Exciting Visions of a Bright Future Fund Managers, economists and politicians agree on the exciting future they see in the Third World. According to them, the engine of the world’s economic growth has moved from the West to what were once the poverty-stricken societies of the Third World. They feel mushy about the rapid increase in the size of the Middle Class in the Third World, and how poverty is becoming history. GDP of India vs. UK in 2016 – crossing over. Just one of the scores of countries that the British once ruled over, India, is now believed to be richer than its colonial master. What used to be colonized countries, believed to have had an inherent problem that prevented them from ever growing intellectually and economically,
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Exciting Visions of a Bright Future
Fund Managers, economists and politicians agree on the exciting future they see in the Third World. According to them, the engine of the world’s economic growth has moved from the West to what were once the poverty-stricken societies of the Third World. They feel mushy about the rapid increase in the size of the Middle Class in the Third World, and how poverty is becoming history.
GDP of India vs. UK in 2016 – crossing over.
Just one of the scores of countries that the British once ruled over, India, is now believed to be richer than its colonial master. What used to be colonized countries, believed to have had an inherent problem that prevented them from ever growing intellectually and economically, are finally seen to be emerging from under the yolk. But are they?
Between 2002 to 2012, the combined GDP of the Third World rose by ~90%, whereas that of the developed world grew by a “mere” ~15%.
GDP growth of developed vs developing world
The reason has been the faster rate of growth in the third world, which has outstripped that of the developed world for most of the last three decades. Future projections look even more exciting:
Annual real GDP growth, emerging markets vs developed markets
The end result has been that that while the combined GDP of the Third World on a purchasing power parity (PPP) basis was half as much as that of the developed world in 1980, it is now higher. This is nothing but astounding according to international organizations and the media. It is simply an impressive achievement of the third world, as they will say:
EM vs. DM cumulative GDP adjusted for purchasing power parity
Lies, Damned Lies, and Statistics
Except for China, Third World countries, erroneously known as “emerging markets”, haven’t achieved what the preceding graphs show. The graphs suffer from four statistical flaws, which are unhesitatingly repeated and regurgitated by the media, the World Bank, the IMF, the developed world, and the Third World.
Those from the developed world desperately want to be seen as self-deprecating and non-racist, while preserving their own jobs and even enhancing their career prospects. As Marc Faber experienced, even a glimmer of expression of facts that go against the conventional, politically-correct wisdom leads to vehement opposition.
In the boardrooms and discussion meetings of big organizations, it is hard to imagine that anyone has a chair to point out the statistical flaws. In our current institutional set-up dominated by virtue-signaling and political correctness, the truth and doing good are of no value.
The Third World fails to challenge the statistical flaws for they love being seen as geniuses and want to feel proud of their ancient cultures and religions which have shackled and ossified them mentally, socially and politically, resulting in their failure to contribute humanity in the areas of science, literature or arts.
In the end, this grave problem underlies the future of the Third World.
Let us consider the flaws before reinterpreting the same data:
Comparing growth rates: Mathematically, this is utter non-sense, for growth rates can be compared only and only if the entities being compared have the same base or at least similar bases.
According to the Economist, India and Ethiopia are among the fastest growing economies of the world, China is facing low growth and the US is struggling:
Let’s look at the absolute numbers to understand what the assertion of the Economist translates into:
If Ethiopia grows at the rate of 8.5%, it will add a mere US$72 to its per capita GDP. Similarly, India, if it grows by 7.7%, will add US$164. The US, despite its seemingly low growth rate, will add US$1,367.
Or quite in contrast with the assertions of superior growth of Ethiopia, the US is growing 1,900% faster and has GDP per capita that is 7,300% larger.
Comparing GDP figures: Comparing GDP figures coveys nothing of value in economic terms. India’s GDP is comparable with that of the UK, but India’s population is 2,000% that of the UK. What is relevant is GDP per capita. That makes the UK 2,300% richer than India on per capita basis. Any data that tries to reach a conclusion based on comparing aggregate UK and Indian GDP numbers is intentionally deceptive.
Looking at GDP growth rates within a society: Populations of the developed world are stagnating and those of the developing world are exploding.
IMF population growth projections
In 2016, the sub-Saharan economy grew at 1.4%. This isn’t something to worry much about until you look at population growth, which was 2.8%. This takes GDP per capita into negative territory, at minus 1.4%.
The difference between what is communicated and the reality is the difference between slowly getting rich, and going bankrupt and returning to a Malthusian equilibrium. What should be looked at to understand a country is its GDP growth rate on per capita basis.
Over use of Purchasing Power Parity: To make the GDP figures of the Third World look larger, indiscriminate use of PPP is made. For example, it is assumed that in India, where half the population goes out into the open to relieve itself, fecal matter containing Mac Burger sold at half the price in nominal terms should be valued the same as it is in the US.
Most people I know would happily pay much more in nominal terms to avoid fecal matter. What those who over-use PPP to explain economic performance fail to understand that to change the value-chain to reduce fecal matter from entering the food-chain would make food more expensive in India than it is in the US.
Every seasoned traveler knows that in poor countries, as you go up the value-chain, things become rapidly expensive, eventually becoming much more expensive than they are in the richer countries. A badly constructed middle class house with the ever-pervading smell of sewage in Mumbai will set you back more than it would in New York.
With an understanding of the above flaws, let’s look at the same data provided by exactly the same organizations:
The top three lines in the above graphs are of developed countries: the US, Japan and the UK. What one immediately gets — unless one is trained not to see facts — is that the developed world has grown much faster than the Third World. This happened not just before 1990s, when the Third World was stagnating anyway, but even since then, during the time when it is erroneously supposed to be growing faster.
EM vs DM cumulative per capita GDP in PPP terms
The consolidated situation between the developed world and the Third World is shown in the above graph, although were it not adjusted for the politically correct measure of PPP, the line depicting Third World economic growth would have been at least lower by half.
Moreover, had they isolated China, which is indeed changing and is the only “emerging market”, the situation of the Third World would have made you cry. Whatever way we look at the Third World it hasn’t achieved what everybody insists we should believe it has.
There is another fatal flaw that international organizations have inculcated in their projections. They believe that the growth rates of economies of cattle-herders and subsistence farmers in the Third World will continue to stay high in the near and foreseeable future. This cannot happen unless the Third World shows the capability to accumulate intellectual and financial capital to not only leverage its current skills, but add even more.
As time has passed, it has also become clear that growth rates of Third World countries have been falling for the last several years, as the following graph shows. This graph would look worse had they used growth rates on a per capita basis. As mentioned above, in sub-Saharan Africa, GDP grew by 1.4% in 2016. Its population grew by 2.8%. The net result was negative GDP per capita growth.
An EM growth slowdown
A none-too subtle headline in an Indian newspaper
To look to the future, we must understand the nature of the trend. As shown above, while the growth rate of the Third World has been hugely exaggerated, there is no doubt that it has done better in recent years.
The problem, alas, is that this growth has been the trend only for the last two or three decades, the time during which the Third World benefited from the advent of the internet and the rise of China, which is the only emerging market and which is growing due to intrinsic reasons of its own.
Zooming out to see the larger trend shows a different story. After the end of WWII, Third World countries at best grew slowly. They often stagnated. Most of them declined economically, going into negative growth. Despite starting from a very low base, their growth rates were lower than those of developed countries.
Across of the board, tyranny erupted — often murderous — in these so-called newly independent Third World countries. Their economies and societies suffered because they had lost a vital element in the equation of growth and social stability: European management.
This is what today’s leadership in the proud and free India is like, in which a great leader was recently seen teaching poor people not to defecate in the open.
No More Low-Hanging Fruit
Recent growth rates in the Third World were made possible by the advent of a new factor in the equation: rapid transfer of technology from the West to the Third World using the new technology of the internet, and a real change happening in China, which enabled growth of natural resource exporting nations.
Also, directly or indirectly, the West, particularly the US, has economically subsidized the Third World, and provided their citizens security by keeping murderous tyrants in check. As Trump pulls back on that subsidy and international conflicts, by insisting that many of these countries play fair, the reality is emerging. The currencies of Third World countries have plummeted and so have their stock markets, a double whammy.
EM currency index.
The low-hanging fruit the internet offered have now been plucked. What emerges is an extremely ugly future for the Third World. Venezuela, Syria, Iraq, Libya, Zimbabwe, Pakistan, Iran and the rapidly worsening South Africa aren’t isolated countries but a part of the Third World trend. Apart from the “noise” of the last three decades, which cannot and should not be seen as a fundamental change in the long-term trend that started after the Europeans left at the end of WWII, the social and political situation of the Third World has continued to worsen.
PPP adjusted GDP per capita of Turkey, China, Brazil and India.
Turkey, which was among the better examples of the Third World, was one of the fastest growing economies. As Turkey has grown economically, so has religious fundamentalism. Ironically economic growth has aided their tribalism — this correlation is something to sit back and think about. Dogmatic nationalism is sweeping across the Third World.
The resilience of tribalism is the fundamental reason why Third World growth is not sustainable. The concept of reason, the glue that enables accumulation of financial and intellectual assets, continues to be conspicuous by its absence in the Third World. For now, at the very least, we should stop exaggerating economic growth of the Third World.
Charts by: India Eye, Jayant Bhandari, the Economist, IMF, Economompic-data, FT/Thomson-Reuters
Chart and image captions by PT
Jayant Bhandari grew up in India. He advises institutional investors on investing in the junior mining industry. He writes on political, economic and cultural issues for several publications. He is a contributing editor of the Liberty magazine. He runs a yearly seminar in Vancouver titled Capitalism & Morality.
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