How Rich Countries Die

This is a brief overview of a book report on The Rise and Decline of Nations: Economic Growth, Stagflation, and Social Rigidities, by Mancur Olson at Philip Greenspun's Weblog. The full book review is fairly lengthy but well worth the read. Indeed the original book itself may have been better titled as "the Decline and Fall of Nations" as there seems little in it that is uplifting in the current situation, except perhaps a warning that many countries are going down a slippery slope towards permanently unproductive economies.

The main thesis is that Olson wants to separate productive and non-productive parts of the economy; something that traditional macroeconomics ignores. He sees government spending as largely unproductive. It does keep people employed but it is just a recycling of money taken from taxpayers and redistributed to activities that by their very nature do not yield a profit and hence do not contribute to economic growth and wealth.

The second attack is against the increased influence of special interest groups within developed economies. Olson sees both corporate lobbying and powerful trade unions as contributing to the decline of a nation's prosperity as they both seek to put their own interests above that of the nation. Surely, seeking a balance is what governments are there for, and yet once the lobbying becomes so ingrained it is almost impossible to find a politician untarnished by either corporate or worker support. The downward spiral of inefficiency and unproductiveness thereby continues as bigger and bigger government is need to monitor often conflicting market rules and regulations.

The book was written back in 1982 and Olson's thesis is that standard macroeconomic theory is basically useless in describing developed economies. Agreements between governments, companies and workers can work in rebuilding a country, as happened in Italy, Germany and Japan, but eventually such arrangements become negative in that they but the brakes on much needed changes demanded by new market conditions and new technologies. Just look at the US auto industry - both corporations and unions want to keep their cozy market and demand government bailouts rather than adapting to market changes ten years ago.

How does all this help an individual today? Well, the message is that if you wish to prosper then look for a new industry and a developing country. The mobility and flexibility of an economy unhampered by decades of nepotism may even be more important than the actual industry sector. Be flexible and mobile and smart!

One slightly depressing side issue is that Olson believes that people moaning about their political establishment should just ignore it and concentrate on earning more money. The special interest groups have significantly more funding than any individual, or even groups of individuals, and that the time wasted in seeking political solutions is better spent seeking personal economic solutions. Voting for change is an illusion - vote with your feet.

G20 Agree on Global Stimulus

The G20 meeting in London ended with a nine-page communique setting out a number of financial stimulus commitments to try and halt the global economy sliding into depression.

The headline figure most sources quote is $1.1 trillion, but this is on top of $5 trillion already agreed by individual countries. The extra $1.1tr will come from global institutions like the IMF and the World Bank. Looks like a bit of shuffling the cards with reserve-rich countries lending to those close to bankruptcy.

However, what the meeting refers to as trade financing is a pathetic $200 billion. So what is the rest of the money for? Plugging black holes in banks worldwide?

All of this, however, begs one huge question. This is yet again gambling the future on expected growth, whilst ignoring all the toxic "assets" - better known as liabilities - and how to deal with them.

Just the regulated derivatives markets (ignoring the OTC trades) are worth some $700 trillion. Even a small 10% loss would dwarf this whole global stimulus package. Where was the solution to this potential earthquake?

Stock markets rose on the news.

Global Trade Collapsing

In the financial frenzy to drive the stock markets up and out of oblivion some sobering data made a brief but unwelcome visit. Taking data from the last five months, as the credit crunch intensifies, the decline in US exports is equivalent to an annualized rate of 49%. The drop in imports is a mere 30%.

The pace of the decline is unprecedented in modern times, economists say. "We doubt even during the Great Depression that trade collapsed with such ferocity," said David Greenlaw, an economist for Morgan Stanley.

The Great Recession, as the IMF calls it, has severed a crucial link in the global economy. U.S. consumer spending has been the main engine of growth for the whole world, but that spending was based largely on phantom gains in asset prices that were inflated by that cheap money from abroad that has now been disrupted. As such inflated asset prices were repackaged and resold around the world the collective debt - and collective pain - have been spread far and wide. (Marketwatch)

Talk of the real economy with real products and saving to spend all sound like a really severe hangover. As one commenter noted,"China has surpassed the United States in a key measure of high tech competitiveness." The Georgia Institute of Technology's bi-annual "High-Tech Indicators" finds that China has risen to 82.8 (out of 100) whilst the USA now sits at 76.1. America peaked at 95.4 in 1999 and has drifted lower whereas China has soared from a lowly 22.5 in just 10 years. No wonder Hillary Clinton went begging to Beijing.

If the economic landscape is changing let us hope it does so with small tremors and not one mighty earthquake.