Capitalism Did Not Win the Cold War

This article first appeared at Foreign Affairs.

Why cronyism was the real victor.

When the Soviet Union collapsed 26 years ago, it was generally agreed that the West had won the Cold War. This was affirmed by the prosperity and possibilities awaiting citizens of Western countries, as opposed to the political and economic stagnation experienced by those in Communist states. A natural conclusion, much repeated at the time, was that capitalism had finally defeated communism.

This sweeping statement was only partially true. If one took capitalism and communism as the only two protagonists in the post–World War II struggle, it was easy to see that the latter had suffered a mortal blow. But there was a third, stealthier protagonist situated between them. This was a system best identified today as cronyism. For if capitalism did win over the other two contenders in 1991, its victory was short-lived. And in the years that have followed, it is cronyism that has captured an ever-increasing share of economic activity. A survey of the distribution of power and money around the world makes it clear: cronyism, not capitalism, has ultimately prevailed. Continue reading at Foreign Affairs >>>

The Futility of Annual Top 10 Predictions

In every recent year, a black swan event has made top 10 lists appear quaintly naive and unimaginative. Our list is probably no better.

This time of year, top 10 predictions are all the rage. These lists can be interesting and entertaining but how useful are they really?

This question goes to the heart of forecasting. How futile or how useful is an attempt to forecast the economy, or technology, or world events for the next twelve months? There are three answers. Read more

Rise of the Rest: A Vision Deferred

Changing demographics and the commodities crash have slowed down the development of poorer countries.

Perhaps it all started with a turn in China’s demographics. Demand growth for commodities has declined sharply from recent years and has resulted in a crash of global prices. Copper is down 54% from its post 2008 peak and down 25% this year alone. Crude oil is down 67% and 39% in the same time spans. In addition to softer demand, prices were negatively impacted by jumps in supply, most notably from shale energy producers in the United States. Read more

The Candidates’ Other Demographic Challenge

It is massively larger than 11 million illegals.

Hans Rosling, co-founder of Gapminder, calls it “the biggest change of our time”. It is Africa’s population growth from 1 billion people today to 2.5 billion by 2050 and 4 billion by 2100.

You could say that a close “second biggest change of our time” is the aging and stagnation of the population in rich countries. The combined population of North America, Europe, Japan and Australia/New Zealand is now at 1.3 billion and it will remain at 1.3 billion by 2050 and 2100 with small gains in North America and Oceania offset by declines in Europe and Japan. Read more

The BRIC and I

The growth prospects of Brazil, Russia and China are dimming, while those of India are flaring.

If one is a lonely number, then ‘I’ could be a lonely letter, at least when it comes to the ‘I’ of the BRIC countries. Brazil, Russia and China all face mounting challenges in 2015 but the road ahead seems wide open for India. The main concern with this opening statement is that it seems to be the view of a large majority of observers.

Still, a majority is not the same as a consensus and certainly not the same as an extreme consensus. In investing, the consensus view is often right but the extreme consensus is absolutely and always wrong. For example, the consensus to buy tech stocks in 1997 was right but the extreme consensus to sell all non-tech and buy only tech in early 2000 was very wrong. When it comes to India, we are with the majority view, edging into consensus territory, but still far from extreme consensus. There remain enough doubters to ensure that this story still has plenty of time to play out.

Our approach to the topic is resolutely from the point of view of demographics. Demographics are not the be all and end all of an economy, but they are a very important vector, one of three very important vectors, the other two being innovation and institutional strength. Looking at the BRIC countries, the demographics of Russia and China are poor and those of Brazil are neutral. By contrast, the demographics of India, though challenging due to the large population size, could hold much promise if this huge newly created human energy can be harnessed and channelled in the right directions.

In general, the best demographic profile for an economy would be a rising population coupled with a declining dependency ratio (the ratio of dependents to workers). The increase in population means that demand for goods and services continues to grow. And the declining dependency ratio means that there is plenty of discretionary capital for consuming and for investing.

The US, Europe and China were in this sweet spot until six or seven years ago. Indeed, much of the world was in this sweet spot, a fact which largely explains the enormous creation of wealth and improvement in living conditions for billions of people in the past few decades. Things got more challenging in the middle of the last decade when dependency ratios in several countries bottomed out and started to rise.

BRIC Countries Total Dependency Ratios
BRIC Countries Total Dependency Ratios

We can’t blame the 2008 crisis on demographics alone. There were many abuses and excesses in the system which brought about the crisis. But it is worth noting that the crisis struck about the same time that a big reversal in demographics was taking place. A crisis would have come any way but instead of 2008, perhaps it would have come in say 2012 if the dependency ratio had bottomed four years later than it did.

Nor should anyone be surprised that Japan peaked in the late 1980s and has been struggling since then. Its dependency ratio bottomed in the early 1990s.  Or that China saw a huge boom since 1980 after it introduced its one-child policy, thus engineering a very steep decline in its dependency ratio. Or that the US recovery has been slow, given that its population growth has slowed down and its dependency ratio has been rising.

USA, Europe, Japan Total Dependency Ratios
USA, Europe, Japan Total Dependency Ratios

As shown in the first chart above, India is the only BRIC country with a declining dependency ratio between now and 2030. Russia and China’s are already rising and Brazil’s will bottom and rise by the end of this decade. Russia seems to be in the worst shape since it has both a declining population and a rising dependency ratio.

Finally two quick words on the other big vectors of economic growth: innovation and institutional strength. Innovation in Brazil, China (ex-Taiwan) and Russia has been slow and cannot be considered a factor in future growth. There was plenty of excess capital to invest in new businesses when the dependency ratio was declining in all those countries but it went instead into real estate and other unproductive investments. Innovation has been slightly better in India and could take a big leap forward with more capital investments in the decades ahead. India also has an immeasurably greater competitive advantage compared to the other BRIC members: its population speaks English.

Institutional Strength can be the subject of endless debate, especially if we try to draw comparisons across countries. All emerging countries have to make significant progress on this account.

Demography Charts – 1

13 November 2014

Below are charts of country and regional dependency ratios.

First some definitions:

The total dependency ratio is the ratio of the population aged 0-14 and 65+ to the population aged 15-64. They are presented as number of dependents per 100 persons of working age (15-64).

The child dependency ratio is the ratio of the population aged 0-14 to the population aged 15-64. They are presented as number of dependents per 100 persons of working age (15-64).

The old-age dependency ratio is the ratio of the population aged 65 years or over to the population aged 15-64. They are presented as number of dependents per 100 persons of working age (15-64).

The charts below are derived from the United Nations’ World Population Prospects – The 2012 Revision

In theory, the economy does better when the dependency ratio is falling and less well when it is rising. But, as discussed in this previous post, two important mitigating factors are a country’s rate of innovation and its institutional strength, .

United States, Europe, Japan

Figure 1 shows the total dependency ratios of Europe, Japan and the US from 1950 to 2050.

Total Dependency Ratio
Fig. 1. Total Dependency Ratio, Europe, Japan, USA

Key takeaways are:

  • The ratio bottomed in Japan two decades before it bottomed in Europe and the US, which may explain Japan’s stagnation relative to the US and Europe in the 1990-2008 period.
  • In the 1980s, 1990s and early 2000s, Europe and the US benefited from a declining ratio.
  • All three ratios will rise from now into the foreseeable future. But Japan’s ratio will rise faster due to its older population.

BRIC countries

Figure 2 shows the total dependency ratios of the BRIC countries: Brazil, Russia, India and China.

Fig. 2. Total Dependency Ratio
Fig. 2. Total Dependency Ratio, BRIC countries

Key takeaways are:

  • The ratios of Russia and China are both bottoming in the middle of the present decade and will rise for the foreseeable future.
  • Brazil’s ratio will bottom later this decade and will subsequently rise.
  • India’s ratio will continue to fall until about 2030 and will level off until 2050, which may help its economy grow faster.

Country Charts

Following are charts for a few individual countries and for Europe and Africa, showing all three dependency ratios as defined above. The blue line is the total ratio, the red is the child ratio and the green is the old-age ratio.

DR United States
Fig. 3. Dependency Ratios, USA

In the case of the US, Europe, Japan and China, it is clear that the rise in the total dependency ratio is mainly driven by a rising old-age ratio. Japan has the fastest rising old-age ratio. None of these countries is expected to see a big rise in its child ratio.

DR Europe
Fig. 4. Dependency Ratios, Europe


DR Japan
Fig. 5. Dependency Ratios, Japan

Note the steep 40+ point decline in China’s total dependency and child dependency ratios between 1970-2010. It is due to the country’s one-child policy and it provided a big boost to the Chinese economy in recent decades.

DR China
Fig. 6. Dependency Ratios, China

The following chart compares the total dependency ratios of the US and China. China’s ratio fell faster and will also climb faster.

Fig. 7. Total Dependency Ratio, USA, China
Fig. 7. Total Dependency Ratio, USA, China

India and Sub-Saharan Africa have a more promising demographic profile. A declining total ratio could markedly improve their economies, if other obstacles can be overcome. In addition, unlike other regions, Sub-Saharan Africa will not have a rising old-age ratio for the foreseeable future.

DR India
Fig. 8. Dependency Ratios, India


DR SubSaharan
Fig. 9. Dependency Ratios, Sub-Saharan Africa


DR Russia
Fig. 10. Dependency Ratios, Russia


DR Brazil
Fig. 11. Dependency Ratios, Brazil



Russia’s Population is Growing For The First Time Since The Early 1990’s


I’ve written numerous times before about the sharp improvement in Russia‘s demographic indicators through the first half of 2012 and the fact that the country was likely to experience natural population growth. However I had to use hedges like “the population is likely to grow,” “if trends hold,” “unless there’s a sudden downturn in births,” and “the data seem to indicate,” This was partially because I generally like to be cautious and measured in my analysis but also because while it was possible to argue that Russia’s population would start to grow at some point in 2012, in reality it was still shrinking (albeit shrinking at a greatly reduced pace). READ MORE.

BMW, Louis Vuitton, Swatch: Can the Boom Continue?

Diamonds are forever. What about growth in the luxury sector?

A few months after Porsche teamed up with RIM to offer the Porsche Blackberry, Tonino Lamborghini recently announced the introduction of three gold plated cell phones (priced $1,850 to $2,750) and of an Android tablet ($2,300) aimed at the Russian market. This story neatly captures the current state of play in the global luxury industry: a prestigious European brand flashing a status product at a BRIC consumer. Notwithstanding the gloom emanating from daily European headlines, the continent’s luxury sector has been riding an unprecedented expansion. With their aggregate 70% market share in global luxury goods, a slew of European companies have been living their best years ever.

The Best of Times

Sales have risen strongly at BMW. And at LVMH, the French parent of Louis Vuitton, Dom Perignon, Bulgari and Tag Heuer. And at Hermes and Burberry. And at Swatch Group, the Swiss parent of Breguet, Glashütte, Blancpain and Omega. In the two years 2010-11, BMW increased its sales by over 17% annually. LVMH increased theirs by an average 14%, Hermes by 18%, and Swatch by 22%. With record margins and cash flows, these results are oddly incongruous with a global economy limping and stumbling out of (or through, or back into) the 2008 financial crisis.

Screen Shot 2016-01-14 at 1.54.12 PM

The boom has been fuelled by rising demand in the BRIC countries and, to a lesser extent, in the United States. In 2011, sales in Asia (including Japan) were 28% of total revenues at BMW, 35% at LVMH, and as much as 54% at Swatch. At LVMH in 2011, sales in Asia ex-Japan and in the US grew by 27% and 18% year-on-year, respectively. For BMW, Asia represented 22.5% of unit sales in 2011, up from 10.6% in 2007.

If the rich, per F. Scott Fitzgerald, are different from you and me, then the suppliers and courtiers who pander assiduously to their vanity or sense of perfectionism, the purveyors of the finest consumer products on earth, are certainly different from the average consumer company. Whether by sheer luck or brilliant foresight, luxury goods companies now find themselves at the nexus of two main drivers of demand. First, the global rich, whose numbers have been increasing, are less sensitive to the economic cycle. They have big reserves of savings and can spend on luxury items even if their incomes falter for a year or two. Most will continue to consume luxury unless the economy is hit by a severe downturn. One of the reasons that BMW is bullish on the future is its expectation that the number of millionaires will continue to rise in developed markets as well as in the BRIC countries and Turkey and South Korea (identified as the BRIKT + China in a BMW presentation).

Second, the newly rich and middle class in emerging markets have embraced luxury products with a vengeance. Like the Japanese in the 1990s, shoppers in the BRIC countries are today’s most profligate luxury customers. Chinese buyers discovered luxury brands years ago and they have been buying with gusto. Significantly, their buying power and obsession with luxury is felt far beyond their borders. According to the Boston Consulting Group, travelers from emerging markets (tourists and business people) account for a large share of global luxury sales, even if some of these sales are recorded in Paris, New York or Tokyo. BCG says that the Chinese spend as much on luxury while away as they do at home.

Barring a global recession, these two groups, the rich everywhere and the middle class in emerging markets, will continue to spend on luxury products and, increasingly, on luxury services. These are undoubtedly the best of times for the luxury sector. The question then becomes: what will derail the boom? A shift in demographics could do it.

A Brief Digression on Demographics and Markets

In general, the world is full of coincidences but it would be foolish to accept all of them at face value. Sometimes it makes sense to ask questions to find out whether two concurrent events are really a coincidence or whether they are related. Among coincidences that we should not take at face value are important reversals in markets which occur at the same time as demographic inflection points. For example, the Japanese stock market peaked in 1990, the same year that the number of Japanese turning 40 also peaked. It could be a coincidence but then the US stock market peaked in 2000, the same year that the number of Americans turning 40 also peaked. It could be another coincidence or alternatively, there could be a poorly understood dynamic underlying the stock market, a dynamic directly linked to demographics, aging and investing etc. (The Chinese stock market peaked in 2007, one to five years after the number of Chinese turning 40 hit its own peak).

Demographics are generally ignored or underestimated by market participants. They are often seen as far-removed inputs in the economy which eventually manifest themselves through other measures. For example, an investor may ignore the change in demographics in a given area or region or country, confident in the knowledge that any significant shift will eventually appear in monthly retail or housing data or other economic indicators. The only problem with this thinking is a large gap in timing. Monthly status updates from the economy are mostly embedded in market prices by the time they are released. By contrast, an analysis of demographic trends can help make a forecast several months or even years before significant changes filter through the monthly economic data.

Dependency Ratios

One demographic measure which should certainly be examined in its relation to markets is the dependency ratio which measures the number of dependents per working adult (it is the sum of people under 14 and over 65, divided by the number of people aged 15-64). The table (compiled from a UN 2010 report) shows the ratio (per 100 people) for various countries and regions. A declining ratio is generally positive for the economy because income earners have fewer dependents and can divert dollars to investing and spending.

The world’s dependency ratio which fell steadily from 1970 to 2010 will be essentially flat until 2020-30 and will start to rise beyond 2030. In the US and Europe, the ratio hit bottom around 2010 and will rise in future decades. But in Japan, it hit bottom in 1990 and has been rising ever since. Perhaps this explains in part Japan’s lost decade which turned into two lost decades.


In the BRIC countries, the dependency ratio is still falling in Brazil and India, but it is near bottom and is set to rise in Russia and China. And in Africa, the ratio will continue to fall for a long time.

As the ratio rises, there will be fewer dollars to spend on discretionary items because more of these dollars will have to be redirected to taking care of dependents, whether this is done directly through assisting family members or indirectly through charities or government social programs.

Which brings us back to luxury goods, in some ways the quintessential discretionary items. Will a rise in the dependency ratio in developed countries, in Russia and in China lead to a slowdown for the sector?


Looking into the future, the case of Japan can be informative. It was not long ago that the Japanese were avid buyers of luxury goods, both at home and while traveling. But a 2009 study by McKinsey found that the Japanese appetite for luxury goods has been on the wane since 2001 (in volume terms) and it noted that their purchases started to decline (in currency terms) in mid-2006, two full years before the onset of the financial crisis.

Whether by coincidence or causality (the latter in my opinion), the demographic data fits well with this turn of events. Because of a low birth rate and an ageing population, Japan’s dependency ratio, 0.43 in 1990, rose modestly to 0.47 by 2000 and more briskly to 0.56 by 2010. It is on its way to 0.7 in 2020.

Nonetheless, heavy investing by luxury companies over several decades means that the Japanese luxury market remains the second largest in the world, after that of the United States. LVMH has 360 stores in Japan, a country 10% smaller than California, vs. 621 for all of the US.


The dependency ratio is bottoming in Russia and China but it will only rise slowly for the next 10 to 15 years. This suggests that, barring other developments, the luxury sector could continue to do well, but its growth rate may taper off. Of all the BRIC countries, India’s ratio looks the most promising and it offers the best longer term profile if its policymakers can set the country on a path to reap the demographic dividend resulting from a decline in its fertility rate. Although luxury companies have a presence in India, their footprint is much smaller than in China and Japan. For example, Louis Vuitton has over 50 stores in Japan, 39 stores in China and 4 in India.

Into Africa

Africa will see a steady decline of its dependency ratio in the 21st century. Luxury companies have a small to nonexistent presence on the continent. Swatch Group records a minuscule 0.6% of its sales there. Louis Vuitton has three stores, of which two in South Africa and one in Morocco, but none in oil-rich Angola or Nigeria. Porsche has seven ‘Porsche Centres’ in Africa, of which three in South Africa and one each in Angola, Nigeria, Egypt and Ghana. But it has 42 ‘Centres’ in China, 23 in Russia and 8 in Brazil. Although store count is an incomplete measure (because of sales through third party outlets), a larger number of own-brand stores denotes a greater confidence in the stability and growth of a given market. If Africa is the next economic frontier, these are indeed very early days for luxury goods companies on the continent.

They should sit up and take note. A team led by Hinh T. Dinh, Chief Economist at the World Bank, recently examined Africa’s prospects as a new manufacturing hub. Dinh writes:

“The ongoing redistribution of cost advantages in labor-intensive manufacturing presents an opportunity for Sub-Saharan Africa to start producing many light manufactures, enhance private investment and create millions of jobs.

According to new evidence, feasible, low-cost, sharply focused policy initiatives aimed at enhancing private investment could launch the region on a path to becoming competitive in light manufacturing.

These initiatives would complement progress on broader investment reforms and could foster industrialization and raise the market share of domestically produced goods in rapidly growing local markets for light manufacturers.”

Rise of Experiential Luxury

In its report, BCG estimated that sales of the global luxury sector amounted to $660 billion in goods (including luxury cars) and another $770 billion in services. BCG also highlighted a gradual shift in customer preference from owning luxury (goods) to experiencing luxury (services). Experiential luxury includes spa services, safaris, luxury travel, fine dining, special art auctions and other services. BCG deems this subsector to be growing by 12% per year while the market for luxury goods grows by 3 to 7%.

A key driver of experiential luxury is the aging of the population in North America, Europe, Japan and China. As people get older, they are less interested in owning expensive watches and handbags and more interested in valuable experiences. Some luxury product companies are trying to position accordingly. In its considerable portfolio, LVMH now also counts Cheval Blanc, a high-end hotel in Courchevel. But these efforts are so far embryonic.

So can the boom last? Yes, but projecting into the future the strategy of the past ten years will not be enough. The reversal of the dependency ratio in several BRIC countries and the rise of experiential luxury in developed markets pose the biggest challenges. Luxury goods companies will have to adapt their geographic and product footprint accordingly. In the near-term, wider concerns about the global economy override demographic developments. But in the longer term, India and Africa look like promising frontiers while the rest of the world (including China) grapples with an older population and a rising number of dependents.