia, correcting the mismatch between long-term economic challenges and election cycles, safeguarding independent economic choices from political pressures, and eliminating dysfunction and gridlock.

Chess players are strategic thinkers who see beyond the next move or the next challenge. They were the ones who succeeded in the long, demanding, grueling Navy SEAL program. The winning cohort were not focused on what would happen after breakfast or lunch; they were mentally focused on the days or weeks ahead, already assessing how to be in the best position to overcome a future challenge. Myopia was the challenge for aspiring Navy SEALs, and myopia is the challenge for economic growth as well.

Some may be tempted to imagine that these political reforms must be accompanied by a thoroughgoing reimagining of capitalism itself. After all, the surest sign that this system has reached the edge of chaos is the indecision and intellectual exhaustion evident in the leading economists and financial analysts of our time.

Complicating matters further are the potentially harmful effects on economic growth emanating from the structural transformations occurring across the global economy: technology advances, demographic shifts, widening income inequality, natural resource scarcity, and the ever-increasing global debt overhang.

Thus far, Edge of Chaos has elaborated the story of how, in its current guise, the liberal democratic system unwittingly dampens prospects for the economic growth necessary for its continued survival. The pages that follow will seek to reframe and recast the political strictures that govern the world’s leading economies. There is enormous scope for improvements in countries guided by liberal democracy. Implicit in the reform agenda offered here is an acknowledgment that the greatest hurdles to economic revival and future success are not economic. They are political. Knocking down political hurdles will require political solutions—and courageous politicians.

ACKNOWLEDGMENTS

How right was Winston Churchill to observe, “Writing a book is an adventure. To begin with it is a toy and an amusement. Then it becomes a mistress, then it becomes a master, then it becomes a tyrant. The last phase is that just as you are about to be reconciled to your servitude, you kill the monster and fling him to the public.”

Writing this book has been all these things and more.

I completed my PhD at Oxford University in economics, not in politics. And while I continue to be fascinated by economic questions—including growth, inequality, and development—it is increasingly evident to me that politics, and not economics, will be the key driver of human progress and prosperity in years to come.

People (like myself) who have been educated or live in the West tend to have a lot of advice for countries that are blatantly, patently nondemocratic. However, we are less effusive when it comes to how we might improve liberal democracy—even at a time when this political construct appears to be under challenge and the need to reform for the better is urgent.

In this book I seek to motivate a debate on how to upgrade and improve the democratic system. While I spent the majority of my formative adolescent years in a nondemocratic, one-party state, I have spent much of my adult life living and working in established democracies. These lived experiences have afforded me a priceless opportunity to observe, examine, and reflect on the benefits and weaknesses of comparative political systems. In this regard, what I offer here are points for discussion and debate, rather than engraved prescriptions.

A heartfelt thank-you for the herculean efforts of the team at Hachette (Basic Books) who magically transformed a kernel of an idea into the book you see today. Led by the exceptional and indomitable Lara Heimert, Brian Distelberg, Betsy DeJesu, Courtney Nobile, Kelsey Ororczyk, Alia Massoud, Thomas Kelleher, Allie Finkel, and Connie Capone were all supportive at crucial times of the book’s writing, editing, and production process. In the UK, Tim Whiting and the Little, Brown team have been equally encouraging and immensely supportive—thank you so very much. I owe a great debt of gratitude to each of them.

7

BLUEPRINT FOR A NEW DEMOCRACY

“GIVE ME LIBERTY OR GIVE me death!”

Uttered in 1775, Patrick Henry’s famous words have, over the past two centuries, echoed within political movements around the world, expressing what billions of people have come to believe: that freedom is the most cherished value of all—and should be at the core of every modern political and economic system. Patrick Henry’s utterance has so resonated that it appears in national anthems and mottos beyond US borders. Uruguay’s anthem, “Orientales, la Patria o la Tumba,” includes a similar statement, “¡Libertad o con gloria morir!”—Liberty or with glory to die!—while “Liberty or Death” (Eleftheria i thanatos) is the Greek national motto. It has taken over a century to convince the world of the merits of democratic capitalism and the freedoms these economic and political systems offer. And yet today, skepticism regarding these systems is at a fever pitch at home and abroad, with many now doubtful that these systems can deliver the human progress they once promised.

Over the past decade, Western democracies have been the source of considerable political volatility (with the rise of populism amid disaffected voters), mounting economic uncertainty (emanating from the financial crisis), and worsening prospects for strong economic growth (as the economic headwinds detailed in Chapter 3 gather speed). This unsettling backdrop has brought into sharp focus the urgent need to objectively and critically reassess the limitations of democracy in its current form.

Indeed, the skeptics are right. Democracy must adapt or further decay. With this threat in mind, this chapter presents ten radical reforms intended to revive the quality of political decision making in democracies, enhance civic responsibility and voter engagement, and ultimately forge a democracy where politicians will pursue and voters will support long-term policymaking and fresh approaches to achieving economic growth. The proposals described here will not be easy to implement. Some may find them unpalatable or even downright objectionable. Nevertheless, they map out a path to combating the myopia that plagues democracies around the world.

The proposals offered here fall into two categories. Some are targeted at politicians and political institutions, and others are targeted at voters themselves. They include making it harder to repeal legislation, reducing the frequency of elections, implementing term limits, requiring officeholders to have nonpolitical experience, mandating voter participation, and instituting minimum qualifications for voters.

AS WE HAVE SEEN, POLITICAL decision making in liberal democracies has prioritized political outcomes today over economic outcomes tomorrow. What follows are seven proposals aimed at altering the actions of politicians to make them more effective long-term policymakers.

The unraveling of previous commitments to public policy can occur in at least three ways. One problem is structural, wherein one branch of government can override commitments made by another. This can be seen in the tendency of some countries (like the United States) to require the legislature to ratify international agreements already negotiated by the executive. This means that a government can agree to a treaty (like the TPP, say), only to have it shot down by Congress, weakening a state’s ability to act on the global stage. A second problem has to do with compliance with existing international agreements. We shall see this phenomenon most clearly in the example of EU members failing to abide by previously agreed levels of debt, in the absence of clear enforcement mechanisms. The third problem is that of policy changeability, when politicians wash their hands of present-day problems created by their predecessors. This can take the form of failing to fund an expensive entitlement program or failing to act on a task force’s or commission’s urgent recommendations. As shall be seen in the example of the Simpson-Bowles model, this means that even when politicians recognize a problem, they may later avoid the difficult votes necessary to solve it. Solutions to these problems include eliminating additional ratification procedures, ensuring compliance, preventing future repeal, and neutralizing the problem of time inconsistency. All represent methods of binding the government.

There have been other efforts to rise above political short-termism by establishing superstructures and institutions that work at a national level, independent of party politics, yet even these may fall victim to policy changeability. The United Kingdom’s National Infrastructure Commission, established in 2015, is a cross-party, independent body designed to focus on long-term infrastructure needs over the next ten to thirty years. It provides independent advice to ministers and Parliament, and holds policymakers accountable over the long term. Yet though this body was created as a means of looking to the long term and seeking cross-party consensus, its decisions are nonbinding and thus toothless.

In a similar vein, the bipartisan Commission on Fiscal Responsibility and Reform (also known as the Simpson-Bowles Commission) was established in 2010 to address America’s fiscal challenges. Here, again, the intent was to free the commission members from the pressures of day‐to‐day politics and enable them to concentrate on the health of the economy. Specifically, the mandate for the commission was to identify “policies to improve the fiscal situation in the medium term and to achieve fiscal sustainability over the long run.” After submitting its recommendations in December 2010, the commission received the bipartisan support of more than 60 percent of its members, but fell short of the required super-majority by fourteen votes. Had this agenda passed, it would have served as a solid basis for setting in motion a strong infrastructure policy push. A revised version was rejected 382 to 38 in the US House of Representatives in March 2012. What the Simpson-Bowles experience highlights is that in practice even bipartisan, widely supported attempts to mold the government can be ignored. The same politicians who support the creation of a task force like Simpson-Bowles may change their minds when it is time to take a difficult vote to change policy. The political mood may change, reforms may languish, and previous policy decisions can be repealed.

The EU proposition is particularly compelling as an example of different governments reflecting different political persuasions coming together and binding themselves to different areas of trade, economics, and security. By being bound at the international level, national governments have to strike a delicate balance between international agreements and domestic policies as they abide by restrictions on the economic policies they can pursue outside their own borders. In this regard, the national government is accountable to a larger (international) body than just their domestic voters.

The question is whether the resilience of such international commitments can be replicated in the sphere of national, domestic affairs, where day-to-day political pressure is much more acute. As a practical matter, and in certain circumstances, binding future political actors and economic policies can mean ensuring that legislation cannot be repealed at all, or at least for a minimum period. Such legislation ensures that subsequent governments are unable to make changes to laws during a prescribed period. For example, although not directly economic in nature, the Australian government in 2005 introduced new antiterrorism laws, aspects of which would automatically expire ten years later in 2015. In the US context, these would include the federal assault weapons ban, which was passed in 1994 and expired in 2004.

Binding the government is not a uniformly positive practice. Another type of binding can have deleterious effects if not avoided. As the Economist suggested in its powerful essay “What’s Gone Wrong with Democracy,” government has a “habit of making promises that it cannot fulfil, either by creating entitlements it cannot pay for or by waging wars that it cannot win, such as [the war on] drugs.” Governments regularly enter into contracts that are designed to outlast the incumbent’s tenure, thereby binding future governments. They order weapons systems in consideration of future installment payments; they accept bids for infrastructure construction projects; they raise debt they commit to repay; and of course they sign up to international treaties and organizations such as NATO, the European Union, the UN, the IMF, the WTO, and NAFTA, binding and committing themselves over multiple generations. To address this problem, “both voters and governments must be persuaded of the merits of accepting restraints on the state’s natural tendency to overreach,” the Economist suggests. “Giving control of monetary policy to independent central banks tamed the rampant inflation of the 1980s, for example. It is time to apply the same principle of limited government to a broader range of policies. Mature democracies, just like nascent ones, require appropriate checks and balances on the power of elected government.” ¹

Even the beneficial methods of binding the government are not, in practice, a foolproof strategy for reforming liberal democracy. In many nations, it may not even be possible. For example, common-law countries (United Kingdom, Australia, United States, Canada, India) and civil-law parliamentary republics (Germany, France) generally adhere to the principle of legislative supremacy, also known as parliamentary sovereignty or parliamentary supremacy. This means that no legislature can pass a law that a future session cannot repeal. The notion that no legislature can “bind” a future sitting is a laudable goal, given the detrimental effects of myopic policymaking that we have already seen. Yet, in many respects, there are often existing avenues for addressing a government’s failure to abide by its commitments. If, for example, a Canadian defense department bureaucrat fails to process a payment that is properly owed to a contractor in a timely manner, the government can likely be sued for recovery. However, if the Canadian parliament passed a law rescinding all of Canada’s agreements to buy fighter jets, there would likely be no legal remedy by Canada’s contractual counterparties—at least not in a Canadian court. Thus, formally, none of these countries has the power to tie its own hands or bind itself to some policy commitment; every new sitting of the legislature is autonomous. So while all major democracies sign on to treaties and multinational agreements, those agreements only retain force until a majority of legislators decides they should not.

After binding the government, the second major reform has to do with campaign finance. Democracies must implement tighter restrictions on campaign contributions so as to reduce the disproportionate impact of wealthy voters in determining election and policy outcomes. Many democracies already cap the amounts individuals and corporations can contribute to politicians and require transparency regarding where campaign funds come from. However, additional reforms are needed, particularly in the United States, where vast sums of money flow to politicians through campaign contributions by wealthy individuals and businesses. At least $2 billion was raised to support candidates in the 2016 US presidential election, and over $6.8 billion was spent by candidates running for federal offices that year, much of it on television advertising. By comparison, in France, where campaign donations and expenditures are tightly capped, the En Marche campaign surrounding Emmanuel Macron in the 2017 presidential elections received around 9 million euros in donations, from approximately thirty-five thousand individuals, giving an average of 257 euros apiece. ² Whereas the average cost of a presidential vote in France in 2017 was 2.30 euros (US$2.73), in the 2016 US election each vote for Hillary Clinton cost US$21.64, and each vote for Donald Trump cost US$15.20—over seven times the cost of a French vote.

Whether contribution limits actually yield better policy outcomes may be difficult to pinpoint empirically. Certainly, raising a lot of money via big donors does not guarantee a win, as Hillary Clinton learned in 2016. Likewise, a preponderance of smaller contributions does not preclude a win, as President Obama demonstrated in 2008. However, it is indisputable that relatively unconstrained campaign contributions, and a political system in which money commands political influence, introduce the risk that politicians (very rationally) spend their time courting and catering only to the needs of their wealthy benefactors, rather than to the wishes of all (voting) citizens.

Many democracies already possess stringent campaign finance rules that govern who can contribute and how much. Those that do not should consider similar policies in order to reduce the corruptibility of the political process, protecting and enhancing the integrity of their systems. One possible approach is an outright ban on all forms of private political contributions from individuals and corporations. However, it is also possible that the imperative to solicit such contributions might decline as expensive television advertising becomes less crucial to electoral success and social media enables candidates to spread their message more cheaply and easily. Nevertheless, today’s campaign financing remains stubbornly high and suggests that more aggressive restrictions on the flow of funds into politics are warranted. Restricting the amount of money that flows into political campaigns need not only be about capping campaign contributions or limiting campaign expenditures, but could also mean that democracies more tightly restrict and regulate political advertising, or provide all candidates some baseline of publicity for their views. Whatever the precise approach, democracies that do not already do so must take steps to limit the undue influence of the wealthy few in elections and subsequently policy decisions.

Third, in order to improve the quality of lawmaking, officeholders should be paid salaries competitive with those of private-sector leaders, as well as performance bonuses. In the private sector, higher compensation—via higher salaries, bonuses, or other perquisites—is thought to act as an incentive for higher-quality performance. But few nations apply the same principle when it comes to compensating lawmakers and other leaders. An exception is Singapore, where government ministers are among the best paid in the world, and ministers receive bonuses linked to the performance of the economy (including GDP), as well as their own performance. With an annual salary of US$1.7 million, Singapore’s prime minister is the highest earner among all world leaders; his compensation exceeds the annual pay of the leaders of Germany, Italy, Japan, and the United Kingdom combined. As of 2016, by comparison, the US president earned US$400,000 per annum, and the leaders of Canada, Germany, the United Kingdom, and Japan earned US$260,000, US$234,400, US$214,800, and US $202,700 per year, respectively. The case of Singapore—admired for its efficient government and economic success—suggests the possible positive effects of revising democratic leaders’ pay schedules sharply upward.

The issue of politicians’ pay is pertinent to the effectiveness of democracy and its leaders in at least two ways. First, large pay differentials between private and public sectors can lead to the public sector struggling to attract and retain the most talented people, who are instead drawn to higher-paying opportunities in the private sector. The gap between the pay of political leaders and corporate leaders has widened. For example, average CEO pay in the United States rose by a factor of ten, from $1.5 million to $15 million a year, from 1979 to 2013. During roughly the same period, the president’s pay merely quadrupled, from $100,000 in 1969 to $400,000 in 2001. Second, a wide pay gap between the private and public sectors can create perverse incentives whereby politicians and policymakers make decisions with one eye toward future, better-compensated employment in the private sector. For instance, government officials might promulgate more diluted and less far-reaching regulations than they would otherwise because they expect to seek work in the regulated industries after their term in office. Raising politicians’ salaries to more competitive levels can help address these problems by making continued public service more attractive. The revolving door problem can be further mitigated by restricting politicians from accepting private-sector roles for at least a full electoral term after they leave public office—a “pay them more and shut the revolving door” approach.

Some might argue that pay premiums (particularly in the form of bonuses like this one) would encourage politicians to focus on outcomes with relatively little regard for how the results are achieved, thereby encouraging bad behavior. Some claimed that the 2008 financial crisis was the result of excessive risk taking by traders who were focused on generating profits, upon which their bonuses were calculated, without thought of the wider implications of their trades on the broader economy. Similarly, bonuses incentivized mortgage brokers to sell mortgages without sufficient regard for whether buyers could actually afford the mortgages in the first place or for what might happen if they defaulted.

A fourth way to discourage politicians’ short-term thinking is to alter electoral cycles so as to lengthen politicians’ terms in office. The goal of such a change would be to better match political attention spans to longer-term economic challenges, and specifically to match political cycles with the length of the business cycle. According to the National Bureau of Economic Research (NBER), there were eleven business cycles between 1945 and 2009. Each cycle—that is, a period of economic expansion followed by one of contraction—lasted an average of 69 months, or almost six years each. Economic expansions lasted approximately 58.4 months, while contractions lasted around 11.1 months. ³ If politicians’ terms in office lasted roughly the same amount of time, policymakers would be incentivized to implement policies that would deliver growth over 5–7 years and beyond, rather than 1–3 years. In this scenario, policymakers would be thinking far enough ahead to know that an economic contraction was inevitably in the offing; they would work to soften its blow rather than, say, take advantage of flush times by enacting a big tax cut or proposing a lot of new spending. Already in a number of countries, politicians hold office for terms that correspond closely to the length of a typical business cycle. In Brazil, for example, federal senators are permitted eight-year terms, and in Mexico and the Philippines, the president is elected for a six-year term. In this respect, the US Senate, with six-year terms, is on the right path, but the US House of Representatives, for which elections are held every two years, is not.

The extension of terms should be accompanied by the imposition of term limits—the fifth crucial reform to mature democracies. In the United States and a handful of other countries, the chief executive is restricted to a limited number of terms in office, and several more impose limits on the number of consecutive terms the executive may serve. But across Europe, the vast majority of heads of government face no set term limits. In Italy, for example, the president may serve an unlimited number of seven-year terms. In the United Kingdom, the prime minister may serve an unlimited number of five-year terms. Meanwhile, there are no limits on the terms served by representatives in the US Congress, and apart from Mexico, the same holds true for national legislators across the mature democracies. US congressman John Dingell from Michigan retired in 2014 after serving fifty-nine years and twenty-one days. Robert Byrd, from West Virginia, served over fifty-seven years total in the House of Representatives and the Senate. The troubling point is that some of the political tenures in democratic states are in line with those in nondemocratic countries. Of course the cases of Dingell and Byrd can be described as outliers in a democratic system (as these are just 2 among 535 members of Congress), but the extraordinary length of their tenures is a product of that system’s weaknesses. Any politician granted a position of authority or power for multiple decades risks slipping into complacency and reduced accountability.

A list of the longest-ruling nonroyal national leaders since 1900 amounts to a veritable who’s who of authoritarian, illiberal, nondemocratic nation-states. The top three leaders include Cuba’s Fidel Castro (52 years, 62 days), China’s Chiang Kai-shek (46 years, 82 days, split between mainland China and Taiwan), and North Korea’s Kim Il-sung (48 years, 203 days). Tellingly, this is not so dissimilar from the tenure of political leaders in democratic states. The problem in the case of authoritarian states is that they are less subject to checks and challenges on the fate and state of their economies, and in most cases remain in power by military dint rather than by voters’ mandates. The underlying premise of “job for life” means these illiberal leaders can survive political office without delivering long-term economic success to their countries. In a similar vein, a democratic system without term limits runs the risk of engendering this sort of lack of accountability.

Like Mexico, the world’s leading democracies should strongly consider moving toward fewer, longer terms for their elected officials, including presidents, prime ministers, legislators, and members of parliament, with lengths of terms being more than five years and numbers of terms being capped at perhaps two or three. Moving in this direction would insulate politicians from constant campaigning and give leaders the time and space to focus on the nuances of complex long-term economic challenges without engendering the complacency and lack of accountability that come with decades of being in office. Given the high cost of elections, there would also be more immediate economic benefits to reducing their frequency.

In order to combat career politicians, democracies should set minimum standards for holders of public office, requiring candidates to have work experience outside the political realm—not only in business but in a range of “real-world” jobs, so that politicians collectively bring to their work a greater understanding of the workings of all aspects of the economy and society. In his article “Arise, Novice Leader! The Continuing Rise of the Career Politician in Britain,” Philip Cowley notes that, “in late 2010, the leaders of the major British political parties had less experience in the non-political world than any others of the post-war era.” Cowley argues this development is “unlikely to be a fluke” as increasingly, over many decades, political parties valued political experience and thus preferred career politicians over those who focused on gaining practical experience before entering the House of Commons. ⁴ Nearly a decade later, the British political class remains dominated by career politicians.

A 2012 study by the British House of Commons Library sheds further light on the rising trend of professional politicians who have little to no real-world experience. The study finds that since 1983, the number of career politicians in Parliament—insiders who worked in politics in advance of their election—more than quadrupled from twenty to ninety between 1983 and 2010. Over the same period, the number of parliamentary representatives with a background in manual labor has trended in exactly the opposite direction, from more than seventy in 1983 to around twenty-five in 2010. The number of teachers in Parliament halved from 1987 to 2010, and barristers (lawyers) have enjoyed a resurgence as political representatives since a low point of just 60 in 1997, to around 85 in 2010, but still short of the peak in excess of 120 in the 1960s and 1970s. ⁵

The British system is now designed to favor those without experience outside politics in two ways: first, those who serve as advisers or aides to politicians are in prime position to replace those politicians in Parliament, and second, once they are in Parliament, officeholders with such backgrounds are in the best position to rise to senior leadership positions, where they have greater decision-making powers. But this professional political class has relatively little real-world experience to inform economic decision making. Its members are arguably more susceptible than most to catering to the whims of the voter at the expense of addressing longer-term economic challenges. It’s simply what they have been trained to do. People with real-world experience, on the other hand, are more likely to understand the sorts of policies that are needed in a modern economy than those conditioned on a diet of polls and political tactics.

The United States, with its minimum age requirements for federal officeholders (thirty-five for a presidential or vice presidential candidate, thirty for a senator, and twenty-five for a representative), already implicitly demands that candidates possess some measure of life experience, though it does not delineate between political and nonpolitical experience. Some might worry that the latter approach embeds age discrimination, as any restrictions related to the minimum age of electability will necessarily favor older candidates. It is fair to say that any and all forms of reforms that may be seen as discriminatory—whether age, education, or occupational—might a priori be unconstitutional. Particularly in the case of the United States, it would be difficult to implement additional restrictions on officeholder experience without an outright constitutional amendment, which would take time and a sustained political campaign.

In addition, some would be concerned that minimum academic requirements would necessarily constrain younger candidates from participating in politics. Schooling mandates would prevent people from quickly beginning work and acquiring the requisite experience for office holding before a certain age. However, in the United Kingdom, where the school-leaving age is eighteen, it is not impossible for a school leaver to acquire a decade of practical business experience and enter Parliament well before their thirtieth birthday.

Weaknesses in the democratic process can and do emerge when the elections are no longer closely contested. If a politician knows that there is little chance of losing an election, there is a risk they will make only a minimal effort to court voters and will fail to work vigorously to ensure the provision of public goods. This can undermine the contract between government and governed, diminishing the politician’s incentive to be a strong representative and an effective policymaker. A politician in a safe seat might become feckless and ineffective, adversely affecting economic policymaking. Ultimately, what is a grave concern is the inadvertent creation of complacent policymakers, who have little need to fulfill their duty in delivering long-term positive and effective policies.

All mature democracies suffer, to some extent, from uncompetitive elections and could stand to work to further incentivize electoral competition. This is true even in the United Kingdom, which has an independent commission to set constituencies and election boundaries. Uncompetitive elections are particularly a problem in the United States, where district boundaries are often drawn by political incumbents to strengthen their own hand (and in so doing weaken their political opponents) rather than strengthen the political process itself. This sort of gerrymandering means politicians need only persuade their own party faithful, essentially disenfranchising large numbers of voters. According to Pew Research, “since 1992, 93 percent of House members who actually seek re-election have won.” For example, in 2014, there were 19 seat switches between the major parties of the 435 contested seats. ⁶

The solution is to change electoral boundaries to minimize the number of safe seats. In North Carolina, for example, campaigners for “Fair Maps, Fair Elections” are seeking to reform the election map of their General Assembly, to reduce “bitter partisan divisions and promote public confidence in the political system.” ⁷ Campaigners favor the Iowa model of redistricting boundaries, which ensures “no political influence in the redistricting process” by excluding partisan politicians from decision making regarding electoral boundaries. Instead, the Legislative Services Agency, a nonpartisan body of civil servants, redraws districts after each census without regard to partisan political advantage.

The debate in political science over the connection between gerrymandering of voting constituencies and political polarization is enormously fraught. Although it seems intuitive that less partisan districts would produce more competitive elections, which, in turn, yield better economic policymaking, it is hard to find empirical evidence that makes a causal link between district boundaries and economic outcomes. In the absence of clear proof of negative economic effects of gerrymandering, legislators create voting districts that favor one party over another. Therefore any effort to counter gerrymandering is a move in the right direction.

One needed reform, and the eighth proposal in my ten-point blueprint, is to address declining voter participation by making voting mandatory. Established democracies, according to the International Institute for Democracy and Electoral Assistance, have seen “a slow but steady decline in turnout since the 1970s.” ⁸ In November 2014, only 36 percent of eligible voters in the United States cast a vote—the lowest turnout in more than seventy years. And while estimates show more than 58 percent of eligible voters voted in the 2016 US presidential election, turnout was down from 2008 (when it was 62 percent). Since 1900, the percentage of voters voting in US presidential elections has scarcely gone above 60 percent.

Many of the world’s countries whose turnout rates are highest—including Australia, Singapore, Belgium, and Liechtenstein, where the 93 percent turnout rate is the highest in Western Europe—enforce compulsory voting laws. As of August 2016, of the thirty-five member states of the Organisation for Economic Co-operation and Development (OECD), five had forms of compulsory voting. In those countries, turnout rates were near 100 percent. There are more than twenty countries where voting is compulsory, including Australia, Belgium, Bolivia, Brazil, Democratic Republic of the Congo, Egypt, Mexico, Peru, and Singapore. In Australia, voter turnout is usually around 90 percent. A more direct comparison within the European Union member states reveals remarkable turnouts from states where voting is mandatory, with 89.6 percent in Belgium and 85.6 percent in Luxembourg. For the sake of comparison, voter turnout was only 42.4 percent in France, 43.8 percent in Spain, and a mere 35.6 percent in the United Kingdom. ⁹

Most often, compulsory voting is enforced through fines on those who don’t vote. Typically these fines are relatively small; in Australia it is AUD 20 the first time you don’t vote and have no good reason, and AUD 50 afterward, while it ranges from 10 to 20 pesos in Argentina. ¹⁰ Many times, the penalty amounts to little more than a symbolic slap on the wrist. But even the threat of a small fine clearly has an impact, as rates of voter participation in these countries suggest. In some cases, nonvoters do face the threat of imprisonment, but usually for failure to pay the fine, not the underlying failure to vote.

Other penalties for not voting come in the form of restrictions on civil rights or the franchise itself. For example, in Belgium, nonvoters will be disenfranchised for ten years after not voting in at least four elections, and it is difficult to get a job within the public sector if you are a nonvoter. In Singapore, nonvoters must reapply to be included on the voting register, explaining why they did not cast a vote. In Peru, voters receive a stamped card that they must carry for months after the election to prove their participation in the election. This grants them access to certain services and goods from public offices. In Bolivia, voters must show proof of participation in order to receive their salaries from the bank for three months after the election. In Mexico and Italy, no formal sanctions are in place, but failure to vote can lead to informal social sanction. This is called the “innocuous sanction” in Italy, where, if you cannot show evidence that you voted, it may, for example, be difficult to find a child care program for your child. ¹¹

In countries without mandatory voting, voters’ failure to show up at the polls has consequences of a different sort. The variations in voter turnout among different groups can swing elections and skew policy outcomes. According to Lisa Hill, a professor of politics at the University of Adelaide, who writes about the failure to vote by US voters, the “failure to vote is concentrated among groups already experiencing one or more forms of deprivation, namely, the poor, the unemployed, the homeless, indigenous peoples, the isolated, new citizens and the young.… This transfers to greater voting power to the well-off and causes policies to be geared disproportionately to the interests of voters (politicians aren’t stupid: they know who their customers are). The legitimacy of American democracy is thereby undermined, assuming you agree that political inequality and unrepresentativeness are bad for democracy.” ¹²

A smaller and narrower electoral base can lead to a more corrupted electoral process. The seventeenth-century szlachta in Poland and the early-nineteenth-century “rotten borough” problem in Britain are two historical examples. In the Polish commonwealth, all nobles were initially entitled to vote for the king. Yet over time, elections were monopolized by only the wealthiest and most powerful members of the Polish nobility, thus causing the strength of the Polish crown to wane. “In 1574 the first royal election drew 40,000 szlachta,” according to the Economist; “by 1674 that number had fallen to 5,000. Low turnout figures were in the interests of powerful noble magnates since they made it easier for them to control elections, but the long-term result was to hollow out the democratic consensus and national strength, ultimately contributing to Poland’s partition.” ¹³

Britain’s “rotten borough” problem in the early 1800s is another example of an extreme narrow voter base and its corruptibility. Prior to 1832, many parliamentary constituencies in Britain were described as “rotten boroughs,” so named because the borough was found to have decayed to having so few voters that the choice of MP was in the hands of one person or family, whose interests the incumbent inevitably championed. Simply put, the smaller the electorate, the likelier that policies will favor the few.

By creating the broadest possible electoral base, mandatory voting maximizes the quality of democracy, making it more efficient and enhancing economic policy outcomes. But of course democracy dominated by the ill-informed many can also prove hazardous to growth. Countries where voting is mandatory but the population is not well informed can fall prey to populist policies that are inimical to longer-term economic growth and success.

It is imperative to educate the population on the tradeoffs between short-term gains and their costs to future growth. Indeed, democracies should care just as much about the quality of individual voters as they do about the quantity of voter suffrage. Thus, as a ninth reform, democracies must seek to educate voters regarding the impact of policy choices. Voters must be nudged toward the right long-term policy choices, rather than being swayed by personalities and short-term fixes. In its most radical form, this might extend to requiring voters to meet minimum requirements for knowledge of key public policy issues. For instance, voters might be required to pass a government-sanctioned civics test in order to vote (akin to passing a driving test to secure a driver’s license) or to pass mandatory civics courses in school before gaining the franchise. The checkered history of civil rights and suffrage means even the suggestion of such tests would be ripe for criticism and if implemented carelessly subject to abuse and discrimination. Moreover, some will object to this proposal—if even just on face value—as reviving the sorts of literary tests once used to disenfranchise racial minorities and the poor in the United States. Yet passing the sorts of civics tests described would ensure that voters made wise economic decisions or took the economic long run into account. The sort of affirmative commitment to voter education proffered by the reforms presented here promises to make a key difference in voter knowledge, their choices, and ultimately policy outcomes.

The notion of restricting citizens’ voting powers may seem to fly in the face of democratic values. Because people have died for the right to vote and still to this day campaign for suffrage, many will see the idea of limiting this right as beyond the pale. Nevertheless, there is a valid debate to be had on whether taking steps to ensure a qualified electorate could enhance policymaking outcomes and thereby improve economic growth. What democracies must avoid is lengthening the tenure of elected officials without addressing voter education as well. Otherwise, the risk is that a poorly educated electorate will elect for a long term in office a poor leader or administration that implements poor policies that damage economic growth. Enhancing the quality of voters would further incentivize politicians to make better economic choices—and it would remove another excuse for politicians to focus only on the short term.

In short, democracies should aim both to expand the electorate (as per the eighth reform) and to improve the quality of voter decisions (as per the ninth reform). But a tenth and final reform—weighted voting—would allow them to pursue both in unison. While the ninth reform requires that voters meet a minimum set of standards, the tenth reform has a different objective: enhancing the voting status of highly qualified individuals. Implementing both these reforms (the ninth and tenth) effectively delineates among three tiers of voters: the unqualified, the standard qualified voter, and the highly qualified voter. Some form of weighted voting would boost the influence of the best-informed segment of the electorate, even as that group expanded over time. It thus offers a route to achieving a fully informed and participating electorate. As a practical matter, each society would decide whether voters would be required to sit additional tests to achieve enhanced voter status (as proposed in the tenth reform) or whether a voter would automatically obtain enhanced voter accreditation based on their professional standing or qualifications. This is an example of a reform that would likely require some form of constitutional amendment.

According to one proposed vote-weighting proposal, prospective voters might be asked to take a quiz, consisting of “objective, factual questions rather than questions concerning beliefs and convictions.” Voters would have to demonstrate knowledge of the structure and broad operations of government as well as key current events and policy debates. Such testing proposals have precedents in the civics tests, which include cultural, historical, and social questions that immigrants must pass in order to earn citizenship rights. If a citizen answers all the questions correctly, their vote would be counted as a whole vote. “If, however, we answer correctly to only three out of ten questions, our vote will be worth three-tenths of a whole vote. In this way, votes from citizens who have kept up with the political debate will be weighted more heavily than votes from citizens who—for one reason or another—gave incorrect answers to the majority of the questions.” ¹⁴

An alternative to this approach would be a “voter plus” system, whereby voters would get rewarded for higher attainment. Better performance on the same sort of civics test, for instance, would yield a higher number of votes—a carrot to induce better-informed voting, rather than a stick. Unlike the system described above, everyone qualified to vote would get at least a single vote, but those who performed best would get more.

Age could also be used in a weighted voting scheme. On the one hand, as one progresses through life, gaining work and life experiences, it would seem that one’s vote should count more—so that the vote of a novice would count only a fraction of that of a veteran. On the other hand, there is another appealing argument for giving younger people more votes than older ones, on the logic that young people deserve more say in their futures than do older people, who have less time to live. The US health care system is skewed toward serving older Americans—a powerful interest group—rather than young people, who will be driving productivity for decades to come. These intergenerational tradeoffs might change if the votes of the young counted more.

The system of universal and automatic suffrage that prevails in leading democracies today carries with it the perennial risk that voter apathy and ignorance will allow politicians to sway the electorate with attractive short-term promises they do not follow through on once they are in office. One famous example in the United States is then–presidential candidate George H. W. Bush’s famous 1988 pledge, “Read my lips: no new taxes,” a promise that likely helped him win the election. Although President Bush opposed the introduction of new taxes when he became president, he eventually agreed to a 1990 budget that saw an increase in several existing taxes. Many voters interpreted this as his going back on his word, and it possibly cost him the next election. A weighted voting system offers a real chance to address this danger by preventing citizens from voting for the wrong reasons and diminishing the influence of the voters most likely to do so. It also reduces the influence of those most likely to be apathetic or disengaged from public policy debates and thus most likely to make poor electoral choices, notwithstanding the fact that the citizen always retains the option to become more knowledgeable and qualified.

Overall, what is needed is a new way of understanding voting, its purpose, and participation in the electoral process—not just as a right but rather as a reward to be earned for citizens’ fulfillment of their civic duty, reflecting their status as a partner in the democratic process. If the reforms proposed here were pursued in concert, with voting made mandatory while weighting and minimum qualification tests augmented the power of knowledgeable voters, the result would be higher-quality decisions by voters, better policymakers, and policies that maximize an economy’s prospects.

The proliferation of personalized media diets increasingly means that each voter clings to their own set of facts, assumptions, and beliefs. This creates a weak civic environment, undermining political outcomes. In the context of economic growth, an ideological media imbues and reinforces a culture of short-termism among politicians and political classes though a twenty-four-hour media cycle, as politicians scramble to act and react to an agenda set by the press. This can be a distraction from the longer-term projects and policies necessary for durable economic growth.

Clearly, young voters are skeptical of liberal democracy as currently constituted, but their enthusiastic participation in all manner of causes suggests they would be eager to take an active role in creating and participating in the sort of reformed approach advocated here. The evidence suggests that the status quo democratic approach might not provide the youth (and voting citizens more generally) the conduit for the progress—political, economic, or otherwise—they seek, and that reform of the current system is a necessary and urgent imperative. ¹⁵

The reform proposals presented here are not simply meant as reactive against rising populism around the world—not merely a “fix” for the problems in democracy that allowed Brexit and election of Trump in 2016 to occur. Rather, they are meant to address the more fundamental structural problem of political myopia, which is leading to economic stagnation. Thus they would be as important even if both Brexit and Trump had been defeated.

This chapter recommends what many will see as uncomfortable alterations to a democratic political system that is viewed as sacrosanct. Nevertheless, the reforms proposed here are critical for achieving economic prosperity and human advancement by addressing political myopia, tackling the headwinds laid out in Chapter 3, and ultimately ensuring long-term sustained economic growth and improved living standards. When this reformed version of democracy begins to delivers attractive outcomes, it will be seen as more attractive across the world.

And as we will see in the next, concluding chapter, the risks of our present democratic stasis and the impact on economic progress are far too great for reform of the political system to be ignored. The ultimate risk is that democracies could be increasingly built on a disillusioned, uninformed electorate and would only produce poor populist leaders who make bad policy that harms growth. In contrast, if the proposals offered here are adopted, the prize is a well-educated, engaged electorate with highly motivated and qualified political leaders driven to deliver the long-term policies best suited for the economic circumstances of their country. With the overhaul of democracy would come a better chance to implement the more flexible and pragmatic approach needed to drive economic growth in the twenty-first century.

3

HURRICANE HEADWINDS

IN THE GREATEST GENERATION, AMERICAN journalist Tom Brokaw describes the emergence of the United States from a period of destitution in the 1930s. The book tells of those born in the early twentieth century who weathered the Great Depression, won the Second World War, established America as the number one global power, and moved the United States from a path of economic decline and depression toward one of mass prosperity. The story of America’s remarkable economic trajectory during those years holds many lessons for us today. ¹

During this period of strong and transformational economic growth, the United States operated full throttle on the three key factors of growth: capital, labor, and productivity. Major capital investments included the creation of the expansive interstate highway system beginning in 1956, which by 2017 had reached nearly forty-seven thousand miles, as well as the massive investment in equipment and machines in the agricultural sector, which constituted a significant part of America’s economy. In terms of labor, the G.I. Bill, passed in June 1944 by President Franklin Roosevelt, offered education and other benefits such as business loans to World War II veterans, thereby upgrading the quality of the workforce. Within little over a decade, more than two million veterans had attended college and more than five and a half million had received training thanks to the bill. The quantity of labor increased as well, with the absorption of women into the formal workforce on the home front beginning during the war. These years also saw a marked growth in productivity, prompted in part by technological advancements, including fertilizer, pesticides, and machinery such as combine harvesters, mainframe computing, and manufacturing. Between 1945 and 1975, output per hour of labor (a measure of productivity) increased 127 percent. This tripartite surge in capital, labor, and productivity propelled the US economy forward through the postwar years.

Just a few decades later, however, each of these factors now faces severe headwinds. We are living in a period of low growth and even economic stagnation. While it is becoming increasingly difficult to determine where growth will come from, there is ever more clarity on the factors likeliest to derail global growth. This chapter seeks to shed new light on seven hurricane-strength forces barreling down on the global economy. When it comes to capital, these headwinds include high levels of debt, natural resource scarcity, and misallocation of capital. Affecting labor are the declining quality and quantity of the global workforce as a result of demographic shifts and worsening effects of widening income inequality. Finally, total factor productivity (the share of output that comes from variables that are not labor or capital) is sapped by the counterintuitive effects of technological advancement, as well as a decline in the efficiency through which capital and labor can be converted into economic growth.

Understanding the seven headwinds described in this chapter is crucial to understanding why the current economic malaise is different from previous economic challenges. Our current crisis is nothing like the 1973 oil spike that was followed by stagflation, out-of-control inflation, and a global debt crisis in the early 1980s, which policymakers sought to combat with interest rate changes. It is likewise entirely unlike the 1930s, when policymakers were at least able to draw on monetary tools (lowering interest rates) and fiscal tools (larger government spending) to ameliorate the crisis. These old solutions of monetary and fiscal policy are proving impotent to resolve the current distress. So are the policies of protectionism in trade and restriction of immigration, which despite their growing popularity dampen economic growth rather than encourage it.

The United States is not alone in its debt spiral. As McKinsey Global Institute has reported, since the financial crisis, “global debt has grown by USD $57 trillion… raising the ratio of debt to GDP by 17 percentage points.” ² Globally, debt to GDP is now at a staggering 350 percent. In the aftermath of the financial crisis many countries, particularly the United Kingdom, France, and the countries described with the acronym PIIGS—Portugal, Ireland, Italy, Greece, and Spain—saw their debt burdens rise rapidly; for these seven countries government debt rose from 5.6 trillion euros around 2009 to 8.2 trillion euros in 2016. This steep increase reflected, in part, the growing use of debt as a tool to address the financial crisis. At the time of this writing, global public debt stood at an estimated US$71.5 trillion, compared to a world GDP of roughly US$60 trillion (although according to some estimates global GDP is as high as US$78 trillion). ³

At relatively low levels, nations and companies alike can benefit from taking on some debt obligations. Borrowing money for investment in the present can lead to future economic gains, especially if borrowing makes the difference between investing and not investing. A modest and manageable amount of borrowing is better than not investing at all. Taking on debt can help pay for important public investments in education, health care, and infrastructure. Debt of this sort has been crucial to US growth over the past century. The approximately $3.8 trillion municipal bond market in the United States allows for the funding of infrastructure and the construction of schools, hospitals, and highways. In the postwar years, municipal borrowing more than tripled from $20 billion in 1945 to $66 billion in 1960, as governments and states invested heavily in building infrastructure. ⁴ In this way, debt can serve as a catalyst for future economic growth.

But there is a limit to debt’s efficacy, as demonstrated in the experience of commodity-driven economies. In periods of rapid economic growth, politicians often borrow from the international capital markets to fund investments, hoping that commodity prices will remain high over the foreseeable future. However, if global commodity prices collapse, or when growth inevitably slows, debt repayments become a larger share of public spending, reducing money earmarked for such needs as education and health care. Worse still, the debt, if priced in foreign currency (for example, in US dollars), becomes much more expensive, as slow growth is often accompanied by a reduction in the value of the home currency versus the US dollar. This mounting debt burden from the greater expense of debt further harms economic growth. In the United Kingdom, interest payments on public debt stood at 8 percent of total tax revenue in 2015, and the payments of £43 billion were equal to half of the UK government’s education budget that year. In the wake of the global financial crisis, Greece, Italy, and Ireland saw their interest payments on public debt rise to 10 percent or more of tax revenue; cash was essentially redirected to debt repayments when it could have been used to enhance investment and economic growth.

Policymakers continue to grapple with the complex relationship between debt and growth, and at what point debt becomes a hindrance rather than a help to economic progress. In Growth in a Time of Debt, an extensive study covering over two hundred years of history, Harvard University professors Carmen Reinhart and Kenneth Rogoff concluded: “When external debt reaches 60 percent of GDP, annual growth declines by about two percent.” Reinhart and Rogoff describe a mixed record of sovereign borrowing leading to high debt levels; they highlight how, in extreme circumstances, defaults have had deleterious consequences on economic growth. Lenders are ultimately reluctant to deal with any counterparty for whom they have reason to worry about repayment risk—or at least, they will demand high costs for doing so. And debt crises not only crush existing debt holders by rendering their bond holdings worthless but also discourage new capital from flowing in. ⁵

Even if economists can define a threshold above which debt becomes a problem for economic growth, policymakers struggle to enforce it, particularly during times of economic stress such as the 2008 financial crisis. The 1992 Maastricht Treaty bound signatories to a debt-to-GDP ratio of no more than 60 percent and an annual government deficit of no more than 3 percent. In the wake of the stresses of the financial crisis these rules were generally ignored, as the average debt-to-GDP levels across all European Union member states soared to over 92 percent in 2014.

In 2014, the International Monetary Fund concluded that there was no definitive relationship between absolute levels of debt and economic growth, but nevertheless stressed that higher debt leads to more volatility in GDP growth. Moreover, the trajectory of debt—that is, whether it was rising or falling—did have notable effects on the path of economic growth. ⁶ As countries around the world have assumed more debt, the debt debate has moved from the periphery of policymaking to the fore. Even in the case of a country like the United States, which has a global reserve currency, reasonable people agree that amassing unsustainable debt constrains a nation’s economic growth.

The key commodity inputs to economic growth are arable land, potable water, energy, and minerals. Today, the greatest amount of untilled, arable land is in Africa, yet this land is often hard to access because of untraversable terrain. In comparison, China, with 1.3 billion people, has only an estimated 11.3 percent arable land. This shortage has served as an impetus for China to go outside its borders in search of commodities and land on which to grow food. China’s systematic and aggressive approach has made it the “go-to” power buyer for commodities and resources. China invested nearly $200 billion globally in 2015, with about a third of the total invested in the energy sector. ⁷

Potable water is also in increasingly short supply. Although 70 percent of Earth is covered by water, about 97 percent of this water is too salty even to be used to clean toilets. Water is essential not only for drinking but also for manufacturing and food production. For example, it takes 20 gallons of water to make one egg and 150 gallons of water to make a quarter-pound hamburger (113 grams). ⁸ The risk of shortage is why such countries as China and Saudi Arabia are investing the most in desalination and are at the forefront of efforts seeking a resolution to water scarcity.

Water will soon become scarce for many other countries as well. According to a report from the Office of the Director of National Intelligence (ODNI), “between now and 2040, fresh water availability will not keep up with demand absent more effective management of water resources.” Water shortages “will hinder the ability of key countries to produce food and generate energy, posing a risk to global food markets and hobbling economic growth.” Furthermore, while the problem may be manageable for wealthier developed countries, the water shortage is a “destabilizing factor” in poorer ones. In addition to outright water wars, the ODNI suggests that water will become a form of political leverage for countries that possess it, with states using “their inherent ability to construct and support major water projects to obtain regional influence.” In the next ten years, water shortages will contribute to social disruptions and political instability, which in turn can fuel conflict. ⁹

Beyond land and water, resources like minerals and energy are becoming ever harder and more expensive to acquire. In the quest for mining and energy resources, producers are seeking out more politically unstable and difficult terrain. For example, in 2014, Rio Tinto’s US$5.4 billion underground expansion of the Oyu Tolgoi mine in Mongolia experienced severe delays after a dispute over investment terms with the government. This contributed to the ousting of Mongolian prime minister Norov Altankhuyag and further delays and financial costs to Rio Tinto. (As of 2017, the Mongolian parliament voted to nationalize the mine.) ¹⁰

These supply-side constraints of arable land, potable water, energy, and minerals are only half of the equation; demand for natural resources is the other half. Numerous factors influence the demand for commodities. The weather can play a role, as hot summer months can increase energy demand to support air-conditioning. Commodity substitutes are also a factor, as innovation adds alternatives, such as solar and nuclear power, to the traditional suite of resources. Economic theory suggests that as scarcity takes effect, prices will rise, and demand will fall. Government policy, however, has interfered with market forces. Subsidies, taxes, and price restrictions can allow demand for products such as energy and fuel to hold up or even continue rising. But ultimately what places the most pressure on resources is population growth.

Over the past fifty years global population growth has been uniquely rapid. As demographers attest, this is a phenomenon never seen in history or prehistory, and one never to be seen again once, by some forecasts, the population plateaus over the course of the next century. This population trend may, in some respects, seem counterintuitive. A swelling global population means more people, more workers, more consumption, and a boost for growth. However, the current population dynamics could entail a much darker future, especially in a world of finite resources.

The Worldometers website displays, moment by moment, the number of births and deaths around the world on a daily and annual basis. ¹¹ In total, there are approximately 7.5 billion people on the planet today, representing roughly 7 percent of the approximately 108 billion people who, according to the Population Reference Bureau, have ever lived on Earth. According to United Nations estimates, the global population will plateau only after reaching a number between 9.6 and 12.3 billion people on Earth in 2100. ¹²

A January 1960 Time cover story entitled “That Population Explosion” heralded the fact that the world’s population had reached 3 billion. But even more so, the milestone underscored the unprecedented rate of population growth in just one generation. Whereas it took until about 1800 for the human race to reach 1 billion people, and around 125 years to increase from 1 billion to 2 billion, the increase to 3 billion took only thirty-five years. In just sixty years the global population has exploded—from around 2.5 billion in 1950 to 7 billion in 2011. Today, India alone is adding 1.3 million people a month to its population, and the global populace is rising by 80 million each year—equivalent to adding more than a whole United Kingdom annually.

By current forecasts the world population will top 9 billion people by 2050, expanding by an additional 1.2 billion over the next twenty years—an almost 30 percent increase in the world population in a mere forty years.

Urbanization, too, promises to create even greater demand for resources. By 2030 an estimated 60 percent of the world’s population will live in cities. The number of cities of five hundred inhabitants or more is projected to grow by 30 percent in Asia and 80 percent in Africa. ¹³ Across emerging markets, explicit and managed urbanization policies are under way. For example, the Chinese government has publicly stated policy targets that will increase the number of cities with at least one million people from the current total of around 80 to 221 cities, and over 20 cities with at least ten million people each. To put this in context, Europe and the United States together have 10 cities with at least one million people each.

Urbanization has generally been seen as more efficient for the delivery of goods and services. Larger numbers of people congregating in dense cities are regarded as good for growth, considering the demand for commodities rises as population density increases. Essentially, not only do cities deliver goods and services more efficiently to their inhabitants, but they also demand more natural resources than less densely populated areas, as a city of one million people requires more commodities than a town a thousand. Furthermore, urban areas are generally associated with higher per capita incomes (urban per capita incomes in India are at least twice as high as in its rural areas), which lead to higher consumption of white goods (such as refrigerators and washing machines), food, energy, telecommunications, and water. Consequently, urbanization can place upward pressure on resource prices and in turn become a drag on economic growth.

There is a long history of concerns about how natural resources will be unable to keep pace with population demand. This clamor dates as far back as 1798, when Thomas Malthus worried about how the global population growth would outstrip commodity supply. Since then the Club of Rome in the 1970s and “peak oil” proponents have joined this chorus, even as the world has been bailed out of crises, often by technological advancements, every step of the way. Even so, potential new sources of resource supply, for example, shale oil, are subject to volatility. Such innovations may mitigate the risk of commodity scarcity over the longer term but are unlikely to eliminate real concerns in their entirety, which presents the increasing risk of greater conflict in the future. A report by the US National Intelligence Council warns that more resource-based conflicts may be on the horizon. ¹⁴ The US director of national intelligence has warned of water shortages in a number of countries—particularly those that rely on the Nile, Tigris-Euphrates, Mekong, Jordan, Indus, Brahmaputra, and Amu Darya. Over the next decade many large and significant countries with close ties to the United States (such as in the Middle East) will experience severe water shortages, deteriorating quality, or floods, and this could fuel political instability and even state failure.

The effort to manage scarce natural resources and address the challenge of climate change creates pressures to restrict growth and has created international disputes over what kind of growth is appropriate and sustainable. After all, according to many environmentalists, economic growth itself is degrading the planet. Meanwhile, economists on the other side of the debate worry that growth will be damaged by overprioritization of environmental concerns. There exist compelling arguments for “green growth”—the idea that economic growth can be enhanced by addressing climate change, CO₂ emissions, and water scarcity—yet the debate between environmentalists and economists still rages.

In 1997 a ninety-year-old Alec Holden placed a bet with the bookmaker William Hill that he would reach the age of 100. William Hill gave him odds of 250 to 1. In April 2007 he won the bet. When Holden picked up the check, William Hill announced that they would no longer offer such generous odds—raising the target for such wagers to 105. Said a spokesman, “If you’re prepared to bet you’ll live to 105, you’ll probably be offered odds of 150 to 1; to get the full 250 to 1 offered to Mr Holden, you’ve now got to get to 110, and you can only wager up to £100.”

We are moving into a world inhabited by fewer and fewer workers who can actively and productively contribute to economic growth. By 2050 there will be sixty-four countries in which more than 30 percent of the population will be over sixty years old. In fact, over 50 percent of the populations of Germany, Spain, Italy, and Japan will be over sixty. Without a young workforce, economic progress will stall. Meanwhile, China risks getting old before getting rich, with some estimates suggesting that half of China’s population will be fifty years old or older by 2050. Japan is already combating a negative population growth rate. Forecasts estimate that 40 percent of Japan’s population will be over sixty-five by 2060. There were six thousand fewer births in 2013 than in 2012. These trends suggest that the country will lose a third of its population over the course of the next fifty years, with negative consequences for its labor market and economic prospects. More generally it has been reported that “some 48% of the world’s people live in a country where birthrates are not sufficient to sustain existing populations: All of Europe except Iceland, BRIC mainstays Brazil, Russia, and China, and even some emerging markets like Vietnam.” ¹⁵ Fertility in all European countries (that is, EU members) is below the level required for maintaining population levels over the long run.

As the economically active population shrinks, the population of economically inactive people grows. And all the while, the life expectancy of the aging cohort of baby boomers is increasing. Global life expectancy is expected to rise to seventy-seven years by 2045. This trend brings mounting health care and unfunded pension costs that act as a drag on economic growth. The United Nations forecasts that by 2050 one in three persons living in a rich country will be a pensioner, and nearly one in ten will be over eighty years old. In the United States, the Social Security bill was close to $900 billion in 2015, making it the largest single item in the annual federal government budget, and representing approximately 25 percent of federal expenditures (up from 0.22 percent during World War II). These numbers are, if anything, conservative, as they do not include additional public pension commitments at the state and city levels. According to the UK Office for Budgetary Responsibility, “spending on pensioners is the largest category of social spending, with gross public spending at 6.1 percent of GDP in 2010 (slightly below the OECD average of 7.3 percent).” ¹⁶

All of this is to say that the West is getting older. The less productive and more expensive to maintain this growing aging population becomes, the greater the burden it will place on already stretched fiscal balances and on the economy overall. A country populated by fewer and fewer young and able-bodied workers will inevitably face the prospect of labor shortages, lower productivity, and slowed economic growth.

Of course, the challenge of aging populations is not just the bailiwick of the rich, industrialized world. The UN’s latest population forecast estimates that the world median age is due to rise from twenty-nine to thirty-eight by 2050. And the fact that, as we have seen, women worldwide are having fewer children means the balance will certainly tip in favor of the aged before too long. ¹⁷ According to the UN’s Research Institute for Social Development, “currently, Europe has the greatest percentage of its population aged 60 or over (24 percent) but rapid ageing will occur in other parts of the world as well, so that by 2050, all major areas of the world except Africa will have nearly a quarter or more of their populations aged 60 or over.” ¹⁸ Between 2015 and 2050, 66 percent of that growth will be in Asia, 13 percent in Africa, 11 percent in Latin America and the Caribbean, and the remaining 10 percent in other areas. ¹⁹

IT’S NOT JUST THAT THE workforce is dwindling in quantity. An issue of quality is also emerging as a further drag on global growth. Decades of underinvestment in quality education have churned out a working-age population ill-equipped to work or contribute effectively to the modern economy.

The global cohort of unemployed youth between the ages of eighteen and twenty-four has now surpassed 71 million. ²⁰ This represents a constant threat to political stability and hampers prospects for economic growth across the world. In the United Kingdom alone, approximately 826,000 people are deemed to be “not in education, employment, or training” (NEETs). These individuals are largely unskilled, unemployable, and increasingly disaffected.

Yet save for relatively small efforts such as the No Child Left Behind legislation, little has been done to address the concerns of A Nation at Risk. The Programme for International Student Assessment (PISA) is a test administered to fifteen-year-olds throughout the world to compare reading, science, math, and other skills. As of 2015, US students rank thirtieth among the thirty-five OECD members in math skills. ²¹ Without a dramatic course change, a generation of US students will enter the workplace unequipped to compete.

Behind these striking macro statistics are signs of inequality in educational outcomes—and these are disturbing in their implications. The global consulting firm McKinsey summed it up best: “The persistence of these educational achievement gaps imposes on the United States the economic equivalent of a permanent national recession.” The report goes on to note that narrowing the gap between black and Latino student performance and white student performance could have resulted in 2008 GDP rising by up to $525 billion, or 4 percent of GDP. Given demographic shifts, the magnitude of this impact will only grow. For the first time in America’s history, its next generation of workers will be less educated than its last.

In 1930, the British economist John Maynard Keynes predicted that economic growth and “technical improvements” would lead to a fifteen-hour workweek by 2030. Today, less than fifteen years from that date, technological innovations continue to increase productivity—and to increase the possibility that production may be able to take place without requiring human workers at all.

Technological advances are, of course, not unambiguously bad. They can have positive effects on economic growth and living standards. At a macro level, innovation transforms the way we communicate, travel, borrow and lend financial capital, and obtain health care and education. Automation ensures faster and better delivery of public goods and can yield considerable economic benefits. Moreover, at a micro level technology can help a company increase its revenue by enhancing delivery of goods and services to its customers. Technology can also help enhance the manner in which a business functions and survives, cutting its operating costs and thus increasing the company’s profitability.

Companies tend to assess technology with a profit lens, examining how innovations can help them create financial value. For example, according to Elena Kvochko at the World Economic Forum, “the Internet accounts for 3.4% of overall GDP in some economies. Most of this effect is driven by e-commerce—people advertising and selling goods online.” Findings from various countries confirm the positive contribution to GDP growth of Information and Communication Technologies (ICT). In Kvochko’s words, “a 10 percent increase in broadband penetration is associated with a 1.4 percent increase in GDP growth in emerging markets. In China, this number can reach 2.5 percent. The doubling of mobile data use caused by the increase in 3G connections boosts GDP per capita growth rate by 0.5 percent globally.” ²²

But for every gadget that enables us to process data and information faster and more cheaply, there is a burgeoning social and public policy challenge of rising unemployment that has dire consequences for growth. Over time and for the foreseeable future the downside risks of technology outweigh the benefits it brings.

There is a real concern that automation and technology will produce a jobless underclass across the global economy. For example, a 2013 report from Oxford Martin School estimates that a startling 47 percent of jobs in the United States are at risk from technological change. ²³ One sector of the US economy particularly vulnerable to automation, in the form of driverless vehicles, is the trucking sector (alone estimated to have 3.4–4.5 million drivers ²⁴ ), including long-haul truckers, bus drivers, and cab drivers. Some current estimates suggest that for the majority of states, trucking is the most common job (though others argue that retail and services make up a much larger share of the labor force). ²⁵ Losing those jobs to automation would be a massive blow to those states’ economies.

As technological capabilities expand and costs fall, robotics can be expected to gradually replace human workers across low-wage service occupations. Japan’s workforce already includes over a quarter million robots. And, as I have previously reported in How the West Was Lost, at some clinics and hospitals in the United States, robots are already at work. For a fraction of the cost of human wages, robots change linens, move surgical equipment, bring patients food, and remove garbage. What’s more, these low-wage service occupations are the ones that have seen the most US job growth over the past decades. If these trends continue, US employment may be severely affected by automation in the coming years.

China’s automation trajectory is similarly daunting in its implications. Reports have suggested that computerization puts more than three-quarters of jobs in China at “high risk” of automation. ²⁶ A report in a Financial Times report notes that “China had 260,000 industrial robots” in 2015, and quotes Rahul Chadha, an executive at Mirae: “Using the rule of thumb that one industrial robot replaces four to five workers, this suggests that robots have rendered more than one million people jobless.” ²⁷

Across the world, rising salaries and worker demands for better pensions, health care, and other conditions of labor will likely serve only to encourage greater and more rapid automation across all sectors of the economy—from agriculture and manufacturing to services and ultimately the R&D sector. In their 2015 report on automation, Carl Benedikt Frey and Michael Osborne report that “the three leading companies of Silicon Valley employed some 137,000 workers in 2014 with a combined market capitalisation of $1.09 trillion. By contrast, in 1990 the three largest companies in Detroit had a market capitalisation of $36 billion while collectively employing about 1.2 million workers.” ²⁸ Silicon Valley is generating multiples of value using a fraction of the number of human workers that Detroit has—a hub that was once a manufacturing engine of America’s progress.

At a potentially higher risk for disruption in the coming years than other sectors is the financial sector. The change in banking and how we conduct financial transactions will likely be seismic. Through robo advisors and electronic market-making, numerous workers are already being replaced in favor of automated platforms. British bank RBS shed 550 employees with the introduction of one automation of their fund management services. A 2016 report by Citigroup, the fourth biggest US bank, said that 40 to 50 percent of US and European bank workers could lose their jobs within ten years, mainly as a result of retail banking automation. ²⁹

The diminution of labor’s contribution to the economy is being felt worldwide. Loukas Karabarbounis and Brent Neiman of the Universities of Minnesota and Chicago put the global decline in labor’s share since the early 1980s at roughly 5 percentage points, so that labor is contributing just over half of national income on average. Their 2013 study finds that forty-two out of fifty-nine countries experienced a fall in the share of labor accruing to GDP. Moreover, much of the recent global decline in labor’s share of GDP “can be explained by the decrease in the relative price of investment goods,” which in turn is driven by advances in computer-driven technologies, leading companies to substitute labor for capital in production. ³⁰

Technologists themselves are not safe from technological disruption. In 2011, Nokia’s chief executive Stephen Elop warned that his staff were on a “burning platform” and that technology was eating the company alive. Three years later Nokia was subsumed into Microsoft. Other research finds that “the labor cost of performing a standardized computational task has fallen by at least 1.7 trillion fold between 1850 and 2006, with the bulk of this decline occurring in the last three decades.” ³¹ At a time when seventy-one million young adults under age twenty-five are unemployed worldwide, it is clear that for all of its improvements to efficiency, technology could markedly worsen the growth picture by capping job creation.

Even so, technology is hard for companies to resist, considering how much it promises to reduce the costs of doing business. Logistics, staffing, and routine tasks all promise to become cheaper and more efficient as they are automated. This is not to say that these jobs are not valid, nor is it an argument against technological advancement—it is simply a recognition that if technology is taking away jobs at a faster rate than it is creating them, this poses a problem for economic growth.

Automation and new digital technologies not only threaten job deterioration but also create new risks of cyber-terrorism and bioterrorism that could hamper economic growth. The Government Accountability Office reported that federal data were compromised in “information security incidents” 77,183 times in 2015, compared to 5,503 in 2006. ³² In June 2015, as a result of technological failure in the biometric data storage system used by the State Department, embassies were unable to issue visas for three weeks. This prevented farm laborers from entering the United States, resulting in significant crop losses (whose value is yet to be determined), and forced companies to increase costs as they were required to pay for lodging and food for stranded laborers. Clearly businesses face the risk of fraud and cyber security concerns, especially as automation proceeds; they must aggressively regulate, monitor, and pursue bad actors, be they states or rogue employees.

Historically, technology advances have on balance created economic growth and improved living standards. Human progress proceeded despite monumental shocks from the agricultural and industrial revolutions. For example, the diminution of the US agricultural sector was correlated with the dramatic improvements in living standards in the United States in the twentieth century. In the early 1900s approximately 50 percent of the US population was employed in some aspect of the agricultural sector. ³³ Over the century, technology and machine advancements replaced the agricultural labor workforce, and today less than 2 percent of Americans work in farming. Technology represented both a pull and a push factor—it may have pushed workers out of a shrinking sector, but it pulled workers into a higher-paying manufacturing sector. And as explained in Dani Rodrik’s “The Past, Present, and Future of Economic Growth,” as countries move from an agricultural economy to manufacturing and industrial products to services and then R&D, per capita incomes rise in tandem. ³⁴

With the benefit of hindsight, we now know that the majority of farming labor was deployed into manufacturing and industry jobs. But today, the policymakers charged with avoiding destabilizing levels of job losses in the economy are frustrated that they cannot predict which new sector can absorb millions of low-skilled workers who are displaced by automation. Nor can they reasonably assess how quickly technology’s full impact might make itself felt. Although the technology sector promises new jobs in biomedicine, data analytics, and coding, many of these opportunities are not yet tangible. Accurately understanding technology’s economic impact is complicated by significant measurement issues. Civil servants and businesses are not adequately capturing the economic impact of hardware, software, and digital technology in advance, leaving policymakers unable to assess how technology is fully affecting the modern global economy.

A question exists as to whether measurement of productivity is fundamentally flawed. US productivity growth has been measured at around 1.5 percent on average per year from 2005 to 2015 (for the sake of comparison, median global productivity growth averaged 1.9 percent yearly from 1950 to 1970). The recent rate of productivity is so low that it represents a slowdown from the previous decade, but that slowdown seems to defy high profits and company valuations within the technology sector over that period.

Some tech leaders believe that many of the promised benefits of recent technological advances, such as mobile robotics, will become evident in the near future. A 2007 study reports that “productivity follows investment in digital technologies with lags of between 5 and 15 years,” which could mean we will see a boost in productivity and economic growth in the future as autonomous vehicles and medical advancements are realized. ³⁵ A 2015 report by Citi research states, “The extensive type of growth that relies on adding more capital or workers in production—a process that is subject to diminishing returns—has come to an end.” ³⁶ The simple proposition here is that tech may indeed be slowing economic growth, but living standards could still improve as goods and services become cheaper to acquire. Ultimately, technological innovation offers positives and negatives. It could reduce the need for workers in both the manufacturing and service sectors in a way that creates a rising jobless class. However, technology could also drive down the costs of household consumption.

On the surface, a world of less work and cheaper goods and services certainly seems appealing. However, it would also create a number of new problems. In such a world, what would people actually do? Would they, as Keynes postulated, stop pursuing the accumulation of riches and contemplate God, culture, and immortality? Would they enjoy their newfound free time, or would they start wars?

For all the promise of technology, it undermines all the old assumptions about productivity and growth. And today and for the foreseeable future, the reality is that technology is putting workers, particularly the low-skilled, out of work. The most tangible effects of technology are joblessness and cost cutting rather than revenue generation and growth. And the fact that those most exposed to the threat of technology are at the lower-income ranks fuels another headwind that is undermining economic growth: income inequality.

A 2015 OXFAM REPORT PROCLAIMED that the richest 1 percent in the world owns nearly half of the world’s wealth, and their 2017 report announced that the eight richest people are worth more than the world’s poorest 50 percent. Behind the widening gap in wealth is an increase in income inequality between the richest and the poorest. As income inequality has increased (so that the incomes of the poor have substantially fallen behind those of the rich), it has become more difficult for the poor to increase their wealth. ³⁷ The key reason that income inequality has climbed to the top of the international policy agenda over the past decade is its ever increasing impact on economic growth. Once considered largely neutral in its effect, there are now good reasons to believe that income inequality is indeed a headwind.

According to the OECD the relationship between growing income inequality and slowing economic growth is one not just of correlation but of causation. The world’s leading industrialized economies have lost a combined 8.5 percent of GDP over the last twenty-five years because of worsening income inequality. By the OECD’s estimates, income inequality has accounted for a decline in economic growth on the order of approximately 6 percent for the United States and 9 percent for the United Kingdom and Norway.

To be clear, over the past few decades inequality between countries’ incomes has actually improved, as poorer economies have posted significant economic growth, converging toward average income levels in wealthier countries. However, within these countries, income inequality has worsened considerably. In the United States, for example, the average income of the top 1 percent is fourteen times higher than the average income of the rest of the population. ³⁸ In 1978, it was just ten times higher. Forbes annually lists the four hundred wealthiest people in the United States. According to the Institute for Policy Studies, “With a combined worth of US$2.34 trillion, the Forbes 400 own more wealth than the bottom 61 percent of the country combined, a staggering 194 million people.” This amounts to owning “more wealth than 36 million of these typical American families. That’s as many households in the United States that own cats.” ³⁹

Worsening income inequality has pernicious effects. Not to be conflated with the negative effects of outright declining wages, which lower living standards for the individual, the deleterious effects of widening income inequality are felt by a society as a whole. In particular, the fact that some in society are unable to escape economic hardship and poverty, face falling educational attainment, and feel left behind by fellow citizens who appear to be progressing economically leads to disaffection, mistrust in the system, loss of faith in leadership, and potential social and political instability. It is these aspects of worsening income inequality that hinder growth.

The income inequality trends identified by the OECD have significant implications for living standards and ultimately economic growth. Research from the University College of London, for example, postulates that there is a difference in life expectancy of twenty years between those born in central London near Oxford Circus and others born further out on the rail line. Newborns around Star Lane have a life expectancy of 75.3 years—a dramatic contrast to the 96.4 years projected for those near Oxford Circus. ⁴⁰ An Atlantic article found a similar disparity on a global basis, as rich men born in 1940 can expect to live ten years longer than poor men born the same year. ⁴¹

Meanwhile, there is also a real risk that income (and subsequently wealth) inequality can manifest as greater political inequality, even in a democratic system. According to the New York Times, just 158 families in the United States account for approximately 50 percent of the money fueling political campaigns. And with estimates that there are more than twenty lobbyists for every member of Congress, and campaign costs running into the multiple billions of dollars for a single presidential election, money remains central to how the United States conducts electoral politics. These vast amounts of money skew incentives and, as described by the Economist, can “add to the length and complexity of legislation, making it easier to smuggle and extract special privileges.” ⁴² Even at the international level, wealthier countries have a history of using their wealth to buy votes to secure and influence voting decisions. ⁴³

Despite the rising importance of income inequality, public policymakers continue to struggle to address it. There are at least three key issues that complicate the income inequality debate: first, that inequality appears to plague both capitalist and noncapitalist economies; second, that even within market capitalist countries, neither left-leaning tax-and-spend redistributive policies nor right-leaning low-tax policies have curtailed the trend of worsening inequality; and third, that policymakers do not agree whether to prioritize reducing absolute inequality or relative inequality. Each of these angles warrants consideration in turn.

Yet even within developed countries, the public policy strategy for confronting inequality is far from settled. In broad terms, left-leaning politicians tend to focus on absolute poverty levels, taking the view that society should have basic minimum living standards for all citizens. As such, they tend to prioritize redistributing income through (higher) tax-and-spend policies that are designed to reduce the gap in incomes and wealth. More generally, left-leaning interventions include raising minimum wages or cash transfers aimed at setting a basic income level in society. Finland, Spain, Canada, and the Netherlands have also adopted this approach of providing transfer payments to citizens. Meanwhile, more right-leaning policies recognize relative incomes in a society and are guided by the premise that society and income inequality can be reduced over time as long as the rich are incentivized to create jobs and invest in the economy. After all, they argue, a society’s wealthiest do, and should be encouraged to, invest and create opportunities that enhance the living standards of all in society, including the poor. Therefore, their supply-side policies include keeping tax rates low.

Yet social mobility is perhaps even more important. Social mobility has historically been key to improving income inequality, but over the past decades it too has worsened. For example in the United States, over the past thirty years the probability that someone born into the bottom quarter (25 percent) can make it to the top quarter has halved. Moreover, if born into the lowest 20 percent, you only have a 5 percent chance of making it into the top 20 percent without a college degree. Without addressing social mobility, resolving income inequality is impossible.

Globally, productivity has been on the decline over the past decade. Global labor productivity of 2.1 percent in 2014 was below the pre–financial crisis levels of 2.6 percent, and well below the average among emerging economies of 4.4 percent. ⁴⁴ And the declining productivity is affirmed across disaggregated data by country over time. As Foreign Affairs has reported, “in the 1960s and 1970s, the G-7 economies saw, on average, a 4.4 percent increase in output per hour worked every year.” In the two decades leading up to the financial crisis, it slumped to 1.8 percent, and by 2015, it had fallen to 0.4 percent. ⁴⁵ Meanwhile, productivity levels in developing economies remain considerably lower than in developed economies. Developed countries have seen marked declines in the last quarter century, while many rapidly developing countries have registered notable productivity gains by innovating and adopting new technologies. In fact, virtually all the gains in global productivity have come from China over the past decades. But even in the Chinese economy productivity has begun to stall—productivity growth in China has slowed to 7 percent in 2014 from an average of 9.5 percent from 2007 to 2012. ⁴⁶ Similarly, Brazil saw a dramatic decline in productivity growth at 0.3 percent in 2014, down from 1.8 percent in 2013; labor productivity growth in Russia weakened to 0.4 percent in 2014, down from 1.5 percent in 2013. This trend has defied expectations that emerging economies would experience an enormous uptick in productivity by simply absorbing and adopting the technologies and innovations of the industrialized West.

Productivity declined in virtually every sector in the United Kingdom in the aftermath of the 2008 financial crisis. Since the start of the Great Recession in early 2008, UK labor productivity growth has remained very low—15 percent below a precrisis trend. In the postwar period, UK labor productivity growth was averaging roughly 2 to 3 percent a year. ⁴⁷ The Financial Times concludes that “lawyers, accountants and management consultants lie at the heart of the UK’s productivity problem.” A quarter of the decline in productivity since 2008 can apparently be attributed to these “professional services.” Just four sectors—“professional services, telecommunications and computing, banking and finance and manufacturing”—account for the majority of the stagnation. ⁴⁸

Highlighting the importance of productivity, Bank of England chief economist Andy Haldane has said that the United Kingdom is twenty times richer than it was in 1850, and that 90 percent of its growth in wealth results from improved productivity. Yet, cognizant that UK productivity has been flatlining, he has also noted that as many as seventeen million adults possess math skills on par with those of a child in elementary school. Such a deficiency could cost the economy as much as £20 billion (US$30 billion) a year and could only be improved through a focus on training and skills. ⁴⁹

Reversing the productivity decline is central to resolving the economic malaise currently witnessed around the world, as well as to turning the stagnation story around. However, fixing the dramatic and persistent collapse in productivity is a puzzle for the economic profession, particularly as there seems to be disagreement as to whether productivity is actually in decline.

There are at least two bearish arguments for the position that the decline in productivity is real; two more sanguine, bullish arguments (mainly around measurement) state that productivity is not declining and may in fact be increasing. First, on the bearish side, analysts suggest that fundamental changes in the structure of developed economies, such as the evolution from manufacturing to services, are forcing productivity lower. The sheer number of people working in the service sector as opposed to manufacturing has risen considerably. Given that the service sector is the largest proportion of the US economy, the “mix-shift” problem—the shift of workers from manufacturing to services—is a notable factor. In essence, because advanced economies have moved from being predominantly manufacturing-based to services (a field that has yet to be fully disrupted by technology and in which there remain many more workers per unit of output) this shift is forcing productivity lower.

The service industry accounted for nearly 80 percent of US private-sector GDP, or $9.81 trillion in 2009. Service jobs accounted for 84 percent of US private-sector employment in 2010. The share of service jobs has grown steadily, from 64 percent (46.1 million jobs) in 1970 to 76 percent (85.77 million jobs) in the mid-1990s to 84 percent (112.12 million jobs) by 2010. Conversely, the manufacturing and agriculture economy shrunk from 33 percent of total employment in the postwar period to 12 percent in 2009, down to 8.8 percent in 2013. As of June 2015, 63.5 percent of total global wealth comes from the services sector. ⁵⁰ According to Adam Szirmai, a scholar of technology studies, “since the late 18th century, the manufacturing sector has been the main engine of growth”; however, as of 2009, the value added by the service sector “accounts for over 70 percent of GDP in advanced economies.” ⁵¹ This differs from emerging markets, in which agriculture (as well as manufacturing in larger, more advanced emerging countries, such as China) makes up the most sizable contributor to GDP.

Viewing productivity as a question of mathematics, where productivity equals output divided by workers, we see that today’s manufacturing sector has relatively few employees. As the denominator has shrunk, the productivity ratio has increased. In contrast, the service sector, which is yet to be fully affected by technology disruption, has a growing denominator. This large number of employees drags down productivity estimates. Even the simple act of going to a restaurant to enjoy a meal means the average guest will be met by a host, coat-check staff, and at least one server. This is not counting the manager, chefs, busboys, and others operating behind the scenes. Clearly, this makes for a far cry from the shop floor in a modern, largely automated factory. Not only is today’s manufacturing sector arguably more automated than the service sector, but the less productive service sector is a greater contributor to the economy, thereby dragging down productivity overall.

Gordon explains that periods of slow and rapid growth are linked to the timing of the three industrial revolutions: the first led by rail and steam; the second by electricity, petroleum, telecommunications, and sanitation; and the third by computers and mobile telephony. Gordon argues that the second revolution was the most important of the three and underpinned the rapid productivity growth between 1890 and 1972. He contends that productivity growth slowed for the next quarter century, before a brief revival from 1996 to 2004 fueled by digital technologies. ⁵²

Despite the persuasive evidence that productivity is falling, others put forward two bullish arguments, suggesting that productivity is not falling and could in fact rise. Both of these views tend to revolve around claims that productivity is being mismeasured in the first place. In particular, as we saw in Chapter 1, some argue that GDP measures do not adequately reflect gains in quality and quantity from technology that would be reflected in enhanced productivity.

One might look to the technology enhancements that have occurred across sectors that are not visible in GDP calculations. Many argue that technology has enhanced living standards without actually affecting GDP. For instance, Wikipedia, whose contributors are not paid, certainly raises productive output for its users. As a consequence, the numerator in productivity calculations is lower than it ought to be.

There is also a question of timing. Those who believe that output per unit worker is rising make the point that current GDP has a built-in time lag that ignores or at least does not fully appreciate the positive impact of technology. Much in the way that it would have taken industrial factories and, for that matter, society as a whole some time to adopt and absorb the scale and reach of the benefits of electricity, the global economy has yet to appropriately absorb the dollar-value benefits of such technological innovations as social media, which could be considerable. For now this means that the “bulls” believe that productivity numbers, and by extension GDP estimates, are artificially low.

CREATING AND MAINTAINING ECONOMIC GROWTH are the defining challenge of our time. But from crushing debt to misallocated capital, demographic shifts to rapid technological advancements, widening income inequality and falling productivity to natural resource scarcity with concomitant environmental degradation, growth faces headwinds of historic proportions. Until we set forth a sturdy and sustainable strategy for accelerating growth, we will be unable to address the most intractable problems of our world today, be they in health, education, climate change, or development.

Each headwind is a major challenge in itself; together, they threaten to unravel globalization, raising rates of poverty while reducing living standards—creating a global army of hundreds of millions of unemployed and underemployed people clamoring for government help. The severity and confluence of all these headwinds—in capital, labor, and total factor productivity—are unprecedented in their ferocity and potential deleterious impact on global economic growth. Overcoming them requires a farsighted approach that more efficiently allocates resources over a long-term horizon, rather than our current short-term approach to political decision making.

Instead, policymaking today is moving in the opposite direction—becoming ever more oriented toward the short-term. At a time of flatlining, lower-for-longer growth, public policy appears to be pushing us further toward economic instability.