Epiphanies of the weekend

Having spent the weekend at an event organized by a major bank for its hyper-wealthy clients--don't get the wrong idea, I was just part of the entertainment--I came away with much greater awareness of two important dividing lines in the world economy today.

The first is between the entrepreneur and the financier. The super-rich get that way by one of two routes. They either inherit their wealth from their parents, or they build a business from scratch and then sell it off to a larger entity. In either case, the financiers play an important supporting role: they help maintain and grow the wealth generated by the family business and they arrange the deals that allow the multi-billion dollar takeovers.  But it was evident at the meeting that they get no respect from the entrepreneurs. Entrepreneurs view financiers as people with no understanding of business, who are as likely to ruin them as help them grow. We generate the jobs, the wealth, and take all the risk, they say. If we fail, no-one bails us out. Financiers, on the other hand...

The second dividing line today is between the pessimism that pervades the U.S. and Europe and the pervasive optimism of entrepreneurs from emerging (emerged?) nations.  The financial crisis that is still growing has left business people from the advanced nations in a very dark mood. Whether a recession is around the corner, or has already arrived, no-one in the first world thinks 2008 is going to be a good year. It is all shades of pessimism.

But if you talk to businessmen (alas they were all men) from India, Russia, China, Turkey or the Gulf States, you would hardly know that we have just experienced a credit market freeze-out in the West. They are all ho-hum about it. Yeah, we could shave a point or two off our growth estimates, they say, if the U.S. goes into a deep recession, but it's no big deal--and can you pass the wine please. Indians are saying we don't rely that much on exports anyhow; the Chinese are relying on their growing middle class; and others have their own stories.

Is this the famous "decoupling" at work? Will this be the beginning of a new era of the world economy, with several key developing countries, the BRICs and the N-11 (using the faddish terms that attach to them), gaining real ascendancy over their Western counterparts?

Probably not. But something interesting is going on.  

Comments

[Per Kurowski]

Rodrik “Is this the famous "decoupling" at work?”

Oh yes they can have been decoupled…though perhaps only from an old and tired locomotive!

Clearly as growth in emerging countries create internal demand in emerging countries they can have a lot of endogenous growth on their own; and share that growth with each other but, the current problems goes way beyond that of a recession in the US.

What we are seeing is a world wide lack of confidence in the general financial structure of the world and if this starts to reflect in a lack of confidence of our monetary system then, when push comes to shove, the emerging countries do not have it in them yet to take up the role as trustworthy backers of their respective currencies and this will also impact them.

In practical terms house owners in the US have lost a lot of value but, how much has the rest of the world lost on their dollar holdings?

[robertdfeinman]

A handful of entrepreneurs who are doing (relatively) well in emerging countries can be justifiably optimistic as to their own prospects, without this meaning that the overall picture is rosy.

Entrepreneurs are by their nature optimists, if they weren't they wouldn't take the risks, but this may also make them blind to negative factors.

Perhaps the decline in the US at present won't have a big impact on those focusing on their home markets, but the issues of resource shortages, inadequate infrastructure, rising wealth inequality and over population aren't going away either.

[Ed]

Let's take a look at the GDP growth at the BRICs:

Brazil:
2007 = 5%
2008 = say 4% (forecast)
Russia:
GDP growth above Brazil for both 2007 and 2008
India:
The same as Russia
China:
GDP growth way above Brazil, Russia and India for both 2007 and 2008.

The rich countries are growing at 2 to 3% maximum, way below BRICs. If this is not decoupling, what is it then?!

[Barkley Rosser]

Ed,

Gerschenkronian relative backwardness catchup.

Dani,

I am not acquainted with this "N-11." Exactly who are the 11 who constitute this group, please (or somebody else)?

[tebow]

N-11 = Bangladesh, Egypt, Indonesia, Iran, Korea, Mexico, Nigeria, Pakistan, Philippines, Turkey, & Vietnam

Coined by Goldman (see p. 7): http://www2.goldmansachs.com/hkchina/insight/research/pdf/BRICs_3_12-1-05.pdf

[Nurhisham Hussein]

Ed, just because there's a divergence in growth rates doesn't necessarily mean these economies are growing autonomously from advanced economies. China's case is the clearest example where, given the trade imbalance with the US, a slowdown in US growth will have an impact on China's economy. The same argument can be made to a lesser degree for the rest.

There's also the fallacy of directly comparing growth rates between economies of different sizes and at different degrees of development - it makes good press, but is essentially meaningless without context.

[Ed]

I believe this time the emerging economies are better prepared to withstand any external shock, such as a slowdown in the rich countries. Most, but not all, have flexible exchange rates now, which gives monetary policy much more power. Any external shock will be absorbed via the exchange rate channel (currency depreciation) without necessarily causing a sharp slowdown in growth, which is what happened during the 1980s and 1990s when the emerging economies operated under a fixed exchange rate paradigm. This is the reason of my optimism with the emerging economies this time. I am not saying a sharp slowdown in the rich world will not have any effect in the emerging countries. Of course it will, but it will be less severe than many of us think.

[Barkley Rosser]

tebow,

Thanks. Offhand, that seems to be a very weird and arbirtrary collection. The originator notes that perhaps only Mexico and (South) Korea are serious candidates to have any substantial impact on the world economy as a whole any time soon, and of course both of them just happen to already be members of the OECD, the "rich man's club" among nations.

[Barkley Rosser]

Of course, maybe Dani is partial to this N-11 list because it includes Turkey... :-).

[Dani Rodrik]

Actually, just as with the BRIC, no analytics has gone into determining the members of the list at all. Countries qualify just by virtue of population size...

[dan k]

One reason the BRIC acronym has stuck is that these are the countries (along with the GCC nations) that have been driving global currency reserve accumulation -- and as a consequence, propping up the dollar. See Brad Setser's ongoing discussion of this issue.

The N-11 category seems like a mishmash doomed for an early death. First off, the name is not that catchy. Second, it contains too many countries. And finally, the choices are just weird. South Korea's GDP is around 10x greater than half the other countries on the list. Mexico squeaks in, but South Africa does not? Compare and contrast Nigeria and Vietnam. Just odd.

[Barkley Rosser]

Dani,

OK, that clearly is an important factor, but not quite all. Just looked at the population list by ranking. After taking out G-8, most of these are among the next top tier in population. The oddity is Korea, which is substantially lower, at 27th (just ahead of South Africa). Presumably it is in because it is more ahead economically. But then we have Thailand, which is 19th in world population, and a good 20 million ahead of (South) Korea in numbers, as well as being a pretty rapidly growing economy. Some others that are ahead of Korea in population are much farther behind and thus presumably do not qualify, Congo and Ethiopia, to name two, with Burma also ahead of Korea in population. But, well, Nigeria makes the list.

Anyway, some oddities to this list. I am skeptical that it is going to catch on too widely or for very long.

[Barkley Rosser]

Oooops! I left out the BRICs. So, the N-11 could be described as the ten largest in population countries that are not BRICs or in the G-8, plus the Republic of Korea, for whatever that is worth.

[Ken]

"The super-rich get that way by one of two routes. They either inherit their wealth from their parents, or they build a business from scratch and then sell it off to a larger entity."

I thought this was an absurd statement, so looked up just the first 10 people in the Forbes 100. 8 out of the 10 (8 out of 10 Dani!!) did not inherit their money and all, if not most still own large fractions of the companies they started. If you're suggesting that the "larger entity" is the public during an IPO, then you're talking about a tautology. Disdaining someone because they made money by selling something is ridiculous. Guess what, that's the only way anyone makes money. You make money by selling a services: teaching and economics research.

Bill Gates
Warren Buffett
Carlos Slim Helú
Ingvar Kamprad
Lakshmi Mittal
Sheldon Adelson
Amancio Ortega
Li Ka-shing

You make it sound like a scam that people might inherit some money, or that people design something that is worth billions and cash in on it. Why is that? So what if people inherit their money? Isn't that one of the reasons people work so hard, so their kids don't have too? And don't we want people designing things that are worth billions of dollars? These inventions make our lives better!

[corvad]

Ken -- Carlos Slim didn't invent anything. He cashed in on Mexico's privatization sale.

I'd hazard to guess that although Bill Gates contribued mightily to technological innovation, he's made his billions by stifling it through monopolistic practices.

Warren Buffett? if you're a nassim nicholas taleb fan you might not be impressed. not everyone is tho.

[Per Kurowski]

Ken “Disdaining someone because they made money by selling something is ridiculous”

Absolutely! Exactly the same way that “Admiring someone just because they made money by selling something is ridiculous”.

[Ken]

Corvad and Per Kurowski,

I am not impressed by nor do I disdain these people. I essentially nothing them. The only reason I thought about them yesterday is because I get nervous when others say the things that Dani said because it is almost inevitably followed by some redistribution package in the name of "social justice"- a nothing term with no meaning whatsoever.

Taleb was right that the super rich are just lucky. They were/are good at the right things at the right time. But this isn't a problem to be corrected for, nor an occasion for celebration by other people. It's just the way it is.

Corvad,

You're taking an awfully broad view of monopolistic practices. As far as I know that main "monopolistic practice" Microsoft followed was offering IE free, which pissed off others trying to get in on the browser market because they couldn't compete with free. Anti-monopoly laws are there to protect consumers, not producers. Basically, people are upset that Microsoft was wildly successful, particularly in light of the fact that "better" OS's were available. What you're forgetting is PC's with Windows installed on them costs far less and work good enough for most people. So people were mainly pissed that other people had different tastes than they do. The lawsuits were motivated by jealousy and the inability to compete, not Microsoft's ability to keep them from bringing their product to market. Which, of course, they had no such power to do.

[corvad]

i definitely don't have a dog in that fight, I think Per's comment -- and your follow up -- describes the point I was suggesting -- although my personal consumption preference is definitely Mac-tastic.

but re: the "social justice" discourse doesn't mean anything to you, nor calls for redistribution, I can't dig it. "social justice" means an awful lot to plenty of other people: it shapes their personal and collective practices in a very real way, from Argentina's incredible ground-up worker's movements that made that country not only liveable after neoliberal redistribution policies redistributed that country's wealth -- and those worker's savings -- right on out of the country to the hundreds of thousands of people who attend and workshop at World Social Forum events each year.

basic suggestions:
1. even if one doesn't buy the substance of it, social justice discourse mobilizes non-state, non-rich actors (as well as private sector NGOs, para-state NGOs, and INGOs) to make competing claims and practices viz what the state does, what TNCs do, what IGOs do -- which is to constantly produce redistribute human, social, and economic capital in societies, one way or another. it's difficult to understand how anyone can describe that as nothing and meaningless.

And if the super-rich are just lucky, and very few in number, the corollary is that the super poor are just unlucky, and very many in number. I'm more of a zero-summer than most who read this site (meaning I believe that to a large degree the accumulation of wealth is driven significantly by practices of dispossession and displacement), but either way the question of redistribution becomes a moral and political, not an economic one: should those who are better off (especially those who are better off because of stupendous luck and timing) be compelled by the state to redistribute said wealth to those who are stupendously worse off (knowing that a sig % of it won't actually make it to those who are worse off because those who are better off use the state to maintain their position)?

or: should what "the state does" -- or any nodes for the concentration of political-economic power incl TNCs and governmental orgs -- reflect more perfectly the preferences of the many over the preferences of the few? in which case your preference for no redistribution is duly noted.

[corvad]

"And don't we want people designing things that are worth billions of dollars? These inventions make our lives better!"

(wistful thought occurs while respectfully disagreeing) if only use value and exchange value equated

[Ken]

Corvad,

To see the absurdity that economics is zero-sum please see this website: http://roslingsblogger.blogspot.com/

As to redistribution and my disdain for it, here it is. While it's too bad that there are poor people, while there are rich, that's the way it is. You make the assumption that government intervention will make things better. I require evidence that this is so. I generally think that government intervention almost always makes things worse. The facts tend to support my opinion. In this case, I think the ultimate end of state intervention will be to make everyone equally poor.

The unfortunate poor is not a reason to prevent others from becoming rich. And it certainly doesn't make theft okay. Just because someone has alot of something doesn't mean it's okay to steal, even if it's just a little. Despite what you might think property rights are incredibly important to a peaceful society.

Look at the countries that have received the most aid from first world nations. They not only remain terrible places, but most have actually gotten worse. Look at the dramatic improvements in American cities when welfare was finally reformed, readjusting the incentives so people will actually work to make their own lives better instead of going to the voting polls with their hands out.

This is because you have to figure out how to make your own life better. However cruel that may seem to you, you don't make someone else's life better by giving them something, you make it better by making them earn it.

And you can respectfully disagree with "wistful thought", but you would be wrong... again. Computers, iPods, drugs, cars, airplanes, lean manufacturing, Wal-Mart, credit cards, etc. All of them billion dollar inventions. All of them dramatically improve our lives.

You really are kidding yourself. And I'm not really sure why I'm responding to you since I'm sure you think what I'm writing is pure bunk. But what the hay. Someone needs to enlighten you.

[Ken]

Addendum:

At the website http://roslingsblogger.blogspot.com/
watch the videos from June 18, particularly the second one.

[corvad]

Ken -- I appreciate your pedagogical sincerity, and I suppose my language might have led to your incredulity. "more of a zero summer" doesn't mean zero summer, in my case.

I'd suggest that our differing points of view reflect fairly different value systems. Surely the commodities you mention do provide use value, a great deal of it, though unevenly in a global context. I suggest that their use value is relatively smaller, in many cases, than their exchange value. Take cars. Transportation systems that are overwhelmingly based on cars lead to relatively high preventable death mortality rates, through accidents and for example drunk-driving. in addition, innovations upon which automobile industry profits are based are partially the result of producing new models and selling them in markets with high amounts of discretionary income or, in the case of Venezuela, heavily subsidized gas prices -- whereas the innovations that could improve the global public good -- such as better mileage rates, reducing emissions -- aren't pursued because they don't lead to higher profits. Alternatively, excellent public transportation systems could move especially low income workers around in a much more efficient, cheaper fashion, benefiting businesses in the form of greater access to labor, therefore lower wages: see the LA metropolitan area for an example.

and with respect to pharmaceutical industries, the development of health products that lead to higher profits leads means that there is an increasing opportunity cost in terms of producing low cost, life-saving technology etc and preventative medicine.

which is to say that I follow the "it depends" response to any broad characterization of what makes the world a better place and how, and I don't like to dismiss other people's value systems, whether I find them compelling or not.

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