CHAPTER 3
FAULT LINES
We learn geology the morning after the earthquake.
—RALPH WALDO EMERSON
South Africa, Nigeria, Egypt, Saudi Arabia, Brazil, Mexico, Venezuela, Turkey, Russia, Indonesia, India, and China have all undergone enormous changes over the past twenty-five years. Each has its strengths and vulnerabilities. Together, these countries contain well over half the people on earth and an even higher percentage of the world’s youth. Their fate will determine the future of the entire twenty-first-century global economy.
Begin in sub-Saharan Africa, a region with fast-growing cities and economies, swelling populations of young people, weak political systems, underdeveloped infrastructure, and long histories of religious, sectarian, and tribal conflict.
SOUTH AFRICA
In recent years, student rage has taken center stage in South Africa. Cameras beam images of flying rocks, rubber bullets, riot gear, pepper spray, stun grenades, and flames across the country and around the world. This is a nation where young people understand the past very differently than their parents and have much deeper fears for the future. Bubbling beneath the surface of these protests is the fear that their country has no place for them, that their degrees won’t earn them a chance at a better life, and that government doesn’t care. There are nearly 20 million South Africans between the ages of fifteen and thirty-five, and just 6.2 million of them have jobs.1
How did this happen? From 2004 to 2008, a moment of high growth across the emerging-market world, high prices for the gold, platinum, diamonds, and coal that the country produces in abundance, along with the surge in state spending that the commodity boom enabled, helped South Africa grow by a robust 4.8 percent. From 2009 to 2013, as both rich and poor countries struggled to recover from a global economic slowdown, growth tumbled to just 1.9 percent.
Things have gotten worse. From 2014 to 2016, the figure fell to 1.1 percent, and the average number of violent protests climbed from 21 per year during the good times (2004–2008) to 164 per year in recent years (2014–2016). Youth unemployment is double the rate for adults, and it’s nearly four times higher for black youth (40 percent) than for white youth (11 percent). Those numbers translate fear and frustration into us vs. them.2 “Them” can be the governing elite or the police or white people or foreign investors or an older generation of South Africans who don’t understand the younger generation. Or it can be unwelcome foreign workers from places like Somalia, Nigeria, or Zimbabwe, particularly in parts of the country where poverty and joblessness are especially high. Guest workers have been the victims of attacks many times over many years.
The peaceful end of apartheid and the transition to genuine democracy in South Africa in the early 1990s stands among the greatest human achievements of the twentieth century. This success was a reflection of the wisdom of Nelson Mandela and the courage of South Africa’s people. But a quarter century later, this remains one of the most unequal societies in the world. Despite hopes for rapid development with broadly shared benefits after apartheid fell, per capita income stands at just $5,200, and much of the country’s wealth remains in white hands or with the black political and business elite. Poverty and joblessness remain chronic problems, particularly for young people, boosting what is already one of the highest crime rates on earth. World Bank statistics show that inequality has increased since the turn of the century.
Under former presidents Nelson Mandela and Thabo Mbeki, the state spent a lot of money to create opportunities for people who needed them most, but unemployment has risen above 25 percent during the scandal-plagued presidency of Jacob Zuma. Only about 30 percent of South African households qualify as middle income. A generation ago, many expected South Africa to lead sub-Saharan Africa toward a development model that reduced inequality. That hasn’t happened, and the country is now headed in the wrong direction.
Some of South Africa’s weakness comes from falling global demand for the commodities it exports, reducing the money that government can invest. But some of these failures flow from the physical legacy of apartheid, the townships and underdeveloped rural areas that continue to separate poor people from the chance to learn and work. Drive the highways that separate South African cities from the dusty, sprawling townships, and you’ll see people of every description, most unable to afford the transportation that might take them to a job, trudging along the side of the road.
Some of it comes down to chronic corruption and poor leadership from the African National Congress (ANC), which has ruled in coalition with the Congress of South African Trade Unions and South African Communist Party since apartheid’s end without a serious electoral challenge. That’s now changing, as both the moderate Democratic Alliance, which has won control of many local governments in recent years, and the Economic Freedom Fighters, a party of young people with a talent for political theater, inspired by Cuba’s Fidel Castro and Venezuela’s Hugo Chávez, capitalize on growing impatience and frustration with the ANC. The ruling party itself is increasingly divided. There is a globalist old guard that remains committed to private-sector-driven growth and openness to foreign investment. There is also an increasingly populist wing, still loyal to Zuma, that accuses foreigners of stealing South Africa’s resources and white South Africans of continuing to control more than their fair share of the country’s land and wealth.
Today, no South African under the age of thirty is old enough to remember apartheid. For many of these young people, the ANC is not the party of liberation but of power and privilege. They see globalization not as a source of personal empowerment, a rising tide that lifts all boats, but as a tool that foreigners use to steal South Africa’s natural wealth. In that sense, they have more in common with Steve Bannon than with Nelson Mandela.
Younger people are voting in smaller numbers than in the past, a sign of cynicism toward the entire political class, but the number of campus protests is on the rise. There’s a government plan to subsidize youth wages to encourage employers to hire young people, but the country’s powerful trade unions oppose the subsidy on behalf of their members and will use their political influence to prevent it from becoming permanent.
South Africa is also especially vulnerable to the disruptive effects of automation of the workplace, because unemployment is already extraordinarily high, leaving much of its surging population of young people without even the most basic job skills. The South African government doesn’t have the money to address that problem by upgrading primary, secondary, and higher education or to invest in research and development of new technologies at home. What is the future for South Africa’s growing youth population? What happens when their frustration reaches a tipping point? And how will the ruling African National Congress—once the beating heart of resistance to apartheid-era oppression—respond when its dominance of South African politics is no longer assured?
We’ll find out soon. That day is coming sooner than many think.
NIGERIA
Nigeria is profoundly divided too. Christian farmers and Muslims herders have fought battles that have killed hundreds. Muslim militants in the country’s north have killed thousands. Militia groups in the southern Niger Delta region have attacked state officials, police, foreigners, and foreign companies that they accuse of stealing the region’s oil wealth. It’s unusual in this country to see a large-scale urban protest against inequality and government corruption. Yet, in 2017, on one cloudy February afternoon in Lagos, the country’s commercial hub, hundreds of protesters stopped traffic and serenaded local police with chants of “Government of the rich, for the rich, making rules for the poor” against a backdrop of music from the late Afrobeat icon and political dissident Fela Kuti.3
With more than 180 million people, Nigeria is Africa’s most populous country and its largest economy. It’s also an increasingly unequal society. A 2017 study published by Oxfam and Development Finance International put Nigeria dead last on its list of 152 countries ranked by “commitment to reducing inequality.” The report labels Nigeria’s spending on public health and education as “shamefully low” and notes that “Nigeria’s richest man earns 8,000 times more in one day than a poor Nigerian will spend on basic needs in a year.”
The problem is getting worse. Nigeria’s economy has grown at a strong pace in recent years, but the study notes that it is one of the few countries where the number of people living in poverty has increased—from 69 million in 2004 to 112 million in 2010—over the past generation.4 That’s a rise of nearly 70 percent, and it means that more than 65 percent of the population is poor. “The number of millionaires increased by 44 percent during the same period,” according to the study, drawing a clear boundary between globalization’s winners and losers.5 The country’s per capita income is $2,200.
Nigeria has a population divided almost evenly between Christians in the country’s southern states and the underdeveloped Muslim-dominated north. To build confidence and a shared stake in the country’s future as democracy took hold in 1999, leaders of the Muslim north and Christian south struck an informal deal for a regional rotation of the country’s presidency. Yet southerners have held the job for thirteen of nineteen years since. The first northern president, Umaru Yar’Adua, died in 2010 after just three years in office and was replaced by his southern vice president. The second, current President Muhammadu Buhari, has been ill for much of his term. Failure to share power as promised hasn’t created a crisis yet, and the first peaceful transition of power from a defeated incumbent to his challenger in 2015 offered a positive sign for the country’s cohesion. But unresolved north-south tensions will become a much larger problem if economic growth slows sharply or if unemployment spikes. That’s exactly what’s begun to happen.
The lower price of oil, which accounts for more than 90 percent of Nigeria’s export revenue, has weighed heavily on economic growth in this OPEC member country, reducing the government’s ability to spend on education, better infrastructure, and other attempts to reduce poverty, particularly in the northern states. The percentage of northern children in school is half the percentage in the south, as money from the country’s oil industry and the service sector in Nigeria’s largest cities, both of which are centered in the south, is not shared with northern states. Boko Haram, an Islamist militant group based in the country’s northeast that has killed more than 15,000 people and pushed more than 2 million from their homes, makes matters worse by making a poor region poorer. In the far south, militants in the oil-producing region of the Niger Delta continue to plague production.
Nigeria, like Saudi Arabia, Russia, Venezuela, and others, needs to diversify its economy away from heavy dependence on oil exports, but its inequality will work against this process because, as the elite within developing countries amass wealth, they may lose the incentive to invest in the country’s future. The introduction of automation into the country’s manufacturing and artificial intelligence into its service sector will create turmoil in the country’s overcrowded cities mainly because, as in South Africa, the country’s education system is ill-equipped to prepare a fast-expanding population of young people for twenty-first-century jobs. The World Bank estimates that automation and machine learning will put 65 percent of all current jobs in Nigeria at risk. This may be the factor that finally tips Nigeria toward real turmoil.
EGYPT
“We want to eat!” It’s the simplest of protest slogans. In March 2017, bread riots erupted in a number of Egyptian cities as thousands of angry people blocked off busy streets and surrounded state-run bakeries to vent their fury at a government decision to reduce the number of subsidized bread loaves that each family was allowed to buy. Egyptians have many reasons to be angry with their government, but none is more basic than this.
Inequality is growing in Egypt. Nearly 30 percent of the country’s 90 million people live in poverty, the highest level since the turn of the century. Its per capita income is less than $3,500, and fallout from the Arab Spring continues. The problems that helped create that 2011 uprising—particularly public anger that the vast majority of Egypt’s people have never benefited from higher economic growth and that government exercised unchecked power over people’s lives—remain unresolved following the military’s recapture of government in 2014.
President Abdel Fattah al-Sisi has tightened his grip by isolating both the moderate and more radicalized supporters of Egypt’s Muslim Brotherhood. Yet resistance is growing. Terrorist attacks in Egypt have taken a human and economic toll, particularly on the important tourism sector, and the Egyptian government was forced to declare a three-month state of emergency in 2017 following attacks on Egyptian Christians.6 The resulting government crackdown on Sisi’s political challengers has discouraged both domestic and foreign investment in the country’s future. Financial help from Saudi Arabia and other Persian Gulf states has slowed sharply as lower oil prices force these countries to spend their money more carefully. Demands from the International Monetary Fund that Egypt allow a devaluation of its currency have pushed prices higher across the country, hitting the poor especially hard. Complicating matters further, the Egyptian military, anxious to protect political stability and its economic privileges, can veto the civilian government’s attempts to introduce reforms that might help Egypt solve some of its lasting problems.
But this country’s greatest challenge will come from its exploding population, which has grown from 66 million in 2000 to more than 90 million today. It is projected to reach 120 million by 2030 and 150 million by 2050.7 Population growth and urban sprawl leave less room for agriculture, exacerbating alarming shortages of food and water in a country that is already the world’s largest importer of wheat. There have been protests over rising prices for food and fuel, as in November 2016, when the government devalued Egypt’s currency and cut fuel subsidies to try to get its financial house in order, and again in March 2017, when it took that extraordinary step of cutting bread subsidies.8
More than half of Egypt’s population is under twenty-five. Some 750,000 Egyptians graduate college each year, but few have the skills needed to succeed in the current workforce.9 Some young people with little hope for a better life will blame their government. Others will blame the IMF, an institution closely identified with globalism, which insists on state spending cuts in exchange for its loans. Near-term, large-scale automation is unlikely in Egypt, because a government that can’t supply bread is unlikely to spend on development of new technologies or on programs to train workers how to use them. The inability to innovate will only leave Egypt that much further behind, and more people with fewer opportunities will surely need someone to blame.
SAUDI ARABIA
In May 2012, a group of men serving as religious police, known in Saudi Arabia as the Commission for the Promotion of Virtue and Prevention of Vice, approached a young woman in a shopping mall. They told her that since she was wearing polish on her fingernails, she would have to leave. “I’m staying, and I want to know what you’re going to do about it,” the young woman replied. She recorded the encounter on her phone and posted the resulting video on YouTube, where more than a million people saw it within days of the incident. The battle between us and them, between those who want greater personal freedom in Saudi Arabia and those who believe these values are foreign and will contaminate the kingdom, played out vividly in the YouTube comments section with strong opinions, colorfully expressed, on both sides.10 Not all young Saudis want a more open society. Many have become Twitter followers of some of the kingdom’s most outspoken conservative clerics. In other words, some young Saudis have embraced globalism and others have not.
Five years later, a woman was arrested for posting a video of herself walking through the streets of a small Saudi village wearing a short skirt and sneakers. Twitter users posted evidence that Riyadh police had issued an arrest warrant that charged the young woman with “disrespecting and violating the teachings of Islam.”11 Nearly half of the country’s 32 million people are under the age of twenty-five, but a close look at social media in the kingdom reveals that even the youngest Saudis are divided over questions of freedom and religious conformity. These tensions have existed for years, but they will run much higher if the Saudi government can’t provide them jobs, income, or greater opportunities to live as they choose.
There is no country quite like Saudi Arabia. Its per capita income is above $20,000, more than five times higher than in Egypt and nine times higher than in Nigeria, but that’s only because it’s a much smaller country that sits on a lot of oil. It has a large and growing population of young people, but two-thirds of the workforce is employed by the government, many of them in undemanding positions created to make work rather than to fuel growth. Physical labor is virtually always performed by foreigners from poor countries hoping to send money home. Expats and foreign guest workers with no path to citizenship make up nearly a third of Saudi Arabia’s population of 32 million and about 75 percent of the private-sector workforce, according to the IMF.
The Saudi economy doesn’t depend for growth on productive workers or technological innovation. The state doesn’t depend for revenue on taxes paid by citizens. For decades, the answer to every question has been crude oil, which accounts for nearly 90 percent of total exports and more than 90 percent of the government’s budget revenue. That’s where the money comes from to pay all those government workers with so little to do.
But the world’s energy markets are undergoing revolutionary change. New technologies are helping oil companies find energy deposits they would not have found ten years ago and extract the oil from new places, and in new ways, that were recently impossible. The result is that known global reserves of crude oil are now almost 2.5 times higher than in 1980, and abundant available supply ensures that prices won’t anytime soon recover to the peak they reached in 2014, if ever.12 Add the fact that economies around the world will rely more over time on a fuel mix that’s less dependent on oil, and the Saudis will find themselves without the seemingly endless inflow of petrodollars that they’ve enjoyed for decades. That won’t happen tomorrow or the day after, because the Saudis still have plenty of cash on hand. But the day of reckoning is coming, the impact will be permanent, and the Saudi leadership knows it.
That’s why King Salman has launched the Vision 2030 project, an enormously ambitious plan, directed by his enormously ambitious son, to enact the economic, technological, and social changes needed to modernize the Saudi economy and create millions of good jobs for young Saudis. Bring women into the workforce by allowing them to drive. End harassment of young people by the religious police. Persuade citizens that the state will wage war on corruption, even if it’s committed by members of the royal family. Change society to change the economy. Will it work? Unlike countries such as South Africa, Nigeria, and Egypt, the Saudi government has money to spend on education. About 90 percent of Saudi children are now in school, and women outnumber men among university graduates. This is the foundation that makes Vision 2030 possible.
But there are reasons for doubt, despite the talent and sincerity of the man leading the project, Crown Prince Mohammad bin Salman. Changing the Saudi economy means changing Saudi society, by creating a national work ethic in a country that has never had one—and by welcoming women not just into the classroom but into the workforce in much larger numbers, even if they don’t all dress in ways that satisfy religious conservatives. It’s one thing to change the law, another to abolish long-observed traditions. King Salman has imposed austerity measures for the sake of a more sustainable economic system. Subsidies have been reduced, raising the prices that citizens pay for water, electricity, and fuel. Free health care and free education could be eliminated next. It’s a short-term gamble that the king hopes will build a more sustainable long-term strategy. But the larger question is how this country will create the jobs its rising population of young people will need.
And what happens if the Saudi public can no longer be satisfied, if ambitious members of the royal family use public anger to boost their own standing within the ruling elite, creating discord in the process? In the search for a “them” to rally “us,” the Saudis are likely to pick more fights with regional rival Iran, creating more frustration and anger inside the kingdom and across the region. Many Saudi young people, meanwhile, will continue to push for a new way of life.
BRAZIL
Brazil is the classic example of a country where government has become a victim of its own success. The country’s middle class grew from about 35 percent of the population when the Workers Party government came to power in 2003 to nearly 60 percent by 2013. That’s a major leap forward for tens of millions of people. It has less to do with well-diversified trade—Brazil’s economy is much less open than other major emerging markets—than with the resource-rich country’s ability to ship commodities to China and its government’s willingness to redirect wealth toward people who had long been excluded via programs like Fome Zero (Zero Hunger) and Bolsa Familia (Family Grant) that have helped poor people afford food, gain access to water, borrow money, vaccinate children, and send them to school.
Yet enormous numbers of people who have been lifted from poverty, and those already in the middle class, now demand much better government—and their expectations have been heightened at an especially difficult moment for Brazil. In recent years, prices of Brazil’s commodity exports have fallen sharply. Brazil’s currency lost one-third of its value in 2015. Government, companies, and consumers have accumulated mountains of debt. In a country mired in recession for the past several years, with a public infuriated by daily updates on the biggest political scandal in the nation’s history, millions of Brazilians are fed up—with corruption, crime, a lack of good schools and quality health care, and gross government incompetence.13 It’s one thing for government to transfer large amounts of wealth to people who need it. It’s another to provide them with the services that middle-class citizens expect. That requires large amounts of investment. Investment requires careful planning, intelligent policymaking, painful reform, and political compromise. All have been hard to come by in postboom Brazil.
Per capita income remains at just $8,700, and Brazil needs to spend much more on basic infrastructure—better roads, bridges, schools, hospitals, ports, and airports—if it is to escape the ongoing economic slowdown that threatens to reverse many of the Brazilian people’s gains. Yet the slowing economy makes that more difficult every year, and the inability of politicians to sustain their popularity for very long makes tough-minded reform that much harder to impose. Anger is rising against an entire political establishment that has not found an effective response, and protests have reached historic heights. This is a country where the battle of us vs. them now pits citizens against the entire political and business elite.
MEXICO
Brazil’s political and business scandals have grown so big that they’ve spilled over into a number of other countries. Odebrecht, an enormous Brazilian construction company and a key player in the Lava Jato scandal, was accused in 2017 of bribing officials in Mexico in exchange for big state contracts. This was just the latest stain on the presidency of Enrique Peña Nieto, who was elected in 2012 with an approval rating of 54 percent and a mandate to undertake ambitious reforms, including a historic opening of the oil industry that promises to bring large amounts of foreign investment over time to modernize the oil sector. He achieved that goal, but it will be many years before Mexico sees substantial return.
So much has gone wrong. The kidnap and murder of forty-three students in the southern Mexican state of Guerrero in September 2014—a landmark case that produced accusations against criminal gangs, local police, federal police, and even the army—provoked nationwide protests in October 2014 and again in August 2015. The story continues to haunt the country, because it suggests to many people that the rule of law remains arbitrary and that the country’s political culture is hopelessly corrupt. Add a financial scandal involving the president’s wife, the state’s suspicious inability to keep drug kingpin Joaquín “El Chapo” Guzmán behind bars, a weaker currency, and the decision to withdraw a popular gasoline subsidy, and Peña Nieto’s popularity had fallen to 17 percent by 2017.
In Mexico, citizens are increasingly frustrated with corruption at all levels of government, rising inflation, mediocre growth for the past generation, and a worsening security situation. Mexico has not experienced the sudden surge in income and expectations that we’ve seen in Brazil and some other emerging markets. In fact, the country’s real minimum wage hasn’t grown in twenty years, and the rate of poverty hasn’t much changed in twenty-five, leaving few Mexicans with confidence that tomorrow’s living standards will be better than yesterday’s. A surge in U.S. oil production is bad news for a country that still sends more than 70 percent of its oil exports to the United States. This is another developing country that badly needs revenue for investment: Mexico ranks thirtieth of thirty-five OECD countries in education spending and thirty-second in health care spending.
This is an interesting moment for Mexico. At a time when the center-right is making a comeback across much of Latin America, public anger in Mexico, fueled by new attacks from Donald Trump, may boost the popularity of the country’s most talented populist—just in time for a presidential election in 2018. Andrés Manuel López Obrador hopes to capitalize on frustration with corruption and fear of both criminal gangs and their enablers within the police to launch a full electoral assault on the current government. The rest of the political establishment fears that López Obrador will try to please voters by reversing policies designed to provide long-term economic gains, like opening the country’s energy sector to foreign investment, and that he’ll open investigations that might throw many of the country’s current leaders in jail. As in Brazil, the risk is that fed-up voters will treat the entire political class as “them,” creating an opportunity for a candidate promising to punish the country’s elite and protect its interests against assaults from the giant neighbor to the north and its bellicose president.
Finally, Mexico is a country where automation will have a big effect. Nearly two-thirds of jobs in advanced manufacturing of automobiles, aerospace products, and plastics can be automatized. That’s good news for companies and shareholders, but it’s bad news for the estimated 5 million workers who will be displaced.14 Add that disruption to the country’s middle class and the impact it will have on wealth inequality, and this will be a volatile and dangerous moment in Mexico’s history.
VENEZUELA
There are many types of shortages. In Venezuela, water was in such short supply by 2016 that citizens added to their meager rations by stealing water from swimming pools and tanker trucks. Electricity shortages forced the government to order public offices to open just two days a week. Power cuts and rolling blackouts became part of daily life. Aspirin disappeared off store shelves. Supermarkets closed because they had nothing to sell. In April 2016, Empresas Polar, Venezuela’s largest private company and producer of 80 percent of all beer consumed in the country, suspended production. “Let them drink water,” government officials might have said, if there had been any water.
Venezuela is blessed (or cursed) with the world’s largest oil reserves. Yet it has suffered much higher levels of unrest in recent years than any other Latin American country. Former President Hugo Chávez, an iconic populist firebrand, invested in improving the lives of poor people long ignored by Venezuela’s political class. State spending cut the country’s poverty rate nearly in half during his presidency, from 49 percent in 1999 to just 29 percent in 2012. Inequality was sharply reduced. Record high oil prices helped Chávez introduce the so-called misiones, which provided the poor with subsidized food, basic goods, housing, and health care. His popularity allowed him to consolidate power at the expense of the country’s democracy and to create all sorts of long-term economic problems.
In 2013, Chávez died. In late 2014, oil prices fell by almost half. A country that imports virtually everything except crude oil quickly faced serious (and lasting) shortages of food, water, and other basic goods. Nicolás Maduro, Chávez’s hapless successor, has struggled to beat back demands for political change. Venezuela’s economy has been in deep recession for many years. Scarce goods, an overvalued exchange rate, and the government’s attempt to manage its debt by printing way too much money have sent price inflation skyrocketing. Product shortages will get worse as the government vows to spend less on imports to ensure it can continue to avoid default on sovereign debt.
The black market has threatened to wreck what’s left of the consumer economy as state-imposed price controls create opportunities for Venezuelans to make more money buying state-subsidized goods and reselling them at higher prices, or smuggling them over the border into Colombia, than they can by working. Extreme poverty has nearly doubled during this crisis, from about a quarter of the country’s population to more than half, reversing the gains made under Chávez. Venezuela’s cities have some of the highest rates of violent crime in the world. Many young people with enough money are leaving the country.
Like Chávez, Maduro uses the ruling party’s control of the country’s courts to keep the opposition from power. When opposition candidates won a majority of seats in the national assembly in December 2015, a supreme court packed with Maduro loyalists dissolved the assembly. Street demonstrations have turned violent, and more than one hundred citizens have been killed. Chávez and Maduro have ensured that loyal allies command Venezuela’s military. That loyalty will continue—perhaps until the order is given to fire on Venezuelan men, women, and children.
Venezuela’s economy will not improve under the current system, and regime change is increasingly likely. It remains unclear, as of this writing, when and how the end will come—and how many will die in the process. It will take years for even the most capable opposition-led government to correct the distortions that Chávez and Maduro have imposed on Venezuela’s economy, particularly if they try to do it without imposing excruciating economic pain on those that Chávez lifted from poverty. All these changes must come at a time when diversifying the country’s economy away from deep dependence on oil exports has never seemed further out of reach.
TURKEY
Turkey has faced plenty of unrest of its own. Recep Tayyip Erdogan and his Justice and Development Party deserve enormous credit for making Turkey one of the world’s most exciting economic success stories of the first decade of the new century. Past governments had simply reinforced the power of elites in the country’s largest cities: Istanbul, Ankara, and Izmir. Wealth remained in the hands of the small number of families who dominated Turkish business. Traditions institutionalized by Mustafa Kemal Ataturk, modern Turkey’s founding father, ensured strict adherence to secularism in the nation’s political life and an orientation toward Europe as a model for political and social development. Turkey’s military has historically served as protector of these principles. Erdogan’s innovation was to empower citizens and small businesses across the country’s Anatolian heartland to join in the political and economic life of their country. He challenged secular dominance of government to allow Turks with conservative social values a greater role in the country’s development. Per capita income tripled during the first decade of his political dominance, and Turkey became a more influential actor on the global stage.
Yet Erdogan let success go to his head, and Turkey’s political system has not yet proved strong enough to restrain him. As he works to remain in power, he pushes economic policies that he believes will help in the short run but which are certain to deepen long-term problems. Prevented by the rules of his party from continuing as prime minister, he won election as president in 2014 and proposed a referendum that would allow a rewrite of Turkey’s constitution to give the presidency much more power. He beat back media criticism by putting journalists in jail. When criticism moved to social media, he tried to ban Twitter.
Well aware that Turkey has a history of military coups, he used warnings of conspiracy to periodically purge the army’s ranks. In July 2016, some parts of the army finally did try to see him off, but Erdogan eluded capture and declared a state of emergency that gave him extraordinary powers to imprison large numbers of enemies, real and imagined, and to further tighten his control of courts, the bureaucracy, the police, and the army. His supporters, many of them empowered and emboldened by his success in increasing the heartland’s influence in the life of the country, lifted him to a narrow referendum victory in 2017.*15 For these citizens, crisis can legitimize a tough authoritarian response.
Yet Turkey’s problems continue to mount. On the one hand, the percentage of those living in poverty has been dramatically reduced—from more than 30 percent in 2002 to just 1.6 percent in 2014. However, among thirty-five OECD countries, only Mexico has greater income inequality than Turkey. Erdogan is also endangered by the economic expectations created by earlier success. In 2012, his party promised that per capita income would climb to $25,000 by 2023. In 2016, it remained just above $10,700. He continues to amass power, but election results tell us there are a significant number of people in his country who oppose his plans to expand it indefinitely.
At the same time, his country’s economy remains stuck in low gear, capping even the gains made by his supporters in years past. Erdogan’s pressure to keep interest rates low to protect growth and his popularity, along with his reluctance to enact painful reforms that will strengthen the country over the long term, leave Turkey unusually vulnerable to external economic shocks. And as in other developing countries, the government has not kept pace with the need to spend more on urban infrastructure as more and more young Turks move to the country’s largest cities with hopes for a better life.
In response to tough times and heightened criticism, Erdogan has proved to be a master of the politics of us vs. them. Beyond political opponents, journalists, and Kurds, he has played to the grievances of many of his supporters—particularly conservative Muslims and hard-core nationalists—by picking colorful fights with European governments. During the referendum, he used the word “Nazi” more than once to describe both German and Dutch officials and their actions. But his most intense fights are with rivals at home, including at times members of his own party, whom he accuses of betraying the country and its president. He has accused journalists who criticize him of abetting terrorism. In the process, Erdogan has further polarized an already divided country. He will continue to push for more power. Those who fear him will continue to push back. There will be more confrontations in Turkey’s streets.
RUSSIA
In Russia, we find another smart, charismatic leader who could once claim credit for a major surge in living standards—one supported, as in Venezuela, by historically high oil prices. After the political and economic chaos of the first post-Soviet decade, capped with a financial crisis in 1998, per capita income tripled during the first decade of Vladimir Putin’s consolidation of power (2000–2010). The share of Russians living below the national poverty line fell from 29 percent in 2000 to just 10.7 percent in 2012. His government built state-controlled wealth funds, with vast sums generated by the export of oil, gas, metals, and minerals, as insurance against future economic turmoil.
But thanks mainly to the steep drop in oil prices since 2014, Russia’s per capita income remains stuck below $9,000 per year, less than in former satellites like the Czech Republic ($18,286), Slovakia ($16,499), Hungary ($12,778), and Poland ($12,316) that have joined the European Union. Oil now accounts for less than half of Russian government revenue only because the price has fallen sharply. State-controlled wealth funds have lost much of their cash as Putin invests in Russia’s military muscle and tries to protect entitlements for the country’s most vulnerable. Western sanctions haven’t helped.
In response to tougher times, state officials have stopped increasing pensions in line with inflation. They have halted most public-sector wage increases in a country where one-third of citizens work for the state or for state-owned companies. They have slashed financial support for regional governments, even as seventy-seven of Russia’s eighty-three regions run deficits and amass debt. Poverty, already on the rise in recent years, will continue climbing, particularly for pensioners and those who live far from the largest cities, the most reliable of Putin’s supporters. Well-educated Russians are leaving the country in search of better prospects. Russia’s life expectancy ranks 153rd in the world.
The gap between rich and poor is now wider in Russia than in all but four of thirty-five OECD countries, though the growth of Russia’s black market mitigates the damage. In 2014, at a time when oil still sold at well above $100 per barrel, Russia’s shadow economy already amounted to an estimated 40 percent of GDP, while 24 percent of the country’s wealth was held offshore. There’s no reason to believe that either statistic has improved since then.
For now, the greatest source of public anger at Russia’s government is the corruption that continues to drive the protests described in the last chapter. State dominance of Russian media, his tough-guy image, and his ability to deflect blame for corruption and a weakening economy onto subordinates have helped Putin continue to defy political gravity. Yet questions remain. Without an unlikely lasting surge in oil prices, what force can reverse the steady decline of Russia’s economy and living standards? How will Russians respond to the repression of political dissent when trouble becomes commonplace in parts of the country where support for Putin remains high? What foreign policy gambles might Putin take to divert public attention from Russia’s decline?
Remember that Levada Center poll from the last chapter? More than half of Russians surveyed in 2017 said they were tired of waiting for Putin to improve their lives. How long can he escape blame if things don’t improve? In the past, many Russians have been reluctant to challenge a government that pays their salaries or those of a family member. How long will that reluctance last as wages stagnate and living standards fall? Protests have already expanded well beyond Russia’s largest cities. How long before public frustration becomes a major political challenge for the Russian government? Putin remains broadly popular, protesters can be punished, there are no credible challengers available to voters, and Russia still has lots of money for rainy days. Yet this country is headed slowly but steadily in a bad direction, and it’s not clear what force might finally turn things around.
INDONESIA
One warm morning in December 2016, 200,000 Indonesian Muslims descended on Jakarta, the country’s capital, to demand that Basuki Tjahaja Purnama be thrown in jail. According to the mob, he had insulted Islam by publicly quoting a verse from the Koran with an interpretation they didn’t like. The crowd’s real motive? This ethnic Chinese Christian governor of Jakarta province, better known as Ahok, was locked in a close battle for reelection, and Muslim populists wanted to see him lose. “Jail Ahok. The law must be fair,” read the banners.16
Though Indonesia is officially a secular country, religious freedom and diversity remain enshrined in the country’s constitution, and Ahok remains a friend and ally of Indonesia’s reformist president, a court convicted him of “blasphemy” in May 2017 and sentenced him to two years in prison. This is the latest sign that the politics of us vs. them is now playing a larger role in the life of the world’s most populous majority-Muslim country, as radical Islam, populism, and nationalism expand their political appeal.
Indonesia is home to an estimated 260 million people. It’s a poor country, with per capita income of just $3,600. Beyond large-scale poverty, Indonesia is burdened with a large gap between rich and poor, one that has grown much wider since the East Asian financial crisis twenty years ago. That’s one of the most important reasons that Indonesians elected the former reformist governor of Jakarta province, Joko Widodo, as their president in 2014. Jokowi, as he’s widely known, is the country’s first president to come from outside Indonesia’s traditional elite, and he has attacked inequality through a sharp increase in state spending on the country’s ramshackle infrastructure, as well as its education and health care systems.
But Indonesia is yet another developing country where politicians and the business elite eat at the same table and corruption remains endemic. So far, the wealthy and well connected who oppose reform continue to target Jokowi’s plans rather than the popular president himself. That will change if failure to deliver higher living standards leaves Jokowi vulnerable. There is also a geographical divide within the country. About 120 million of the country’s 260 million people live far from major cities on Indonesia’s more than 17,000 underdeveloped smaller islands, and they have a lot of catching up to do. The private sector sees little profit opportunity in investing in these islands, and the state lacks the money to make up the difference, because this is a country where government isn’t good at collecting taxes.
Jokowi presses on. The number of Indonesians over age fifteen grew by more than 3 million between 2014 and 2015, while the number of jobs grew by just 200,000.17 The poor can expect more cash transfers and education subsidies to give them a better chance at middle-class life. The rich can expect higher taxes. Yet Indonesia’s vast population (the world’s fourth largest), its youth bulge (half the country is under twenty-eight), its urban-rural divide, and the very large number of poorly educated, low-skilled workers make the country especially vulnerable to the coming revolution in the automation of manufacturing. If Jokowi can’t raise enough revenue and pass legislation to invest much more in better roads, better schools, and more electricity beyond Java, young Indonesians will never develop the skills they need to compete in a digital-age East Asian economy. The country’s divides will grow, its reform movement will be discredited, and tens of millions of Indonesians will slide back into poverty.
The elite will build more gated communities and private schools. The poor will turn to local schools and organizations that promote an Indonesian brand of Sunni Islam that rejects the government’s traditional “unity in diversity” message of tolerance, an idea that has helped keep the peace for many years in a country with large ethnic and religious minorities. Given their numbers, an aggrieved underclass might then use the ballot box to elect leaders who promise to use any means necessary to right what they believe is wrong. That’s not difficult to imagine in a country where we already see Islamist parties promote Muslim dominance and nationalist parties demand loyalty to patriotic values as they define them.
INDIA
One evening in September 2017, Gauri Lankesh, an Indian journalist with a famously satirical sense of humor, returned home after a long day at work. A few steps from her front door, she was shot dead by an unknown drive-by assailant. As news spread, speculation about a motive began and protests erupted in cities across the country. On one side were friends and allies of Lankesh, who claimed she was murdered by Hindu nationalists and their allies in government who wanted her punished for her reports on their brutality. On the other were politicians of the ruling Bharatiya Janata Party (BJP) and their allies, who insisted the motive was unknown and that government critics were exploiting her death for political gain.18
Seven decades after India’s independence and partition from Muslim Pakistan, religion remains a focal point of the politics of us vs. them. It’s frightening enough that there are still religiously motivated murders in this profoundly diverse country and that mob violence continues against Muslims accused of stealing, selling, or eating cows, which are sacred to many conservative Hindus. It’s more alarming that political officials of the ruling BJP often fan these flames, including by calling journalists who criticize Hindu nationalism “sickular” and “press-titutes.”19
With per capita income of just $1,723, fast-growing India remains the poorest of these twelve countries. A program of economic liberalization that began in the 1980s, accelerated with a debt crisis in 1991 and which continues today under reformist Prime Minister Narendra Modi, has sharply accelerated India’s economic growth, but the ongoing (partial) dismantling of the labyrinthine socialist bureaucracy that makes growth acceleration possible has exacerbated income inequality.
The good news for India is that income inequality there is less severe than in fellow BRICS countries Brazil, Russia, China, and South Africa. The bad news: That’s mainly because a much larger percentage of Indians are dirt poor. About 600 million of the country’s more than one billion people get by on near-subsistence levels of farming, informal village-level jobs, and off-the-books, low-end manufacturing. A study published in 2017 by French economists Lucas Chancel and Thomas Piketty found that inequality in India and the share of national income that goes to the top 1 percent of wage earners are higher than at any point since Indians began paying income tax in 1922.20 The days of the so-called Hindu rate of growth—the tepid expansions produced by India’s state-dominated economy from independence in 1947 until the 1980s—appear to be gone. But the slow opening of India’s economy, the expansion of its service sector, and its growing consumer class have so far benefited only a small percentage of the country’s workforce.
Under Modi’s leadership, India has become the fastest-growing large economy in the world, and near the top of his list of reform plans is a surge in investment in India’s famously rusty infrastructure. Yet the country’s needs are enormous. In 2012, before the BJP rose to power, a massive blackout highlighted the scale of one part of the problem by cutting electricity to 700 million people. The International Energy Agency estimated in 2015 that 240 million Indians live without any access to electricity. The government said it expects every household in India to have power by 2018, but the number of hours per day it lasts is another question.
As of 2014, 600 million people in India did not have a toilet inside their homes.21 The government also said in 2015 that nearly 40 percent of the country’s 5.4 million–kilometer road network remained unpaved.22 In much of the country, the rail system is more than a hundred years old. In 2016, Finance Minister Arun Jaitley warned that the country needed $1.5 trillion in investment in roads, bridges, railways, ports, water sanitation, electricity grids, and other projects over the following decade to meet its basic infrastructure needs and maintain growth.23
Access to water is one of the country’s biggest challenges and an important potential source of large-scale unrest. Nearly 76 million Indians still lack access to safe water, according to a 2016 estimate from WaterAid, a London-based nonprofit, and millions more drink water of very low quality.24 Aquifers, which supply 85 percent of the country’s water, are not being refilled. The water table is dropping, and birth rates are highest in the northern and western states where water is most in demand. More than 600 million people in India make their living from agriculture, but nearly two-thirds of the country’s farmland depends on rain for irrigation. Droughts can affect hundreds of millions of lives.25 Climate change isn’t helping; given the lack of water, a drop in rainfall totals during (increasingly erratic) seasonal monsoons can drive food prices higher, triggering riots by those unable to buy staples. This is already a big political issue in many of India’s state elections.
Most important are the country’s demographics. Within the next five years, India will surpass China to become the world’s most populous country.26 Unlike China and Russia, India has a fast-growing population of young people. Half the country is under the age of twenty-five, and 65 percent are under thirty-five. For now, that’s good for economic growth. But even today there aren’t enough jobs for the one million Indians who enter the workforce each month. Remember that, according to UN forecasts, automation and machine learning innovations in the workplace will put 69 percent of India’s existing jobs at risk.
There are other challenges. Beyond the tensions, and sometimes bloodshed, that still plague relations between Hindu nationalists and a Muslim minority population of more than 100 million people, there are also still divisions defined by caste. Affirmative action policies that provide sought-after spots in the country’s best institutions of higher learning and well-paid government jobs to lower-caste citizens stoke resentments among different groups—tensions that play out in local politics and sometimes in the streets. Over time, more groups will demand these privileges, and they’ll vote for parliamentary candidates who promise to deliver them. It’s difficult enough to govern a country in which thirty-five different languages are spoken by at least a million people each, with 22,000 distinct dialects, but fast-expanding access to social media will make protests easier to organize and harder to contain. Dynamic, ambitious India has defied warnings of impending doom for decades. But where will the jobs come from? How can India’s government continue to meet rising expectations unless all these big structural problems are solved?
India has long been among the most protectionist of major emerging markets, its economic course set long ago by the Fabian Society socialism that founding father Jawaharlal Nehru absorbed during student years in Britain, and later by the determination of his daughter, Indira Gandhi, to protect state dominance of India’s economy as a matter of national pride. This country’s lead politicians have long been suspicious of “globalism” and the colonialist mind-set they see in its origins. Modi has opened some sectors of the economy to more foreign investment, but he and his BJP have also added a strong dose of Hindu nationalism to the mix. Globalization has created important opportunities for ambitious young Indians in recent decades, especially those with good command of English. But all those call centers, in Bangalore and other Indian cities, can soon be run by machines as artificial intelligence moves from the U.S. and European service sectors to poorer countries. Put it all together, and there’s a serious risk that a new generation of Indian politicians will make names for themselves by pitting various versions of “us” against new versions of “them.”
CHINA
Here is globalization’s greatest success story.
China’s rise can be measured in many ways, but the most impressive number is the 700 million people that state-led reform has lifted from poverty over the past four decades. In 1986, China’s per capita GDP was $282. In 2016, it climbed above $8,100. The country’s middle class represented 4 percent of the population in 2002 and 31 percent in 2013.27 For the future, the Communist Party leadership says it can educate enough people, create enough jobs, stoke enough growth, and provide enough health care to boost 50 million more from the lowest income brackets by 2020. Despite predictions from many people over many years that a crash of China’s economy is long overdue, the world’s biggest emerging market and its aspirations remain aloft.
Yet, for a variety of reasons—all of them inevitable—the country’s growth rates continue to slow, and its gains are under pressure. The 2008–2010 financial crisis in the West made clear to China’s leaders that they must move more urgently to relieve the country’s dependence for growth on the willingness of U.S. and European consumers to buy China’s cheaply made manufactured goods. To lock in long-term economic stability, China needs to build and bolster its own middle class, one that can afford to buy much more of those factory-made consumer products. Success has pushed Chinese wages higher. But as pay rises, China loses the advantage that brought so many foreign companies to the country in the first place. Even Chinese companies have begun to move production to poorer countries, particularly in Southeast Asia, where labor is cheaper. Higher wages can’t help you if you don’t have a job.
Further, the problem of inequality has been growing for years. Even as hundreds of millions have climbed the ladder, the wealth gap has grown larger between the low-income population still trapped in the countryside, the new middle class, and the now superrich. The Gini coefficient has risen dramatically (from 0.27 in 1984 to 0.42 in 2010), but even that large jump probably doesn’t capture the true scale of the problem. Statistical fraud at different levels of government undermines confidence in numbers we know are politically sensitive. We can be sure that the coastal regions of China are far richer than the interior and that, even by the standards of other developing countries, the gap between urban and rural wealth is large and growing.
Exacerbating inequality, if you live in Beijing, Shanghai, Guangzhou, or another city where incomes have risen quickly, you may have access to good schools. If you live outside the lead cities, you probably don’t. Education will become an even more controversial subject over time, because the jobs of the future are much more likely to demand highly skilled, well-trained, and well-educated workers. And there’s rising fear even in the best cities that surging prices, especially for housing, will drive out huge numbers of people.
Then there is the poisoned air and water, the bitter product of decades of surging economic growth. The statistics have become sadly familiar. China’s Ministry of Environmental Protection has reported that two-thirds of China’s groundwater and one-third of its surface water are unfit for human contact of any kind.28 Toxins and garbage ensure that almost half the country’s rivers fall into this category.29 Estimates are that air pollution kills more than one million Chinese people per year.30
In addition, the country’s social safety net remains a massive work in progress as China’s population gets old faster than anywhere else in the world, leaving fewer and fewer workers to produce the wealth needed to pay for care for the elderly. In 1980, the median age, the point that divides a population into two numerically equal halves, was 22.1 years in China and 30.1 years in the United States. A UN study has estimated that by 2050 the median age will be 40.6 in the United States and 46.3 in China. In the 1990s, China introduced a program called the Minimum Livelihood Guarantee Scheme, or Dibao, to provide small amounts of money to the poorest people. More recent projects designed to boost incomes for people living in the countryside have reached hundreds of millions of people but with payouts too small to meet the most basic needs, particularly of the elderly.31 Automation will help China avoid a sharp fall in productivity as its population ages, but it will be years before we know what that means for China’s social safety net and the government’s ability to finance it.
All these pressures fuel the thousands of protests in China each year mentioned in the last chapter. The country’s economic slowdown will make it much harder than in the past to address all these problems since the government’s first priority will be to prevent the bankruptcy of deep-in-debt state-owned companies and local governments struggling to provide basic services for populations of people surging into cities. These are the kinds of issues that drive protest. As in other countries, those lifted from poverty have much higher expectations of government.
It’s also possible that, if times get tough, China’s middle class, and its consumption-driven lifestyle, will become a target—of poorer people who envy their prosperity and of a government looking to protect itself against populist anger. This fear within the middle class explains why so many send their children abroad for education and their money overseas for financial security. It may also explain why President Xi Jinping has explicitly revived the cult of personality around Mao Tse-tung, founder of the People’s Republic and a man who wouldn’t recognize the increasingly consumerist country that China has become. This is the fault line that might separate “us” and “them” within China if the country’s economy suffers a major meltdown.
China has important advantages, particularly over other developing countries. First, its system of higher education is improving quickly and in ways that may help make the transition to a world of sharply expanded automation and artificial intelligence. According to annual rankings published by U.S. News & World Report in 2017, China is now home to four of the world’s top ten engineering schools. (The United States also has four.) Each year, China now graduates four times as many students as the United States (1.3 million vs. 300,000) in the subjects of math, science, engineering, and technology.32
In addition, while India is uniquely diverse, the dominance of the majority Han Chinese population, which represents more than 90 percent of China’s total population, creates social homogeneity in the country’s most prosperous and influential cities and provinces. The lack of any viable leadership alternative to the Chinese Communist Party reinforces stability. It’s also fortunate that China’s senior leaders understand many of the country’s challenges very well—and that the party’s long-term survival depends on meeting them. No government has been more effective since 1980 in advancing reforms that expand prosperity. A serious effort is being made to tackle corruption, pollution, lack of access to education and decent medical care, wealth inequality, product (particularly food) safety, and the need for a stronger safety net.
But . . .
Though the Chinese leadership has said plenty about the positive impact that the large-scale introduction into the workplace of automation and artificial intelligence will have on China’s economy, it has said and done little to address the enormous economic, social, and (perhaps) political turmoil it’s bound to create. Remember that the World Bank has estimated that automation and innovations in machine learning threaten 77 percent of all existing jobs in China. That’s a major disruption in the lives of hundreds of millions of people, particularly in the country’s most crowded cities. As Chris Bryant and Elaine He wrote in January 2017, “It took 50 years for the world to install the first million industrial robots. The next million will take only eight, according to Macquarie [Group]. Importantly, much of the recent growth happened outside the U.S., in particular in China, which has an aging population and where wages have risen.” China, they note, is installing a much bigger absolute number of industrial robots than any other country on earth.33
It’s all the more remarkable, then, that China’s political leaders say they’re determined to embrace the tech revolution with both arms and as quickly as possible, with little public discussion of, or preparation for, massive job losses that can’t be avoided. Instead, the government has focused almost exclusively on building China’s competitive edge in robot manufacturing. In China’s carefully controlled political system, there are no civil society organizations warning of this oncoming wave.
Xi Jinping’s government will push hard to improve education for high-tech jobs, since China faces major shortages of high-skilled tech workers in semiconductors, robotics, and artificial intelligence. But there are also shortages of qualified teachers and open university slots, leaving huge numbers of workers with a fast-narrowing set of work options.
Failure to protect rising middle classes from crime, corruption, and contaminated food, air, and water, along with failure to care for the unemployed, sick, and elderly, creates a profoundly dangerous situation for China. But it is the extreme disruption of the workforce and massive loss of jobs that could push tens or hundreds of millions back toward poverty that might prove an entirely new kind of threat to the country’s stability and its future.
China has some obvious advantages. It’s the one government that, at least for now, can afford to spend huge amounts of money to create unnecessary jobs to avoid political unrest. China’s historic successes suggest this might be the one country that can find a way to adjust, and the aging of its population could be a plus as the country needs fewer jobs in coming years than rival India. We all better hope so, because, month by month, the entire global economy is becoming more dependent on China’s continued stability and growth.
Only now are the political implications of automation, the accelerating pace of machine learning, and the introduction into the workplace of artificial intelligence in developing countries beginning to become clear. Some of these governments will have the foresight, money, and talent they need to prepare young people to adapt to rapid technological change. Others won’t have the money or the political will to act. Still others won’t recognize the scale of the challenge. These are the factors that will determine which of these countries can survive and thrive.
The gap between winners and losers will also grow within individual countries, both developed and developing, as work that demands complex technical skills makes access to better schools and training more important than ever before. But we’ll also see a reversal of globalization’s great convergence as better schools and universities, more technically skilled citizens, stronger social safety nets, and stronger governing institutions will help wealthier countries cope much more effectively with these challenges. That’s a problem for all twelve of these countries—and, therefore, for everybody else.
People and governments have demonstrated resilience throughout history, but the accelerating pace of technological change and its direct impact on so many lives and families around the world is driving the current international system headlong toward a reckoning.
Whether with creativity or by force, the state will build walls.