Why Self-Sufficiency Matters (Or Why Europe's Growth Outlook Is Not Good!)
Self-sufficiency matters. Bridgewater's Ray Dalio sees this logical concept as consistently an important ingredient for individuals, and even more so for societies as a whole, to become successful. As he notes in a recent missive, "self-sufficiency encourages productivity by tying the ability to spend to the need to produce," adding that is likely not controversial to state that people spend money they earn differently than money they are given (i.e. the connection between working hard and spending is a healthy one). By quantifying 'self-sufficiency' as one of the parts of 'the formula for economic success', Dalio shows that "Societies in which individuals are more responsible for themselves grow more than those in which they are less responsible for themselves." The nine-factor gauge of self-sufficiency provides some interesting insights into those nations most likely to experience above-average growth going-forward and those that are not; as European countries, notably Italy, France, Spain, and Belgium, all ranking at the very bottom on self-sufficiency. Perhaps, in order to encourage growth, these nations must enable their citizens' self-sufficient animal spirits by removing their pacifying nanny-state support?
Via Bridgewater Associates: Formula For Economic Success: Self-Sufficiency
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 competitiveness, 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.
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 productivity. So, it is not a big leap to presume that countries with greater amounts of self-sufficiency do better than those with less. Since self-sufficiency creates capability and independence it produces self-esteem. Studies on happiness have shown that once income levels surpass those required for subsistence, that these factors are more highly correlated with happiness levels than the amount of money one has. For these reasons, it is logical to conclude that self-reliance is both productive and satisfying.
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:
Which countries are most self-sufficient?
The chart shown above 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.
How is this self-sufficiency barometer constructed?
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.
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 competitiveness, 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.
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