Marvin Zonis, Professor Graduate School of Business The University of Chicago Getting to the Future: The Principal Drivers of the Global Economy.

Marvin Zonis, ProfessorGraduate School of BusinessThe University of Chicago

Getting to the Future:

The Principal Drivers of the Global Economy

Marvin Zonis + Associates, Inc.International Risk Consultantswww.mza-inc.com

2

Globalization Withering Away of the State Technology Demography – Human Capital Failed States Economic Growth

The Principal Drivers of the Global Economy


3

Globalization

“As a result of very rapid increases in telecommunications and computer-based technologies and products, a dramatic expansion in cross-border financial flows and within countries has emerged. The pace has become truly remarkable. These technology-based developments have so expanded the breadth and depth of markets that governments, even reluctant ones, increasingly have felt they have had little alternative but to deregulate and free up internal credit and financial markets.”

Alan Greenspan, keynote address at the Cato Institute's 15th Annual Monetary Conference, October 14, 1997.

An increasingly interconnected world:


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Globalization

“For several major industrialized countries, including the U.S., foreign trade—exports plus imports—has only recently surpassed the levels achieved in the 19th century. Capital flows are even less integrated. Current capital flows are still only about three-quarters of the levels achieved in the 1890s.”

Steve H. Hanke, Johns Hopkins University

economist

Globalization is not a new story:


5

GlobalizationForeign Trade as % of GDP:

Source: Forbes, August 24, 1998


6

March 24th, 1999:

The UK's highest court upholds Chileanex-President Augusto Pinochet's arrest

NATO strikes against Serbian targets in Yugoslavia begin

The Withering Away of the State


7

Assault on state sovereignty from above – supranational organizations:

NATO

EU

WTO

IMF



8

Assault on state sovereignty from below – regionalism:

Quebec and Canada

The Walloon and Flemish separatists and Belgium

Kurds and Turkey

East Timor and Indonesia

Corsica and France

Basques and Spain



9

Global inequality is widening – I:

“Some 3 billion people, half of the world's

population live on the margin of subsistence, and the gap between the average incomes of the richest and poorest countries has widened to 70:1.”

– Secretary-General Kofi Annan in a message to the International Conference on Development, June 24, 1999

Global Inequality


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Global inequality is widening – II:

“If we do not have the capacity to deal with social emergencies, if we do not have longer-term plans for solid institutions, if we do not have greater equity and social justice, there will be no political stability. And without political stability, no amount of money will put together packages which will give us financial stability."

- James Wolfensohn, President, The World Bank Group, to the IMF-World Bank Meeting in Washington, 1997

Global Inequality


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320.3

305.4

304.1

289.8

283

234.1

211.5

190.1

178.6

140

138.2

137.3

124.8

98.7

95.7

Iceland

Finland

Norway

Sweden

US

Australia

Canada

New Zealand

Denmark

Singapore

Switzerland

United Kindom

Netherlands

Hong Kong

Israel

Internet users per 1000 people (1998):

Technology and the Digital Economy


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Registered hosts on the Internet:

Source: Matrix information and Directory Services

Technology and the Digital Economy


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1950 1998 2050World Total 23.5 26.1 37.8More developed regions 28.6 36.8 45.6Less developed regions 21.3 23.9 36.7Africa 18.7 18.3 30.7Asia 21.9 25.6 39.3Europe 29.2 37.1 47.4Latin America and the Caribbean 20.1 23.9 37.8Northern America 29.8 35.2 42.1Oceania 27.9 30.7 39.3

Median age by major area, 1950, 1998 and 2050 (in years)

Source: UN Population Division

Human Capital – Changing Demographics


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0.0

5.0

10.0

15.0

20.0

25.0

30.0

35.0

40.0

45.0

50.0

UnitedStates

China Japan Germany India France UnitedKingdom

Italy Brazil Mexico

1985 2000 2015

Median Age 1985, 2000 and 2015

Source: UN Population Division

Human Capital – Rise in Median Age


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0.0

0.5

1.0

1.5

2.0

2.5

3.0

3.5

4.0

4.5

5.0

UnitedStates

China Japan Germany India France UnitedKingdom

Italy Brazil Mexico

1985 2000 2015

Fertility rates 1985, 2000 and 2015 (births per woman)

Source: World Bank and US Census Bureau

Human Capital – Decline in Fertility Rates


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“According to current projections, in 2030 every third person in the member countries of the Organisation for Economic Cooperation and Development will be over age 60.”

– UN, Division for Social Policy and Development

Human Capital – Aging Population


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“Today, the ratio of working taxpayers to nonworking pensioners in the developed world is around 3 to 1. By 2030, absent reform, this ratio will fall to 1.5 to 1 - and in some of the fastest aging countries, such as Germany and Italy, it will drop all the way to 1 to 1 or even lower. The typical working couple will thus be required to fund the full cash pension and health-care needs of at least one anonymous retiree.”

– Former U.S. Commerce Secretary Peter G.

Peterson

Human Capital – Aging Population


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Consequences of Global Aging:

Change in consumption patterns

Changes to pension systems

Huge infrastructure for young and rapidly growing populations

Human Capital – Global Aging


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What Are the Emerging Markets?

11.68.68.68.58.38.3

7.87.77.57.47.47.27

6.76.36.36.36.265.95.85.75.65.55.4

0 5 10 15

ChinaMalaysiaVietnam

SingaporeChile

LebanonLesotho

SudanIndonesiaThailandUganda

Korea, Rep.Ireland

Lao PDRJordan

MyanmarSyrian Arab Republic

PeruIndia

OmanIsrael

Papua New GuineaEl Salvador

CambodiaArgentina

5.35.35.25.15.1554.94.84.74.64.54.54.44.34.34.24.24.24.14.14.14.14.1444

0 5 10 15

Hong Kong, ChinaSri Lanka

EritreaDominican

NepalGuinea

MauritiusMozambique

PanamaBangladesh

ChadBenin

Botsw anaColombiaEthiopiaTunisiaGhana

MauritaniaPakistan

BoliviaGuatemalaNicaragua

PolandTurkey

Egypt, Arab Rep.Iran, Islamic Rep.

Uruguay

High Growth –• AVERAGE GDP GROWTH ABOVE 4 PERCENT PER YEAR, 1987-

1997:


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3.8

3.8

3.7

3.6

3.6

3.4

3.4

3.3

3.3

3.3

3.3

3.2

3.1

3.1

3

2.8

2.7

2.5

0 1 2 3 4

Costa Rica

Namibia

Yemen, Rep.

Malaw i

Zimbabw e

Brazil

Guinea-Bissau

Burkina Faso

Honduras

Mali

Philippines

Gabon

Ecuador

Paraguay

Cote d'Ivoire

Nigeria

Tanzania

Senegal

2.2

2.2

2.2

2.1

1.9

1.9

1.8

1.7

1.6

1.5

1.5

1.4

1.4

1.2

1

0 1 2 3 4

Gambia

Mexico

Venezuela

Kenya

Morocco

Togo

AlbaniaSaudiArabia

Greece

NigerSouthAfrica

Belgium

SloveniaCen.

AfricanZambia

Steady Growth –• AVERAGE GDP GROWTH BETWEEN 1 AND 4 PERCENT PER

YEAR, 1987-1997:


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0.9

0.8

0.7

0.6

0.4

-0.1

-0.2

-0.2

-0.3

-0.6

-0.8

-1

-1.2

-2.4

-2.5

-3.3

-3.6

-3.8

-4.4

-5 -4 -3 -2 -1 0 1 2

Madagascar

Algeria

Congo, Rep.

Slovak Republic

Jamaica

Cameroon

Czech Republic

Hungary

Romania

Mongolia

Macedonia, FYR

Croatia

Angola

Uzbekistan

Haiti

Bulgaria

Burundi

Estonia

Sierra Leone

-5.7

-6

-6.1

-7.1

-7.7

-7.9

-8.5

-9.5

-9.6

-10.3

-13.1

-14.1

-15.1

-16.3

-16.4

-20 -15 -10 -5 0

Rw anda

Congo, Dem. Rep.

Belarus

Lithuania

Russian Federation

Kazakhstan

Latvia

Kyrgyz Republic

Turkmenistan

Armenia

Ukraine

Moldova

Azerbaijan

Georgia

Tajikistan

Growth??• AVERAGE GDP GROWTH BELOW 1 PERCENT PER YEAR, 1987-

1997:


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What are the Emerging Markets? The losers:

• Countries whose average annual population growth is above their Average Annual Change in GDP (1987-1997):

(20.00) (15.00) (10.00) (5.00) 0.00

TajikistanGeorgiaAzerbaijanMoldovaUkraineTurkmenistanArmeniaKyrgyz RepublicCongo, Dem. Rep.LatviaRussian FederationRw andaLithuaniaSierra LeoneBelarusBurundiUzbekistanHaitiAngolaEstoniaMongoliaCameroonBulgaria

(20.00) (15.00) (10.00) (5.00) 0.00

Saudi ArabiaCongo, Rep.MadagascarZambiaNigerGambiaAlgeriaTogoCroatiaCentral AfricanKenyaMacedonia,South AfricaJamaicaTanzaniaYemen, Rep.RomaniaVenezuelaCzech RepublicSenegalNigeriaMorocco


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Sources: OECD,UN, Euromonitor

Leading Growth Countries Since 1950:

Rank CountryGDP Growth 1950-90 (%) Rank Country

GDP Growth 1950-90 (%)

1 Oman 3677 11 Thailand 15402 Taiwan 3185 12 Japan 14603 Botswana 3142 13 Libya 14514 Macau 3135 14 Israel 14145 Andorra 2797 15 Jordan 12256 Hong Kong 2504 16 French Polynesia 11177 South Korea 2324 17 Maldives 10568 U. A. E. 2156 18 China 9789 Singapore 1799 19 Swaziland 975

10 Saudi Arabia 1577 20 Malta 971


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What Are the Emerging Markets? Failed States:

• Symptoms of failed states – low GDP per capita and low economic growth:

Country

GDP Per Head of Population (US$)

Real Annual GDP Growth, as percentage Change on Previous Year Country


Real Annual GDP Growth, as percentage Change on Previous Year Country


Real Annual GDP Growth, as percentage Change on Previous Year

Somalia 100 0 Guinea-Bissau 325 4 Ukraine 720 -1Ethiopia 123 4.5 Vietnam 338 3.5 Korea, D.P.R. 745 -7Congo, Dem. Rep. 161 0 Togo 340 4.5 Angola 766 1Niger 180 4 Liberia 344 2 Mongolia 858 3Mali 244 5 Pakistan 418 -0.1 Honduras 888 0.5Madagascar 246 4 Ghana 463 2.5 Guyana 904 1.8Moldova 275 -8 Zimbabwe 481 1.5 Bolivia 948 -1.9Bangladesh 277 3.4 Haiti 493 1.5 Philippines 963 1.8Tanzania 281 3.3 Indonesia 544 -3.4 Nigeria 1242 1Kenya 301 1.5 Nicaragua 623 2.5 Kazakstan 1314 1

Source: ICRG


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Latin American Debt Crisis of 1982

ERM Crisis of 1992

Mexican Peso Devaluation of 1994

East Asian Crisis of 1997

Russian Crisis of August 1998

Brazil Crisis of 1999

The Major Financial Crises of Our Times:


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The Major Financial Crises of Our Times: East Asian Crises, 1997-1998

Japanese Model of Economic Development• State guides economy and growth

• State allocates resources

• Export led growth

Unregulated Banking Systems• High Levels of Corruption

• Common Industries

• Investment Boom

• Japanese slowdown

• Chinese Devaluation, 1994

• Currencies Pegged to Dollar

• Robert Rubin pushes for strong dollar, March-April, 1995


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Then:

All emerging markets were treated alike.

Emerging markets were considered virtually equal bets.

Companies tended to ignore country risk, focusing on the financial and economic aspects of the deal.

Then and Now


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Then and Now

Now:

A Beauty Pageant

Differentiation of Emerging Markets countries on the basis of considerations of political risk.


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The Major Financial Crises of Our Times:

The countries that will emerge most successfully from the crises are the ones that will make the most deep seated structural reforms.


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Factors for Country Success

Stable Institutions Democratic Politics

Policies Human Capital Market Economics Globalization Technology


31

Factors for Success: Institutional Strength Long Term Ratings:

83

84

84

85

86

86

87

88

89

92

92

94

95

96

96

97

0 20 40 60 80 100

Panama

Argentina

Chile

South Korea

Czech Republic

Mexico

J apan

Taiwan

Italy

Germany

New Zealand

United Kingdom

France

Netherlands

United States

Australia

44

54

63

66

66

68

72

72

72

73

74

75

79

80

83

0 20 40 60 80 100

Indonesia

Russia

Venezuela

Colombia

Vietnam

Malaysia

Brazil

Peru

South Africa

China

Philippines

Thailand

Hong Kong

India

Canada


32

Factors for Country Success

Stable Institutions Democratic Politics

Policies Human Capital Market Economics Globalization Technology


33

Factors for Success: Human Capital Women's activity rates for the age group 20-54

years in 1950, 1970, 1990 and 2010


34

The East Asian Crises, 1997-1998

35%

40%

45%

50%

55%

1990 2025

Malaysia

China

Thailand

US

25-to-59 age group as % of population

projected

Prospects for the Future:• Asia’s Growing Labor Force


35

Factors for Success: Human Capital

Adult illiteracy rate – 1995:


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Factors for Success: Human Capital

Country Literacy Rate

Russian Federation 98.00%

Korea, Rep. 98.00%

Spain 96.00%

Thailand 93.80%

Mexico 89.60%

Indonesia 83.80%

Brazil 83.30%

Turkey 82.30%

China 81.50%

India 52.00%

Literacy Rates, 1997:

Source: ABC-Clio


37

Ethnic DistributionIn The Former Yugoslavia

States in Decline


38

Factors for Success: Human CapitalEthnic DistributionIn Russia


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Factors for Success: Corruption

Source: Transparency International

1998 Corruption Perception Index

CountryCorruption Perception Index Rank

CountryCorruption Perception Index Rank

Hong Kong 16 Mexico 55Chile 20 Philippines 55Malaysia 29 Thailand 61Taiwan 29 Egypt 66South Africa 32 India 66Czech Republic 37 Russia 76South Korea 43 Colombia 79Brazil 46 Indonesia 80China 52 Nigeria 81Turkey 54

Marvin Zonis, Professor Graduate School of Business The University of Chicago Getting to the Future: The Principal Drivers of the Global Economy.

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