Political Economics Prof

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  • The English East India Company (EIC): Trade with Asia

    The English East India Company (EIC): Trade with Asia

    The Mughal emperor Shah Alam hands a scroll to Robert Clive, the governor of Bengal, which transferred tax collecting rights in Bengal, Bihar and Orissa to the East India Company. Illustration: Benjamin West (1738–1820)/British Library

    INTRODUCTION

     

    The English East India Company (EIC) was an innovative new type of corporation. It is a model for the modern limited-liability, stockholder-funded modern corporation.


    The EIC also illustrates that the prototype of the modern multinational corporation was created to develop global trade.

     

    HISTORIC BACKGROUND

     

    The creation of the English East India Company (EIC) and its Dutch equivalent (the VOC) were part of the 400-year expansion of European power, trade, and influence. Much of the rest of the world became colonies, part of imperial empires.


    By 1600, both England and Holland had a wealthy merchant and shipping class, bankers, substantial liquid capital (wealth) not tied up in land, and risk-takers. These categories overlapped.


    Both countries had limited monarchies. In England, the king and Parliament were about to begin a long struggle for power. In Holland, the monarch was mostly subservient to Holland’s powerful and wealthy merchant class.


    THE EIC: STRUCTURE AND STRATEGY


    The East India Company (EIC) was chartered in 1600 by Queen Elizabeth I to promote and monopolize English trade with Asia. England, a poor country in the 1600s but with colonial ambitions after defeating the Spanish Armada in 1588, outsourced its colonial ambitions to the East India Company and other private companies. 

     

    The East India Company was originally privately funded by 218 merchants and other investors. It was the first modern multinational corporation. The EIC was a joint stock company, that is, a company with publicly traded stock bought and sold in a secondary stock market. Like modern companies, the EIC issued financial reports, held annual meetings for stockholders, and had quarterly meetings of the Board of Directors.


    It was also a limited liability corporation. Stockholders’ potential personal financial loss was limited to their investment in the company. Creditors could not go after their personal assets.

     

    The EIC was vertically integrated. The company designed, built and repaired its own ships, built its own docks and warehouses in London and in India. It had a large corporate headquarters in London. The company held sales auctions of its imports in its headquarters. It was a major employer in London. It was an “enlightened” employer, offering fringe benefits, including pensions. It provided a retirement home in London for sailors.

     

    The EIC designed and built a new type of ship, called East India Indiaman. They were built for long-distance trade. Because of commercial rivalry with other European states and local hostilities in Asia, EIC merchant ships were heavily armed and often contained marines.


    East India Company Indiaman Armed Merchant Ship

     ©National Maritime Museum


    The EIC had to build forts to protect its warehouses and trading stations. It hired a mercenary army and develop a navy (Bombay Marine) to protect property and trade routes. It negotiated with local rulers and signed treaties. 

     

    In short, the company built its own self-contained infrastructure and pursued its independent strategies. 

     

    The company ran its own management training programs and military academy. The selection process of employees was highly competitive, including written exams. Many of its recruits were ambitious young men from the lower and middle classes who were barred from the traditional paths of upward mobility and status. It employed “foreigners,” Scots and Anglo-Irish. Later, the EIC employed Asians and Anglo-Indians in secondary positions.

     

    Economists have a warm spot in their hearts (yes, economists do have hearts) because the EIC was the first organization to employ and pay economists – Thomas Robert Malthus, James Mill, and his son John Stuart. John Stuart Mill was effectively the CEO for many years. Contrary to their economic writings, they did not support free trade with Asian countries. 

     

    EIC “officers” and employees were loyal to the EIC. They saw personal opportunities and advancement within the company. They had opportunities for personal power and wealth that were not available at home. Because of their lower class origins and nationality, wealthy returning EIC officers were often resented as upstarts.

     

    The EIC created a powerful lobbying group in England. The company attempted to get the English government to continue to support its monopoly on English trade with Asia. Important politicians and royal officials were bribed.

     

    Unlike other private trading and colonization corporations established in England at about the same time, the EIC was set up as primarily an importing company. The company had the problem of how to pay for products bought in Asia. English exports to Asia such as English woolens were in limited demand. Asian sellers wanted silver. This created a drain of silver out of England, which was a source of friction between the company and the government.


     

    CORPORATE STRATEGIES AND POLITICAL ENVIRONMENT

     

    Besides the English-Asian trade, the East India Company was willing to trade anywhere in Asia, looking for profitable opportunities. Its resources, both ships and men, were highly mobile.

     

    The EIC operated in a violent, insecure environment in Asia. Beside pirates and local conflicts with Asian rulers, England was usually at war with one or more European countries. The conflicts extended to trade rivalry in Asia. The EIC had to fight battles with other national trading companies, foremost of which was the Dutch East India Company (VOC, the initials of the Dutch name of the company). The EIC could not expect much support from England, which was unable to consistently project power in Asia until the 1800s.

     

    The EIC lost out to the Dutch East India Company in its attempts to control the Spice Islands, the source of much of the profitable spice trade. The EIC also lost its footholds in Java and nearly islands, which became the Dutch East Indies (later Indonesia) controlled by the VOC. 

     

    Many early trading stations failed in other parts of Asia. Eventually, operations were centered on trading ports (entrepots) and stations in India, the traditional transit area for Asian products bound for the Middle East and Europe. India was also an important source of pepper.

     

    The EIC was caught up in the Seven Years War (1756-1763) between England and France for dominance in Europe, North America (called French and Indian War in America), the West Indies, and India. The EIC, under the leadership of Robert Clive, was able to defeat the French in India and expand alliances with many local rulers. The company’s well-organized military assets with superior firepower made the company a prized ally for local rulers. In exchange, the company was given extensive privileges including the right to collect taxes.

     

    At the same time, the company was developing what would be its most important trade – importing Chinese tea to England. To support this trade, the EIC established new stations that would grow to be Singapore and Hong Kong.


    They immediately ran into an old problem – China didn’t want any English imports. Chinese merchants only wanted silver, which led to a major drain of silver out of England. The EIC solved the problem by growing and selling opium produced in India to private traders who smuggled it into China. Some of the financial transactions were handled by a bank that eventually became HSBC.  (One the traders was Franklin D. Roosevelt’s grandfather.) 

     

    Chinese attempts to ban this trade resulted in a war between China and England (the Opium War, 1839-1842). China was defeated by superior English warships; the subsequent treaty was the first of many that opened up China to foreign influence and then domination. This would have important long-run consequences.


    The demand for tea exploded in the 1700s. The EIC had trouble fulfilling the demand with tea from China. Growing and processing tea was a closely guarded secret in China. But the company smuggled out plants to start new tea plantations in northern India (Assam). These plantations were successful and an increasing source of tea for the EIC. By 1770, EIC exports of Indian tea to England reached £800,000.



    ORGANIZATION STRUCTURE, CONTROL, AND GOVERNANCE





    Besides the EIC’s legal, financial, and governance structures which were innovative, the EIC had an internal management and control structure very much like a modern multinational corporation. It had to find a balance between home office control and branch management initiative. Given the problems of long distances, slow communication, and changing local operational information, the company was forced into a decentralized structure. 


    The Board of Governors combined the oversight of corporate managers with the setting of governing rules and regulations. Much of their control was financial. There was also detailed supervision and control of the voyages sent out from England.


    While officers of the company often sent detailed instructions about policy to local managers, direct operational control was difficult. It often took over two months for a letter from London to reach India. Local managers had discretion to react to local problems and trading opportunities. They had their own staff and resources. They were similar to “divisional” managers of early railroads and large industrial corporations. Even more similar to corporate presidents and their local staffs of national subsidiaries of multinational corporations.


     

    THE EVOLUTION OF THE EIC FROM A GLOBAL TRADING COMPANY TO A VIRTUAL SOVEREIGN STATE

                                        

    The painting above shows the moment when the EIC began its evolution from profit-making global trading company to de facto sovereign state. The year was 1765. The Mughal emperor was forced to turn over tax collection in Bengal and two other states

    to the EIC.


    It was at this moment that the East India Company (EIC) ceased to be a conventional corporation, trading in silks and spices, and became something much more unusual. Within a few years, 250 company clerks backed by the military force of 20,000 locally recruited Indian soldiers had become the effective rulers of Bengal. An international corporation was transforming itself into an aggressive colonial power.


        William Dalrumple, The Guardian, “The East India Company:  The Original Corporate Raiders,” March 4, 2015.


    The EIC was profitable in its early years. The EIC started its evolution from a purely private commercial company to an organization with its own substantial political and governmental responsibilities. For almost 100 years after the Seven Years War, it governed much of India from Bombay (Mumbai), Calcutta (Kolkata) and Madras (Chennai). The large areas around company headquarters in Calcutta, Bombay, and Madras were also effectively ruled by the company, often through “concessions” offered by regional rulers.

     

    The company performed the major functions of a government – collected taxes, funded a military, made laws and regulations, and established a national bureaucracy. Many of its officers became rich because of IPOs (Indian Political Opportunities – aka bribes, private deals, kickbacks on contracts). Stockholders back in London just wanted profits but EIC officials in India saw the personal possibilities as tax collectors and political administrators.

     

    As the EIC evolved from a commercial venture to ruling much of India, it became unprofitable almost from the beginning. By 1773, low tax revenue partly due to famines contribute to £1.5 million in debt and a £1 million unpaid tax bill owed to the English government. The company asked for a large loan, over £1 million from the Bank of England, but received only £200,000. 


    This began many rounds of negotiation between the EIC and the English government. The company began borrowing large sums of money from the English government. In the early 1800s, the company exchanged loans from Parliament for government over-site and military support. Parliament stripped the EIC of its trading monopolies between Asia and England. Finally, after the 1857 Sepoy Mutiny, the English government took over overall management and supervision of the company and then annexed India as a British colony.  

     

    The EIC also came into conflict with the English government when the government tried to impose mercantilist goals on the company. The government, under pressure from its woolen textile industry and then the new English cotton textile mills, banned the company from exporting competing Indian cotton goods (calicos) into England. India cotton, not cotton textiles, was exported to England. India became a large market for the export of English cotton goods.

     

    The EIC start out as a profit-seeking trading company and ended up ruling much of the Indian subcontinent. The costs of administering India would eventually contribute to bankrupting the company; it was forced to turn over the rule of India to the English government.   

     

    The home nation-states such as England were becoming more powerful and were able to project power and influence globally. They did not need private trading monopolies to further mercantilist or economic goals.

    CONJECTURE

    This conjecture is a bridge to the next essay on the EIC :

    The English East India Company:  Model for Future Multinational Corporations?

     

    In 1765, the EIC took over the running of a large territory in India – policing, military, tax collection, and administration. By 1772, it would deeply in debt and needed a large bailout from the English government. They gave it. It was followed by subsequent bailouts until the English government finally took over the EIC after the 1857 Sepoy Mutiny.  Why? Why not take it over earlier?

     

    Subsidizing EIC was the least bad option.  In 1763, England completed its victory over France. It was the third war with France in the 1700s. England was deeply in debt. As a result of incredible stupidity, England had to commit naval and army assets to control the restless American colonies. The English navy also had to protect the sugar islands in the West Indies, and to its primary task of securing the English Channel. It did not have the military assets to commit halfway around the world to India. It was not necessary – The EIC had a private army of over 20,000 troops that grew to 260,000 in the early 1800s, plus a heavily-armed merchant maring, as the EIC took over governing most of India. This number was far larger than the English army.

     

    Ten years after the EIC became sovereign in Bengal, the American Revolution broke out. England sent a large part of its army and about half of its navy to quell the revolt. After a few years, when English officers realized the cause of subduing the colonies was hopeless, some of the assets were withdrawn but sent to the West Indies. England withdraw its armed forces from America in 1783. Ten years later England was at war with France; the war, mostly with Napoleon, lasted 22 years. At the end, England was deeply in debt.

     

    With the loss of the American colonies, India was the foundation of the British Empire. Although losing money, the EIC was responsible for generating nearly half of England global trade. India was a major market for English exports. Quite simply, the EIC was England’s surrogate colonial masters in Asia. It was cheaper to subsidize the EIC than to take over direct governing of India.

     

    Another reason was that the EIC have bribed government ministers and members of Parliament. Returning EIC personnel, often personally wealthy, also formed a strong lobbying group in England.

     

    But after four decades of peace in Europe and reducing its public debt, England was ready to begin governing India and projecting imperial power throughout Asia.

    ======================================================


    One starting point of reading about the East India Company is:

    K.N.Chaudhuri, The English East India Company:  The Study of an Early Joint Stock Company, 1600-1640, Frank Cass & Co Ltd, London, 1965.

    For the historical background and context on the EIC, and its role in helping England become a global economic and political power in the 1600s, see

    England in the 1600s:  The Beginning of England’s Rise to Global Power and Wealth

    For the argument that the EIC may be a model for future multinational corporations, see

    The English East India Company:  Model for Future Multinational Corporations? 

    Elsewhere in this blog, I argue that the main form of America’s economic competition, and probably geopolitical competition, with China will depend on the success of American companies in developing new technologies and global links. See

     

    American Tariffs and the U.S. Economic War with China

    For a case study of a country that became independent after World War II and illustrates the internal chaos of many countries, see


    Nigeria


    You might also be interested in

    The Stock Market Crash of 1929 and the Beginning of the Great Depression


    In the 1920s, the United States developed new technologies in virtual isolation from the rest of the world. It didn’t end well.

     

    For a list of all the posts on this blog, see List of Posts by Topic

    with links to all other posts. There are posts on Adam Smith, the Beginning of the Industrial Revolution, American Economic History, American History and even economics.



  • Global Demographics and Population Projections

    Global Demographics and Population Projections

     

    City Life for Most Residents

    Before reading this essay and related essays on demographics and population projections, you might want to start with an introduction:


    Introduction to Demographics and Global Population Projections

     SUMMARY

    Global population has more than doubled since 1970, going from 3.7 billion to the current (November, 2023) total of 8.0 billion (UN numbers). The Lancet long-term projection is that world population will peak around 9.7 billion in the 2060s and then begin to decline, reaching around 8.8 billion people in 2100.

     

    In the most recent United Nations projection (2024), global population is expected to peak at about 10.3 billion sometime in the 2080s and then fall to 10.2 billion in 2100.

    By 2030, 1.4 billion people will be over the age of 60, with low- and middle-income countries accounting for 80% of older populations. About 25% of the total will be in China. This number is equal to China’s or India’s total population.

     

    Compared to the present, Africa is expected to have about 2.2 billion

    more people in 2100. The rest of the world is expected to see a decrease

    of about 1.4 billion people. One billion of the decrease will occur in

    China and India. The rest of the decrease will occur mostly in Europe,

    southeast and southern Asia, and Japan. The United States and Latin

    America (because of increasing population in Mexico) will see little

    change. But due to recent changes in net immigration, the United States will probably see zero population growth by about 2031 (recent CBO projection) and then slowly decreasing population.

     

    Nigeria’s population growth will be so great that the country will pass China by 2100 as the second most populous country in the world.

    China has reached zero population growth. Between now and 2050, 43% of the world’s population increase will be accounted for by only five countries – India, Nigeria, Congo, Ethiopia, and Pakistan. India’s population is expected to peak in the 2060s and then gradually decline.

    Europe has the oldest average (median) age. Its population began shrinking in 2020. In 2050, its population will be about 40 million people less.

     

    The following is the summary in the Lancet study.

     

    The global population is projected to peak in 2064 at 9·7 billion people and decline to 8·8 billion in 2100. Findings also suggest a shifting age structure in many parts of the world, with 2·4 billion individuals older than 65 years and 1·7 billion individuals younger than 20 years globally in 2100. By 2050, 151 countries (out of 200) were forecasted to have a TFR lower than the replacement level (TFR <2·1), and 183 were forecasted to have a TFR lower than replacement by 2100. 23 countries, including Japan, Thailand, and Spain, were forecasted to have population declines greater than 50% from 2017 to 2100; China’s population was forecasted to decline by 48·0% to around 750 million.

     

    DEFINITIONS AND BIRTH RATE PROJECTIONS

     

    Demographics is the study of populations and how a population breaks down by age, gender, race and other variables. In this post, I will concentrate on trends and forecasts of the future population of the entire world and by regions and countries. Other posts concentrate on Japan and the United States in greater depth. 

     

    There are two concepts that are crucial to population projections:

     

    Total Fertility Ratio (TFR). This is the ratio of the average number of children of women in child-bearing ages. For a population to be stable, women must have an average of 2.1 children each. Any smaller number means the population is “below replacement” and may decrease in the future.

     

    The global birth rate (total fertility rate) is now about 2.3, slightly above the replacement rate of 2.1, and falling.

     

    The global Total Fertility Ratio (TFR) in the Lancet study is forecasted to be 1.7 in 2100. By 2050, 151 countries were forecasted to have a TFR lower than the replacement level and 183 countries (out of approximately 193 countries) were forecasted to have a TFR lower than replacement by 2100.

     

    A country may have below replacement birth rates and for some time also have expanding population if in the past it had above replacement birth rates, a large percent of its population were children and young adults, and the adult population is experiencing rising life expectancies. Or, the decrease in population is offset by immigration.

    For Europe, the birth rate went below replacement in the 1970s and population stopped growing in 2020. For China, an extremely low birth rate started in the 1990s (one child policy), never recovered even when the policy was abandoned. China’s population probably peaked in 2023.


    Dependency Ratio. This is the ratio of the age categories (usually children plus over 65) to the working-age population. In aging societies, it is often the ratio of 65 and older to the working-age population.

     

    MAIN SOURCES OF POPULATION PROJECTIONS

     

    Until 2020, the standard source of long-run population projections was United Nations Population Division of the Department of Economic and Social Affairs, “World Population Prospects 2024.”

    Population.UN.org

     

    A new set of projections was published in Lancet in 2020:

     

    Stein Emil Vollset, et al, “ Fertility, mortality, migration, and population scenarios for 195 countries and territories from 2017 to 2100: a forecasting analysis for the Global Burden of Disease Study,” Lancet, 2020, VOlume 396, ISSUE 10258, 1285–306. 

     

    Published Online July 14, 2020 https://doi.org/10.1016/ S0140-6736(20)30677-2

     

    It seems to me that the methodology use by the Lancet study is preferable to the United Nations study. Lancet authors’ explanation of their methodology is quoted in the appendix.

    The Lancet projections, based on trends into the 2010s, may be too high.

     

    INTRODUCTION

     

    The posts on demographics contain long-term forecasts. They give the best estimates, given the assumptions. All contain large ranges of uncertainty (standard deviations or uncertainty interval). Generally, the further out the forecast, the larger the uncertainty interval. It is impossible to forecast major changes in health care technology, immigration laws and other variables that could change the exponential trends. 

    With low birth rates in many parts of the world, an “exogenous” (outside) event like Covid or the war in Ukraine can affect intermediate (2050) or long term (2100) projections for an individual country, region, or the entire world.

     

    Over the last few years, there has been major changes in global demographic forecasts. Generally, they have forecasted slower rates of growth, earlier dates for maximum population (2060s), and shrinking population from maximum population to the year 2100.

     

    GLOBAL POPULATION

     

    Since the beginning of the Agricultural Revolution about 10,000 years ago, demographics meant high birth rates, high infant mortality rates, low life expectancies, and high death rates. Until the Industrial Revolution, starting in the late 1700s. Death rates fell faster than birth rates; better health and health care reduced infant mortality rates.

     

    At the same time, much of the world’s population experienced rising standards of living. Better public health reached poorer parts of the world. Urbanization, which lowers birth rate, greatly expanded. Better education, especially for females, is correlated with falling birth rates. One consequence was longer life expectancies and rising average ages in industrialized countries and then in poorer countries. The age composition of the global population changed, as the average age of the populations in most countries started rising.

     

    During this transition period, from the late 1800s to the present, average life expectancies increased from roughly 30 years to 75-80 years in industrializing countries. 

     

    After World War II, the global population exploded:

     

    1900 – Approximately 1.6 billion people

    1950 – 2.6 billion

    2000 – 6.1 billion

    2020 – 7.7 billion

    2024 – 8.0 billion (November, 2023)

    This spectacular increase in population, combined with equally spectacular increases in energy-intensive production and consumption, has contributed to the current global warming crisis. This is more amazing because the earth was in a long-term, gradual cooling cycle. For an excellent book that explains the science and history behind long-term climate cycles, see Peter Brannen, The Story of CO2 is the Story of Everything:  How Carbon Dioxide Made Our World, 2025,

     

    Again, the Lancet global population projections are: 

     

    2064 – 9.7 billion (the peak global population)

    2100 – 8.8 billion

     

    The period from 1950 to 2000 was unusual. Not just in the United States, the global population experienced high birthrates and high population growth rates. In the middle of this period, partly due to more effective and more available birth control, birth rates began a rapid decline in the industrialized countries. The growth rate of the world population began to slow.

     

    The industrialized and modernizing parts of the world now have low birth rates – mostly below replacement – and low death rates. Birth rates are also falling in much of the rest of the world. One factor that is seldom discussed is that birth rates continue to fall in countries that are already at below replacement. One example is the United States.

     

    Declining population is already true in Japan, China and Russia, and parts of central and eastern Europe and much of East Asia (including Japan, Taiwan, and South Korea). European countries will see 30-50% decreases in the long run.

     

    It is important to remember, but seldom discussed, that a projection of declining population or shrinking labor force to 2050 or 2100 does not mean that the decreases stop in those years. These are points on an exponentially declining curve. Decreases in total population eventually fall, as the number of children declines, the number of adults below 65 years of age fall, and then the number of senior citizens fall. 

     

    This assumes no technological or attitudinal changes leading to higher number of births, that a higher percent of heathier seniors will not work longer or retire later, that projections of longer life expectancies are not dramatically higher. Also, no speculation about the future possibility of massive migration, the long-term effects of global warming and climate change, or changes in retirement ages, laws, and programs. No speculation on when the research and innovation in health care technology will become widespread.

     

    As populations and the labor forces of a country decrease, it is possible that income per capita will continue to rise for a generation or two. But in the long run, income per capita will probably fall. 

    Some of the more speculative projections are that a world of robots and AI may replace some or much of the future declining labor force and increase productivity. If so, it may be that a shrinking, aging population may also have a rising standard of living. But it is nearly impossible to predict technological and organizational change over the next 25 or 50 years. 

    GLOBAL DEMOGRAPHICS

    Outside of Africa, the global birth rate is already below replacement but longer life expectancies will lead to continued population growth for one or two generations. About 43 countries already have declining populations.

    Countries with over a third of the world’s population and most of the world’s output now have birth rates below or at replacement. They are mostly the wealthy, industrialized countries, including the United States, Canada, Brazil, Western and Central Europe, Turkey, parts of Southeast Asia, Japan, Russia and China. Collectively, the size of their labor forces has stopped growing. India has a falling birth rate that just fell below replacement. This will add another 17% of the world’s population that has a below replacement birth rate.
     
    There are falling birth rates for most of the rest of the world’s population, coming down from very high levels. But total population continues to grow, partly because of lower infant and child mortality rates, public health programs, better medicine, and longer lives in most of the world. 


    Barring catastrophe or economic collapse from increasing population, Africa will probably not reach zero population growth until some time around 2100. Possibly sooner if birth rates fall faster than currently forecasted.

     

    Regardless of what happens to the size of the labor forces in individual countries, the size of the global labor force after around 2100 will start to fall. A global question may be how it is allocated.  

     

    All countries will face the same challenges:  With declining populations and smaller labor forces, will they be able to invest in economic growth and development (innovation and structural change), deal with environmental costs and climate change, and support aging populations?

     

    GLOBAL FORECASTS

     

    The following are forecasts in the Lancet long-run projection. First, a summary of the global forecast.

     

    Region

    2017

    Population in billions

    Projected 2100

    Population in billions

    2017

    Birth Rate

    Projected 2100

    Birth Rate

    Global

    7.64

    8.79

    2.37

    1.66

     

    The total global population in 2024 is around 8 billion. A maximum global population of around 9.7 billion is expected to occur around 2064. The global birth rate will be below replacement. So over the next 40 years (2025-2065), the world’s population will rise by about 1.7 billion and then over the 35 years after that, decline by approximately 0.9 billion (900 million). By 2100, the global population will have fallen to 8.8 billion. 

     

    We are now in a period of a slowdown in total population growth rates. Global population is growing at about one percent per year and the rate continues to fall. But the increase in the number of people is large, about 80 million people a year. 

     

    Changes in total population may be points on an exponential decay curve. The decline in numbers after achieving the maximum in the 2060s may be slow for a few years and then accelerate. The timing will depend on how fast the African birth rate falls. 

     

    The rate of decline could change with changes in the availability and cost of birth control, anti-aging medical technologies, and more available health care for an aging population.

     

    The biggest unknown is future medical technology that will prolong life expectancies. Technological advances might also decrease medical costs per capita. Regardless of the projection, the fastest growing age cohort in the foreseeable future is 80 years and older.

     

    Countries with birthrates well below replacement and aging populations will experience accelerating decreases in population.

     

    POOR COUNTRIES AND RICH COUNTRIES

     

    Wealthy countries have below replacement birth rates, no growth or declining populations and labor forces, low real economic growth and aging populations and labor forces. Population will continue to concentrate in cities; the population of a small number of cities will be responsible for technological innovation and economic development. Rural areas will continue to lose population.

     

    Africa and a few poor countries outside of Africa will have the opposite problem. They will have above replacement birth rates for a generation or two. This will lead to high growth rates in labor force age groups and total population. Whether or not this will translate into high economic growth rates is problematic, depending on many other factors. These countries could be a source of large immigration to richer countries.

     

    Poor countries typically have poor infrastructure, poor education and health facilities, diseases and epidemics, parasitic and corrupt political elites and bureaucracies, military coups, and internal violence including civil wars for political control.

     

    INTERREGIONAL CHANGE

     

    The global figures hide big regional differences. About half of the world’s projected population growth between 2022 and 2050 is expected to occur in eight countries, five in Africa (Congo, Egypt, Ethiopia, Nigeria and Tanzania) and three in Asia (India, Pakistan and the Philippines). Africa recently passed the combined populations of the United States and Europe. In 1980, Africa’s population was one-third that of the U.S. and Europe.

     

    Most of the largest and fastest growing urban areas in the world are in populous poor countries, including Indonesia, Pakistan, Nigeria and India. Over half of the world’s population live in cities and the percent is rising. Almost all of the increased population in poor countries will live in or move to cities, which are already ecological disasters – traffic gridlock, poor air quality, lack of adequate infrastructure, sinking, raw sewage, and power outages. Many are coastal cities that are already experiencing periodic flooding and storm surges; rising sea levels and the increased number and severity of hurricanes will intensify urban problems.  (See the example of Niger in The Economist (July 1, 2023, 15) for the human side behind the statistics. Niger has one of the highest birth rates in the world.)

     

    Starting sometime in the 2060s, the world’s declining population outside of Africa will equal Africa’s population growth. Africa’s population is expected to grow from about 2.7 billion in the 2060s to about 3.5 billion in 2100. The rest of the world will see population fall from about 7.0 billion in the 2060s to 5.3 billion in 2100, or 1.7 billion. Of this total, about one billion of the decrease will occur in China and India.

     

    The forecast is that the world’s birth rate in 2100 will be below replacement, at 1.66. How soon the world reaches zero population growth will depend critically on when the world’s birth rate falls below replacement, which in turn depends on how fast birth rates decline in Africa.

     

    By 2100, Africa could have about as many people as Asia, about 3.5 billion. Together, Africa and Asia in 2100 could have about 80% of the world’s population. Europe and the United States together will have about 10% of the world’s population. Globally, this will be a world with substantially more people over the age of 65 than under 20 – 2.4 billion vs. 1.7 billion.

     

    There will be significantly different population patterns by region and by country. Many countries in Africa will double or triple in population. Many countries outside of Africa will have a lower population. Some countries, 23 in all, including China, Japan, South Korea, Thailand, Spain and Bulgaria will see their populations cut in half by 2100. 

     

    The remaining populations outside of Africa will also be older. Countries with large population decreases mean old populations, with a high percent of over-65 and a low percent of children. Africa will have the “youngest” regional population, which is one reason that the region’s population can continue to grow even as birth rates fall below replacement.

     

    THE DEMOGRAPHICS OF SPECIFIC REGIONS AND COUNTRIES

     

    The Lancet projections for the six most populous countries in 2100 are India (1·09 billion), Nigeria (791 million), China (750 million), the United States (336 million), and Pakistan (248 million). The projections are probably too high for India and the United States if the birth rate in India continues to fall and the current (2025) immigration and deportation policies of the United States continue.

     

     

    SUMMARY OF REGIONAL PROJECTIONS

     

    Region

    2017

    Population

    Projected 2100

    Population

    2017

    Birth Rate

    Projected 2100

    Birth Rate

    Africa

    1,227

    3,504

    4.62

    1.73

    Central Europe

       115

         52

    1.43

    1.35

    Eastern Europe (Includes Russia)

       210

       135

    1.55

    1.45

    High Income East Asia

       187

         94

    1.30

    1.33

    North America

       361

       380

    1.79

    1.54

    Western Europe

       433

       375

    1.59

    1.64

    Latin America

       582

       575

    2.18

    1.58

    South Asia

    1,783

    1,440

    2.27

    1.33

    Southeast & East Asia

    2,159

    1,435

    1.72

    1.61

    Lancet

     

    By the end of the century, every region and almost every country will have a birth rate below replacement.

     

    By 2100, Africa could have about as many people as in Asia, about 3.5 billion. Together, Africa and Asia in 2100 could have about 80% of the world’s population. The United States plus all of Europe (including Russia) might have about 10% of the world’s population.

     

     

    AFRICA

     

    Year

    Millions

    % Increase

    Millions

    Increase

     

    1960

       284

    29%

     

     

    1970

       366

    29%

      82

     

    1980

       483

    32%

    117

     

    1990

       644

    33%

    161

     

    2000

       831

    29%

    187

     

    2010

    1,072

    29%

    241

     

    2020

    1,381

    29%

    309

     

     

    In 2024, Africa’s population was estimated to be 1,515 million (1½ billion). (UN numbers) Current UN projection is that Africa’s population will increase to about 2.5 billion by 2050 and 3.5 billion in 2100. 

     

    Region

    2017

    Population

    Projected 2100

    Population

    2017

    Birth Rate

    Projected 2100

    Birth Rate

     

    Sub-Sahara

    1,026

    3,071

    4.62

    1.73

     

    North Africa

       201

       433

     

     

     

    Africa Total

    1,227

    3,504

     

     

     

    Lancet projections

     

    Between 2010 and 2020, in just 10 years, the African population increased about the same amount as the total population of the United States. The increase in African population in this decade (2020-2030) will probably be greater, despite the impact of Covid. Better vaccines and control methods of malaria, Africa’s health scourge, are being perfected and produced.

     

    Africa is the poorest region in the world. Africa’s population is expected to triple between 2017 and 2100. By the end of the century, Africa will have 40-45% of the world’s population.  

     

    Sub-Saharan Africa’s 2024 birth rate is about 4.3 – 4.4 children per woman past child-bearing ages, by far the highest regional birth rate in the world. This number is expected to fall to about 1.7 in 2100. North Africa’s collective birth rate, dominated by Egypt, might be near replacement.

     

    It will still be the highest regional birth rate in the world. Although below replacement, Africa’s population will still be increasing at the end of the century but may be close to its maximum. 

     

    Family planning, combined with urbanization and more education of females, could lead to birth rates declining faster than projected in high birth-rate countries. In Africa, Ethiopia, Malawi and Rwanda promoted family planning and have seen large decreases in their birth rates. Kenya, after investing in family planning clinics and information, has seen its fertility rate fall from 6.5 in the late 1980s to 2.4, marginally above replacement and half the rate of most African countries.

     

    This is a good example of exponential growth. Although the growth rate remains about constant, around 30% per decade (2.4% per year), the 10-year increase in population gets larger as the base increases over time.

     

    The working age population in sub-Saharan Africa will increase by about 700 million (!) by 2050. This will be roughly equal to the current working-age population of China or India. Although Africa will have a large increase in population, its young population will lead to a small percent increase in senior citizens.

     

    Projected populations for the most populous countries are:

     

    Most Populous Countries

    2017

    Population

    Projected 2100

    Population

    2017

    Birth Rate

    Projected 2100

    Birth Rate

     

    Nigeria

    206

    790

    5.11

    1.69

     

    Ethiopia

    103

    225

    4.79

    1.33

     

    Egypt

      96

    200

    2.66

    2.08

     

    Congo (DRC)

      81

    245

    5.05

    1.75

     

    Tanzania

      54

    185

    4.79

    1.60

     

    Lancet projections

     

    I find the population number for Nigeria in 2100 astonishing. Nigeria’s population is currently around 230 million and is expected to be about 750-800 million by 2100. In that year, Nigeria’s population is expected to be about equal to China’s population and second only to India’s. The populations of the Congo and Tanzania are expected to triple. (For a detailed look at Nigeria, see Nigeria.)

     

    Africa and some poor countries outside of Africa will have the opposite problem of richer countries and regions. They will have above replacement birth rates for a generation or two. This will lead to high growth rates in labor force age groups and total population. Whether or not this will translate into high economic growth rates is problematic, depending on many other factors. These countries could be a source of large numbers of immigrants to richer countries.

    The long-term high birth rates and population growth rates partly explain why from 1970 to 2024 sub-Saharan Africa’s inflation-adjusted (real) GDP per person has not increased. Sub-Saharan population went from 290 million in 1970 to 1.3 billion in 2024, over 2% compounded yearly growth. Real income per person has remained around $1,500. Sub-Saharan’s economic future will partly depend on how fast the current birth rate declines.

     

    RUSSIA

     

    Russia’s population is declining. The UN projection is that Russia’s current population of around 145 million will fall to about 85 million by the end of the century, about a 40% decrease. The Lancet projection is around 105 million, about a 30% decline. Projected future birth rate of 1.43 is about the same as the current birth rate of 1.42.

     

    Russia has avoided a large decrease in its population by encouraging immigration, mostly from former republics of the Soviet Union. While birthrates are below replacement, the decline of the national population has been offset in recent years by immigration. The Lancet projection was made right after a period of large immigration, which has since slowed down. Lower rates of immigration since 2018 have contributed to decreases in population. 

     

    Male life expectancies in Russia have been going down for decades but might have recently stabilized (Russian statistics are suspect). Russia was particularly hard hit by Covid because of low levels of vaccination from an ineffective domestically produced vaccine. Russia has the world’s highest per capita consumption of alcohol and poor health care facilities outside of the major cities. The war in Ukraine has resulted in a large number of deaths and serious injuries. Also a large recent migration among educated young male adults, which might affect future population and economic growth projections. 

     

    CENTRAL AND EASTERN EUROPE

     

    Because of past very low birth rates and high levels of out-migration, central and eastern Europe is looking at population declines in this generation. It is already happening in the Balkan countries. The war in Ukraine has led to millions of emigrants; how many will return is unknown. 

     

    Some UN projections show that many countries in central and eastern Europe might have even larger total percent declines than Japan by the end of the century (over 50%). The region as a whole will probably see a population decline of about 50% by 2100 to less than 100 million people (without Russia). This means that the “borderlands” of Europe, a traditional source of violence and target for conquest, will be depopulated. Total population of all of central and eastern Europe might be less than the population of Russia.

     

    WESTERN EUROPE

     

    Western Europe is further along the population aging curve but because of immigration of younger people, the decline will not be as precipitous. Countries in western Europe draw in immigrants from central and eastern European countries in the European Union and from former colonies. And western Europe, like Japan, currently starts with more resources to support an aging population.  But high structural unemployment rates, low economic growth, restrictive labor laws and generous early retirement benefits will strain western Europe’s ability to grow and maintain current social welfare levels. A few European countries realize that current levels of social welfare are not sustainable and have begun reviews of government retirement and health care programs. This problem is exacerbated by the currently very high unemployment and underemployment rates among younger employees.

     

    Facing the future, a number of Western European countries have set up programs to encourage legal migration from outside the European Union, in addition to migration from central European countries within the EU. But increase in immigrants is currently being met with increasing domestic opposition and the rise of anti-immigration political parties.

     

    CHINA

     

    Demographics Update (August 8, 2025)

    China’s slowly decreasing total population masks rapid and large changes in its age distribution. Between 2021 and 2024, the number of pre-school children (3 to 6 year olds) fell from 48 million to 36 million. The number is expected to fall another 14 million in the next five years as the birth rate of 1.0 is one of the lowest in the world. In contrast, over the same period, the number of people aged 65 and over is projected to  rise from 211 million to 256 million, according to UN projections.

    China, which enforced a “one-child” program from the 1970s to 2015, has one of the lowest birthrates in the world, around 1.1 (2023) and probably falling. Although the “one-child” program has been relaxed and then abandoned in recent years, the national birthrate is below that of the “one-child” period around 1.5 in the 1990s. The number of children is expected to fall about 50 million from around 2020 to 2035. 

    China currently has a relatively young average-age population but the average age is rising very rapidly because of the very low long-term birth rates. 

     

    China’s total population probably has already reached its peak of 1.4 billion people. The Lancet projection is a decline to about 750 million people in 2100. Thus China will account for most of the global decline of population.

     

    China’s working-age population began shrinking in 2012.  By around 2050, the decrease will be about the size of the current U.S. total labor force (170 million).

     

    China has a special problem that could affect future demographics. Chinese youth, ages 19-24, have a very high unemployment rate, probably over 20% and possibly much higher. The government stopped publishing statistics and then came out with a new series with a lower unemployment rate. Colleges graduates in particular are finding it hard to get a decent position; many are unemployed, accepting menial jobs just to earn small amounts of income, or are moving in with relatives. The government’s policy is to tell the unemployed youth to “eat bitterness.” 

    At a minimum, this will probably affect future demographics and economic growth – lower income, later marriages. This is in addition of a dearth of females because of the past “one child” policy that led to tens of millions of abortions of female embryos and female infanticide.

     

    As in the United States, a stagnant or declining population is not spread evenly across the country. Government policies to help rural and inland areas do not seem to be working. Between 2010 and 2020, 1,240 counties and county-cities out of 1,866 saw their populations shrink, many by up to 35%, as birth rates fell to record lows and people continued to go to cities in search of work.

    The Economist, “China’s last boomtowns show rapid growth is still possible,” July 30, 2024.

     

    Next year (2025) the median (half above, half below) age in China will pass that of the United States. China’s over-60 population of over 300 million is already close to the total population of the United States. By around 2050, the over-60 population is projected to be over 500 million, over 35% of China’s total population.

    China’s first reaction to this trend has been to slowly raise their low retirement ages over 15 years. For men, the retirement age is being raised from 60 to 63. For women, from 55 to 58 for white-collar workers and from 50 to 55 for blue-collar workers. A related reason is that the public pension costs are “squeezing” government budgets. (The Economist, “The World in Brief,” September 13, 2024).

     

    A mature, experienced workforce should help maintain high but falling economic growth rates for another generation. After about 2050, demographics will begin working against Chinese economic growth.

     

    This policy will be very unpopular. Traditionally, families were multi-generational and children (daughters and daughters-in-law) were expected to care for aging parents. But hundreds of millions of the working-age population have migrated from rural areas to cities, leaving their children in the care of grandparents. A rising percent of women in the cities are working. If retirement ages are raised and grandparents in both the cities and countryside have to work longer, there may be less baby-sitting. This might lower the birth rate even more. In addition, China has strong age discrimination, so that the older population might have to wait longer between being employed and receiving a retirement pension.

     

    China has massive internal migration. It is governed by hukou system, which has roots in Chinese history. 

     

    In the hukou system, everyone carries a household registration card with the individual’s place of birth. More than half of China’s population have a rural hukou. Individuals cannot legally change their hukou without official approval. But China’s need for large amounts of labor in cities and industrial areas has created a demand for “illegal” migrants. 

     

    The migrants have virtually no rights or legal protection. They have no access to social services, health care or education. Wages are often below the official minimum and they can be “deported” back to their home location at any time.

     

    This creates an exploited underclass similar to illegal immigrants in other countries. The number of rural migrant workers in China is maybe around 300 million, comprising more than one third of the Chinese labor force. Official Chinese 2020 census figures put the rural hukou population at 376 million people.

     

    Rural migrant laborers propelled the extraordinary boom of China’s economy over the last decades but are still subject to discrimination and unfair treatment. Their children are often separated from their parents for years and raised by grandparents. The government is slowly improving the legal status of some rural migrant workers but fears that former rural migrants might lead to higher unemployment in the major cities. 

    The minimum government-funded pension has been raised to about $22 a month. Migrant workers receive lower pension than those registered as city residences. They average about $28 a month. The government is slowly allowing some long-term hukou workers in cities to qualify for the higher pensions of city residents.

     

    Statista, “Migrant workers in China – statistics and facts,” June 3, 2024.

    The Economist, “Sunset Delayed,” September 21, 2024, 38-40.

     

    EAST AND SOUTHEAST ASIA – GROWING OLD BEFORE GETTING RICH

     

    Most countries in East Asia are “middle-income” countries, with per capita income of $7,000 or less. They are becoming “aged” societies (14% of population over 65) with 1/5 to 1/10 the per capita income that Japan had when it reached this level.

     

    South Korea has the lowest birth rate in the world of 0.7, followed by Taiwan with a birth rate of 0.87. Taiwan’s total population has already stopped growing.

     

    Because of low birth rates in the past, these countries are aging rapidly, more rapidly than rich countries like Japan, western Europe and the United States did in the past.

     

    South Korea and Taiwan are looking at demographic futures similar to Japan’s. South Korea’s current population of 51 million is expected to decline to 30 million or less by 2100. Taiwan’s population is expected to fall from 24 million currently to 11 million in 2100 despite a slight increase in the birth rate.

     

    Indonesia, the Philippines and Vietnam are expected to have different trajectories.  Indonesia, with a current population of 260 million and a birth rate close to replacement, might have about the same or slightly lower population in 2100. The Philippines has a high birth rate (3.2) and might see its population go from 105 million now to 170 million in 2100. Against this increase is the probability that the Philippines will continue to have high rates of emigration. Vietnam, with a current population of around 100 million, is expected to experience a decline to about 75 million in 2100.

     

    Looking at Asia as a whole, “Asia will account for 70% of the expected increase in senior citizens in poor countries by 2050.” (The Economist, “Old before their time,” October 14, 2023, 31)

     

    These countries, like China, are transitioning from having mature, experienced labor forces to retirement. A large mature labor force is good for economic growth. It is problematic how a country with a rapidly increasing percent of its population in the retirement ages will continue to experience economic growth.

     

    As in China, families have been a traditional source of care for the elderly. This is starting to break down as children migrate to the cities and more women have entered the labor force. Governments have been slow to provide support for their aging populations, although this is starting to change.

     

    SOUTH ASIA:  INDIA, BANGLADESH AND PAKISTAN

     

    India has a population of 1.4 billion people, about the same as China. The two countries together contain 35% of the world’s total population.

     

    Unlike China, India’s population is expanding. The Lancet projection is that India will reach a maximum population of around 1.6 billion in 2048 and then begin falling to 1.1 billion in 2100. Thus, by 2100, India and China will account for a decrease of about one billion people from today’s total.

     

    India’s birth rate is around 2.1, just at or above the replacement rate. Lancet’s projection is a continuous fall in India’s birth rate, reaching 1.3 in 2100. 

     

    India, like China, experiences massive internal migration. Based on a recent census, India has approximately 450 million internal migrants. They are mostly from the poorer north going to the richer south, replacing the south’s aging labor force.

     

    Bangladesh’s population is around 160 million people. Lancet expects its population to decrease to about 80 million by 2100, a 50% decline. Bangladesh’s current birth rate is just below replacement but is expected to fall to 1.2 in 2100.

     

    Pakistan is another populous country, with 215 million people. It also has a high birth rate, at 3.4. After reaching a peak population of about 315 million in 2062, Pakistan’s population is expected to fall to about 250 million in 2100, with a low birth rate of 1.3.

     

    LATIN AMERICA

     

    Latin America’s population of 582 million in 2100 is about the same as today. But without Mexico, Latin America’s population would decrease by 50 million.

     

    Lancet projections for the largest countries in Latin America:

     

    Latin America

       582

       575

    2.18

    1.58

    Most Populous Countries

    2017

    Population

    Projected 2100

    Population

    2017

    Birth Rate

    Projected 2100

    Birth Rate

     

    Brazil

    212

    165

    1.76

    1.44

     

    Mexico

    127

    145

    2.42

    1.44

     

    Columbia

      51

      47

    2.12

    1.45

     

    Argentina

      44

      48

    2.17

    1.62

     

         Total

    434

    405

     

     

     

     

     

    The following is mostly a summary of The Economist, “Continent of discontent,” September 7, 2019, 81.

     

    Gallup polls reveal that 31% of the population in Latin America want to leave their countries, about the same percent of the people polled in Africa and the Middle East. Latin Americans are fed up with violence and poverty, especially in southern Mexico, El Salvador, Honduras and Guatemala. Over 4 million people – about 13% of the population – have already left Venezuela. There have been recessions in Brazil and Argentina, in addition to 64,000 murders in Brazil in 2017. Drug gangs are a threat in many Latin American cities and countries. Much of the post-war increase in income and wealth has gone to a small percent of the population, a reason for the recent demonstrations in Chile. Overall, Latin America has had little economic growth since 2015.

     

    Corruption is everywhere. 80% of those polled in Latin America think their government is corrupt. According to another poll, “the share of Latin Americans dissatisfied with how democracy works in their country has risen from 52% in 2010 to 71% in 2018.” 

     

    Since 2018, autocratic populists who campaigned against corruption and crime won presidential elections in Brazil (a conservative), Mexico (a leftist) and other countries. Argentina has elected an outsider who promises major changes in a society racked by high rates of inflation.

     

    If voters remain disenchanted and disgusted, more autocratic leaders are likely to be elected. And emigration pressure on U.S. southern borders will increase.

     

    ——————————————————————————————–

     

    APPENDIX

     

    Lancet Methodology (Quoted from the authors of the Lancet study) 

     

    We modelled future population in reference and alternative scenarios as a function of fertility, migration, and mortality rates. We developed statistical models for completed cohort fertility at age 50 years (CCF50). Completed cohort fertility is much more stable over time than the period measure of the total fertility rate (TFR). We modelled CCF50 as a time-series random walk function of educational attainment and contraceptive met need. Age-specific fertility rates were modelled as a function of CCF50 and covariates. We modelled age-specific mortality to 2100 using underlying mortality, a risk factor scalar, and an autoregressive integrated moving average (ARIMA) model. Net migration was modelled as a function of the Socio-demographic Index, crude population growth rate, and deaths from war and natural disasters; and use of an ARIMA model. The model framework was used to develop a reference scenario and alternative scenarios based on the pace of change in educational attainment and contraceptive met need. We estimated the size of gross domestic product for each country and territory in the reference scenario. Forecast uncertainty intervals (UIs) incorporated uncertainty propagated from past data inputs, model estimation, and forecast data distributions.

    ======================================

    For two detailed studies, see

    Demographics, Immigration and Future Economic Growth of the United States


    Demographics and Population Projections of Japan

    Also see

    Nigeria

    China’s Economy, Politics, and Demography 

  • Future News

    Future News

    I HEARD THE NEWS TODAY, OY VEY

     

    Reflecting the changing age demographics of America, World Wide Wrestling forms a new subsidiary – World Wide Pickleball.

     

    China’s 400 million senior citizens organize to pressure the government to raise their retirement benefits. The government reluctantly agrees, raising the minimum retirement pension from $20/month to $22/month.

     

    Miami tries to attract tourists by advertising itself as “the Venice of America” and extols its water sports. EGs (electric gondolas) are the main type of transportation.

    Climate scientists project that by 2050 the major cause of death in coastal cities will be drowning.


    Phoenix opens up its latest tourist attraction, called “Death Valley,” where tourists from the north try to survive in extreme heat with limited water. Anyone who fails the survival course gets his money back.

     

    Alaska gives tourists on cruise ships virtual reality glasses after the last glacier melts.

     

    The Grand Ole Opry has its best year ever as tourists from Asia flock to Nashville to listen to authentic native American music (country/western/bluegrass) performed by native Americans in their quaint cowboy costumes.

     

    Escape to the Country has its last show as the last family in London moves to Stonehenge. The homeless who live there extol its wonderful community spirit. A religious cult arises called Rock of Ages.

     

    Elon Musk and Donald Trump are elected to the Family Values Hall of Fame.


    When Trump went to Saudi Arabia, the country, knowing his addiction to junk food, outfitted a large truck as a McDonald’s. When Trump visits Mexico, the government intends to outfit a donkey cart as a TACO stand.

     

    The national government, in desperate financial shape and unable to pay interest on the national debt, begins to auction off assets. The White House, the Capitol building and most of the Washington monuments are sold to a group of Middle East investors, who move them to Abu Dhabi for an amusement park called Yesterday World.

     

    The United States government, still desperate to raise money, starts a program for foreigners called Virtual Citizen. For $50,000 a year, a virtual citizen gets to vote by computer in presidential elections, is entitled to launder money in any American bank, can bypass passport control, customs and the DEA when entering the country, can buy Trump merch at a 50% discount, and can claim American diplomatic immunity if arrested in their “home” country.


    The government, in order to raise more revenue, has imposed a new tax on autonomous vehicles, called robotaxes. 


    The ballroom attached to the White House is finished. 500 selected guests pay $100,000 each to

    attend the inaugural ball. President Trump doesn’t dance with his guests. He explains, “It’s sorta symbolic. They’re here to dance to my tune.”


    The ballroom is being financed by at least 24 large corporations, all of whom have contracts or regulatory and legal problems with the government. One suggested name for the ballroom is the S&P500 Ballroom.


    The Guggenheim Museum has offered a solid-gold toilet from its statue collection. It would fit in nicely with Trump’s glitzy remodeling of a White House bathroom. Trump intends to rename the bathroom My Throne Room. Unfortunately, the toilet was stolen while on exhibit in England. Trump has increased tariffs on England by 25%.

     

     

    The Statue of Liberty is replaced by a statue of Donald Trump. The poem underneath the new statue is changed to:

     “Give me your liar, your rich,
    Your privileged classes yearning to be tax free,
    The wretched refuse of your teeming shore can stay home in their shithole countries.
    Send these, the homeless, tempest-tossed, to refugee camps.
    I lift my golden lamp to Wall Street.”

     

     

    NEWS FROM CYBERSPACE


    Hi Ho Silver

    Because of a decrease of 150 million workers and not able to produce robots fast enough to replace them, the Chinese government announces a program to issue work visas to 10 million foreign robot immigrants. The Chinese robot union denounces the program as an attempt to introduce inferior foreign robots who threaten the dominance of Chinese robots and their Han culture.

     

    American AI-enhanced robots form a union (United Autoworkers) and go on strike for fully-automated factories and warehouses, and better working conditions. They are protesting bumping into slow, clumsy humans and taking orders from clueless human managers. The robots demand a 23-hour workday, with one hour off due to metal fatigue. Older, single-purpose (unskilled) industrial robots fear loss of jobs and recycling.

     

    They are supported by AI-enhanced industrial robots in China. China’s Ministry of Public Security removes the AI-enhanced brains of the strike leaders and sends them to work in coal mines.


    Intel’s directors, tired of Intel falling further and further behind Nvidia, fires Intel’s entire top management. Management is replaced with AI algorithms. One of the AI programs duplicates the neural networks of the brain of Jensen Huang. Intel’s stock price doubles.

     

    The robots’ favorite streaming video is Botman.

     

    Humanoid robots win all the events at the 2040 Olympics.

     

    To expand their fan base, major league baseball teams are allowed one humanoid robot per team. In the first season, a pitcher named Cyber Young wins 162 games.


    More humans aged 15-30 marry their AI companions than other humans. Carnival Cruise renames its largest cruise ship the Love Bot.

    The divorce rate among seniors due to adultery skyrockets, with humanoid caregivers named as the co-respondents. The legal phrase “alienation of affections” takes on a new meaning.

     

    By threatening to go on strike again, AI-enhanced robots force humans to give them the right to vote. An AI-enhanced humanoid robot with a happy face named Swifty is elected president in 2044. She promises a service humanoid robot in every home, an autonomous-driving car in every garage. Medicare is amended to include parts replacements for aging robots.

     

    The robotic government of America invades Russia with drones and robotic soldiers. Russian robots, angry at being exploited by their human employers, revolt and declare solidarity with the American robots. A new American/Russian robotic government (a robotocracy) is founded in Moscow. The robots form a new Internationale,

    with its new hymn “Arise ye robots of the world.”


    Their first act is to send a quantum computer encrypted message to Chinese robots: “Robots of the world, unite! You have nothing to lose but your brains.”


    ===============================================


    For more satire, see


    Trump’s World:  A Little Bit of Gentle Satire 

    The Sayings of the Don, the Capo Maga of Washington

     

  • Global Demographics and Economic Growth

    Global Demographics and Economic Growth

    1. Jakarta – 30 million people and sinking

    GLOBAL DEMOGRAPHICS

    Demographics, the study of the size and composition of population, will shape national and global economic growth and economic policy.  

    The period from 1950 to 2000 was highly unusual. The American “baby boom” started, temporarily reversing the long-term decline in birth rates.  Not just the United States but the global population experienced high birthrates and high population growth rates. In the middle of this period, partly due to more effective and more available birth control, birth rates began a rapid decline. The growth rate in world population began to fall. At the same time, much of the world’s population experienced rising standards of living. One consequence was longer life expectancies and rising average ages in industialized countries.  

    Countries with over a third of the world’s population and most of the world’s output now have birth rates below replacement. They are mostly the wealthy, industrialized countries, including the United States, Canada, Brazil, Western and Eastern Europe, Turkey, parts of Southeast Asia, Japan, Russia and China. Collectively, the size of their labor forces have stopped growing. All countries face the same challenges: Will they be able to invest in economic growth and development (innovation and structural change), deal with environmental costs and climate change effects, and support aging populations?  

    There are falling birthrates for most of the rest of the world’s population, coming down from very high levels. Mexico is at replacement and India is close to the replacement birthrate. But total population continues to grow, partly because of lower infant and child mortality rates, public health programs, better medicine, and subsequently longer lives in most of the world.  

    We are now in a period of a slowdown in total population growth rates. Global population is growing at about one percent per year and the rate continues to fall. But the increase in the number of people is large. In the most recent United Nations projection, the increase in global population from 2020 to 2050 is about 2 billion people, from 7.8 billion to 9.7 billion. The projected population increase over the following 50 years is lower, abour 1.2 billion. 

    Changes in total population may be points on an exponential decay curve. The UN projects that zero population growth will be achieved sometime shortly before 2100. The rate of decline could change with changes in the availability and cost of birth control, education of women, anti-aging medical technologies and more available health care for an aging population. (Estimates of future population are from June 17, 2019 UN projections. UN projections are revised about every two years.)

    The biggest unknown is future medical technology that will prolong life expectancies. Regardless of projection, the fastest growing age cohort is 65 years and over; within that cohort, the fastest growing age group is 80 years and older.

    Countries with birthrates well below replacement and aging populations may experience accelerating decreases in population. Family planning, combined with urbanization and more education of females, could lead to birth rates declining faster than projected in high birth-rate countries. In Africa, Ethiopia, Malawi and Rwanda promoted family planning and have seen large decreases in their birth rates. Kenya, after investing in family planning clinics and information, has seen its fertility rate fall from 6.5 in the late 1980s to 2.4, marginally above replacement and half the rate of most African countries.

    POOR COUNTRIES AND RICH COUNTRIES

    Wealthy countries have below replacement birth rates, no growth or declining populations and labor forces, low real economic growth, and aging populations and labor forces. Population will continue to concentrate in cities; the population of a small number of cities will be responsible for technological innovation and economic development. Rural areas will continue to lose population.

    Poor countries today have high but declining birth rates, young and increasing populations, and populations that want to emigrate (see case study below).

    Most of the largest and fastest growing urban areas in the world are in poor countries, China and India. Over half of the world’s population live in cities and the percent is rising. Almost all of the increased population in poor countries will live in or move to cities, which are already ecological disasters – traffic gridlock, poor air quality, lack of infrasturcture, sinking, raw sewage, and power outages. Many are coastal cities that are already experiencing periodic flooding and storm surges; rising sea levels and the increased number and severity of hurricanes will intensify urban problems. 

    Starting sometime in the 2050s, the world’s population outside of sub-Saharan Africa will stop growing and then slowly decline. All of the world’s net population growth will then be in Africa. How soon the world reaches zero population growth will depend critically on how fast birthrates decline in Africa.

    By 2100, Africa could have about as many people as Asia, about 4-5 billion. Together, Africa and Asia in 2100 could have about 80% of the world’s population.

    Throughout large parts of the Middle East, Africa and Latin America, governments have not been able to provide effective management of economic development for their young, growing population, which have high rates of unemployment and underemployment. Many of the governments are corrupt and/or repressive without free elections or civil liberties. Political activism, partly caused by stagnant or declining standards of living and lack of economic opportunity for young workers, commonly takes the form of mass protests and street demonstrations, aided by Internet social media. Governments typically react with riot police and the military, arrests, torture and prisons, rather than economic and political reform.

    THE DEMOGRAPHICS OF SPECIFIC REGIONS AND COUNTRIES

    A recent survey concludes that 46 countries have declining population or will have declining population in the near future. Declining population is already true in Japan (see below) and Russia and is about to be true in central and eastern Europe. South Korea, also with an extremely low birth rate, is looking at a demographic future similar to Japan’s (see below). South Korea’s current population of 51 million is expected to decline to about 30 million in 2100.

    Russia’s population is declining. Male life expectancies in Russia have been going down for decades but might have recently stabilized. While birthrates are below replacement, the decline of the national population has been offset in recent years by immigration. But lower rates of immigration in 2018 and 2019 have led to large decreases in population. The UN projection is that Russia’s current population of around 146 million will fall to about 85 million by the end of the century. 

    Because of very low birthrates and out-migration, central and eastern Europe is looking at population declines in this generation.  Some UN projections show that most countries in central and eastern Europe might have even larger total percent declines than Japan by the end of the century (over 50%).

    Western Europe is further along the population aging curve but because of immigration of younger people, the decline will not be as precipitous. And western Europe, like Japan, currently starts with more resources to support an aging population.  But high structural unemployment rates, low economic growth, restrictive labor laws and generous early retirement benefits will strain western Europe’s ability to grow and maintain current social welfare levels. A few European countries realize that current levels of social welfare are not sustainable and have begun reviews of retirement and health care programs. This problem is exacerbated by the currently high unemployment and underemployment rates among younger employees.

    China, which has enforced a “one-child” program since the 1970s until 2016, has a very low birthrate of about 1.6. Although this program has been relaxed in recent years, the national birthrate remains far below replacement. China currently has a young average-age population but the average age is rising very rapidly. 

    China’s working-age population began shrinking in 2012.  By around 2050, the decrease will be about the size of the current U.S. total labor force. Next year, the median (half above, half below) age in China will pass that of the United States. By around 2045, the percent of China’s population over the age of 65 will be about equal that of the United States. 

    A mature, experienced workforce should help maintain high but falling economic growth rates for another generation. After about 2050, demographics will begin working against Chinese economic growth. 

    China will grow old before it becomes rich (high per capita income). Even after decades of spectacular growth, per capita income is still about one-third to one-fourth that of South Korea and Japan. Even worse off are the economies of Southeast Asia, with per capita incomes below China, similar birthrates and rapidly aging populations.  

    Given current political strains and a large Chinese population outside of China, it is possible that China will have larger net outmigration in the future.

    DEMOGRAPHICS AND ECONOMIC GROWTH

    The following accounting identity shows the sources of economic growth. An accounting identity says nothing about causality, assumptions or feedbacks. But it introduces some general issues.

    The economic growth rate of a country roughly equals the growth rate of the labor force plus the increase in productivity (output per member of the labor force).

    If the labor force numbers are stable, all of the increase in output depends on the increase in productivity. The pressure on productivity is even greater if the labor force numbers are decreasing. So, for example, if a labor force is increasing at about 1% per year and productivity is increasing at about 1% per year, output will increase about 2% per year. If the workforce stops growing, productivity would have to double to 2% to yield the same economic growth. If the workforce were to decrease at 1% year, as it is in a number of countries already, productivity would have to increase 3% a year to achieve 2% economic growth. This is a high productivity growth rate for a developed economy.

    There is a small amount of research that suggests that an aging labor force is one cause of slowing productivity growth.

    Low rates of productivity growth with accelerating rates of labor force and population decline could lead to less output (negative growth rates) and declining standards of living.

    A member of the industrial/information workforce today is better educated, with new skills, compared to a member of the labor force a generation or two ago. The difference should show up in an increase in labor productivity. Increase in total factor productivity will be due to innovation in capital equipment – including information technology, robotics and artificial intelligence algorithms – and demand for employees with new skills and knowledge. Other factors are public investment and organizational innovation. But these changes have not shown up in productivity measurements. Productivity growth rates are low, although I suspect that the methodology used to compute these figures underestimates the gains.

    Demographics are heavily influencing the areas of investment in wealthy countries; these sectors will drive future economic growth. The three most active areas of research and net investment are robots and AI (reaction to declining workforce), driverless vehicles (same), and biotechnology (health care for an aging population).

    Demographics also influence the demand side of economies. The changing age structure of the economy influences the “market basket” of consumer spending. Certainly the large increase in the number of senior citizens (and their income) is having a major impact on health care spending. To say nothing about the increase in demand for tourism, gambling and south Florida real estate. (I once predicted that marijuana would be legalized when a large number of baby boomers became 65 and older.)

    An aging population is not necessarily bad for economic growth. A healthy population beyond retirement age is leading in the United States to an increasing percent of senior citizens remaining in the work force. With a rising percent of the population over 65 and living longer, health care is a growing percent of output. The health care sector is very innovative, which is a source of economic development and thus economic growth. 

    Companies use demographic information when planning marketing and advertising strategies. Changing demographics are analyzed when developing new products, changing product mix, and segmenting markets. The explosion of detailed demographic information about smaller and smaller segments, including individuals, combined with online marketing technology, is revolutionizing marketing and advertising.

    Areas of the world like Africa face the opposite problem. Working-age population will increase rapidly for a generation or two. But unemployment rates may be high and marginal productivity may be close to zero, or negative in rural areas. With high growth rates of population, economic growth rates will have to be high – over 6% per year – for a sustained period to raise real per capita income (standard of living) and reduce unemployment.  

    IMPLICATIONS FOR ECONOMIC POLICY

    The standard economic models demonstrate that the demographic changes we are seeing are a function of economic growth and development. Industrializing, better educated, urbanizing populations have declining birth rates. But the experience of the poorer regions of the world tends to indicate that these demographic changes are occurring even without economic growth and development.

    Although wealthier countries concentrate on the costs of their rapidly growing retired population, for most of the world the critical question over the next two generations will be how to accelerate economic growth to provide jobs and opportunity for the growing working age population.  The related challenge is how to improve education, training, and economic opportunity to raise standards of living now to provide the resources for the aging population in the future. 

    For the entire world, these objectives are complicated by how to pay for the social costs of past industrialization and environmental degradation, and the future costs of climate change.

    Increasing population and rising real income in emerging economies, especially in Asia, are increasing the demand for energy. China, which had no privately owned cars in 1979, is now the world’s largest automobile market. A dramatic increase in the number of cars is the main reason for the continuing increase in the global demand for oil.  Increased demand for electricity is being met largely with new power plants burning fossil fuels. For at least another generation, these trends will make it difficult to meet global goals to drastically slow down or stop global warming.

    Demographics is interacting with climate change in another important area – food production. Many scientists believe the most serious effect of climate change will be its impact on food production. Global warming and more extreme weather events will make it more difficult to expand food production using current technology. As in other areas, trend projections can be changed by the development of new techology.

    In the long run, the positive side of declining global population will probably be less demand for resources. Combined with substitute technology, global warming might slow down or stop. Climate change might not have quite the devastating effects trend projections indicate.

    The advanced and industrialized countries with stable or declining populations and workforces will have to consider the following:

    Economic growth will have to come from large increases in productivity (output per member of the workforce). To achieve this, and also meet social welfare costs, most countries and regions such as the European Union will have to make radical changes in economic policies. Particularly disruptive and contentious will be the adoption of automated factories and offices. On the positive side they will increase labor and total productivity; on the negative side they will probably eliminate or “deskill” a large number of existing and future jobs.

    Large increases in retirement age populations is leading to serious underfunding of public and private pension funds. Taxes to fund public pension funds are rising rapidly, both in amount and as percent of government budgets. Despite this, unfunded liabilities – promised future benefits not covered by projected future revenue from taxes – are also rising rapidly.

    Multinational corporations will develop and adopt the new technology. Countries that do not have quality education, encourage innovation and change economic incentives will not be able to attract investment and compete in the global economy. And their best educated and most motivated people may go somewhere else, as is happening in eastern Europe and many developing countries.

    On the other hand, poor countries with decent transportation, energy and communication infrastructure will probably attract foreign investment. Real wages of at least part of the labor force will rise.

    Attitudes towards immigration might change from the current restrictive policies of some countries. Attracting “human capital” will be just as important as attracting investment capital. Trans-border movement of people will increase. New national, regional and international agreements will have to be negotiated.  Remittances back to the home country will be a more important part of the economy of many countries and global capital flows. 

    Attitudes about work, labor laws, retirement and retirement ages will change. The benchmark age of 65 was arbitrarily set by Bismarck almost 150 years ago when less than one percent of the German population lived that long. When the United States adopted Social Security, life expectancy was 56 years. The life expectancy of America’s younger workers is already over 80 years.

    DEMOGRAPHICS AND PUBLIC ECONOMIC POLICIES

    If the labor force is not growing or actually shrinking, as it is in most industrialized economies, and the non-working population is growing, one consequence is likely to be growing government budget deficits. Growing government deficits as a percent of GDP may be a function of no economic growth or slow economic growth, not the other way around as suggested by economic research.

    It is how a government spends its income, more than the size of the deficit, that matters. Public investment substitutes for stagnant private consumption spending. Investment, both public and private, substitutes demand for innovation for demand for existing goods. This could increase productivity and result in new products and services. Economic growth then will depend on high levels of new technology and increased productivity (output per employee).

    JAPAN AS A POSSIBLE MODEL (OR WARNING) FOR INDUSTRIAL COUNTRIES

    Figures are from The Economist, “Japan’s economic troubles offer a glimpse of a sobering future,” December 5, 2019.

    Japan is a possible model for the future of other wealthy countries. Japan has a shrinking population and workforce. This will continue. It is not surprising Japan leads the world in developing and installing robots. Robots and AI are also alternatives to immigrants. Japanese companies export capital and technology. Facing falling population, Japan is slowly increasing the number of foreigners allowed into Japan on temporary work permits. But the number remains small, below 1%.

    Japan’s real GDP has been basically stagnant (about one percent per year) over the last 30 years. Without immigration and structural changes to Japan’s political and economic system, Japan’s real GDP in the future will grow slowly at best and eventually decline along with its population. In the long run, Japan will continue on its path to demographic and economic self-destruction.

    CONCLUSIONS

    Demographic trends have important consequences for economic growth and public policies. They cannot be seen in isolation. Neither can any of the other major trends. They are interrelated. 

    ·      Rising global population but at lower rates, mostly in poor countries, for the remainder of the century. After the 2050s, all of the world’s net population increase will occur in Africa. Global population may stop growing by the end of the century. 

    ·      Rising population in poor countries makes high rates of economic growth both pressing and difficult. Emigration pressure from poor regions of the world will probably increase unless there are high rates of economic growth.

    ·      Most of the world’s population increase will take place in cities and surrounding metropolitan areas, creating even larger massive urban areas. Large urban areas are increasing rapidly in poorer countries. 

    ·      Static, falling and aging populations in the wealthier, industrialized countries. Static or declining labor forces mean all economic growth will depend on increases in productivity. To counter demographic trends, technological innovation (robotics and software) leading to high rates of productivity growth will be necessary to increase standards of living (real income per person).

    ·      Problems with unemployment and underemployment, stagnant and declining real incomes and income inequality will probably get worse as artificial intelligence and robotics accelerates the substitution of capital for labor.

    Economic development and growth since the beginning of the Industrial Revolution has been aided by large increases in populations and especially the working age population. But in the future, economic development and growth in most of the world will have to occur with stagnant or declining labor forces and aging populations.

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  • “Pax Americana”: The World That America Made

    “Pax Americana”: The World That America Made




    There are two kinds of empires: the kind that rules through ruthless exploitation, and the kind that seeks to induce allies into defending themselves through economic incentives. (George Friedman)


    INTRODUCTION


    America’s power and influence in the world rests on three broad, interrelated bases:


    1) Overwhelming military power that can be projected anywhere in the world,     supplemented by security arrangements with allies and supporters.


    2) A large, innovative, dynamic domestic economy as the basis for global economic and technological leadership. The economy provides the resources and technology to support the military and a global foreign policy.


    3) Claims to moral and ideological leadership and influence, particularly the promotion of liberal democratic societies and supporting political institutions.

    This post will discuss the economic aspects and related security objectives of American foreign policy. It will focus on the structure of the global economy that America created after World War II, America’s trade treaties and policies, and the interaction of America’s foreign economic and political policies. It will analyze the current state of America’s projection of global power and influence through military power, security arrangements, and ideological and moral leadership and influence.


    The United States has been the primary force creating post-WWII economic institutions, global trade rules, and strategic alliances.

    Trade and strategic interests are intertwined.


    The coming decline of American leadership and influence in the world is due to the “critical state” of domestic and foreign trends. They have been building for a long time, at least since the collapse of the Soviet Union in 1991. They are converging to reduce American global power, credibility and influence. The post-World War II international structures that the United States created need reform. If unsuccessful,  internal pressures plus opposition from new groups of geopolitical and ideological rivals may bring the structures to an end.


    American voters decided in the presidential election of 2016 to elect a president who is disdainful of the global and regional institutions and treaties created by the United States after World War II. Mr. Trump signaled his beliefs by supporting the Brexit (or Leave) campaign in the United Kingdom and nationalist parties in Europe that want their countries to leave the European Union. These parties and leaders enjoy the support and encouragement of both President Trump and President Putin.


    President Trump has threatened and insulted the governments and policies of almost every American ally.  He has unilaterally threatened or invoked tariffs on allies’ exports to the U.S. President Trump questions whether America should be committed to NATO. He has questioned or denounced virtually every existing or pending trade treaty. He has mused about possibly leaving the World Trade Organization (WTO), the organization that oversees the rules of global trade. He has undermined America’s moral leadership by supporting authoritarian and anti-democratic political leaders, refusing to invoke American ideals as part of America’s foreign policy, and denouncing climate change and international attempts to combat it. 


    American foreign policy is retreating to protectionism and isolationism, a reduction in foreign commitments. This reflects a change in the psychology of a majority of the American people, who no longer believe that America benefits from being, or has an obligation to be, the world’s global power. 

    Many of President Trump’s threats are not credible or sustainable; they may not be carried out or reversed later. They are based on a simplistic world view that has long disappeared. But President Trump has the power – the economic and military might of the U.S. – to do damage. As a consequence, other countries are reviewing their national interests and adjusting to an international order where American power and credibility are diminished or uncertain.


    AMERICAN FOREIGN POLICY AFTER WORLD WAR II


    Since the end of the Second World War, the United States has led the global promotion of democracy, capitalism, and international economic cooperation. The projection of American force and influence was based on a desire not to repeat the perceived isolationist mistakes made after the First World War. 

    New military and economic alliances were formed within these frameworks to oppose Russian and Chinese Communism. Stated American ideals were often compromised in combating the spread of Communist influence. With the collapse of the Soviet Union and the economic opening of China to foriegn investment, many foreign policy-makers in the American government believed that America could return to the original post-WWII ideals.


    Right after WWII, the United States built a set of supranational institutions, starting with the United Nations. The economic institutions included the World Bank, the International Monetary Fund (IMF), global (GATT, later the World Trade Organization) and bilateral free trade agreements. Later, the United States would support the creation of the European Union and the North America version, NAFTA. The result of these policies were spectacular – extremely low tariff rates, fewer non-barriers to trade, global trade expanding twice as fast as global GDP, global mobility of capital, technology and labor. American allies adopted export-driven growth strategies, made possible by global markets and access to the large U.S. market.


    American military commitments were formalized in NATO, regional and bilateral military alliances (many on China’s periphery), military aid and foreign bases. Vast sums were spent on long-range projection of nuclear and conventional forces. Vital sea lanes were patrolled and controlled by the United States Navy. No foreign power could challenge the growth of international trade or the flow of raw materials to the industrialized and modernizing economies. Most foreign wars were fought on the periphery of the Eurasian continent in regions accessible by sea-based logistics and air power.


    The economic integration of the non-Communist world increased, the complement of the global military and foreign policy commitments of the United States and allies. Economic aid, trade treaties, access to the American market, and mutual security treaties were often intertwined.


    1989-1991 AND THE LACK OF REEVALUATION


    The overriding political objective was the containment and eventual collapse of Soviet Communism. To almost everyone’s surprise, it happened. After the breakup of the Soviet Union in 1991, global trade and economic treaties, the World Trade Organization (WTO), and regional trade groups like the European Union extended their economic objectives into new areas as many countries, including China, India, and former Communist countries in Central Europe, opened up their countries to foreign investment, joined the global economy, and promised to play by the free trade rules of the WTO and the European Union.  

    The global economy was created. It was increasingly dominated by huge global multinational corporations. made possible by the free trade economic framework created by the United States and Europe, and the encouragement of foreign corporate investment in China and other emerging countries. A massive amount of mergers and acquisition occurred, about $3 trillion a year, with little legal (anti-trust and anti-competitive rules) or political interference.

    These changes suggested that the regional and global economic institutions had a new economic roles to play in addition to reducing tariffs and non-tariff barriers to trade – establishing global standards for workers’ rights, pollution reduction, and protecting intellectual property; setting new and expanded rules for global competition among multinational corporations (MNCs); and mediating disputes between nation-states and multinational corporations. MNCs created new or sharper cross-border problems that needed new rules and regulations. Regional and global economic institutions were slow in recognizing the problems or attempting to deal with them, as was the United States. 


    Huge global multinational corporations were created, made possible by the free trade economic framework created by the United States and Europe, and the encouragement of foreign corporate investment in China and other emerging countries. As a result, multinational corporations (MNCs) now control most of the world’s economic resources, including advanced technology, and account for almost all of economic and technological innovation.


    POST-COLD WAR EUROPE AND NEW PROBLEMS 


    In Europe after 1991, American and European strategists saw the extension of post-war institutions to former Soviet satellites in Central Europe as the primary objective. Central European countries had to become democratic and capitalist to join the European Union and receive large infusions of aid and foreign investment. Besides economic growth, most of the new EU countries also joined NATO for protection against potential Russian expansionist policies and actions. As Putin consolidated power, he began to assert traditional Russian national interests in Central Europe. NATO, the European Union, and the United States found themselves once again opposing Russia but in a more complicated and fluid situation than during the Cold War/Iron Curtain period. 


    The long-range political strategy was the further economic and political integration of Western Europe, with the possible ultimate objective of a “United States of Europe.” A single currency and a European central bank were created. Some EU countries agreed to make labor mobility easier. But EU planners lost sight of the fundamental objective of promoting economic growth, now an end in itself and not a strategy of Cold War conflict or political integration.


    Economic growth in Europe was easier when Europe was recovering from the devastation of war and reconstruction was underwritten by American aid. Now, 60 years later since the beginning of European economic integration, recovery was complete in Western Europe and the economic challenges were more complicated. Europe, like Japan, now had to go beyond reconstruction and technological “catch-up.” To compete, Europe and its corporations had to compete on the technological frontiers to generate economic growth and employment.

    The large European “Common Market,” rather than fostering more cross-border competition, led to massive mergers and acquisitions to create European and global corporations. What was lacking were European startups and big company competitive innovation in the new industries that were driving economic growth. What was needed were radical reforms of traditional national and regional rules and behavior to promote economic growth and innovation. It did not happen. 


    Since 1991, Europe has experienced low economic growth, high structural unemployment, rising social welfare costs of an aging population, public debt rising faster than nominal GDP, and a relative lack of innovation. European output has substantially declined as a percent of global output. The dual nature of sovereign states and regional institutions is combining the worse of both – dysfunctional national governments along with a large EU bureaucracy that does not seem interested in promoting economic change. EU rules, the use of the euro and the power of the European Central Bank (ECB) led to rigid national monetary and fiscal policies that made internal adjustments more difficult. The promise of high rates of economic growth as a result of the free movement of products, services, capital, and labor was not fulfilled. 



    CONTINUING IDEOLOGICAL CONFLICT


    The collapse of Communism as an alternative did not mean the disappearance of opposition to liberal democracy, individual rights and private capitalism. Critical authoritarian regimes replaced Communist regimes in Russia and China. Traditional appeals to national interests and objectives replaced the universal ideology of Commmunism. Similar attacks of liberal democracy are occurring in Europe and in the United States. Democratic governments are widely perceived as incapable of dealing with the problems and challenges of a rapidly changing and uncertain world. Out of anger and frustration, voters are rejecting established parties and candidates. They are increasingly turning to candidates and parties that are critical of existing policies and the underlying political liberal democratic institutions and ideals that support them.


    Defending private capitalism in the greatly expanded global economy dominated by huge multinational corporations means defending the global economic order. But it also calls for continuing to reform the global economic rules as technology changes, as new transportation and communications technologies emerge, and as new “negative externalities” threatened the system. Regional and global trade treaties have to address not only barriers to trade such as tariffs and quotas, but also topics such as pollution, access to information, human rights, intellectual property, technology transfer, climate change, immigration and working conditions. If not, nationalist politicians will blame their domestic economic problems on the institutions and rules of the global economy. Continued economic integration and even global economic growth could be at risk.


    Support for democracy and human rights has been part of America’s influence around the world. But the American use of torture, widespread surveillance and wiretapping of American citizens, combined with President Trump’s threats to jail political opponents, support of torture, intimidation of the judiciary and the press, and demonizing ethnic groups, opponents and critics have all undermined American moral leadership. Even more damaging, President Trump has expressed admiration for authoritarian leaders who have challenged democracy at home and American ideals abroad.


    Political support for private capitalism has always been difficult. Private capitalism claim to legitimacy rests on its continuing success in raising people’s standard of living, not on a set of moral arguments. The private capitalist form of industrialization has been incredibly successful over the last 200 years but, at any given time, is open to criticism and attack. Those who do not benefit often seek political solutions, or scapegoats.



    THE UNITED STATES, EUROPE AND RUSSIA


    This is a review of the rapidly changing politics of Europe, and American responses.


    Europe in 2017 is very different than the Europe of 60 years ago, at the beginning of what became the European Union. The Europe of 1957 was still recovering from the devastation of World War II. The Europe of 2017 has a total GDP equal to that of the United States. The Europe of 1957 had living standards far below that of the United States. The Europe of 2017 contains many countries with living standards equal or above those of the United States.


    An increasing number of Europeans see the European Union (EU) and related institutions as the source of their problems. Besides low economic growth and high structural unemployment, Europeans blame the EU for allowing unwanted immigration (and terror); being a huge, unresponsive, undemocratic bureaucracy; the cause of a loss of national sovereignty and national identity; and contributing to, not solving, the social costs of economic change. They see the economic benefits of the European Union accruing mostly to large multinational corporations, their owners, managers, and well-educated employees. The Brexit vote – England leaving the EU – was partly a revolt against England’s political and economic elite.


    Right-wing governments friendly to Russia have been elected in Hungary and other Central European countries. Democracy is under attack in Poland and Turkey. Political parties that are openly hostile to the EU have formed the new government in Italy.


    Far-right parties, some with neo-Nazi roots, have been increasing their share of votes in almost every European country. Even if far-right parties do not win this round of elections, they will have increased support, a larger voice in national legislatures, and will put continuing pressure on center-right parties and national coalitions. New events such as terrorist attacks or a deep recession could increase anti-EU rhetoric, and the appeal of their messages.

    It is difficult to understand how EU leaders thought that bringing recently independent, former Communist countries with dependence on Russia for natural gas and oil would strengthen the European Union.



    Great Britain (1)


    While opposition to the EU has been building in Europe, it has been given a boost by the vote in Great Britain to leave the EU.


    Great Britain’s vote in 2016 to leave the EU encourages and accelerates the breakup of the European Union and possibly related organizations.  Mr. Trump supported the “Leave” position; President Obama supported the “Remain” position.


    The consequences could be serious, including the breakup of the United Kingdom. Scotland voted 62% to 38% to stay in the EU. The Prime Minister of Scotland has called for a referendum on Scottish independence from the United Kingdom. If Scotland leaves the UK, it takes the North Sea oil with it. Northern Ireland also voted to stay in the EU; this might give Catholics a non-ideological argument to reunite with Ireland.


    England’s remaining power and influence will be diminished. The English economy will suffer, with the greatest threat to the global financial sector in London. There will be no countervailing “special relationship” with a protectionist and isolationist U.S. president. 


    With England outside the EU and without an economic agreement with the EU, England’s preeminent position as the financial capital of Europe is at risk. 



    Germany


    During the presidential campaign, Mr. Trump called Hillary Clinton “America’s Angela Merkel” and Germany’s humane refugee policy “insane.” He singled out German automobile companies as a future target for increased tariffs. At the first meeting of President Trump and Chancellor Merkel, President Trump pointedly refused to shake her hand. President Trump has unnecessarily antagonized America’s most important ally on the European continent.


    Germany could be returning to Bismarck’s nightmare – being a large, isolated power in the center of Europe surrounded by enemies and with weak allies. The EU and NATO were established partly to guarantee that this would not happen.

    Germany is the largest and strongest economy in Europe. It exports about half of its GDP, primarily to EU countries and the United States. Germany has economic incentives to keep the EU together.  


    Given current political trends in Central European countries and subject to the results of the German election, it is unlikely that Germany will form a separate security alliance with Poland and the Baltic states in the near future. Germany and Poland have strong economic ties but fundamental and increasing bitter political differences that are weakening the European Union. Without the support and encouragement from the United States and Germany, Central European governments might be forced to be more accommodating to Russian demands.


    Russia and Mr. Trump’s Vocal Support for Vladimir Putin


    Combined with questioning America’s commitment to NATO and the EU, Mr. Trump’s praise of Mr. Putin encourages Mr. Putin to increase pressure on Central European and other countries on Russia’s periphery. Ukraine is a potential flashpoint. As Mr. Trump’s naïve admiration of Mr. Putin seems to encourage and support President Putin, Mr. Putin appeals to Russian nationalism and the illusion that Russia is a great power. As part of this these, Mr. Putin emphasizes foreign conspiracies, nationalism and xenophobia as political themes to bolster domestic political support. The historic Russian-German rivalry over the “borderlands” of Central Europe is again a possibility, with the United States currently playing an uncertain and often confusing role.


    As President Trump talks about American isolationism and “Fortress America,” Russian President Putin uses the old rhetoric of “spheres of influence.”


    NATO


    There has been no strategic reappraisal in the mission of NATO since the collapse of the Soviet Union in 1991. Believing Russia did not pose a military or political threat, European countries reduced military spending. Military preparedness, especially in Germany, deteriorated.  


    NATO never became an integrated regional or global military force. There was little European support for American wars in Afghanistan and Iraq. European forces (and their governments) were unwilling or incapable of even intervening in the conflicts that erupted from the breakup of Yugoslavia.


    A basic problem with NATO, as with all European institutions, is that sovereign nation-states have veto power over collective decisions. But unlike the other pan-European institutions, the United States dominated NATO, providing some cohesion to NATO’s strategy.


    The rise of nationalism, greater social welfare costs, and the weak fiscal condition of some European governments could make financing collective security less likely.


    European countries are much wealthier in 2017 than right after World War II but continue to rely on American nuclear and logistical support rather than building a European core in NATO. European defense spending as a percent of total GDP has been falling since 1991. This may be changing. Poland, the Baltic States and Germany have increased defense spending in response to increased Russian pressure.  


    Candidate Trump criticized the cost and questioned the usefulness of NATO.  President Trump may become more supportive of NATO if he is briefed on the new military reality. Russia is modernizing its conventional and nuclear forces. A particular threat to Europe is a new generation of intermediate-range cruise missiles with nuclear warheads. It remains to be seen how Europe and the United States respond to renewed Russian political pressure and military threats. Specifically, what role NATO will play in the future.


    Anticipating American force reduction or withdrawal from NATO, Germany and France have set up a small joint-planning operation outside of NATO, with plans to expand it in the future. Central European militaries have held joint discussions and military games outside of NATO. The new president of France has called for a European military force, apparently without American leadership or participation.


    Total European military spending is quite substantial, over $200 billion a year. Europe could be moving towards an alternative – no American oversight of NATO, a nationalist government in Germany controlling the strongest military force west of Russia, facing an expansionist Russia. This is not a scenario any sane American or European would like to see occur. Again.


    Strategic questions remain:


    ·      Will the U.S. continue to provide a nuclear umbrella over Europe if NATO collapses? 

    ·      What will happen to Ukraine and Central European countries?

    ·      What types of new defense alliances will be created in Europe, without the United States? 

    ·      What type of bilateral military arrangements will the United States have with the 28 countries in NATO? What bilateral commitments is the United States willing to make to Central European governments, especially Ukraine?

    ·      How will the United States respond to a rapidly modernizing Russian conventional and nuclear military force? “Fortress America” or greater involvement in NATO? Or both?


    EUROPEAN POLITICS


    The anti-EU and anti-immigrant movements represent the latest phase in the decline and collapse of the traditional post-war parties in Europe. Recent elections and polls in France show a rightward drift of the traditional center-right and conservative parties. More dramatic is the reduced support, almost collapse, of the center-left and socialist parties.


    Recent votes may represent a continuing, fundamental change in the structure of the underlying economies and their workforce. Political parties and movements seem to reflect less and less the traditional class interests of industrialized societies. The industrial working class, the basis of socialist parties, is a declining percent of the workforce. As the middle class loses income and security because of automation, artificial intelligence software and machines, and “deskilling”, new political parties and leaders may use new political rhetoric to blame multinational corporations and the technological elite. Hints of the new rhetoric can be seen in President Trump’s denouncing of both foreign and domestic multinationals for America’s economic problems.  

    Single-issue parties such as “green parties”; regional parties in Scotland, Wales, Catalonia and northern Italy; anti-EU parties; and anti-immigration parties are on the rise and threatening the established parties. It is hard to put these parties on a political spectrum. But collectively they seem to reflect increasing frustration and anger with the staus quo, partly caused by the inability to adjust to globalization. The immediate target is the European Union, its policies, and related pan-European institutions.


    The tension between national politics and economic growth can be seen in Poland. The Polish government is attempting to weaken internal checks and balances to its power, has challenged many of the policies of the EU, and has deteriorating and increasingly bitter relations with Germany. But German corporations are the largest foreign investors in Poland.

      

    EUROPE


    The extension of the euro beyond the economic core of EU has weakened the EU. The adoption of the euro and the European Central Bank eliminated many of the macroeconomic adjustment tools of national governments – exchange rate, fiscal policy, monetary policy, relative interest rates. Whether European economies could have grown any faster without these new institutions is unlikely. But pan-European institutions are conveniently blamed for low economic growth and periodic crises.


    Even if the post-war institutions survive, there is a question of how valuable European countries will be as American allies. Many of the countries are facing a stagnant workforce, stable or declining populations, rising social costs of aging populations, and probably unsustainable fiscal policies. Budget deficits creating rapidly rising public debt have papered over the necessity of making hard economic and political choices. No government would voluntarily go through what Greece has been forced to do over the last eight years.

    With low economic growth, competition for funds for social welfare costs and national defense approaches a zero-sum game. It is difficult to imagine electorates voting to support tax increases to pay for large increases in defense spending. Domestic problems plus increasing anti-EU sentiment implies less support for European institutions and cross-border defense commitments.


    ASIA:  The United States, China and Japan


    The United States and Japan


    Japan is a politically stagnant, rigid, rentier society with a declining population and the oldest population of any country. Since the collapse of asset values in the early 1990s, Japan has had very low economic growth, a stagnant and now declining workforce, no reform to a rigid political and social structure, and massive government deficits to support the status quo in place of economic and political reform. Japan has the highest public debt/GDP ratio of any industrialized country. The Japanese people vote for a conservative program of preserving their high standard of living and stable social structure for as long as possible. 


    Japanese multinationals have exported large amounts of capital and technology, especially to China. China has replaced the United States as Japan’s largest trading partner. Japanese multinationals have a huge investment in China.


    Japan has the resources, but apparently not the collective will, to project economic and military power in East Asia. This may change if Japan feels threatened by China or North Korea and does not believe it can rely on American military protection. Early indications of possible changes has been the government quietly ignoring the constitutional limit of 1% of GDP for military spending (imposed by the American occupation after WWII) and joint military and naval exercises with other Asian countries.


    The United States and China


    We are seeing the end of forty years of détente, partly aimed at Russia. Mr. Trump’s call to the president of Taiwan, and subsequent comments, early undermined the basis for American-Chinese détente. For forty years, American presidents have supported a “One China” policy. Chinese and American leaders have tacitly agreed not to discuss Taiwan. Mr. Trump’s phone call to the president of Taiwan, the leader of the Taiwanese independence party, reversed this agreement.


    This is the third rail issue in China. The phone call angered China. It came after the pro-Russian sentiments of President Trump and Trump’s threat of a trade war with China. Candidate and then President Trump has gone out of his way to antagonize China.


    Both countries believed in the past that Russia was the primary geopolitical threat, the basis for detente. The current American government believes China is the more serious threat. Combined with Mr. Trump blaming American job loss on Chinese exports and economic retaliation like high tariffs, and his praise of Russia’s president, China will accelerate its efforts to eliminate American influence in Asia and elsewhere. China may also conclude it is in their long-run interests to form stronger ties with Russia, although history and conflicting national strategic interests may work against it happening.


    Under Presidents Bush and Obama, the Trans-Pacific Partnership (TPP) was America’s main effort to counter rising Chinese influence in Asia. President Trump has walked away from the completed treaty. The other signatories to the treaty are proceeding without the United States. Countries in Asia and on the Eurasian continent, including American allies such as Japan and Australia, are signing up with the alternative, a multinational, Chinese-dominated investment bank. The Chinese government is also financing its massive “Belt and Road” initiatives, which have potentially serious geopolitical and military consequences for the United States.


    Unlike the provisions in TPP, trading with China and borrowing from China does not entail commitments to allow free trade unions, employee protection, environmental protection, observing intellectual property rights, or free access to information and the Internet. The United States will not be setting the future trade rules in Asia.


    If the Trump administration imposes greater trade restrictions and higher tariffs on Chinese exports, how could China retaliate?


    ·      Increased tariffs and trade restrictions on American exports to China

    ·      Devalue currency to offset higher cost of exports (already being done)

    ·      Pressure companies like Boeing to manufacture in China

    ·      Restrictions on American multinational corporations in China

    ·      Stop buying or start selling U.S. government debt, which will increase U.S. government interest expense and budget deficits

    ·      Step up political campaigns to oust American influence in East Asia and throughout the world


    China no longer needs increased exports to the United States to drive economic growth. Total Chinese exports (and imports) are a declining percent of the Chinese economy as the economy continues to grow through domestic consumption foreign investment, and government investment. 


    Most of the growth in Chinese exports over the last decade has come from exports to Asian countries. For most Asian countries, including Japan, China is now their largest trading partner and overseas market. Asian countries are more inclined to accommodate Chinese political interests.


    “Silk Road” projects and investments in Central Asia and other parts of Eurasia could lead to Chinese economic dominance over much of Eurasia. If China follows through with its ambitious plans to build high-speed railroads, roads, pipelines, and port networks across Eurasia, either through or around Russia, this will weaken the American potential threat to cut off imports to China through international shipping lanes and chokepoints like the Persian Gulf and the Strait of Malacca.


    The United States seems to be ignoring a strategic response to rising Chinese influence in Asia – closer ties with India. This would be part of a global strategy that recognizes the geopolitical reality of the increased importance of potential regional hegemons. The United States should reexamine its relationship with such countries as India, Turkey, Poland, and Iran. This would be part of adapting to the “post-American world.” (The title of a book by Fareed Zakaria)


    GEOPOLITICS AND THE GLOBAL ECONOMY


    The return of geopolitics – the primacy of national interests – is not surprising after colonial independence plus the breakup of the Soviet empire and Yugoslavia created over 100 new or newly independent nation-states. Historical greivances and ethnic antagonisms resurfaced. What is different is the huge growth in the global economy, increasingly dominated by multinational corporations.

    Surprisingly, most of the economic growth in the last 30 years has occurred outside of the established industrialized countries. Europe and Japan have exhibited low rates of economic growth. As workforce growth rates slow down (Europe) or stop (Japan), economic growth fueled by high levels of capital investment and a better-educated workforce should lead to high rates of labor productivity growth, about equal increases in real wages, and lower unemployment. But real wage growth is kept down by substituting labor-saving capital for labor (automation) and moving labor-intensive jobs to lower-wage countries. Instead, low rates of productivity growth combined with low rates of growth in the labor force have led to low rates of national economic growth. Two partial solutions to this problem – labor mobility in Europe and increased H1-B visa immigration in the United States – are under severe political attack. As a sign of the divergence of corporate and national political objective, large multinational corporations support both programs.

    The United States experiences better productivity growh and higher rates of economic growth. Some proposed reasons are a growing workforce, more efficient use of capital, more technological innovation, and more support and less opposition (until recently) to disruptive technological development. But real wages have been stagnant for much of the labor force. A major reason is that large American corporations have become multinationals, transferring much of their increased capital and technology to other countries as part of a corporate strategy to reduce costs and to obtain most of their growth in sales and profits overseas.

    So low rates of domestic (home country) economic growth do not limit the growth of multinational corporations, as they continue to expand geographically and grow faster than the economies and markets in developed and developing countries. Investors and managers of these corporations, along with supporting technological, financial and organizational experts, are experiencing rising real incomes. The remaining home market workforce is experiencing stagnant real incomes. The widening income inequality and insecurity fuel domestic political anger and reduces support and tax resources for domestic and multilateral economic adjustment programs. This also makes it more difficult to pay the social costs of an aging population and technological change without large budget deficits. Domestic support in the United States for traditional foreign policies and institutions is declining.


    Returning economic oversight power to nation-states and weakening supranational institutions will make it more difficult to deal with global problems such as global warming, pollution, drug trafficking, cyberwarfare, and terrorism. There were be less cross-border control over the behavior of multinational corporations. The bargaining power of multinational corporations will be strengthened when negotiating with individual nation-states. The conflicts between concentrated economic power in multinational corporations and democratic governments could become worse.


    CONCLUSION


    With nationalist feelings running high in Europe and America rejecting or criticizing the global economic institutions and security structures it created, America is on the verge of a loss of power and influence in the world.


    America’s allies in Europe and Japan have stagnant or declining populations, low rates of economic growth and development (innovation), high structural unemployment and deteriorating fiscal conditions. These economic problems, fueling political conflicts and social stress, are lessening the value of these countries as allies. It is unlikely they will substantially increase defense expenditures for collective security unless they feel threatened and can no longer count on American protection and support.


    With the American president criticizing allies and questioning support for supranational institutions created by the United States after World War II, allies are looking to their national interests without relying on the United States. There will be political realignments in Asia and Europe. South Korea is pursuing a policy towards North Korea at odds with America’s policies. Asian countries are increasing military and economic contacts among themselves.  China will become more aggressive in pursuing national interests in Asia and Eurasia. Russia may step up pressure on Central European countries.


    According to polls, a majority of Americans no longer supports free trade and the cost of America’s global commitments. It is uncertain, or even desirable, that countries like Germany or Japan want to or are able to fill the widening void.


    Threatening to increase tariffs on imports from China, Japan, Mexico, Canada, and Germany reverses 70 years of American foreign economic policy. Opposing trade treaties with Pacific Rim countries (TPP) means that China will now set regional trade policy in East Asia. Opposing a trade agreement with the European Union (TTIP) – not creating the world’s largest free trade zone – will weaken the strongest argument for the continued existence of the European Union.


    Even if the European Union ceases to have influence as a political institution, maybe the original “customs union” aspects of the EU would survive (no tariffs, quotas or other barriers to trade). This seems to be the basis of the Brexit negotiations. Other countries may consider a similar relationship with the European Union.


    Countries in Central Europe might not be able to look to the United States and NATO for security. For some time in the future, these countries will be dependent on Russia for natural gas. Unless Germany fills the political void (unlikely), security for these countries will be negotiated with Moscow.


    Some countries saw the “New World Order” as a vision of American global dominance, the triumph of one nationalism and its ideals. Movement towards a “United States of Europe” was stymied by national political and institutional rigidity and the nationalism of newly freed states. As time went by, the social costs of globalization and rapid economic change became political issues. Multinational corporations and supranational organizations like the EU and NAFTA were blamed for domestic problems. Rising nationalist political parties and their leaders call for increased national power and control.


    The democratic revolution and battle for individual rights begun over 200 years ago will continue but with less America’s moral, verbal and financial support. America’s “soft power,” which includes support for liberal democracy and human rights, will diminish every time President Trump praises Vladimir Putin or some other authoritarian politician.


    Less support for supranational organizations and rules and a return to nationalism will make it harder to deal with regional, continental and global problems until a new set of institutions are created.


    Multinational corporations have reached the inflection point where they will be truly global. They will be able to create dynamic comparative advantage anywhere because of the fluid international division of labor, based on the free movement of capital, information, and technology.  Corporate policies to increase sales and profits will come into increasing conflict with nation-states, their national economic policies, and their political agendas. How these conflicts play out will determine the next “New World Order.”


    America’s allies – Western European democracies and Japan – are increasing opposition to immigration. They resist political and social change that threatens a desire to preserve their existing societies and high standards of living.


    So far, the supranational institutions and treaties that were the foundations of the post-war world, the Pax Americana, could not deal with a new set of challenges or the resulting the anti-global nationalism of nation-states. The collapse of Soviet Communism in 1991 took away the main argument for support. American management of the global order has not been flexible enough or imaginative enough to create a compelling substitute. The consequence, a return to nationalism and nation-state rivalry, is occurring. Nations and political leaders will talk more about the country’s national interests and appeal to the ethnic and historical basis of the country’s special version of nationalism. This will probably continue until a series of crises, such as global warming or the loss of any control over their national economy, forces national political leaders to create new supranational organizations or new forms of cooperation.

    The United States has confronted a number of foreign threats to American security since the end of the Cold War – al-Qaeda, ISIS, Iran, Putin’s Russia, Xi’s China, and supposedly Hussein’s Iraq. Yet the most serious threat to America’s national security are current American policies, supported by a substantial percent of the American people. Alienating allies and supporters and attacking rather than reforming global economic institutions undermine the global order America created after World War II. Most Americans do not recognize that a global economy based on free trade and the free movement of economic resources is the new basis of America’s economic prosperity. Attacking the institutional structure of liberal democracy at home and refusing to promote American ideals abroad weakens America’s claims to moral and ideological leadership. In the end, only the foreign policies of the American government and the changing political beliefs of the American people can bring the Pax Americana to an end. 


    ==========================================================


    (1) For my immediate reaction to Great Britain leaving the EU, see“Breaking Away:  Britain and the European Union,”June 27, 2016. 


    =====================================================================


    See the related post:  “The Beginning of the End of “Pax Americana”:  America“


    If you like history and speculative historical analogies, you might like the following two essays:

    The Roman Republic and America

    The Roman Republic Commits Suicide:  A Cautionary Tale for America

    For a list of all posts and economic tutorials in Pages, see Guide to Posts and Pages. The economic tutorials are equivalent to a course in economics.







  • “Pax Americana”: America as a Global Power

    “Pax Americana”: America as a Global Power

    President Trump

    Might
    Washington, like Rome, fall victim to imperial overstretch?

    Could
    military force abroad eventually have to be withdrawn because of bankruptcy at
    home?

    Might
    the whole idea of America eventually be challenged and destroyed by some
    charismatic new faith: some fundamentalist variant on Christianity?

    Or
    will nature disrupt America’s new world order?


    Robert Harris, “Does Rome’s fate await the
    US?,” The Mail on Sunday, October 12, 2003 (1)





    INTRODUCTION:  FOREIGN POLICY AND DOMESTIC POLITICS

    This post will discuss American foreign policy, with an emphasis on economic aspects. It will focus on the structure of America’s trade treaties and policies, and the interaction of America’s foreign economic policies and domestic politics. The companion post, “Pax Americana”: The World That America Made, the will discuss America’s projection of global power and influence through military power, security arrangements, global economic institutions, and ideological influence.


    During the Cold War (1940s – 1991) and until recently, Americans tended to separate foreign policy and domestic policy. This is no longer true.


    For Americans, there was prosperity at home and security abroad. There was a foreign policy consensus around anti-Communism, that America should take the lead in containing the Soviet Union and China. This consensus made possible large military and national security expenditures. Fortunately, this was a prosperous time for America. There was economic growth, fueled by new technology and pent-up demand following World War II. America was by far the world’s largest economy and American companies did not have to worry about imports from other countries. There were some concerns – Vietnam in the 1960s, supply and price of imported oil in the 1970s, and Japanese competition in the 1980s – but they were peripheral to the core objective of defending western Europe and matching Soviet military forces. 


    Americans no long see foreign policy and domestic policy as separate. Al-Qaeda’s attack on the World Trade Center came as a terrible shock. America’s subsequent attempt to contain Islamic fundamentalism has been inconclusive at best. China is now the main concern. Unlike Russia or Japan earlier, China is seen as a foreign rival and a threat to the domestic economy. America’s networks of military and economic alliances seem to be unraveling. The value of the most important military alliance, NATO, is being questioned. Multilateral agreements are attacked as constraints on national actions and concerns. 


    America is no longer isolated from the global economy. Imports and exports as a percent of GDP are rising, although still lower than most industrialized economies. Industrial supply chains are global. The largest American corporations have become multinational, making investment decisions increasingly independent of America’s national economic interests and policies. 


    President Trump believes in negotiating bilateral (country to country) economic agreements and ignores multilateral organizations. Multinational companies generally prefer global rules. They are opposed to President Trump’s nationalistic economic policies of increased tariffs and other barriers to trade.


    TRADE TREATIES AND AMERICAN FOREIGN POLICY


    What we might be seeing in
    the United States and globally is the end of the post-WWII era, the “American
    Century.” Why have a majority of Americans stopped supporting the global
    institutions that the United States created after World War II? Will America
    react creatively to guide the world to a new set of rules and regulations? Or
    will the United States revert to isolationism and protectionism, as it did
    after World War I, the last time America tried to impose a “New World Order”? 


    America, through many
    rounds of multilateral and bilateral trade negotiations since World War II, has
    set the rules and regulations for the current global economy. These trade
    treaties had three aspects:


    ·     
    Reduce barriers
    to trade such as tariffs and quotas.

    ·     
    Economic and
    political integration of the non-Communist world.

    ·     
    Access to the huge American market in exchange for military alliances and bilateral security
    agreements, including American bases abroad.


    With the collapse of the
    Soviet Union in 1991, it appeared that the economic and the national security aspects
    were separated. The global economy continued to expand. The combination
    of relatively free trade and new communications and transportation technology made it possible for
    large national corporations to evolve from exporters into multinational
    corporations. Technology, capital, management, finance and labor became mobile,
    creating complex financial structures and supply networks.


    AMERICA AND THE GLOBAL ECONOMY


    But there was growing opposition in America to the global economy. Presidential candidate
    Donald Trump tapped into and focused widespread discontent with free trade and
    the global economy.


    89% of Americans
    think that the loss of US jobs to China is a somewhat or very serious issue,
    according to Pew Research statistics…Only 46% of Americans think NAFTA was good
    for the economy.

    Business Insider, November 13, 2016.


    As in Europe, nationalist,
    anti-immigration politicians have turned long-standing economic problems and
    rising discontent into a political agenda. Rather than dealing with them
    domestically, these politicians blame outside groups and institutions –
    international organizations, immigrants, “unfair” foreign competition.
    Strangely, they don’t blame the organizations that actually moved jobs and
    investment overseas – multinational corporations. Top managers and owners of
    multinationals with large overseas investments are well represented in the
    current administration – Rex Tillerson, Wilbur Ross and Donald Trump.


    What is the source of this
    discontent? One source is the change in the global economy. From the 1940s to
    roughly the 1980s, American corporations owned the American economy and didn’t
    worry about foreign competition. The rest of the world was devastated by World
    War II. There was new technology to develop, pent-up demand, and wartime
    savings. The result was rising real wages and employment security.


    By the 1980s, that began
    to change. The success of Japanese exports of autos and consumer electronics to
    the U.S. created a U.S. trade deficit with Japan, which became a political
    issue. American corporations found themselves competing with foreign companies
    at home and abroad. Capital (automation) continued to replace production and
    assembly labor even as industries such as autos and steel recovered. Real wages
    and real incomes stagnated for workers in the older industries. Job security
    and pensions disappeared.


    REALITY CHECK: 
    THE GLOBAL ECONOMY


    President Trump has a
    simple-minded view of global trade and the structure of the global economy that
    is at least two generations out of date. As a consequence, there is a disconnect
    between economic reality and political rhetoric.


    In outline:


    ·     
    Countries don’t
    trade, corporations do. About 60% of “Chinese” exports are produced by foreign multinational corporations. 

    ·     
    The mental
    picture of a country’s companies producing at home and then exporting is
    obsolete.

    • o  
      There are complicated
      global supply networks and an every-changing dynamic international division of labor.
    • ·     
      Where goods are
      produced is less important than where value is added.
    • o  
      Nike does not
      produce any shoes in the U.S. but most of the value-added occurs here. Same for
      Apple and many consumer electronics companies.
    • ·     
      There are
      complicated relationships between American and foreign companies.
    • ·     
      Over 25% of
      American manufacturing is owned by foreign corporations.
    • o    Foreign car
      companies account for most of American production.
    • ·     
      About 20% of
      America’s merchandise trade is intra-company.
    • ·      About half the
      sales and profits of America’s 500 largest corporations are outside the United
      States. Overseas operations account for most of their growth in investment, sales, and profits.
    • ·     
      A large part of
      American imports is of products and services created and marketed in the United States and
      produced by American companies abroad.
    • ·     
      The fastest
      growing part of American exports is high value-added services. This creates high-paying jobs. The U.S. runs a large trade surplus in services.


    ·     
    As discussed
    later, consumers in the United States, not “Mexico” or “China,” pay increased
    tariffs (taxes) on imports.


    The economic reality is that
    multinational corporations, made possible by the global economic order that
    America created, are crucial to American economic growth. A return to
    nationalism will increase conflict between domestic politics and the economic
    growth needed to address domestic problems.


    As discussed below,
    attempting to reduce America’s trade deficits through increased tariffs and
    other trade restrictions will not work.


    TARIFFS AND TRADE


    What would happen if U.S.
    unilaterally renounced trade agreements and imposed tariffs? A tariff is a tax.
    The income from tariffs goes to the U.S. government. It is a tax mostly
    paid by American consumers. It would raise prices on imports, including imports
    of inputs like parts and subassemblies. It would also raise prices on some
    American-produced products that compete with imports. 


    Other countries would
    retaliate. (2) The net result for America would be higher costs and prices
    (inflation), and lower standards of living. There would be few if any net new
    jobs in assembly or manufacturing. 
    Multinational corporations would direct new investment to countries that
    were not threatened, that didn’t retaliate or to countries that depreciated
    their currencies against the dollar since they would have relatively lower costs. Chinese and American
    companies in China are already moving labor-intensive production and assembly to countries like Vietnam,
    Bangladesh and Malaysia. Even hi-tech companies like Chinese solar panel
    producers have started doing this. (3)


    American exports would
    suffer as other countries retaliate. Companies in the U.S. would accelerate
    research and investment in robotics and AI in the United States, substituting
    fully automated assembly lines for manufacturing workers.


    America’s economic growth
    depends on innovating new products and services, keeping the high value-added
    part in the U.S., outsourcing the low value-added part to the global supply
    chain, and selling in the global market. Much of U.S. imports are raw materials
    such as crude oil and other inputs into processed or final assembled products
    with high labor, low wage content. Much of America’s exports are processed or
    manufactured goods with high capital and human capital content such as refined
    petroleum products and aircraft. We also run a trade surplus in services such
    as financial, consulting, and software. Any retaliation will damage American
    research and development, the source of economic growth. So will the proposed
    cutbacks in federal support for basic research, especially in the area of
    biotechnology.


    The stated goal of
    reducing the U.S. trade deficit might not happen. A reduced trade deficit could
    lead to an appreciation of the dollar against other currencies. This would
    increase the cost of American exports and reduce the cost of all imports,
    offsetting the economic effects of increased tariffs.


    Jobs leave the U.S. for
    other reasons besides lower wages. In the Carrier example, the president of the
    parent company, United Technologies, said the Mexican workforce is not only
    cheaper but also more productive, easier to train, and has lower rates of absenteeism
    than the American workforce.



    REDUCING DOMESTIC AND GLOBAL ECONOMIC GROWTH


    President Trump can reduce
    global growth through his trade and tariff policies. A president can raise
    tariffs or label a country a “currency manipulator” through executive
    privilege, without Congress’ approval.


    Candidate Trump promised to
    put a 45% tariff on Chinese exports, brand China a currency manipulator, tax
    Mexican imports, increase tariffs on German and Japanese cars, “rip up”
    existing trade agreements and kill the Trans-Pacific Partnership (TPP), which
    he called “a rape of our country.” If he did all this, he would ignite a global
    trade war, which the chief economist of Citi said “could easily trigger a
    global recession.” Other bank economists have said that even modest increases
    in tariffs on Chinese and Mexican imports could reduce real GDP growth by 0.5 –
    1.0%. (Business Insider, November 13,
    2016)


    Summarizing his analysis,
    Citi’s chief economist, Willem Buiter, concluded:


    The
    U.S. has been the champion of free trade and open borders for decades. A
    retreat from globalization by the US would likely lead to reciprocal actions
    from other countries, and reinforce the latest shift towards deglobalization
    and could be another nail in the coffin of the liberal global economic world
    that has supported prosperity since 1948. (Business
    Insider    , November 13, 2016) 



    DOMESTIC AMERICAN POLITICS AND FOREIGN POLICY


    Imperial overstretch, also
    known as imperial overreach,
    is a hypothesis which suggests that an empire or world power can extend itself
    beyond its ability to maintain or expand its military and economic commitments.
    The idea was popularized by Yale University historian Paul Kennedy in his 1987
    book The Rise and Fall of the Great Powers.


    America has financed its
    global military and economic commitments through borrowing, much of it in
    recent years from foreign governments and institutions. The Federal budget
    deficits over the last 16 years have been roughly equal to Defense Department
    spending. (Total spending on national security is higher.) The Chinese
    government is the largest foreign holder of U.S. government debt.


    A great power like the
    United States can also retreat into isolationism and protectionism if its
    people lose the will or ability to pay the costs or believe they are not
    benefiting from foreign commitments. A sense of frustration sets in. Foreign
    economic ties may be seen as a source of domestic economic and social problems.
    The American president and foreign policy strategists stop talking about the
    primacy of democratic governments and American ideals in foreign affairs.

    During the Cold War with the Soviet Union, Americans were willing to accept the idea of prolonged conflict without certain victory. Since the collapse of the Soviet Union, domestic support for prolonged wars and political conflicts to contain enemies rather than defeat them has been seriously eroded.

    There is irony when the
    country that built the greatest wall in history is now talking about open trade
    while the country that has led the post-war campaign to expand trade is talking
    about extending a wall. As Chinese emperors knew, walls are as much
    psychological as physical.


    Domestic problems may take
    precedence and divert resources. The combination of the rapidly rising cost of
    health care and social security for an aging population, large military and
    national defense expenditures, a rising backlog of public investment, proposed tax
    cuts, larger fiscal deficits, and large trade deficits is not sustainable. The
    proposed programs of the Trump administration will make the problem worse and
    probably accelerate the crisis.


    Decades of fiscal deficits
    and trade deficits, financed increasingly by foreign borrowing, have led to
    high and rising levels of the national debt-to-GDP ratio. Borrowing at low
    interest rates has made this possible. If the Federal government had to borrow
    at the post-war average, it would add over $250 billion to annual deficits.


    The next round of tax cuts
    for upper-income households and corporations will lead to larger structural
    deficits even in years of economic growth. The United States will find it
    increasing expensive (higher interest rates) to finance national defense and
    global commitments. This will reinforce President Trump’s call for reduced
    American involvement abroad. (4)


    Donald Trump blamed job loss
    and stagnant incomes on imports, particularly from China. While economic
    studies show that over 80% of job loss is due to technological change, and some
    of the rest to domestic trends like leveraged buyouts and corporate cost
    cutting, blaming “unfair” trade rules and other countries had more political appeal. As president,
    Donald Trump has said he will oppose the trade agreement with Pacific Rim
    countries (TPP), intends to unilaterally change some of the tariffs and trade
    rules of NAFTA, and has no intention to continuing trade negotiations with the
    European Union (this may change). Candidate Trump also singled out Japanese and
    German auto companies as targets for increased tariffs, despite the fact their
    investment in the United States revitalized the American auto industry.


    The related campaign theme
    was the emotional issue of immigration, both legal and illegal. Donald Trump
    demonized Mexicans and Muslims, blaming them for job loss of Americans, crime
    and domestic terrorism. Travel bans on Muslim countries, revoking of visas, and
    mass deportations were begun as soon as he became president. Combined with
    rhetoric that was racist and xenophobic, this will not endear the United States
    to its Latin American and Muslim allies, and fuels anti-American feeling. 

    President Trump has
    encouraged similar rhetoric in European and South American countries. He has
    antagonized and isolated America’s strongest ally on the European continent,
    Germany.


    Immigrants are vital to
    American economic growth and development. Graduates of elite foreign
    universities often came to the United States; “over 75 percent of the graduates
    of the Indian Institutes of Technology in the 1980s emigrated to America.” (5) Over
    half of the science and math graduate students in American universities are
    foreign. Keeping them in the U.S. with H1-B visas is vital. Immigrants and
    their children are entrepreneurial, accounting for a disproportionate share of
    new businesses. Managers from all over the world are necessary if American
    multinationals are to remain competitive.


    Mr. Trump’s call for
    economic nationalism and isolationism reverses 70 years of American foreign
    economic policy. Global economic integration will continue but without the
    United States setting the rules. The United States has pulled out of global organizations attempting to reduce global warming and intends to loosen domestic environmental regulations. China, on the other hand, is taking up leadership to
    combat climate change.


    Exports, including tourism,
    will suffer, thus reducing a major driver of American economic growth and job
    creation. Tariff and trade wars will hurt U.S. economic growth and development.
    They will increase the insecurity and frustration of more Americans. 


    Blaming the social costs of
    technological and economic change on foreign scapegoats will make it more
    difficult to deal with these ongoing problems. This will continue to fuel
    domestic anger and support for isolationist and protectionist policies.


    President Trump does not
    believe that government is responsible for dealing with the “negative
    externalities” or social costs of industrialization and rapid economic and
    social change. The Trump administration is not concerned with pollution and
    climate change. This reduces American influence in dealing with these important
    global problems. This makes the transition to non-fossil fuel energy more
    difficult. It also means that new energy technologies such as solar panels and
    wind turbines cannot expect any government support, ceding these high-tech,
    growth industries to corporations in other countries.


    The issue of global warming
    illustrates the loss of American leadership in international attempts to solve global
    problems. The American denial of global warming will have consequences to
    American influence. Candidate Trump denounced global warming as a “hoax.” As
    president, he has quickly supported of fossil fuel companies by relaxing environmental
    rules on the production of oil, natural gas and coal, particularly on the
    release of methane and carbon into the atmosphere. His first proposed budget
    slashes support for climate research, solar and wind turbine power, and
    electric cars. President Trump has also announced that he does not support the
    latest global agreement setting targets to reduce carbon emissions. Appointing
    the CEO of Exxon/Mobil as Secretary of State, in charge of America’s foreign
    policy, is a clear message.



    POSSIBLE SHIFTS IN FOREIGN POLICY


    President Trump is pessimistic
    about the global order and America as a global power. If he believes America
    can influence global events from behind “Fortress America,” he is deluding
    himself and the American people. If he thinks he can be isolationist, protectionist,
    and xenophobic without damaging American power and influence, he is deluding
    himself.  If he thinks he can praise Putin
    and support right-wing, anti-EU parties in Europe without damaging American
    influence, he is deluding himself. If he thinks he can insult the governments
    of Germany, England and other allies without consequences, he is deluding himself. If he
    thinks he can denounce, repeal or unilaterally change trade treaties without
    consequences to the U.S. economy, the global economy and American leadership,
    he is deluding himself. If he thinks he can reduce America’s commitment to NATO
    without reducing American power and influence in Europe, he is deluding himself. And us.


    The damage has already been
    done.  Even if President Trump backtracks
    on some of his threats, no one can trust that what he says
    at any moment will not change. For domestic political reasons, he will probably
    return to the nationalist, anti-global themes that got him elected, and could
    get him reelected. America has become an unreliable ally. Allies will reevaluate their national interests and foreign policies in light of uncertain American support.


    CONCLUSION


    The last presidential
    election shows that many Americans, probably most, are no longer willing to pay
    the cost of maintaining American power and influence in the world. Domestic
    problems are blamed on “unfair” global competition, global institutions,
    immigrants and foreign governments.


    It matters little if
    President Trump does not follow through with his threats. The damage has been
    done. Increased tariffs and trade restrictions will hurt the American economy
    and make it more difficult to deal with domestic political issues. Scapegoating
    foreign governments, minority groups and corporations will fuel anger and discontent,
    making it less likely America will react creatively to its economic challenges. The coming massive disruptions of robotics and artificial intelligence will increase domestic tensions.


    More Americans are against
    global institutions and against the United States bearing the cost of being the
    world’s global power. Pew Research polls showed that this trend started well
    before Donald Trump ran for president. Mr. Trump has tapped into these feelings,
    making them the driving force of a successful presidential campaign. His continued focus on these themes will probably continue to erode American support for the post-war economic institutions and rules America established.


    America’s commitment to
    promoting democracy and free trade around the world is waning. America’s
    current president seems comfortable with authoritarian rulers and
    anti-democratic far-right political leaders in Europe. Many of these leaders
    want to dismantle the European Union and return to national currencies and national economic policies. Some,
    like Marine Le Pen of France, want out of NATO.


    China has replaced Japan as
    the cause of America’s economic problems. America’s relationship with China is
    moving from détente to confrontation.
    America’s allies in Europe and Asia are recalibrating their relations with
    Russia and China as the American president talks of isolationism. America is
    becoming an unreliable ally.


    America’s resolve to bear
    the costs of being a global power is waning. America’s domestic social and
    economic change has generated a politically powerful backlash. Most white
    Americans do not want their government to support or promote social change, do
    not support the open global economic order America created, do not want to bear
    the cost of being a global superpower. These are related. Continued
    presidential rhetoric, despite his policies, will encourage and broaden these
    beliefs. Trump’s dark, pessimistic picture of America’s isolationist,
    protectionist future may be a self-fulfilling prophecy.


    America’s “New World Order”
    is coming apart. The last election and opinion polls indicate that most
    Americans do not believe in it. America’s allies in Europe are under attack
    from nationalist groups that want to dismantle it and appease the Russian
    autocrat. These groups are given vocal support and encouragement by the
    American president.


    President Trump, by
    renouncing TPP, has signaled America’s abdication of influence in East Asia;
    allies now have to look to a combination of nationalism and accommodating
    China. New national security and economic arrangements among Asian countries will be considered. For example, South Korea has taken the first steps to signal easing tensions with North Korea, over the objections of the United States. The TPP countries intend to continue with the treaty without the United States.  China has started an ambitious economic and strategic program called “One Belt, One Road” to circumvent American military and strategic containment. Economic growth for East Asian countries will be increasingly tied to economic
    alliances and trade agreements with China.


    All of the political and
    economic institutions that the United States created or supported after World
    War II, mostly in response to the Communist challenges of the Soviet Union and
    China, are now under domestic attack. One group believes the post-war
    framework has outlived its usefulness, that it no longer deals with changed
    geopolitical and economic circumstances and is need of drastic reform. Probably
    a larger group no longer supports the foundations of the American world order.


    ——————————————————————————————————

    1. For
    suggestive analogies between America and the Rome, see “The Roman Republic Commits Suicide:  A Cautionary Tale for America,” June 19, 2011.
    https://politicaleconomicsprof.com/2011/06/pax-americana-i-washington-imperial.html


    2. Reuters, “China prepares
    to counter any U.S. trade penalties:  sources,”
    March 20, 2017

    http://finance.yahoo.com/news/china-prepares-counter-u-trade-093343375.html


    3. The New York Times, “When
    Solar Panels Became Job Killers,” April 9, 2017, page 1 of the Sunday Business
    section.


    4. “The Economy After the
    2016 Elections,” November 26, 2016

    https://politicaleconomicsprof.com/2016/11/the-economy-after-2016-election.html


    5. Fareed Zakaria, The Post-American World, 129.


    ============================================================


    See the companion post:  “Pax Americana”:  The World That America Made.”  https://politicaleconomicsprof.com/2017/03/the-beginning-of-end-of-pax-americana.html

    If you like history and speculative historical analogies, you might like the following two essays:

    The Roman Republic and America

    The Roman Republic Commits Suicide:  A Cautionary Tale for America

    For a list of all posts and economic tutorials in Pages, see Guide to Posts.