Bridgewater Associates: Formula for Economic Success - October 30 2012
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Bridgewater Associates: Collection of Writings (1999-2012)

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Bridgewater Associates: Formula for Economic Success - October 30 2012 Document Transcript

  • 1. © 2012 Bridgewater Associates, LP. Any publication or other use (including, without limitation, distribution via email or any internet posting) of Bridgewater Daily Observations™ without prior written consent from Bridgewater Associates, LP is prohibited by U.S. and foreign copyright laws. Bridgewater® is a registered service mark of Bridgewater Associates, LP. All rights are reserved. 1 Bridgewater ® Daily Observations 10/30/12 Bridgewater® Daily Observations October 30, 2012 ©2012 Bridgewater Associates, LP (203) 226-3030 Ray Dalio Bob Elliott Mark Dinner Nate Gooding Formula for Economic Success As you know, we think the economy works like a machine and we think of ourselves as practical mechanics – or, if you prefer, we think it works like a body and we operate like a doctor. We believe that there is no point – in fact we think it’s dangerous and costly – to wish the economy works some way differently than it really does. Too often we hear people say “I believe…” based on adherence to a belief system and without substantiating why they have that belief. We don’t want to do that. We think that it is our responsibility to clearly explain how the economic machine works by describing the cause/effect relationships that make it up, and to do that for everyone to examine and poke at. We know that we all will learn more that way. To us the existing discussion about what should be done to make our countries successful lacks the specificity and the testing of predictability that is necessary to make the discussion useful. For example, everyone knows that having a more educated population is better than having a less educated population, so naturally we hear that improving education is important to improving competitiveness. However, measurements of the value of education are lacking. If we simply educate people without considering the costs and paybacks of that education, we will waste resources and become less competitive even though we will become more educated. So the productive value of the education in relation to its costs is a more sensible way of measuring it. When measured, we should see how predictive it is. What are the Keys to Success? Its seems intuitively obvious, and is in keeping with our experiences as a practitioners operating in many countries over several decades, that four factors drive relative growth: they are competiveness, indebtedness, culture and luck. In a study that we did that we will send you shortly, we will show how we measured each of these and how they predicted subsequent growth, so we won’t go into that now. However, we would like to now have you focus on one of the components of our “Formula for Economic Success” – self-sufficiency – because we think it’s interesting enough to stand on its own. Self-Sufficiency It is both logical and consistent with the evidence to believe that self-sufficiency is an important ingredient for individuals and societies to be successful. Self-sufficiency encourages productivity by tying the ability to spend to the need to produce, it allows people to be free rather than dependent on others and it gives people self-respect. It is not controversial to say that people spend the money that they earn differently than the money that others give them – i.e., that the connection between earning and spending is a healthy one. If people have to earn money to spend it, they have to be more productive. Over the long run increases in living standards rise as a function of increases in
  • 2. 2 Bridgewater ® Daily Observations 10/30/12 productivity. So, it is not a big leap to presume that countries with greater amounts of self-sufficiency do better than those with less. In this Daily Observations we will show you how self-sufficiency varies by country and how it has been correlated with economic growth. You will see that there are significant divergences in how self- sufficient individuals are in different countries and that these differences occur for different reasons. For example, in some cases they are chosen (e.g., the amounts of transfer payments developed economies have are largely chosen) while in other cases that they are not (e.g., high self-sufficiency in the poorest societies is primarily the result of necessity rather than choice). Nonetheless, the evidence is clear. Societies in which individuals are more responsible for themselves grow more than those in which they are less responsible for themselves. To be clear, by self-sufficiency, we do not necessarily mean leaving people on their own. Cases in which people are helped to stand on their own and the help proves to be cost-effective encourage growth. Which Countries Are Most Self-sufficient and How Has Self-sufficiency Been Correlated With Growth? To determine the answer to these questions we created indicators which we aggregated into a self- sufficiency barometer. We will explain how we did that and what the individual indicators showed, but to cut to the chase:
  • 3. 3 Bridgewater ® Daily Observations 10/30/12 Which countries are most self-sufficient? The chart shown below conveys those which are most-self-sufficient. As shown, Asian economies are measured as most self-sufficient, followed by Latin American countries. The English speaking developed world generally comes next. Finally, European countries, with the large European periphery countries like Spain and Italy, are the least self sufficient. The chart below shows these ratings. Look at it to see if you are surprised and note those surprises so that you can see what they are attributable to when we show you the composition of our barometer. For example, you might find it notable that “communist” China has greater self-sufficiency than the capitalist US. TLD SGP IND MEX KOR CHN HKG IDR TAI PHP COL JPN CHE USA RUS AUS BRZ ARG CAN NZL GBR SAF NLD CZK VEZ PLD PRT NOR DEU GRC HUN IRE ESP FRA ITA SWE BEL Aggregate Self Sufficiency Indicator (Z-Score) -2.5 -2.0 -1.5 -1.0 -0.5 0.0 0.5 1.0 1.5 2.0 2.5 EM Asia is generally at the top… …English speaking developed world, Switzerland and Japan are most self sufficient in the developed world. …Europeans are generally the least self sufficient
  • 4. 4 Bridgewater ® Daily Observations 10/30/12 How is this self-sufficiency barometer constructued? To measure self-sufficiency, we look at 9 indicators related to 1) how hard individuals work, 2) how large government supports are relative to incomes, and 3) how rigid labor markets are (e.g., how easy/difficult it is to hire and fire). While no one of these perfectly measures self-sufficiency, together they paint a picture that is highly indicative. Our measures of working hard look at how many hours individuals actually work, the percentage of the population that is looking to work (labor force participation), the amount of vacation and holidays they take, as well as the effective retirement age. We measure the size of government supports by looking at the size of government outlays and the size of transfer payments to households. Finally, we look at three measures to examine labor market protections: unionization as a percentage of the workforce, how hard it is for businesses to hire and fire, and how high the minimum wage is relative to the average income. To come up with an overall gauge, we weigh 50% our measures of how hard individuals in a society work and 50% the system of supports and protections, i.e., 25% for government supports and 25% for labor market rigidity. Within each gauge we mostly give equal weight to the individual indicators. Self-Sufficiency Indicators and Growth Weight Indicator Aggregate Self-Sufficiency Indicator Hard Working 50% Average Hours Worked 25% Labor Force Participation 8% Effective Retirement Age (% of Life Expectancy) 8% Actual Vacation + Holidays Per Year 8% Government Support 25% Transfer Payments to HH, %PGDP 13% Gov Outlays as % of PGDP 13% Rigidity of Labor Market 25% Unionization as % of Workforce 8% Ease of Hiring/Firing 8% Minimum Wage as % of Average Income 8%
  • 5. 5 Bridgewater ® Daily Observations 10/30/12 How well does a country’s self-sufficiency predict its next ten year’s growth rate? To answer this question we gathered these indicators and put them together into the previously shown gauges and constructed this barometer in past years so that we could see how well they correlated with subsequent period growth rates. We saw that the most self-sufficient countries notably outperformed the less self-sufficient ones, with an the overall correlation of about 43% to subsequent 10-year real growth in income per capita across all countries and time. As you will see in our subsequent study, other measures of competiveness, indebtedness, culture and luck explained most of the rest. Self-sufficiency is a reasonably good predictor of growth in both the developed and emerging worlds when looked at on their own (33% and 39% correlated, respectively). Below we show the relationship of our aggregate self-sufficiency indicator against future growth for all countries across time. We then show the relationship of our individual guages and indicators to subsequent growth. Our data set includes over 40 countries since 1960. ` Self Sufficiency Against Future Growth Correl. = 43% -4% -2% 0% 2% 4% 6% 8% 10% 12% -2 -1.5 -1 -0.5 0 0.5 1 1.5 2 2.5 3 3.5 Developed Correl = 33% -2% 0% 2% 4% 6% 8% 10% -2 0 2 Emerging Correl = 39% -4% -2% 0% 2% 4% 6% 8% 10% 12% -2 0 2
  • 6. 6 Bridgewater ® Daily Observations 10/30/12 Looking at the individual indicators, we see that government supports and working hard both have a moderate correlation to future growth across time, of about 38% and 26% respectively. Among the individual indicators, average hours worked is one of the most strongly correlated with growth across time, 40%, followed by government outlays, 26%. Government transfers have a high correlation with future growth, though our dataset for this indicator is more limited and will have some bias because of countries with lower growth having higher transfers. Still a causal relationship is intuitive to us. Labor market rigidity and its component measures have shown the lowest empirical relationship to growth using our measures, though this is where our back history is most limited. More Depth on the Individual Indicators of Self-Sufficiency Below we show 1) how our individual indicators of self-sufficiency have correlated with subsequent 10- year real growth in income per capita and 2) where countries stand on these measures today. We start with those indicators that have been most correlated with (predictive of) subsequent growth and go to those which have been least. Since our government support indicators have been most predictive, we will start with them. Government Supports Government supports, directly through transfers that redistribute incomes or indirectly through services, are the primary means of enabling individuals to consume more than they earn. To be clear, we aren’t arguing for or against such payments; we are just measuring self-sufficiency and, since this is one of the biggest influences on it, it is a significant part of our gauge. All else being equal, countries that have fewer transfers, smaller welfare systems and more limited social services than those societies that have larger ones grow faster. In aggregate, our government supports indicator is -38% correlated with future growth of countries through our dataset.
  • 7. 7 Bridgewater ® Daily Observations 10/30/12 Turning first to outlays, we see many of the emerging Asian countries have very small governments relative to the size of their economies. Singapore’s government spends close to 15% of GDP, and China's government doesn't spend that much more, about 20%. India is a bit lower down but still in the top quartile, with government spending around 25% of GDP. There is some variation with Latin American countries, with Mexico’s government outlays at less than 25% of GDP, and Argentina and Brazil’s governments closer to 35 to 40%, around the middle of the pack. Japan and the US are also in the middle. France and Italy are on the other end of the spectrum. Their governments spend between 50% and 55% of GDP. Over time this measure is -26% correlated with future growth. SGP HKG PHP IDR CHN KOR TLD TAI MEX IND COL ECD CHE AUS ARG RUS VEZ JPN BRZ USA CAN ESP NZL GBR PLD CZK PRT DEU IRE NOR GRC NLD ITA HUN BEL SWE FRA Government Expenditures (% of PGDP) 15% 20% 25% 30% 35% 40% 45% 50% 55%
  • 8. 8 Bridgewater ® Daily Observations 10/30/12 Turning to transfers, we see that India and China’s governments are the least redistributive, by our measures. In both countries transfers to households are around 5% of GDP. Transfers in the US and Japan are about four times larger, around 20% of GDP respectively, but still much lower relative to the rest of the developed world. In Western Europe and Scandinavia, transfers range from a bit under 25% to nearly 30% in France and Sweden. As mentioned, transfers have a high correlation with future growth in our sample, though our dataset for this indicator is more limited and will have some bias because of countries with lower growth having higher transfers. IND CHN SAF KOR RUS BRZ AUS USA CAN JPN CHE NZL NLD NOR GBR GRC HUN ESP PRT ITA DEU BEL SWE FRA Government Transfers to Households (% of PGDP) 0% 5% 10% 15% 20% 25% 30% 35%
  • 9. 9 Bridgewater ® Daily Observations 10/30/12 Hard Working Societies that are self-sufficient have a high percenage of their population working hard each day to be self-reliant. People who work hard both produce more in the near-term and generally grow faster through time than those who opt more for leisure (i.e. it impacts the rate of change not just the level of difference today). Below we look at a variety of measures to get a sense of how many individuals are working and how hard and also how that has related to future growth in the past. In aggregate our hardworking indicator is 26% correlated with future growth of countries through our dataset. As we will see in a report that will soon be released, those in lower-income countries work harder and, all things being equal, those in lower-income countries are prone to grow faster. The indicator most correlated with future growth is average weekly hours of actual work. Regretably we must look at this measure for just men in the labor force because different social norms across countries around women in the workfoce distort the numbers, and we must adjust for things like labor force participation, vacation time and holidays. When we scan across countries, we see emerging countries at the top of the list, including China, Mexico, and India. Overall, emerging Asia comes through as working the hardest, followed by Latin America. Among rich countries, Singapore and then Japan have the hardest workers. The US is fairly hard working among developed countries, wheras workers in Europe appeare to opt for leisure more than anyone else based on these measurses. Over time this measure is 40% correlated with future growth. In the last 10 years the correlation has been similar, 49%. TLD CHN SGP MAL TAI MEX IND IDR COL TUR PHP ARG JPN VEZ CHE BRZ KOR HKG CHI CAN GBR NZL AUS NOR USA CZK RUS GRC SWE DEU NLD PLD PRT IRE ESP ITA HUN FRA BEL SAF BGL Average Hours Worked (Hrs/wk) 15 20 25 30 35 40 45
  • 10. 10 Bridgewater ® Daily Observations 10/30/12 Labor force participation is an indication of how much a society wants to work. By and large the emerging world has much higher male labor force participation rates than the developed world, though there are exceptions. Brazil, India, Mexico and China have some of the highest labor force participation rates (all above 80%). There is still a high participation of men in the workforce in Singapore and Switzerland (around 75%), despite the wealth of these countries. Japan has one of the highest male labor force participation rates among developed countries (above 70%). This measure is a bit lower in the US, UK and Commonwealth countries. Labor force participation is lowest among men in Western Europe, particularly Italy, France and Greece (60% to 65%), though Germany and Spain are not far behind, along with parts of Eastern Europe, especially Hungary, which is at the bottom of the list. Over time this measure is 14% correlated with future growth. In the last 10 years the correlation has been higher, 40%. PER IDR ECD BRZ IND MEX CHN VEZ TLD COL PHP MAL SGP CHE ARG CHI NZL AUS JPN KOR NLD CAN TUR RUS NOR USA GBR HKG IRE SWE CZK PRT ESP TAI DEU GRC PLD FRA BEL SAF BGL ITA HUN Labor Force Participation (% of Working Age Population) 55% 60% 65% 70% 75% 80% 85%
  • 11. 11 Bridgewater ® Daily Observations 10/30/12 The picture isn't that different looking at vacation time. Japanese workers appear to take very few vacations (less than one week per year on average), consistent with a strong work ethic reflected in our other measures. India and China are toward the top of the list, with the average vacation time around two weeks per year. The norm in the US is about three-and-a-half weeks. German, French and Spanish workers appear to take the most vacation, with Italy and Greece not far behind. On average, Europeans appear take 6 to 7 weeks of vacation per year. In the last 10 years the correlation with future growth has been 25%. JPN KOR AUS MEX SGP IND CHN NZL USA CAN RUS BRZ NLD CHE IRE NOR PLD HUN CZK GRC ITA BEL PRT GBR SWE ESP FRA DEU Actual Vacation Time (Wks Per Year) 0.0 1.0 2.0 3.0 4.0 5.0 6.0 7.0
  • 12. 12 Bridgewater ® Daily Observations 10/30/12 Another measure of how hard individuals work is how long they work before retirement. We measured this by looking at the effective retirement age as a percentage of life expectancy. The picture shows some notable differences with the earlier patterns we saw. While the countries at the top are mostly emerging, Japan and the US are ahead of many low income countries. Japanese and US workers appear to work 85% or more of their life expectancy before retiring. On the other hand, workers in China retire much earlier, having worked closer to 70% of their life expectancy before retirement. Consistent with other measures, Europeans fall in the bottom half of this measure. Over time effective retirement age as a percent of life expectency is lowly correlated with future growth on its own (14%), and the measure has not had a meaningful relationship to future growth in the last 10 years. SAF MEX KOR RUS IND ARG TUR PRT CHI JPN HUN USA PLD PHP NZL VEZ CZK SWE NOR IRE GBR CHE AUS HKG CAN DEU GRC NLD IDR ESP ITA BRZ BEL FRA MAL CHN Effective Retirement Age as % of Life Expectancy 70% 75% 80% 85% 90% 95% 100% 105%
  • 13. 13 Bridgewater ® Daily Observations 10/30/12 Labor Market Rigidity Support from the state to an individual can happen through either direct transfer payments and the provision of government services (as we examined above), or by regulating companies to provide workers with supports, e.g. enforcing a minimum wage or making it difficult to fire individuals. Unions can also work to protect certain workers at the expense of others. To the extent that these structural labor market supports limit companies from engaging with employees in a free manner, it limits the need for individual self-reliance. And this approach limits the dynamism of corporations and individuals to respond to conditions – which through time should make countries with high rates of labor rigidity grow more slowly. Empirically our indicator through time does not have a strong relationship with future growth but our data set here is most limited and what we care about most is whether our logic makes sense. Unionization rates is one of the measures where we see little relationship between the income of a country and where it ranks. Still the measure shows different choices within countries of similar income and it’s relationship to self-sufficiency makes sense to us. Unionization rates are low in France, the US, and Mexico (close to 15% and below). They are very high in Scandinavia, Italy, Russia and Argentina (35% and higher). This is one of the few measures on which China ranks lower. Over time, this measure doesn’t have much correlation with future growth, 12%, and has shown a similar low relationship in the last ten years. PER IND TUR MAL FRA PHP KOR USA CHI MEX PLD ESP HUN SGP CZK CHE AUS JPN DEU SAF BRZ PRT NLD BGL NZL HKG GRC GBR CAN COL CHN IRE ITA TAI ARG RUS BEL NOR SWE Unionization as % of Workforce 0% 10% 20% 30% 40% 50% 60% 70%
  • 14. 14 Bridgewater ® Daily Observations 10/30/12 While we don’t have our other two measures of labor market rigidity (ease of hiring/firing and minimum wage as percent of average income) back through time, they have an intuitive relationship with self- sufficiency and show a picture today broadly consistent with our other measures. Looking first at ease of hiring/firing, the US and Singapore rate as some of the most self-sufficient developed countries, and among the most self-sufficient of any country on this measure. China is not far behind, still in the top quartile. Protections against firing appear to be high in Europe (both the core and periphery but especially Spain and Portugal), which makes sense as structural reform is a contentious and important issue being debated now. Protections against firing also appear high in Latin America – Argentina, Brazil and Mexico are all in the lower half. The correlation of this indicator and future growth in the past ten years was 28%. SGP CHE HKG USA CAN MAL GBR TLD CHN HUN IDR BGL TUR IND COL TAI IRE RUS NZL PER AUS CHI PHP PLD KOR CZK NLD MEX GRC ITA ECD BRZ BEL DEU JPN NOR ARG FRA ESP SWE SAF PRT VEZ Ease of Hiring and Firing Index -2.50 -2.00 -1.50 -1.00 -0.50 0.00 0.50 1.00 1.50 2.00 2.50
  • 15. 15 Bridgewater ® Daily Observations 10/30/12 Turning last to minimum wage, we again see quite a bit of difference across countries even within the same income group. Singapore is again at the top of the list, with the US not far behind. They are joined by other developed countries, like France and Germany, and lower income ones like Mexico and India. On the other end we see both developed countries, like Sweden and Italy, and lower income ones, like the Philippines and China, that have much higher minimum wages as percent of incomes. Over the last ten years this indicator did not have much of a relationship with growth on its own. SGP RUS MEX FRA USA TLD NLD AUS CZK DEU IND BRZ CHI HKG JPN PRT PLD HUN ESP CAN BGL NZL GBR KOR GRC ARG BEL NOR CHE IRE TAI MAL CHN PER IDR ECD ITA COL SWE VEZ TUR SAF PHP Minimum Wage as % of Average Income 10% 20% 30% 40% 50% 60% 70%
  • 16. 16 Bridgewater ® Daily Observations 10/30/12 In Conclusion Self-sufficiency matters. If self-sufficiency were the only thing that matters we would now create a simple formula that would allow you to plug in facts and that would provide you with an estimate of what the next 10-years growth rate will be. That is useful to us. To the extent that policy makers agree with this formula, it could be useful to help them better set policy. To the extent that anyone disagrees with the formula, we could examine the disagreements and see how they would improve or worsen it. However, since self-sufficiency is only one of the factors that matters, we will defer that exercise until we show you the others and we can look at them all together.