An extraordinary dialogue took place recently at a Moscow
investment conference between representatives of the Russian and
American economic elites.
[caption id="attachment_58775" align="alignright" width="300"
caption="Sunset or sunrise for the West?"]
[/caption]
Herman Gref, the respected CEO of Russia's biggest bank,
Sberbank (
SBRCY
,
quote
), put an uncomfortable question to his co-panelists, including
superstar economist Paul Krugman and junk-bonds legend Michael
Milken: Is it time to start wondering whether Western democracies
are politically capable of solving the debt problems they have
created for themselves?
When governments are forced to do what their people want, Gref
suggested, maybe it is impossible to make the unpopular decisions
necessary to put fiscal houses in order.
Krugman and Milken quickly pooh-poohed the idea that democracy
is on the ropes, and few Americans are clamoring to emigrate to
Vladimir Putin's Russia just yet. But it is hard to escape the idea
that the Western governance model is in a crisis that risks
morphing into a shambles, and that leaves emerging markets
reasonably doubting the model they have at least selectively
followed for a generation.
Late 2008 may have been a more desperate time than the present
financially. But the situation now is more challenging
philosophically.
During the post-Lehman Brothers panic, everyone could blame a
small circle of bankers and financiers, and hope that once they
were reined in Western democracy would emerge healthier than ever.
The current debt crisis in Europe, and the bigger one inevitably
looming on current trends in the U.S., makes it clear that the
problem is all of us in the advanced societies. We adamantly demand
more state goodies than we are willing to pay for, and politicians
have no choice but to acquiesce. To paraphrase Barack Obama, we are
the crisis that we can't seem to get out of.
The good news is that emerging markets have been successfully
experimenting with politico-economic models of their own, which
have produced startling results even in democratic societies.
Brazilian president Luiz Inicio "Lula" da Silva managed to
hit all the orthodox macroeconomic marks on inflation, debt and
growth, yet also instituted programs for the poor that bucked the
supposedly inevitable global trend toward greater income
inequality. Turkish prime minister Recep Erdogan combined
privatization and cutbacks in entitlement programs with aid to
small business and a religiously tinged populism to transform his
country from hyperinflationary madhouse into the tiger bridging
Europe and the Middle East.
Indian leader Manmohan Singh has mixed a free-market crusade in
paring back his country's massive bureaucracy with leftist schemes
like guaranteed government work for rural residents. The result has
been one more astonishing national renaissance. Asian tigers like
South Korea manage to stay out of debt while still providing
universal health care and world-beating education.
In short, the sum of economic knowledge has been greatly
enriched just over the past decade or so by eclectic
experimentation in the developing world. But you would never know
it from the predictable, sterile debates in Washington and
Brussels.
Here in the rich countries, pump-priming Keynesians and
austerity-loving Chicago-school adherents slug it out in what is
starting to look like an ideological replay of World War I,
endlessly stalemated and mutually destructive.
Austerity looked on the verge of a decisive victory just 18
months ago as the Tea Party surged in the U.S. and the 'Merkozy'
consensus attacked the fattened European welfare state.
Then the voters realized that austerity might actually cost them
something personally, and stalemate returned. Nicolas Sarkozy looks
headed for defeat as president of France, the International
Monetary Fund is leaning on his partner Angela Merkel to ease up on
her solvency-challenged neighbors, and Obama is at least even money
to win re-election despite everything.
What is still worth emulating in the advanced countries is their
transparency, rule of law, and generally realized promise of fair
play.
In most places in the developing world, economic growth has done
little to alleviate corruption, cronyism, and the propensity of
officials at all levels to shift goalposts to the advantage of
their family and friends. Greater wealth has on the contrary, often
made the grabbing more extravagant and shameless.
This enduring atmosphere of crookedness demoralizes the large
new middle classes that prosperity is creating, and drives many of
them away to seek opportunity in slower-growing America and Europe.
That's counter-intuitive from a statistical point of view. It just
happens to be reality. Countries that figure out how to inject
enough democracy to keep the bureaucrats from looting their
treasury, but not so much that the general population starts to do
the same, can expect a bright future.
The economist or social scientist who designs a system for this
achievement will deserve multiple Nobel Prizes.
Meanwhile investors must do their best to understand the world
as it is. That means going beyond shopworn yardsticks like "liberal
reform" to grasp the particulars of each country's social software:
the education and opportunity that the current generation is
bequeathing its children; the morale level of its best and
brightest citizens; the quality of key institutions like courts and
regulatory bodies.
In the long run these factors will correlate with prosperity no
less than sound macroeconomic policies. In the short run, you will
find out a lot that is worth knowing.