A Brave New World?
The West’s failure to reap economic benefit from its greater levels of personal and political freedom has broken what I call the “Fukuyama Curve” and its confidence.
Given one parent was Sri Lankan and the other Singaporean, a commonly cited stat in my childhood home was that both countries had similar GDPs back in the early 1970’s (turns out this is true)[1]. The question of how countries diverge economically and culturally over time isn’t just theoretical to me. The current COVID-19 pandemic provides a moment to pause and reflect on the divergence of reactions to the crisis between different states, and on how different states have developed over the past thirty years.
The tenor of Western society is anxious and uncertain. This picture differs starkly from the optimistic afterglow of the fall of the Berlin Wall. Francis Fukuyama’s End of History -the thesis that Western Liberal Democracy would inexorably become the model for Government worldwide - seemed to temporarily play out across the West. The 1990’s saw a wave of popular, centrist, market-orientated governments taking office across the U.S, Germany, France and the U.K; mostly delivering decent GDP growth for two decades. Ex-Soviet European states began the process of EU accession coupled with market reforms converging on liberal democratic norms. Ireland, Spain and Portugal began the rapid process of converging on this particular ideal. Although it’s not much commented on, back in the late 1980's, Hong Kong, Taiwan, South Korea and Japan also offered evidence that outside North America/Europe, convergence on a liberal, market economy was viable.
Fukayama came to the conclusion he did with good reason in the late 1980’s[2]. I’ve been playing around with some data from the Legatum Institute’s Prosperity Index and GDP information from the World Bank. What’s clear from the late 1980’s is that a country’s wealth - measured by GDP per capita, or other proxy measures for personal and public wealth - were strongly correlated to a country’s orientation towards freedom. More freedom meant more prosperity. Reagan’s slogans resonated because they were true. To measure how reasonable Fukuyama’s thesis was back in the late 1980’s, I’ve set out to create a “Freedom Index[3]”; a score indicating how free each country was and is today. Broadly what I’ve done is measure political data for each country regarding its personal and political freedoms, with specific variables ranging from freedom of opinion, association, assembly, censorship, press to the rights of private property. I’ve taken all these factors and created a “Freedom score”[4]. The story back in the 1980’s was that the freedoms of both individual and society walked in lockstep with prosperity (which for this analysis I’ve measured by GDP per capita). The entrenched confidence the West had in its own institutions was based, I would contend, on the West walking confidently on with its two feet — one of freedom, and the other of prosperity.
Exhibit 1: Freedom vs Wealth 1988 — “Fukuyama’s Curve”
By the late 1980's there were broadly three groups of countries which broke this freedom vs prosperity relationship; many of which, interestingly, have found themselves in the firing line of Western foreign policy. The first group observed to be richer than they “should” have been in the 1980’s were the OPEC countries which by virtue of geology, extracted (and continue to extract) value from more free but oil-dependent countries. The second group were the USSR and its satellite/successor states; a reminder perhaps that for 60 years the Reds provided a model of providing a level of wealth that, although low in absolute terms, was significantly higher than you would expect given levels of freedom. Then there was Singapore, the city-state, and the perennial outlier — at least two decades ago. Broadly though in 1980's it would have been completely rational to argue that countries which protected personal and societal freedoms set economies on a path to greater prosperity. I’ve coined this “Fukuyama’s curve”, and it was real back then. By 2019 this straight-line relationship between Freedom and Prosperity had been weakened by vertiginous growth in freedom-ambivalent South Asian countries (China included) and limpid growth across the entire developed world.
Exhibit 2: Freedom vs Wealth 2019 “Fukuyama’s Curve”
By tracking how political freedoms and wealth have increased across the world these past thirty years a couple of patterns are immediately clear. Firstly, there has been no “freedom dividend” from the West being more free and liberal, translating into greater wealth creation 1988–2019 (see Exhibit 3). Unfree countries grew as fast -if not faster - than the West, and not all of this a function of a low baseline of wealth to begin with.[5] Neither was this broken relationship between freedom and wealth a result of the financial crisis hitting the West harder. Even by 2007, the year prior to the crisis, the closeness of the relationship between freedom and prosperity had already collapsed to 0.27x from 0.48x in 1988.
Exhibit 3: Change in Wealth vs 1988 Freedom Score
The maths indicates that for every unit of freedom (somewhat arbitrary I know) GDP per capita (logged) increased by 1 unit. By 2019 this association dramatically weakened so that for only 1 unit of freedom, GDP per capita (logged) increased by 0.65 — a drastic decrease in the strength of the relationship. Being democratic mattered much less to becoming richer. China’s economic miracle is a central piece of this story — a 3.5x increase in GDP per capita (i.e. living standards) but that’s not on the only story. Substantial economic growth amongst other, less free, South East Asian countries (Sri Lanka, Thailand, Vietnam) have also driven the splintering of Fukuyama’s curve as seen in Exhibit 4 below. By colour coding Fukuyama’s curve by geographic area it becomes clear that Freedom and prosperity positive covariance is still extremely strong in both the West (see Exhibit 5), and in areas of Western influence, but that in China, and its sphere of influence, the liberal escalator towards prosperity doesn’t exist.
It’s worth reflecting on the fact that Europe and the West managed to co-opt huge tracts of the USSR and Yugoslavia and place them on a path towards freedom and prosperity; the Cold War really was won. Fukuyama was right, but perhaps only for another 10 years and only in certain places. There’s something there too for both Eurosceptics and Europhiles — EU accession looks clearly correlated with countries’ climb towards freedom and prosperity, but many of the most free and prosperous countries of all don’t appear to be in the Eurozone and/or the EU. Maybe both are right, and the EU is a passing house for developing countries to becomes developed ones.
Exhibit 4: Fukuyama’s Curve at 2019: All Continents
Exhibit 5: Fukuyama’s Curve at 2019: The West, Central/South America, Ex Soviet Europe and Ex-Yugoslavia
Exhibit 6: Fukuyama’s Curve at 2019: Asia, Middle East, Africa and Asian Ex-USSR
What’s also clear here is that the West’s influence in the world can broadly be measured by the strength and steepness of this curve — and that across the Middle East, Asia, Africa no countries — save Japan, South Korea and Israel — are following the Western template. This will become more acute over time given differential population growth between free and unfree populations over the next 50 years. What’s also apparent, from Exhibit 6, is China’s centrifugal place in the economically growing and unfree world. Its gravitational pull is underpinned not just by a rejection of liberal democracy but also by significant debt financing — with Harvard suggesting that up to 15% of developing world debt is owned by China as a result of Beijing’s Belt and Road Initiative.[6]
Faced with stagnant growth and productivity, Western leaders and thought leaders have focussed for the past decades on social issues; for example, LGBTQ rights, other minority rights, animal rights, affirmative action and a growing awareness of climate change. These are noble goals — which I personally support — , but politics is the language of priorities. The plight of the worker in a routine occupation who hasn’t seen their pay packet rise in a decade was basically ignored for the best part of a decade and half across the developed world. Government-sponsored social liberalism - even if the arc is towards justice - requires economic credit, or at least framed in that way. By far the most affective way to get cut through on the great issue of climate change will be to position and frame it as an economic/insurance issue that could be GDP destructive in the way that COVID-19 has. Another way of looking at it is that Western Governments have spent the last two decades focussing on the top layer of Maslow’s Hierarchy of Needs - self expression and self-identity - without understanding the intrinsic hierarchy of needs. Economic security first, and then let’s talk about our right to self-expression and autonomy. This priority set has angered voters across Europe and America, where the task of increasing wages and wealth has been de-prioritised, often courtesy of the wealthiest elites, and not proved an attractive template for developing societies which want to put food on the table and money in the bank before hypothecating about self-identity. That’s the appeal of a rampant Conservatism across Europe and North America. It’s about the language of priorities. Economics first, virtues second. It’s hard otherwise to see how Western anxiety (see Exhibit 7) is ameliorated. All perhaps a reminder that humans are relative in their judgement, trajectory obsessed and pretty anchored in most assessments they make. The pessimism felt in the West doesn’t reflect that average wages are significantly higher vs the rest of the world. Western pessimism doesn’t reflect that their collective wage and wealth are unlikely to converge with the developed world any time soon. Instead it’s a pessimism forged on the back of anaemic economic growth. The Malthusian left which seems to think that Western confidence and happiness can flourish in a post-growth world are wrong. The exponential increase in personal and societal freedoms has not translated into greater optimism, even if these freedoms are of existential importance to some groups. With COVID-19 proving GDP kryptonite in the short term, perhaps now is the time for the West to be thinking about economic growth as the necessary condition by which it can make the case for more freedoms across the rest of the world.
Exhibit 7: Pew Research: GDP Growth vs financial optimism
Exhibit 8: OECD Forecasts 2019/2020 (which may, however, prove quite the challenge)
[2] I’ve chosen to benchmark data to 1988 as the year of apotheosis of the End of History thesis. It is also the year of my birth.
[3] Methodology used Factor Analysis on freedom/rights data collected from the Legatum Institute as at 2019, and then bootstrapped to the average political and civil rights scores from Freedom House as at 1988 to estimate “Freedom Scores” change 1988, 2007, 2019
[4] Factor Analysis
[5] Only 29% of variance in GDP growth (logged) 1988–2019 is explained (R2) by prior low levels of GDP. Lower levels of freedom are almost as predictive (24%) at explaining GDP growth (logged). Together they explain 32% of variance (Linear, multivariate regression)
[6] https://hbr.org/2020/02/how-much-money-does-the-world-owe-china
Data is here https://docs.google.com/spreadsheets/d/1DzwC2yJKg0lvxjymPp43J1nNsu74nKWOX8iHsD_LcUg/edit#gid=1042140737