Today we continue my series of open letters to the presidential candidates. In the meantime, we’ve drawn a little closer to knowing whom the two major parties will nominate. A few people are vowing to consider minor parties, too.
In any case, whoever replaces Barack Obama will face a world of challenges. The good news is that most (not all) of the challenges are manageable – given the willingness to make very difficult choices. Remember, in this letter we are focusing on the economic realities that the new president will face, and those realities will force stark choices in other arenas such as healthcare, defense, and geopolitics. The economic picture is unequivocal – more so than in any era since Roosevelt – and will compel the president to either choose among merely very difficult options at the beginning of his or her term, or to put off choosing and be left with only seriously bad choices toward the end of a first term. There will be no easy choices, and the process will be messy, but I think we’ll muddle through.
In Part 1 we looked at China and Japan. Part 2 covered Australia, India, the Middle East and Europe. That leaves Africa, South America, and North America. Let’s dive back in.
Buying African Futures
Dear Presidential Candidates:
Many Westerners still think of Africa as the Dark Continent – a mysterious, unknown place brimming with danger. Many Africans think the same of the West. Faraway lands are always mysterious and a little forbidding until you visit them, or at least try to learn about them.
Having been, at last count, to 15 African nations, I have learned how little I know about Africa. It is a land of astonishing economic and cultural diversity. As president, you shouldn’t have an African policy – you should have a whole series of policies for different parts of Africa. One size will most definitely not fit all.
You should also remember that your actions as president will have consequences for future presidents. Demographic projections suggest that by the year 2100 Nigeria will have a larger population than China will. Africa is going to make up for lost time. From an economic standpoint, Africa as a whole is unlikely to directly impact the United States for years to come, but there is an opportunity in Africa that we have neglected for 100 years.
Owing to the original colonial presence of the European powers, the various nations of Africa are still economically connected to Europe. I remember being in Zaire (now Congo), and meeting a young man who, oddly enough, is now one of the country’s leading politicians. Kinshasa was a town of multiple millions of people, and the local TV station did a story on “the” American who was visiting and looking to do business. Talking with the European expatriates there, I was left with the impression that in the early 1990s there may have been fewer than 100 adventurous souls from the United States on the whole continent. Given the ease with which Europeans bribed their way into business in the countries I dealt with – and the fact that if a US businessman acted similarly, he would go to jail – US entrepreneurs started with one hand tied behind their backs.
Thankfully, attitudes and practices are changing, and there is an anticorruption movement in a host of African countries today. Africa is going to be one of the growth stories of the coming 30 years, and it is a place where US businesses should definitely be involved. The US can facilitate that involvement by appointing ambassadors who are not just career diplomats looking to check another box on their résumés but are instead actually US businessman with connections who can introduce US businesses that would like to get involved. Not only would this approach help our trade balance, it’s just good basic policy. In general, Africa doesn’t need aid, but it does need our business acumen.
Oddly enough, Africa’s relative lack of development may help it leapfrog the rest of the world. Instead of slowly replacing outmoded telecom and energy infrastructure, Africa is right now expanding mobile internet and solar energy capacity faster than some developed nations are. Kenya’s M-Pesa payments platform is helping millions of the “unbanked” enter a thriving economy, even as the US struggles to adopt microchipped credit cards.
South Africa, where I have many good friends, is struggling a bit from the commodities downturn and some unwise decisions by the Zuma government. (I have met with Zuma three times, and each time he affirmed that he wanted to create economic growth and change. Instead, he has done nothing and made the situation far worse.) Thankfully he will be leaving soon, and South African businesspeople may once again have an opportunity to prosper.
As president, you can set up the US to have good relations with Africa, or you can create damage that will take decades to fix. Choose wisely.
Latin American Limbo
Our next flight takes us westward to South America. Here we find a blend of good, bad, and very bad news. We’ll start with the country in the worst fix, which is definitely Venezuela. The word meltdown is no exaggeration here. Years of socialism are having the predictable result.
Unlike the Socialism Lite that Senator Sanders represents, Venezuela has the real thing. Government controls the means of production and so produces the wrong things. The result is massive inflation and a crazy mix of excesses and shortages – but no shortage of misery.
The oil price collapse hasn’t helped. Venezuela’s high production costs made it one of the first victims of the downturn and will also make the country’s recovery that much harder. I do not know a painless way to pull Venezuela out of its hole. I feel terrible for the people who must live in this manmade economic disaster zone.
A collapse in Venezuela could lead to a possible interruption in a significant part of our oil supply. It’s not that there’s not plenty of oil in the world, but many of our refineries are set up to handle the rather thick, low-grade oil that comes from Venezuela. Retooling the refineries would be time-consuming and very expensive. There is little that you as president can do to keep Venezuela’s oil flowing, but the situation is one to watch.
You will not be able to ignore Brazil, the world’s eighth-largest economy and fifth-most populous country. The outlook there is better than in Venezuela, but not by much. You are no doubt aware of the enormous scandal that is going on at the highest levels of government over bribery and corruption charges involving major government figures and Brazil’s national oil company, Petrobras. President Dilma Rousseff is deeply implicated and will likely face impeachment. A recent conversation between her and former President Lula has been made public and furthers the impression of corruption.
The Brazilian economy shrank 3.8% last year and is still heading south. It is not likely to turn around until the political situation has been settled. Ordinary Brazilians are making their displeasure known through massive street protests, but it is hard to know from afar exactly who is unhappy with whom. Brazil’s poorest have been in dire straits for a long time. The wealthy Brazilians caught up in the scandals also control the country’s media outlets.
Making a bad situation worse, the mosquito-borne Zika virus has brought to Brazil a heartbreaking wave of deformed infants, with more on the wayexpected. And the country will host this year’s summer Olympics, diverting resources from the other problems and showing the whole world a nation in distress. (The Zika virus is a real concern, as it is likely to come to the United States sooner or later, and the Southeastern part of the US is home to the type of mosquito that carries the virus. There are companies developing both a cure and a preventive vaccine, but their efforts are bogged down in bureaucracy, which you as president could cut through.
As with Venezuela, you may not be able to help Brazil much, but you also can’t ignore it. US businesses and investors poured capital into Brazil when it looked like a promising emerging market. Those investments don’t look so hot now.
Argentina is another economic basket case, but one that actually appears to be improving. Argentina cycles through huge ups and downs. The government defaulted on about $100 billion in international debt back in 2001. It is now in final negotiations with some creditors who declined to accept previous restructuring offers. If the parties can reach a deal, Argentina will again have access to global capital markets.
That deal can’t happen too soon. New President Mauricio Macri says he will reduce deficit spending and keep inflation down to “only” 20–25%. He has already lifted currency controls and done away with agricultural export tariffs. These are important steps but only a beginning.
Finally, let’s head up to Mexico, our North American neighbor and trading partner. I find it stunning how ignorant most US citizens are about Mexico. On a purchasing-power-parity basis, Mexico is the 11th-largest economy in the world – larger than Italy, South Korea, Canada, Australia, or Spain. It is generally growing faster than the countries ahead of it on the list. It is not located in a faraway continent like Africa – many of us could easily drive from our homes to the border in less than a day. Yet we still have a caricatured view of Mexico. The caricatures do fit in some instances, but Mexico is so much more.
My colleague George Friedman recently shattered some misconceptions in an excellent article, “Mexico as a Major Power.” A quick excerpt:
Mexico is commonly perceived, far too simplistically, as a Third World country with a general breakdown of law and a population seeking to flee north. That perception is also common among many Mexicans, who seem to have internalized the contempt in which they are held.
Mexicans know that their country’s economy grew 2.5 percent last year and is forecast to grow between 2 percent and 3 percent in 2016 – roughly equal to the growth projection for the US economy. But, oddly, they tend to discount the significance of Mexico’s competitive growth numbers in a sluggish global economy.
Here, therefore, we have an interesting phenomenon. Mexico is, in fact, one of the leading economies of the world, yet most people don’t recognize it as such and tend to dismiss its importance.
Some of you candidates are having great success spinning Mexico as some kind of conspiracy of nefarious people wanting to sneak into our country and do us harm. Yes, people do cross the border illegally and ought to be stopped. But the irony is that today more Mexicans here illegally are going back to Mexico than are coming in. This has been the case since the Great Recession hit. Over one million Mexicans, including US-born children, have left the US for Mexico since 2009, far more than have entered illegally. They cross the border headed south because they see better opportunities in Mexico than they do in the US. That is the real problem you should talk about – and try to change, if you reach the White House.
I am not arguing that we don’t need to control our borders. Of course we do. Every nation should. But we need to remember that we have right next door to us a country that is quickly becoming an industrial powerhouse. In 20 years Mexico is likely to be one of the five largest economies in the world. We need to figure out how to do more business with Mexico, not less. The country is going to become a huge potential market for us.
Canadian Capitalism
Our other neighbor, Canada, managed to avoid much of our last financial crisis, but its turn finally came. Instead of housing, it was energy prices that pushed Canada toward the edge. The country is now in a technical recession, one from which the new Justin Trudeau government promises it will escape by resorting to old-fashioned fiscal stimulus. Keynes himself would be proud.
Will Trudeau fail? Maybe, but it won’t be for lack of trying. The forthcoming deficit spending will add to an already significant debt burden. I would be very concerned if I were a Canadian. Thegovernment is well on its way to amassing the kind of permanent debt burden we enjoy (?) here in the US.
The whole point of fiscal stimulus is to boost consumer demand. Give people cash and they will buy more stuff. Yet lack of demand is not Canada’s problem, especially in the energy-driven provinces. Depressed oil prices are the problem. Trudeau’s stimulus plans will do nothing to raise oil prices. That problem is far outside his control.
I fear Canada will fall into the same trap we are in. We ran deficits thinking they would restore growth, boost tax revenue, and let us pay down our debt. In fact, we got growth that is mild at best, not enough tax revenue, and yet more debt.
As I wrote recently, growth is the answer to everything. Enable economic growth and your other presidential mistakes won’t matter so much. Suppress growth and even your best efforts will not be enough to move us forward.
On that note, we finally arrive back home.
Pivot Back to the United States
Obama announced a pivot to Asia at the beginning of his last term. Given the importance of Asia to the world’s future, that is an understandable decision. But in the next four-year term, economic reality is going to force the president to pivot his or her focus back to the United States. There are a number of factors coming together that are going to require serious crisis management.
When you take office in January 2017, the weakest recovery in modern history will have stretched on for 81 months. It will already be the third-longest recovery without a recession since the Great Depression. By 2018 it will be the second longest. Only during the halcyon economic daze of the 1960s have we seen a longer recovery; but that record, too, will be eclipsed sometime in 2019 – if we don’t see a recession first. And note that we were growing at well over 3% in the ’60s, not the anemic 2% we have averaged during this recovery and certainly not the positively puny 1.5% we have endured lately. As we have surveyed the economic scene around the world for this series of letters, it has been clear (and IMF and BIS data confirms) that global growth is slowing down. Given the fact that the US economy is barely growing at stall speed, it won’t take much to nudge us into recession.