Archives for February 2012

The New World Order: G7 and E7 Nations.

There has been a profound change in the world’s progress as we have known it up to recently; capitalism’s geography is changing. In recent years, the average economic growth rates gap between the big emerging countries versus the big developed ones has been both substantial and consistent; that has already been going on for a considerable number of years, overwhelmingly favoring the largest emerging nations. The relative economic and political weight of the E7 economies has been the net result, said weight has been progressively increasing compared to the G7 countries’ weight.

Source: Computations based on GLOBALIZATION, Opportunities and Implications, The ABCs to a Global Social Revolution, Martin Marmolejo, Section 5, page 567-575.

The previous table shows a most interesting comparison between those two groups of nations: the G7 and the E7. The figures shown in the table are 2010 statistics. There are several outstanding points which are very important to bear in mind:

  • The G7 nations’ total output was approximately 33% larger than the E7’s during 2010. That gap was 44% the year before. During 2011, that gap was still reduced further, to less than 30%; we’ll know that for sure later in the year when official 2011 figures are released.

  • During 2011, there also must have occurred a couple of momentous displacements among the top-eight nations of the world in economic output: a) India overtook Japan as the world’s third-largest economy. b) Likewise, Brazil and the UK traded places. Brazil started the year as #8, ending up as #7.

  • During the previous year, 2010, a couple of displacements took place among the top-eight nations: a) Russia displaced the UK from 6th standing. b) Brazil displaced France from the 8th position.

Most of the G7 countries have yet to successfully overcome major long-term structural issues: debt, deficits, deleveraging and the accompanying slow-growth. The E7 nations, in contrast, are  growing at a very healthy and substantially higher rate of growth than the E7’s countries, they currently have very low debt levels, and also low and manageable budget deficits. As a result, to different degrees, the E7 nations are very much on a speedy and consistent catching-up trail with their developed brethren. There still remains a gigantic per capita output gap to be filled, before the E7 countries can be close enough to a developed nation status; it will take a few decades for that gap to be completely filled. On a volume basis, however, that gap is not substantial, and is getting smaller by the day, as we have already seen.

We are living in a very dynamic world. What we have witnessed in the past few years is a harbinger of things to come. It does not have to be a traumatic repositioning of economic and political power. It is of utmost importance, however, to understand what is going on and why in order to be better prepared for new opportunities and risks, as they emerge.

Austria, Netherlands and UK offer the world a great and very constructive testimonial of former world-leading-nations that have transitioned with class and dignity from that status to a new one of highly respected developed nations of a second tier nature. Indeed, they are three role model nations that can teach the world a lot in that particular aspect so critical for the world’s well-being.

Why are most of the world’s nations socially and economically underdeveloped?

Undeniably the most important question within the realm of social sciences as well as in the economical standpoint. How to account for the abysmal performance gap that separates the developed nations from the underdeveloped ones?  Before going forward with this, let’s keep in mind that, during 2010, at the very top of the pyramid, a little less than 13% of the world’s population generated 46% ($34.29 trillion) of the world’s total output. Whereas, at the very bottom of the same pyramid, a little less than 26.5% of the world’s population only generated 3% ($2.236 trillion) of the world’s output! In between those extremes lies the majority of humanity ($38.014 trillion), most of it tilted towards the lower part of the pyramid.

There have been many attempts of explaining this question and understanding the major reasons behind it. Most of them are very agreeable. From my personal perspective, there is a fundamental element missing: simplicity. Very frequently, simplicity is the key which unlocks the most profound and complex questions, and yet we insist on making it difficult for ourselves to find the most simplest of answers!

The major reason behind the huge gap which separates the developed nations from the underdeveloped ones is a lack of a true understanding of the nature of things, in the lagging countries. In short, a lack of proper understanding (and  the corresponding implementation) of two fundamental philosophical principles:

  • Cause and effect.
  • Cost/benefit relationship.

Those two principles are very closely intertwined in every day situations, at any level, in most circumstances in life. This particular analysis is no exception.

First of all, social and economic underdevelopment is a consequence, an effect due to a well known cause. The short, obvious answer is that underdevelopment is the result of noticeable lack of appropriate organization and management in the lagging societies. As well as the lack of proper social and political leadership, another fundamental cause; a different side of the same coin.

Secondly, underdevelopment is the result of a marked lack of a proper understanding of the cost/benefit relationship. If that relationship were more appropriately practiced and understood, the majority of the underdeveloped world would swiftly move in the right direction, closing the gap with the developed nations in an accelerated manner.

Very fortunately, there are a few, quite commendable countries that indeed are closing the gap that separates them from developed nation status, at a vigorous and consistent way. Currently, among the most outstanding cases are: China, Czech Republic, Slovakia, Estonia, Poland, Croatia, Lithuania, Latvia, and Chile. Along with these countries, there are others on the tracks to development such as: India, Brazil, Russia, Mexico, Indonesia, Turkey, Kazakhstan, Trinidad and Tobago, Gabon, Mauritius, and Botswana. Finally, on the-almost-there-countries category, Israel, Slovenia and New Zealand have done a tremendous job!

China has been, rightly so, making plenty of headlines concerning its astounding rate of growth. China’s case is very particular due to a virtuously rare combination: huge population mass -the largest on Earth in a single nation- combined with an astounding economic growth rate. There are very few nations that have been growing at around 10% a year for the past three decades, China is one of them. They have found a near-perfect way to lever their poverty, making a constructive utilization of their large population mass.

Other than China, (being still a very poor country on a per capita basis) the rest of the world is either growing at a dismal pace or, in the best of cases, growing at a pace significantly below its true growth potential. In all cases, lagging countries are lagging the developed nation status by a factor of 5.8 times# (the 2010 weighted average). That is, the average lagging country will need to grow its output by about an additional 5.8 times before being able to get to the bottom of the range of a developed nation standard of living. Since the total 2010 output of the lagging countries was $40.25 trillion (the complement of the 46% aggregate of the developed nations’), the relinquished annual output amounts to a staggering $233.45 trillion, over three times the total current world output!. That is the opportunity cost of the current state of affairs. That humongous gap cannot be filled overnight, even if everything that has to be done took place right away. That gap must be closed in several decades. The beauty of it is that, in so doing, the average annual growth rate of the whole world would be increased by several points, not less than 2-3%, on many decades to come, while the catching-up materializes, depending on how many countries participate in this colossal undertaking.

It is beyond the reach of this post to get deeper into such a fascinating and promising, yet disturbing subject. In GLOBALIZATION, my book, I delve deeper into this analysis, reaching a self-sustainable solution to this most pressing problem confronting mankind.

SOURCE: Computations based on GLOBALIZATION, Opportunities and Implications, The ABCs of the Global Social Revolution, Martin Marmolejo, Appendix VI, page 693.

Kazakhstan and the Former Soviet Republics

The world offers an almost unlimited supply of very interesting countries to analyze and learn from. That’s one of the most useful and promising aspects of globalization. One of those very attractive cases is Kazakhstan, a relatively unknown Central Asia republic with 15.5 million inhabitants, and the world’s largest land-locked country –the world’s ninth largest, overall– with a territory slightly larger than Western Europe’s. Kazakhstan was one of the 24 countries that emerged as an independent nation from the Soviet system implosion in 1990–1991.

Unquestionably, the most interesting aspect of Kazakhstan’s contemporary history is its relative good economic performance, within a relatively stable political local environment. Kazakhstan is the most affluent Muslim country in Central Asia. Like the popular saying goes, “Kazakhstan is a good house in a terrible neighborhood”. Although Kazakhstan is far from being at the forefront in socioeconomic development among its former Soviet brethren –like Slovenia, Czech Republic, Slovakia, Poland, Estonia, Croatia and Lithuania–, whose performance, on the average, exceeds that of Russia’s, it is not that far behind from the latter. Most unfortunately, the remaining 16 former Soviet republics’ socioeconomic performance is very poor, some of them indeed deplorable. Among the former Soviet republics, Hungary could have been classified as a successful case, until recently; however, given its ongoing monumental debt crisis, it is left apart. Among those 16 lagging, former Soviet countries are Kyrgyzstan, Uzbekistan, and Turkmenistan, three neighbors of Kazakhstan.

The current and only president Kazakhstan has had during the last 20 years as an independent, post-Soviet nation is Nursultan Nazarbayev, its former communist-era leader. To a different degree, Nazarbayev has been following some of Deng Xiaoping’s transformation footsteps. The major similarity in both cases is the commitment to get away from the centrally-planned economy model.

Kazakhstan’s vast oil and gas reserves make it an energy powerhouse, the major pillar of its economy. It has been making significant progress toward developing a market economy, becoming one of the first former Soviet country to receive an investment-grade credit rating, in September 2002. Kazakhstan established, since January 2001, a sovereign oil fund, modeled after Norway’s StatOil experience, currently worth over US$20 billion; it is  funded from oil, gas, and other extractive industries taxes, royalty payments, and signing bonuses by joint venture partners.

Kazakhstan has, since 1998, an ambitious private pension program in place. Vanguard tax reforms have been adopted since the 1990s, lowering the tax burden across the board. It has also embarked itself on an ambitious diversification program, aimed at developing strategic sectors like telecommunications, transport, pharmaceuticals, petrochemicals and food processing.

During 2011, Kazakhstan had a solid economic performance: both the budget deficit and the government debt level, as a percentage of GDP –2.3% and 16%– are low and very low, respectively. The inflation rate, is still at an unacceptable level –8.3%, although it seems not to represent any immediate threat. The economy approximately grew by 6.5% during 2011.

Kazakhstan may have a very bright future ahead, provided that profound structural reforms continue to materialize. It is very encouraging to see the smart government policies this Central nation has taken since becoming independent from the Soviet Union. Kazakhstan’s government has been remarkable in overcoming its communist origins, and having chosen an increasingly pro-market orientation.  Although, in that regard is seriously lagging most of its European former Soviet brethren, so far it is the only viable former Soviet country in Asia. In the political side, there is much to be done still, towards a more open, democratic, transparent, accountable and equitable society. A solid economic background, however, seems to be an ideal springboard for that utmost objective. Kazakhstan is, by and large, the most prosperous of the Central Asian countries, compared to everyone, not only to the former communist countries. It seems to have the momentum in place for an adequate transition to a developed economy status in the decades ahead.

What do Singapore and Congo (DRC) have in common?

At first glance, not much.

Singapore is a tiny nation, both population and territory wise, whereas Congo is a large one, in both accounts. Singapore is deprived of many of the most basic natural resources –it doesn’t even have enough supply of drinking water, not to mention any oil or minerals in its tiny territory. Congo, in contrast, has been blessed with one of the biggest mineral reserves on Earth, oil, and is also the better endowed African country in water supply.

The table below shows some very relevant information that captures a great deal of what is behind this couple of profoundly contrasting nations.

The comparison, as it can be seen, is a most dramatic one. Congo is about 15 times more populated than Singapore, in a territory 3,364 times larger. Notwithstanding that, Singaporean society managed to produce 12.6 times more output in a year (2010), and to export almost 42.9 times more than Congo. As a result of all that, output per person during 2010 was 191.3 larger in Singapore than in Congo. The comparison is indeed a most brutal one. Precisely for that reason I chose this real life case to exemplify the huge disparities and opportunities that lie in front of us, mankind. In fact, this is about the most extreme comparison of its kind to be found in the world. Unfortunately, there are tens of these real, most sorrowful stories, involving about ⅔ of mankind. Luckily, the other side of the coin shows a universe of potential, and opportunity, ahead for everybody, the unfortunate citizens of those failed nations, and the rest of the world, if this humongous drama is appropriately approached and dealt with.

How, in the world, can something like this happen? The answer, as complex as it may seem, is actually very simple: it has to do with cause/effect, the most basic of all philosophical principles. In its simplest approach, the only major fundamental difference between this couple of very contrasting nations is leadership and management (or lack thereof). The analysis can and must go much deeper than what we have already done here. GLOBALIZATION, the book, does just that, and much more, since it goes well beyond the usual analysis done elsewhere. Furthermore, it provides a specific workable, self-sustainable solution to this most painful humanitarian, social and economic paradox.

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