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Slow Growth, Part 2: China and Russia, Demographics, and Central Banks

With Robert Kaplan, Ruchir Sharma, and Tom Hill and Ian Morris

In this episode, Foreign Affairs authors discuss how stagnation in Russia and China could lead to anarchy in Eurasia, the role that demographics play in economic stagnation, and what central banks can do to goose growth. Featuring interviews with recent authors Robert Kaplan, Ruchir Sharma, and co-authors Tom Hill and Ian Morris. 

Don’t miss an episode of Foreign Affairs Unedited, subscribe on iTunes or on PodBean to have this podcast delivered right to your audio player of choice.  Listen to Part 1 here.

To learn more on the subject, check out the March/April 2016 issue and these related links:

Eurasia’s Coming Anarchy by Robert D. Kaplan

The Demographics of Stagnation by Ruchir Sharma

Can Central Banks Goose Growth by J. Tomilson Hill and Ian Morris

This podcast has been edited and condensed. A rush transcript is below. Music credit: / The Stealing Orchestra & Rafael Dionisio, Podington Bear


Allawala:  I’m Katie Allawala, and this is Foreign Affairs Unedited.

“As China asserts itself in its nearby seas and Russia wages war in Syria and Ukraine, it is easy to assume that Eurasia’s two great land powers are showing signs of newfound strength. But the opposite is true: increasingly, China and Russia flex their muscles not because they are powerful but because they are weak.”

So begins Robert Kaplan’s article for the most recent issue Foreign Affairs, which we’ve been discussing in this two-part series on slow growth. Later in this episode, we’ll be talking to several recent authors about the role that demographics play in economic stagnation and what central banks can do to goose growth. First up, though, is Kaplan on how stagnation in Russia and China could lead to anarchy in Eurasia.

Kaplan: The real danger of Russia and China is not their strength but their weakness.

Allawala: That’s Kaplan,  who is Senior Fellow at the Center for a New American Security.

Kaplan: It's their slow motion economic implosion that counter-intuitively and ironically will fuel greater aggression from Moscow, greater aggression from Beijing because they will employ nationalism and spectacles abroad for the masses as a means to solidify the nation's state at a time of severe economic turmoil.

Allawala: In Western Europe and the United States, economic discontent has also resulted in increasing nationalism. But in those countries, the sentiment seems to be more inwardly directed than outwardly directed toward states on their peripheries. Kaplan explains that the different has to do with China and Russia’s geography and history.

Kaplan: China and Russia are historically insecure land powers, and also historically imperial powers. So it's a combination of insecurity over centuries and imperialism over centuries that makes these countries more prone to lash out abroad. Russia has been invaded, not just by Germans and French, but by Swedes, Lithuanians, and Poles over the course of history. And therefore, Russia has desired a buffer zone of influence in Central and Eastern Europe to protect it. So that Russian nationalism is integrally tied in with aggression abroad going westward.

Allawala: The same, he says, goes for Chinese nationalism.

Kaplan: Chinese nationalism, going back to the many Chinese dynasties, is very tied in with sort of moving into the near abroad of Islamic Central Asia. The Tang Dynasty had trade routes all the way to, what is today, Iran. And now that the Chinese are more secure on land than they've ever been, their imperial aggression takes the form of being a sea power and extending their influence into the adjacent seas of the South and East China Seas.

Allawala: In response to Chinese and Russian assertiveness, the West has placed sanctions on the Russian regime and the United States has conducted freedom of navigation operations around China’s man-made islands. Kaplan suggests that the United States should also keep in mind what Teddy Roosevelt said of his own foreign policy.

Kaplan: "Speak softly and carry a big stick" was Teddy Roosevelt's, by now, cliche phrase. But when you're dealing with declining powers, whose economy at home is declining, they're particularly nervous and particularly sensitive, so the last thing we want to do is bait them with aggressive statements like the kind that come often from Congress.

Allawala: As to what that means in practice, Kaplan suggests beefing up the U.S. presence in Europe and the South China Sea.

Kaplan: We probably need to send a brigade or two back to Europe. When President Obama withdrew two brigades from Europe in 2012, that was sort of the equivalent of declaring "Mission accomplished" in a premature way. After that came the Ukraine crisis. And the Freedom of Navigation operations that we've started conducting in the South China Sea also need to be more robust with helicopter operations off those ships and the like. So it's a matter of being tough but not verbally baiting these powers.

Allawala: According to Kaplan we’re in a particularly delicate moment in U.S. foreign policy

Kaplan: We live in a dangerous moment because the Obama administration has about 11 months yet to go. And the chances are far better than average that the next president, even a Democrat like Hillary Clinton, is going to be significantly more aggressive abroad. New administrations always try to distinguish themselves from previous ones, even if they're of the same political party.

Allawala: And that means that now is the time for Russia and China to make headway in their near abroads.

Kaplan: So I think by stepping up our Freedom of Navigation exercises and the like, and moving troops back to Europe, that will be a sign that we're very serious. And if we combine that with very, very disciplined verbal statements that do not get out of hand, it will give these powers in Moscow and Beijing an excuse not to react in an aggressive manner because we live in a global media age. 

Allawala: For now, Kaplan also suggests watching Russia’s Southwestern front and China’s borders with India and Vietnam closely.

Kaplan: in Russia, we pay far too little attention to Russia's Southwestern Front, which is Moldova and the Greater Black Sea Region around the Ukraine. Moldova is much more easily destabilized by Russia than the Baltic States are. It provides a pathway into the Balkans, into the Mediterranean. I think that Russia has just been having military exercises in the region. So, I think we need to pay attention to the Balkans in Moldova in addition to the Baltic States. I think in terms of East Asia, I think in addition to the South and East China Sea, we should pay attention to the conflict or to the historic disagreement between India and China over the Himalayas and to the land border between China and Vietnam.

Allawala: That was Robert Kaplan on Eurasia’s coming anarchy. Of course, China and Russia aren’t the only countries dealing with slow growth. “In every single region of the world,” explains our next guest in his recent Foreign Affairs article, “economic growth has failed to return to the rate it averaged before the Great Recession. Economists have come up with a variety of theories for why this recovery has been the weakest in postwar history, including high indebtedness, growing income inequality, and excess caution induced by the original debt crisis. Although each explanation has some merit, experts have largely overlooked what may be the most important factor: the global slowdown in the growth of the labor force.”
Sharma: It’s a very simple economic concept.

Allawala: That’s Ruchir Sharma, Head of Emerging Markets and Global Macro at Morgan Stanley Investment Management.

Sharma: That economic growth or the potential for any country is driven by two factors. One is the increase in productivity and the second is the increase in the labor force or the number of people working in that country. And what we've found historically is that the contribution to growth is roughly half. Half comes from productivity and half comes from the increase in the labor force growth rate.

Allawala: There has been a lot of discussion about productivity growth. It seems to be slowing although there is some debate about whether economists are measuring it right.

Sharma: Are we capturing the new internet revolution and all the other technological advances properly?"

Allawala: But there’s less discussion of the other part of the equation: labor force growth. And there, Sharma says, there can be no debate.

Sharma: What we've seen there is that the world's working age population used to average the growth rate of just under 2% from 1960 till 2005. After 2005, it's been falling off a cliff, and currently the working age population of the world is increasing at a pace of just around 1%.

Allawala: Sharma explains in his Foreign Affairs article, that figure “will likely slip further in the coming decades as fertility rates continue to decline in most parts of the world.” For example, he writes, “the labor force is still growing rapidly in Nigeria, the Philippines, and a few other countries. But it is growing very slowly in the United States—at 0.5 percent per year over the past decade, compared with 1.7 percent from 1960 to 2005—and is already shrinking in some countries, such as China and Germany.” Of course, we might not see the effects right away.

Sharma: There's a time lag that from the time that the population growth of a country peaks, it takes about 15 years for that to make its way into the working age population because people are working between the age of 15 to 64 typically. We were worrying a lot about a population bomb, instead what we really now need to be concerned about is a population de-bomb.

Allawala: There is an argument that if you have fewer people, you don’t need as much production and growth. There would just be fewer people producing fewer things.

Sharma: There are two factors out here. One is that the decline in working age population growth of late has been even faster than the decline in the population growth rate. And secondly, when you compare different countries the game becomes very interesting because what was going on is that some of the countries which we're seeing a decline in their working age population growth were getting much more aggressive. Believe it or not, on policies such as immigration, of getting more people to come to their countries. But that's something which is now taking a back seat following the crisis of last year.

Allawala: That’s a sign, Sharma says, of how difficult and sensitive such policies can be.

Sharma: It shows you how difficult it is because these things have an impact on the social fabric of a country, that to achieve these things is so difficult, that brings you back to the original point, which is that the global economy is likely to see much slower growth than we did in the past because of a host of other factors, but the main factor to me is because we are seeing a decline in the working age population like we have never seen in post-war history.

Allawala: The challenge is particularly clear in China.

Sharma: The country with the biggest changes taking place to me is China. That for the first time in China's post-war history, its working age population shrank last year. Actually shrank. And why is this significant? Here's why. Because we looked at all the countries which have seen a shrinkage in their working age population growth rate. And what was their growth rate? Economic growth rate for the decade after which their working age population started shrinking. And the growth rate was as low as just 1.5% a year. They're trying to reverse it now by abandoning their one child policy and promoting two children. But by the time that really has an effect, it takes 10 to 15 years on the working-age population growth rate. So in China's case, yes, I think they face major demographic headwinds, and so therefore for anyone to expect China to grow at 6% when you have negative working-age population is really something which I think is implausible.

Allawala: As for pronatalist policies in the rest of the world, Sharma sees a mixed record.

Sharma: Governments have tried across the world, in terms of how to increase fertility rates, and the success has been very mixed. But what can be done is this, you can have more immigration. And the US used to be good at this at one point in time. Or you can do something to increase the female labor-force participation in the labor force, because that has flat-lined for the last couple of decades. So to get more women to work in the labor force can really help. And the other concept which I think needs to be abandoned is the retirement age. Now people are living longer, they're living healthier because of advances in medicine, and this entire thing that you should stop working at the age of 64 or some age like that, I think that is going to change, and we're seeing it.

Allawala: In 2007, Germany increased the retirement age from 65 to 67. And, as Sharma explains, most other European countries have since followed suit. Still, as he concludes in his Foreign Affairs article, it probably won’t be enough. “It’s hard to see,” he writes, “how the world economy can find enough new workers to grow as fast in the future as it has in the recent past.

 Allawala: That was Ruchir Sharma on demographics and slow growth. For our final segment, I’m turning things over to Foreign Affairs’ Nikita Lalwani, who recently talked to the authors of  “Can Central Banks Goose Growth,” a look at how central banks should understand slow growth after the 2008 financial crisis and what they should do about it.

Hill: Hi, I'm Tom Hill. I'm President and Chief Executive Officer of Blackstone Alternative Asset Management.

Morris: Hi, I'm Ian Morris. I'm a Senior Managing Director at Blackstone and Head, the Asset Allocation Strategy for Blackstone Alternative Asset Management.

Lalwani: You've argued that the problem is on the demand side rather than on the supply side. Could you talk a little bit about how you know that?

Morris: Well, if you look at some of the key characteristics of where we are, firstly, we've had quite a long period of slow economic growth. Secondly, we've had quite a long period of inflation being very low, indeed too low, if you compare it to Central Bank inflation targets. And on top of that, thirdly, you've got debt still very high. Private sector debts relative to GDP may have leveled off, but certainly, public debt of the past seven or eight years has certainly continued to skyrocket. So, total debt, both private and public borrowings are still very high.

Morris: And fourthly, you've essentially got a zero interest rate world, and in some cases sub-zero interest rates. So, that is all suggestive of a deficient demand problem rather than a lack of ability to supply. If it had been more of a supply problem, you would have seen a lot more inflation.

Lalwani: Many governments, especially in Europe, seem to have reacted as though the problems were on the supply side, for example, enacting labour reforms. Why has this misunderstanding happened?

Hill: Well, I think governments are always looking for efficiencies when you think about the need for tax reform, not just in this country but around the world, that is really geared towards a supply side creating more efficiency. Ironically, when an economy becomes more efficient, that actually creates more supply, and if it's a demand problem, you've just exacerbated the problem.

Lalwani: So is that why pro-market reforms haven't corresponded with economic recovery?

Morris: That's what some of the evidence suggests. If you look at the OECD's measures across countries of product market reforms, or labor market reforms, and even the World Bank looks at the ease of doing business across countries. Some of the biggest improvements in reforms, and we're not arguing that they're a bad thing, it ultimately it is a good thing, but it's missing the point to some degree. Some of the biggest improvements have come from places like Greece and Portugal, which if that had correlated with growth you would see big improvements there. But of course, those two countries suffered some of the biggest problems in Europe right now.

Also, if you look at countries that had very high scores on these measures of structural reform, both before the crisis in '08 and afterwards, this included countries like Ireland and Finland, and it didn't stop Ireland from crashing in '08 just because they had good scores before '08. And after '08 great scores for Finland didn't stop them from stagnating.

Lalwani: So if the real issue is weak demand, how should governments and central banks be responding?

Hill: If you buy the argument that it's a demand problem, and then you say, "Okay, what is the consequence of that?", which is low inflation, or no inflation, or even deflation, then the question becomes "How do governments deal with a potential deflationary environment or absence of inflation?" And if you look at Japan, what Kuroda and Abe have done is said "We're going to fix a 2% inflation target." The problem with that is that maybe the 2% as a target is too low.
Ian, you've thought about this a lot.

Morris: Yeah, no, absolutely. I think a high enough inflation target, and if that can be achieved, provides a way to lower the real interest rates when your interest rates are at zero. The only real way to stimulate the economy by driving the real interest rate lower is by raising the inflation target. And this is a radical policy. Central banks are not going to be just willing to do this because they've spent 35 years trying to extinguish undesirably high inflation.

Lalwani: I'm glad you mentioned negative interest rates because at least three countries, Japan, Switzerland, and Germany have begun implementing them. And I think you guys were mentioning that Janet Yellen is now talking about negative interest rates as a possibility as well. How likely is the Fed or other Central Banks to implement this kind of policy, and what's holding it back from wider acceptance?

Hill: Well, I want to make a plug for the Council on Foreign Relations, and as you know last week, the Fed Vice Chair Stanley Fischer was there, and he stated that he was actually pleasantly surprised that the foreign central banks that had resorted to negative rates to stimulate their economies had been more successful than he had anticipated. And he basically, here's a quote, "It's working more than I can say I expected back in 2012," And that he said to the council and everybody including the Fed is now looking at how negative rate work.

Lalwani: So given the likelihood or possibility of another downturn, let's say you were able to advise the next President, what would you tell him or her to do? Aside from tax reform? What would you wand his or her priorities to be?

Hill: Well, one of the things we have benefited from was independence of the Central Bank and to the extent there is any attempt to, what I would call handcuff the Central Bank, the Feds, would be a big mistake. So you would want the President to show leadership in saying "hands off the Central Bank." Second, you want the ability to do bold action because rebuilding confidence or creating stability often requires very major actions, and so giving the Central Banks a sense of confidence that they can pursue bold actions and then I think innovations.

Hill: I think we're gonna be in unchartered territory. Just like we were in unchartered territory with QE. We're in unchartered territory now with negative rates. We've outlined, for instance, a deflation insurance plan. If the problem is the demand side, if we're in, not just zero inflation, but deflation, then you maybe want to come up with something creative and we outline, one possibility which is the deflation insurance plan. There is too much government debt around the world, so our whole idea of how to eliminate that through a debt forgiveness program is also a very creative idea that policy and planning should contemplate.

Lalwani: Are you guys generally optimistic that if another recession were to hit, policy makers and central bankers would respond wisely?

Hill: Central Bankers and politicians are up to the task, we just hope it doesn't take a crisis to actually put in place some programs that can get us on the road to higher growth.

Lalwani: So, you mentioned you have nine specific proposals and one of them is this idea of helicopter money. Could you talk a little bit more about what that is specifically and how feasible a proposal like that would be?

Morris: This is an idea that Milton Friedman came up with. The idea of essentially having a fiscal policy easing driven by monetary financing. So in effect, you could think of it more as a QE Direct. Quantitative Easing Direct. Whereas right now when the fed buys bonds, essentially all that money flows through into reserves and the banking system, but we're never sure of whether the banks are gonna lend it out and turn it into loans. Whereas with helicopter money, you would be directly say, for example, sending cheques to households who would then turn around and presumably spend the money. We're pretty confident that they would. In essence this would just cut out the middle man if you like, and that would help things as well.

Lalwani: Morris and Hill also proposed using quantitative easing for a debt cancellation program.

Morris: Using QE for a debt cancellation program, I think is an interesting idea that if we were to find ourselves in deflation and in the economic doldrums, and the Fed decided that the only way it was ever gonna get back to 2% inflation was to generate enough confidence in the economy for people to spend, and the only way to do that was to reduce the debt to GDP ratio of the Federal government, say, because it was extraordinarily high.

If the Feds, for instance, were to suggest, "Well, actually that's too high otherwise we're gonna be stuck in a deflation spiral like Japan," One of the ways out would be for the federal reserve to say, "Okay, we're going to announce that we're going to buy, say, 50% of GDP worth of treasury bonds. We're gonna do it over time, say over the next five years, and these bonds will mature over the next 10 years, and we're just going to let it sit on our balance sheet and mature and when it comes time for the treasury to pay back its debt, they're essentially not going to have to do that." And in effect it becomes like the reality that the treasury doesn't need to pay back it's debt.

Now, the initial reaction would be, "Whoa! This is inflationary. This is a crazy idea," But remember, we're assuming that you're in a deflation trap and that you're actually trying to create inflation expectations. Indeed that would be the idea. And in large scale, this is probably the thing that Japan should start doing today.

Allawala: Sometimes, Hill and Morris write in their recent article, “changes in the global economy require drastic steps… Eventually—probably during the next downturn—stagnation will force one or a few countries to dig even deeper into the unconventional toolbox. There will be no easy fixes. But armed with new ways to speed growth and a willingness to experiment, some countries will get it right, and then others will follow as success breeds success. Policymakers all over the world should do everything they can to prepare now so they can be early adopters and avoid getting left behind.”

That’s all for this week. Please join us again in two weeks for a new episode. Until then, send us a review on iTunes or email us at



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