Stability and Growth

Stogy old economies, encumbered with high costs of living and plenty of social support systems, slammed by austerity programs, seem to be shuddering slowly to modest growth numbers while the infamous BRIC nations – Brazil, Russia, India and China – and their ilk are facing contractions in their exceptionally rapid growth numbers in the last few years. Why? Corruption, environmental disasters, changing demands from the citizenry are all factors as is lack of access to internationally-recognized market exchanges and transparent financial regulatory schema. Heavy polarization, the melding of wealth and political power, an unequal access to educational opportunities, and outright hordes of angry citizens – sometimes armed – add fuel to the stability fire. The International Monetary Fund labels such inequities as very significant growth disruptors.

Even within the successful Western nations, countries like Canada – with strong regulatory control over financial institutions and limitations on what they are permitted to do – have managed to avoid severe recessions and depressions entirely. The “cowboy way” in the United States, where market movement (volatility) makes traders rich, has escaped sufficient meaningful regulation and captured dozens of medium to large economic contractions along the road.

But these stogy countries have advanced educational systems – even if they have degraded of late – infrastructure that has evolved over the last century plus to support economic growth and there is sufficient historical experience with managing a productive economic engine that corporate wagon wheels rapidly find the ruts in the productivity road that they have driven down for many, many decades. These modern nations often house great universities, famous for turning out innovation and innovators. The culture supports work, jobs and productivity on a mass basis.

Overlooked by too many are the complex and highly-developed legal systems in Japan and the West that can challenge even the most powerful incumbents. Contrast the European or American legal systems with those in the BRIC countries. The BBC tells us that in the last 10 years, Russia has imprisoned about half a million middle and larger entrepreneurs for a host of charges which most agree are not legitimate. In China, any court decision can be overturned at the whim of high-ranking party officials. Bribes are commonplace all over the world (particularly in heavy growth, developing nations), and except for Russia (where connection to the Putin regime is determinative), the rich have little to fear from their local civilian courts.

“In the wake of global scandals involving kickbacks and accounting fraud, one unlikely country, India, is aiming to set a tone in overhauling its corporate oversight laws… [In August] the nation’s upper house of Parliament passed the Companies Bill, 2012, sweeping legislation meant to overhaul auditing, impose stiffer penalties for fraud and create more government oversight of businesses… India, a nation notoriously rife with graft and bribery, was partly motivated to pass the legislation in the wake of an accounting scandal that has been called India’s Enron. In 2009, B. Ramalinga Raju, the chairman of a prominent outsourcing company, Satyam Computer Services, confessed to overstating company assets and earnings by more than $1 billion, and then resigned. The fact that one company could defraud shareholders of such a large sum despite regular audits made painfully obvious the need for greater oversight in corporate India…

“Yet while hopes remain high that the bill will appeal to foreign investors, and kick-start India’s economic growth, nearly a decade of revisions has left a watered-down measure lacking structure. Much of the bill depends on new committees and rules that have yet to be drafted, so legal experts have doubts about its ability to police corporations.” New York Times (DealBook), August 14^th. Yeah, right, it’ll clean up fast… and I’m the Easter Bunny!

If you read some of the general negative criteria about barriers to growth noted above, you can see that the United States is beginning to develop some really bad habits – where 1% of the people own 42% of the wealth – that may eventually drag us into those columns of negative attributes that plague the “other” growth-nations. Our legal system seems to be holding it together, assuming that the Supreme Court stops tilting the playing field further in favor of the incumbent wealthy class. But in these other nations, it’s a whole lot worse, no matter the best intentions of many (but not all) of the local leadership.

Protests in Brazil over massive spending to draw in the World Cup and the Summer Olympics whiles masses of people still live in favelas – the infamous massive urban slums – and cannot afford the increases in things like food, public transportation, and healthcare. In Russia, it’s best to keep your head down and not succeed too much… unless you are really certain that the Putin regime loves you. China has lifted a billion people out of poverty but there is no doubt that the privileged lead very different lives from those around them, fighting necessary environment regulation of toxic polluters in which even high-ranking government officials have a financial stake. Infrastructure in India remains a horrible local joke (see the picture above).

“For emerging economies, analysts say that the current cooling of growth is taking some of the countries to a more sustainable pace of expansion after years of acceleration that some considered unhealthy. In China, the 14.2 percent expansion seen before the peak in 2007 is not likely to be reached again, though the expected growth of 7.5 percent next year is still impressive… ‘Even though it’s slowed down some, there is still a big opportunity,’ said Barry P. Bosworth, a China expert at the Brookings Institution.

“Brazil and India have deeper problems. India has not been hurt by falling commodity prices, but the economy has been constrained by corruption and inefficiency. The value of the Indian rupee fell recently to a record low against the dollar… In Brazil, many economists say the declining value of the country’s iron ore and soybeans has revealed that Brazil’s leaders failed to invest in infrastructure when the money was pouring in.”  New York Times, August 14^th. For us, the lessons need to be clear. Invest in that which makes you productive, fight trends that further polarize society and value legal transparency above all… or join the ranks of spoiled dreams and dashed hope.

I’m Peter Dekom, and learning lessons from the mistakes of other never has been a strong American practice.