Voice

The Magic Number

South America's experience suggests a tantalizing possibility: that reaching $8,500 in income is the secret to sustainable growth.

What makes volatile countries settle down and grow in a stable way? Is it a change of institutions, opening the door to trade, or the end of a war? Perhaps it's none of these. As crazy as it sounds, simply reaching a set level of income may be enough.

Economic growth can happen under almost any kind of government, though there are few models that seem to guarantee steady, equitable increases in living standards over the long term. Take South America. In the past century, countries there have tried just about every model there is, from disorderly Weimar-style democracy to dictatorship. Most often, they have swayed back and forth between various flavors of left-wing populism and right-wing authoritarianism. In the meantime, they have managed to grow, but only fitfully.

For some countries, however, the political pendulum has stopped swinging. In Brazil, Chile, Peru, and Uruguay, roughly the same sequence of events has resulted in relative stability. First, a center-right government has taken power and instituted the kinds of policies that warm the hearts of international investors: flexible exchange rates, fiscal balance, and tight monetary policy. Then, a center-left government has been elected. These new leaders have maintained the policies of their predecessors but, crucially, have also legitimized those policies by pursuing priorities that spread the gains of investment-led growth: education, health care, social programs, and other forms of redistribution.

It's no coincidence that these four countries are now among the most promising on the continent, from an economic perspective. They and Colombia (more about it later) attracted the biggest inflows of foreign direct investment per capita in 2011, and the five are the only ones rated as "investment grade" by Standard and Poor's. But why did this transformation happen when it did?

Here's a theory. As people's incomes rise, they're less likely to be swayed by political extremists. Neither populist promises of a chicken in every pot nor severe measures to suppress dissent are particularly appealing. The people are too well off to be persuaded by advocates of revolution, which makes approval of undemocratic crackdowns similarly unlikely. They just want to hold onto what they've got and enjoy their civil and economic freedoms.

The question is: How much do people have to earn for their economic situation to anchor them in the political center? Remarkably, this question may have an answer in South America. In the four countries that made the transition to stability, the completion of the sequence outlined above occurred as average purchasing power reached $8,500 per year at 2005 prices, as computed by the World Bank. In those four cases, the first election after crossing the $8,500 threshold ushered in the center-left government that would confirm the country's path of steady, equitable growth.

So, what does $8,500 buy you? The figure is a measure of an entire country's GDP adjusted for differences in prices around the globe and divided by its population. It's not a median income, nor is it for an entire household; a typical household in one of these countries might have something like $15,000 in total purchasing power every year. (As a guide, the United States has per capita GDP of about $48,000 and median household income of about $53,000, but households in the United States average about 2.5 people, versus more than 3.5 in Brazil.) That's by no means a high-income family, but in most countries it represents middle-class, or at least working-class, respectability. Such a household might spend $1,500 a year on taxes, $400 a month on housing, $50 a week on food, and $120 a week on everything else.

The latest South American country to reach the $8,500 threshold was Colombia, in 2011. If it follows the same path as the other four, the election in 2014 will replace the center-right government of Juan Manuel Santos -- and previously Álvaro Uribe -- with a center-left government. A center-left government isn't always easy to spot in South America; plenty of observers thought Brazil's Luiz Inácio Lula da Silva might turn out to be a loose cannon or fellow traveler of Venezuela's Hugo Chávez, but he was nothing of the sort.

In fact, Santos, who was elected in 2010, may himself qualify for the center-left distinction someday. He is already moderating some of Uribe's harsher policies, and his coalition in Colombia's congress commands support from left-wing liberals. In other words, the transition may already be happening.

Of course, not every country with more than $8,500 per capita in purchasing power has attained the magical combination of political and economic stability, even in South America. Though the World Bank's figures don't go back before the 1980s, it looks like Argentina crossed the $8,500 line sometime in the 1960s, coinciding with the progressive government of Arturo Illia. But Illia was elected by a flawed process and soon ousted in a military coup. Venezuela may have reached $8,500 even earlier and has had elected governments since the late 1950s. Yet as in Argentina, its living standards were essentially stagnant until the past decade or so.

The difference here may be as simple as one word: globalization. Brazil, Chile, Peru, and Uruguay have been able to bolster their growth with foreign investment to a degree that Argentina and Venezuela never could, not just in the extent of the investment but also in its diversity. Globalization has also made South American countries less isolated, both politically and culturally. It's easier than ever for their people to compare the performance of their governments with others around the world.

With that in mind, could countries in other regions follow the South American example? Possibly, but the similar and shared histories in South America make the case for the $8,500 rule particularly compelling. And their story of development is by no means the only one; in East Asia, the narrative of state-organized industrial growth in Japan, South Korea, and Taiwan is equally notable. More likely, up-and-coming regions like South Asia and Sub-Saharan Africa will write their own stories of stability and success.

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Daniel Altman

Size Isn’t All That Matters

What's lost in all the talk about America's debt problem.

Debates about government debt, whether in the United States, Japan, the eurozone, or elsewhere, have been missing one fundamental point: The composition of both debt and spending matters just as much as the size. This is such a basic, obvious notion, yet it seems to have eluded many of the politicians, pundits, and credit-raters who have been obsessing about the billions or trillions of dollars that may be spent or saved. In the case of the United States, it is particularly germane.

For American politicians, the big numbers are the ones that invariably get top billing, as they did at U.S. President Barack Obama's Monday-morning press conference on the debt ceiling fight. Yet whether it's $970 billion (the projected deficit after the "fiscal cliff" deal) or $11 trillion (the debt held by the public), these numbers say nothing about how money is borrowed and spent. In Washington, the only difference between good and bad spending is usually 'spending in my district' versus 'spending somewhere else,' as Obama mockingly remarked. It doesn't take much brainpower to see how much important information such a simple, shortsighted distinction omits.

Imagine two people with similar assets and incomes who are both seeking to borrow $100,000 for 10 years. One plans to spend the money on a master's degree that will improve her options in the labor market. The other plans to take a luxurious vacation with his family and buy a pleasure boat. To whom would you charge the higher interest rate? By investing the money in her ability to repay, the first borrower is increasing her credit-worthiness. She should be able to obtain a lower interest rate on the $100,000; she should also be able carry more debt than the other borrower at any given interest rate.

Now imagine that two other people with similar assets and incomes both plan to carry $100,000 in debt for 10 years. One has a fixed interest rate of 3 percent for the entire period. The other has borrowed for two years at 2.5 percent and plans to roll over the debt -- repay and then borrow again -- four times. Which borrower has the bigger risk of default? Since interest rates can fluctuate a lot over the years, and they seem pretty low right now, the long-term borrower probably has the safer strategy.

The lesson is clear: How you borrow and spend can make as much difference to your credit-worthiness as how much. And it's no different for governments. A government that uses borrowing to invest in its economy's future growth -- and hence its ability to repay -- should be able to borrow more than one that doesn't, all other things equal. By the same token, a government that borrows at low, fixed rates for the long term should be able to borrow more than one that constantly rolls over short-term debts.

In the past several years, the national debt of the United States has undergone a tremendous change. Long-term securities -- those with maturities of seven years or more -- have gone from about 30 percent of the debt in 2009 to about 40 percent today. By 2018, according to the Treasury's own estimates, they'll make up 50 percent of the debt, a proportion the Treasury expects to maintain from then onward. The United States is doing what any smart borrower would do: locking in low rates for the long term. As a result, its probability of default for any given level of debt has dropped.

The nature of government spending is undergoing a dramatic shift as well. For a decade, the United States spent roughly $100 billion a year on wars whose value to creditors -- in terms of enhancing the nation's ability to repay its debts -- was not exactly clear. Reducing spending in this area will make the United States more credit-worthy. But even if this spending were simply replaced by programs that invest in the economy -- infrastructure, scientific research, education, health care -- it would still make the United States a less risky borrower.

In fact, there is a powerful argument that the United States can and should borrow more to spend money on these long-term investments. Yet the mere idea of spending more, increasing deficits, and adding to the national debt makes politicians, pundits, and especially credit-raters of all stripes recoil in horror. They do not seem to understand that the United States, despite its national debt growing to about 75 percent of GDP, may actually be a better risk now than it was in, say, the early 1990s.

The markets seem to understand this. Interest rates on Treasury securities have fallen steadily. Of course, the Federal Reserve has been doing its best to keep rates low, and other countries have been in even worse shape fiscally than the United States. But had those been the only important factors, rates on longer-term securities -- 10-year and 30-year debt, for example -- would have recovered more by now.

In the next couple of decades, the United States will indeed have to reduce its budget deficits. Medicare costs and historically low tax rates are likely to be an unsustainable combination. But in the meantime, the nation can do much to improve its credit-worthiness through changes in the composition of its borrowing and spending. Indeed, it already has.

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