The Road to Global ProsperityMichael MandelbaumFrom THE ROAD TO GLOBAL PROSPERITY by Michael Mandelbaum. 223 pages

The Top Priority in International AffairsEconomic growth isn’t dead. The recession and the euro crisis hit hard in the United Statesand Europe, but the emerging markets of Brazil, Russia, India and China, that is, the BRIC nations, grew. The global trend of economic growth from 1991 to 2008 took a break fora time but then continued, as economic expansion proved the most likely path for world markets. Prosperity must keep going – it governs the health and safety of the world’s seven billion people.Pursuit of wealth can be a cooperative and mutually beneficial endeavor. Power struggles end with winners and losers; economic expansion creates winners on all sides. The money generated by international trade boosts living standards, fosters political stability andcreates an incentive for adversaries to get along.The 21st century will be an era of relative peace and democratic capitalism. A new mindset of “war-aversion” avails; it’s better to trade and invest with your rivals than to make war. Weaponry advances have also raised the stakes of war. Advanced nations can easily kill many people and are less willing to do so. Yet war has not disappeared. Conflict in Congo claimed five million people in the 1990s. Because Congo matters little to the world economy, its war created no fiscal waves outside Central Africa. War would shock the economies of North America, Europe and Asia – and so has become rare. The newly emergent powers of Russia, India and China have less war-aversion than the West’s developed nations. Though they are less skittish about war, they remain reluctant to engage in it. China, for instance, would see a declaration of sovereignty by Taiwan as an act of war. Yet China is so intertwined in the global economy that it can’t afford a conflict that might disrupt commerce or invite sanctions from trading partners. Costs of war make invasions and fighting a poor investment, especially compared to the alternative of vibrant trade. As the United States emerged as the world’s policeman, spending by American consumers – not fighting by American soldiers – has proven the most powerful driver of global prosperity over the past seven decades.International trade is a force for good, fostering cooperation and discouraging war. Yet many governments still protect their economies from free trade. Protectionism, deeply embedded in 20th-century nationalism, remains a powerful force in global politics. Nations recognizethat globalism can be

economically disruptive. A country that enters world markets runs the risk that some of its citizens will lose their jobs because they can’t compete with those who produce similar goods and services elsewhere. Governments respond to this threat by creating barriers to foreign competitors, like high tariffs on imports. Political pressure also can thwart cross-border investments. For instance, in 2005 a state-run firm from China tried to buy Unocal, an American oil company. In 2006, Dubai Ports World sought to take over a company that managed several US ports. India and Brazil struggle with opening their borders to international trade.

The US Housing Bubble and the Euro CrashThe US housing bubble resembles a drinking binge. The reveler has a couple of drinks, then a couple more. As euphoria builds, the partier drinks until he collapses. The American housing market party’s driving force wasn’t alcohol, but cheap money and rising property values that fed individual decisions to borrow in order to buy real estate. As the bubble swelled, foreign capital flooded the US. As American consumption outpaced production and investment outran savings, more-frugal nations – like China, Japan and Germany – sent their surplus capital to the US.The housing crash is in the rearview mirror, but the US economy still suffers trouble spots. The US is the planet’s largest debtor, a position that’s unlikely to change. It must slash its federal budget deficit and wean its appetite for foreign fossil fuels. While the US spends too much, China spends too little. Its consumers save heavily because their nation lacks a social or retirement safety net. China has become the world’s manufacturer, but consumes less than it makes. Such imbalances provide a continued source of global economic tension.The US housing bubble led the world economy into the 2008 recession, but the US holds no monopoly on poor financial decisions. Consider the euro crisis: Europe created the euro to reduce its exchange-rate risk and allay currency friction resulting from European countries doing business with their neighbors. The new currency was supposed to foment European political unity and economic prosperity. It yielded the opposite effect. The model of the US was, in part, the idea behind the euro. If 50 states could share a currency, why couldn’t the European countries?This overlooked several key distinctions. Sovereign monetary policy facilitates responding to a recession. In the US, a common language and ease of movement across state borders acts as a pressure valve for unemployment. If unemployment spikes in Michigan and stays low in Texas, residents of Michigan can relocate to follow those Texan jobs. The federal government provides unemployment compensation to residents of both states. The euro’s major miscalculation was ignoring the reality that national borders and a currency area must go hand in hand. The euro plan’s weaknesses became clear after the Greek meltdown. The euro required member nations to have a deficit of less than 3% of GDP and total debt of no more than 60% of GDP. Greece lied about its numbers to meet the requirements. The euro bubble popped as southern European countries imported more than they exported.

In 2008 and 2009, the US government sprang into action to stop the damage from the mortgage meltdown. The euro zone lacked a central government and lender of last resort, and the public-sector rescue was slow to respond. The euro was meant to nurture unity, but in crisis, old divisions surfaced. Germans chafed at bailing out their profligate neighbors. Greeks and Spaniards balked at the imposition of austerity measures. The crisis and its political hangover leave the euro zone with an uncertain future. Keeping the euro zone intact has proven

painful and contentious, but breaking it up might be even more costly and difficult.

The BRICs: A Shaky Building BlockInvestors lavish attention on Brazil, Russia, India and China – the BRICs, as a Goldman Sachs economist named them in 2001. Their combined GDP quadrupled from 2001 to 2011. Dynamic and fast growing, these four nations offer a glimpse of the future global economy. As the developed world fell into recession – first the housing crash in the US, then the euro crisis in Europe – the BRICs posted impressive growth rates. For all their gaudy results, though, the BRICs face political turmoil and economic fault lines. They illustrate the promise and the problems of developing nations as a force in world commerce.

BrazilBrazil has long held the mantle of being the nation of the future. With its vibrant population and huge landmass, it has been poised for greatness. For decades, Brazil followed a strategy of populism. Its economy relied on “import-substituting industrialization,” as government protections for the steel, aluminum and auto sectors propped up homegrown industries by keeping out foreign competition. The government owned some companies, paying generous wages and establishing a costly pension system.Brazil borrowed and printed money – inflation soared, hitting 45% in the 1960s and 428% in the 1990s. In 1993 alone, inflation hit 2,708%. In the course of 20 years, Brazil issued four different currencies, hoping each new unit might keep prices in check. Brazil turned the corner in 1994, after Finance Minister Fernando Henrique Cardoso introduced the real. Reduced government spending, privatization of state-owned industries and lower tariffs accompanied the new currency. Prices stabilized, and Brazil elected Cardoso president in 1994 and 1998. Brazil’s newfound stability is miraculous, but its economic growth is the least impressive among the BRICs. From 1995 to 2006, Brazil grew a modest 2.25% a year. Brazil remains saddled with large public expenses – pensions make up 13% of GDP. Widespread poverty endures, but Brazil seems unwilling to invest in its weak education system.

RussiaBorrowing heavily after the collapse of the Soviet Union, Russia defaulted in 1998 on $70 billion in debt. That led to spending cuts and greater stability. Russia remains astonishingly corrupt. Bribes eat 20% of GDP, leaving little for public investment in roads, ports and schools. Russia’s crony capitalism only confirms who is in charge. Friends of Vladimir Putin receive lucrative contracts while the government punishes his opponents. Mikhail Khodorkovsky, owner of the oil company Yukos, faced politically motivated charges and lost his company during a decade in jail.Oil is Russia’s blessing and curse. Escalating oil prices created a “Potemkin economy” – a facade of prosperity masking a harsher reality. Soaring oil prices are akin to steroids for the Russian economy. The nation is a bulked-up “petro-state” that added 363,000 bureaucrats during Putin’s first two terms. Adopting a classic petro-state approach, Putin made Russia less democratic. Russia’s population continues to contract as low fertility cannot counteract high death rates.

IndiaIndia is another economic miracle that isn’t so miraculous. The numbers look great. From 1988 to 2007, India grew 6.3% a year, a rate that surged to 7.7% a

year from 2007 through 2011. The number of telephone subscribers soared from five million in 1991 to 960 million in 2012. A deeply flawed economy lies behind growth in GDP and communications. India is overburdened with agricultural workers, a “lopsided configuration” that defies the usual trend of workers leaving farms as an urbanized economy develops. India’s burgeoning service sector gained attention as technology companies and call centers set up shop. However, only a million of India’s 500 million employees work in information technology; the tech boom has done little to lift India’s masses of poor people from poverty. India’s rickety power grid remains deeply problematic. The country experienced a world-record blackout in July 2012, when power failures left 670 million people without electricity. Schools go wanting. Many villages have no teachers or only a part-time teacher.India’s literacy rate is 75%, well below China’s 92%. As manufacturing jobs become more sophisticated, they require basic literacy and numeracy; illiterate Indians cannot achieve positions that could raise their incomes. India’s socialist-leaning government often hinders economic activity. A huge, diverse nation, India features as many languages as the European Union and twice as many people. The government’s weak commitment to roads, schools, clean water and a reliable power grid undermine India’s vibrant economy.

ChinaChina is the most resounding success among the BRICs, with sustained annual growth of nearly 10% since the late 1970s. Hundreds of millions of Chinese people still subsist on $2 a day or less, but China’s economic revolution has already lifted half a billion people out of poverty. China’s rulers know that their authority relies on prosperity and therefore invest in public works, schools, roads, ports, airports and power plants. Unlike India, China successfully shifted farmworkers into low-wage manufacturing jobs.China has fault lines of its own. Demographics pose one challenge. China’s aging population means that retirees and children are on pace to outnumber workers. Developed nations grew wealthy before their populations flatlined. China is unique in reducing its population prior to enjoying widespread prosperity. Unlike Brazil, which is committed to pensions, China offers little in the way of a Western-style safety net. China must address this to ensure its long-term stability. Property rights are another problem area; individual ownership of real property and intellectual property remains murky. Individuals own urban apartments; the government owns the farmland. Firms split revenue with the government; their patents, trademarks and other rewards for entrepreneurial risk taking have no legal protection, which undermines innovation. China’s pollution poses huge health risks. Public dissent is rare, but mass protests have erupted over China’s environmental degradation.getabstractgetabstract

About the Authorgetabstract

getabstractMichael Mandelbaum, author of That Used to Be Us with Thomas Friedman, directs American Foreign Policy at The Johns Hopkins School of Advanced International Studies.