Alan Greenspan writes extensively about the global economy in The Age of Turbulence.
He believes there are common dominators to economic success. One is a cultural desire for growth, which includes government integrity, the acceptance of a certain amount of income inequality, incentives to take risk and the willingness to let market forces determine supply and demand. Markets are the antithesis of government decision making. The fall of Russian communism showed the fallacy of central planning. The socialism of Western Europe and the populism of Latin America are lesser forms of substituting the wisdom of government for the marketplace. Western Europe (India and elsewhere) suffers from bureaucracies with extensive approval processes which slowdown change and bureaucrats who substitute their judgment for the market. Restrictive work rules imposed on employers drive up costs and reduce the incentive to take risk, resulting in lower growth and, perversely, higher unemployment.
A second factor in economic growth is education. It speaks for itself. A third is a young, or growing, population. Workers who save money (accumulate capital) and contribute to their heath and retirement plans aid economic growth. Non-workers, such as retirees, who consume these services, which have been promised to them by their government but have not been funded, place a strain on economic growth. As the ratio of workers to retirees shifts, due to the aging of the baby boomers and increases in longevity, the burden of these transfer payments on an economy/society increases.
The last determinate of economic prosperity is a strong rule of law, defined as a protection of property rights (and, by extension, individual rights). This is a major theme of Mr. Greenspan’s. Property rights include real estate, intellectual property, goods and, broadly, commercial transactions. A strong rule of law is not a dictatorship, in fact, it’s just the opposite. Individuals/companies will take risk, and invest for the future, if they can see a clear and consistent set of rules. As a corollary, risk premiums will be lower in this environment, meaning the cost of capital will be lower, promoting growth.
We can extrapolate from Mr. Greenspan’s thinking as to the best international areas for investment. So let’s go for an around the world tour. Western Europe has a strong rule of law but their bureaucracies, aging population, restrictive immigration which could otherwise offset an aging population, and expensive social services means their economic growth will be limited. Eastern Europe is on its way to a well developed rule of law and does not suffer from the problems of Western Europe (yet). It’s overcoming its Communist legacy and production costs are low.
Russia has inconsistently applied laws which vary with the whim of its rulers. It also has the Western European population demographics. A currency inflated by the high price of oil and gas exports is another limiting factor. However, abundant natural resources, an entrepreneurial spirit, and burgeoning consumer market are positives. Russia has great potential but equally great obstacles to overcome.
Japan has greater population problems than Western Europe in terms of age and immigration and a bureaucracy structured to prevent companies from failing, limiting imports, and preventing foreign companies from operating in Japan. Yes, it has a strong rule of law but it is very Japan-centric. Is it any wonder that the Japanese economy has been stagnant for the last 15 years? Mr. Greenspan says that it will no longer be the world’s second largest economy by 2030.
China is the global wildcard. Its growth has been impressive and it has moved towards a comprehensive rule of law. But a Western-style rule of law and the personal freedom which it, and economic growth, brings are in conflict with a ruling autocratic party. One or the other will have to give way at some point. Mr. Greenspan believes that China’s growth will continue, and although he doesn’t come out and say it, China will surpass Japan in GDP by 2030.
India has a strong rule of law but a bureaucracy which makes Western Europe’s look like a Ferrari. Its growth has been impressive but it hasn’t kept up with China due to severe infrastructure problems and cultural crosscurrents preventing its markets from freely functioning. Latin America is cursed with populism (take a look at Venezuela), Brazil being the possible exception. Severe income inequality, education and rule of law (government instability and corruption) problems abound.
Emerging economies, Mr. Greenspan cites Vietnam, are where the biggest money will be made. Of course, they carry great risk. Nonetheless it will be exciting to see new economic hotspots emerge as the world looks for low cost production areas and certain counties seize the opportunity. Lastly, the United States looks pretty good by comparison to the rest of the world, despite our problems. Mr. Greenspan predicts we’ll still be the biggest and the best in 2030, although a smaller part of a bigger global pie.
How do you invest globally? Stick with Mr. Greenspan and go with a strong rule of law. Invest in Europe, East over West and, if you can take more risk, invest in China and India. Constantly look for changes in law, or a shift in attitude towards a change, and watch for emerging gems.
