Scheherazade S. Rehman is a professor of international finance/business and international affairs at The George Washington University. You can visit her homepage here and follow her on Twitter @Prof_Rehman.
This is the fifth blog in the series on the world's potential next superpowers; we have covered the European Union, Russia, and Turkey so far. The ensuing blogs will be about India, Brazil, and China. But today, in deference to Veterans Day, I would like to first hold a moment of silence for all those who bravely fell in the line of duty throughout time and across borders for defending freedom, justice, and the weak. Second, I would like to revisit the nature of superpowers and the costs of wars today—it would seem apt.
An often forgotten fact amongst economists is that significant and lasting shifts in a county's wealth, i.e. becoming a rich nation, tends to transpire over very long periods of time and is cyclical. Past patterns in premodern civilizations reveal that it took more than 200 years for a country to become wealthy then—now it is taking less time. On average it is about five generations—approximately 100-150 years. Clearly there are many exceptions to this rule. There are plentiful countries that simply never became seriously wealthy—pick any in Sub-Sahara Africa. There are a handful of countries that acquired wealth very quickly due to the discovery of natural resources such as oil. And then we have the rare exceptions, such as Japan, which through the careful crafting and innovation of its comparative advantage, rose to economic supremacy in just decades.
Nonetheless, give these vast time spans for acquiring wealth for the average country it would seem entirely reasonable to argue that no government in the world is really controlling its country's growth or wealth plan. The time-frame is simply too long. An excellent place to look at these wealth cycles is Ray Dalio's "Why Countries Succeed and Fail Economically." His work spans back to the 1500s as he tries to observe the patterns of wealth in the rise and decline of nations. According to this study countries typically go through five cycles/stages of growth:
- "Stage 1: Countries Are Poor And Think They Are Poor." The country is underdeveloped and people work hard but have very low income and cannot save—thus, they don't waste money. The government does not have any real investments as private capital markets do not lend to them.
- "Stage 2: Countries Are Getting Rich Quickly But Still Think They Are Poor." The courtiers are getting rich and productivity is increasing. People are still working hard but now they are making more money and can save it but they still behave like people in Stage 1—they do not waste money. In this stage of development a country's savings and investments experience rapid expansion and private money is flowing into these emerging markets.
- "Stage 3: Countries Are Rich And Think Of Themselves As Rich." "Economic decadence" sets in and people and their governments focus more on enjoying the fruits of their past labor instead of working, producing, and saving. Countries that are large are typically economic and military superpowers during this stage. This is when importing and debt rises simultaneously for both the government and its people. No one is saving and money is being "wasted" on so called non-essentials.
- "Stage 4: Countries Become Poorer And Still Think Of Themselves As Rich." As people and their governments try to retain their level of standards of living, rising debt is accompanied by excessive leveraging.
- "Stage 5: Countries Go Through Deleveraging And Relative Decline, Which They Are Slow To Accept." Governments begin to print money as asset values and net worth declines both of the people and the government. These previous economic and military superpowers begin to see their influence decline.
China is in Stage 2 and there is much debate about whether the United States is in Stage 4 (somewhere between Stage 3 and 5 depending on whom you believe). Perhaps both new governments of China and the United States should remember that in the end—large debt and excessive leveraging coupled with wars speeds up the march to Stage 5.
- Read Andrew Natsios: The Dangers of the Coming North Korean Famine
- Read Stephen Hayes: Second Obama Term Will Bring More Dynamic Policy Towards Africa
- Check out U.S. News Weekly, now available on iPad.
Corrected 11/12/2012: An earlier version of this blog post failed to properly denote quotations regarding the five stages of country growth.