This was first published by CFA Institute's Enterprising Investor.
While listening to the BBC World Service a little over a week ago, I came upon a story that got me thinking about the labor force and the factors that drive economic growth. What followed was a multi-day period during which I spent a lot of quality time with Microsoft Excel, ate all of the animal crackers in our New York City office, and repeatedly apologized to editor Paul McCaffrey for turning this post in late.
So what set me wondering?
Egypt made headlines over Presidents’ Day weekend by attacking Islamic State militants in Libya. The militants had apparently beheaded 21 Egyptian Coptic Christians in a brutal mass execution. Given the well-documented violence and disorder in Libya, I wondered what had driven the victims to locate there.
It turns out they knowingly risked their lives to find work. After speaking to an Egyptian Christian who said he plans to go to Libya soon as well, the BBC ended the segment with a stark assertion: many people would rather die seeking work in Libya than go on living in abject poverty where they are.
For those suffering from the injustice of extreme poverty, life is a series of difficult choices. Evaluating the merits of various career options is rarely one of them. Thinking people tend to hope for a world where living standards rise across the board, but too often this hope omits a depressing question: What is keeping this from happening? Though it’s beyond the scope of one article to suggest comprehensive causality, in this piece I’m going to examine growth in capital and labor markets in an attempt to piece out the places in the world — like Egypt — where exogenous factors are inhibiting GDP growth. (I will leave it up to others, hopefully with a lot more smarts than I currently possess, to isolate what precisely those factors are.)
I’m going to do this by looking at two components of growth — growth in labor and growth in the money supply — as well as growth itself. There are a couple of limitations to this analysis. The first — a big one — is that I’m really supposed to be looking at capital rather than money in traditional growth accounting. I’m also supposed to piece out the amount of aggregate growth attributable to both labor and capital individually. I chose to proceed with money (and also to ignore the second step of the analysis) for a couple of reasons.
The biggest is that I couldn’t value every single capital asset in the world accurately if I had the cooperation of every one of the 130,000-plus CFA Institute members on the planet and a full year. It might take that long just to settle on an appropriate discount rate. That’s before we talk about the precise attribution of growth to different factors, which would likely take even longer.
I’m okay with using money instead of capital because this is intrinsically a “back-of-the-envelope” exercise. I am just mapping national growth using a consistent method, not trying to work towards a new truth in economics. My hope is that this work is helpful in generating ideas for further research as well as in digesting global growth patterns. If it inspires a heated discussion about the difference between stocks and flows in economics or a better stand-in for capital, I’m all ears. If you include a link to a time series, I might even update the charts.
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And without further ado . . .
The Global Labor Force
I figured I’d start this off with something that represents “consensus” thinking.
In many conversations about growth, there are three places that tend to be the focus of discussion: the developed world (represented by the OECD, which was at one time referred to as a “club of the rich” and is never growing fast enough to satisfy), China, and India. In terms of how to slice up the globe, this can be a useful strategy.
But if we start by just considering the labor force, there is — quite literally — an entire world of growth that is obscured by that method . . .
And that the non-China, non-India, non-OECD labor force is growing at a much faster rate than in the three places mentioned above. Now remember: Growth in the labor force only represents potential economic growth, not actual or even probable growth. But let’s set that aside for a moment. Which countries’ labor forces grew the fastest from 1999–2013?
Cumulative Labor Force Growth 1999–2013
This chart is misleading on purpose.
Some countries grew so fast that they threw off the scale and made the comparison less meaningful. So I stripped them out of the above. Those countries where the labor force grew by 70% or more from 1999–2013 are below.
I colored the countries that are traditionally considered part of the Middle East blue. Did you expect these results?
Granted, this is not necessarily material at the global level, but it doesn’t need to be to be interesting. The 14 countries shown here had just over 42-million people in their labor forces in 2013, but given that they had just over 19 million in 1999, it warrants some examination. It seems clear a remarkable transformation is taking place in the Middle East. If you’ve ever wondered why CFA Institute has been holding an annual Middle East Investment Conference for the last few years, one of the factors that makes the region interesting should be clearer now. There are a lot of people looking for something to do.
The Global Money Supply
So what about the money part of this equation? Well, let’s take a look at another pie chart.
Perhaps this chart is why people are so focused on the OECD, China, and India? It makes sense that if roughly 90% of the world’s money is flowing around those places, they merit substantial attention. . . .
This slide is just in case you didn’t notice how outsized China was in the previous chart. China’s economic growth is probably grist in and of itself for another charts post. But suffice it to say, China’s money supply expanded by more than an order of magnitude from 1999–2013. If a roughly average-sized baby (48.5 cm in length) was to grow at the same rate over the same period, we would have an adolescent who is more than 4.8-meters tall on our hands.
A note on the data here: I’ve seen different numbers from different sources on M2 levels in these countries but decided to stick with the World Bank numbers just to stay as consistent as possible. Now that I’ve disclaimed suitably, we can ask the important question: Is China to money supply what the United Arab Emirates is to the labor force? Let’s take a look.
Cumulative Money Supply Growth 1999–2013
Actually, that’d be Azerbaijan you’re looking for, but China’s not so far off. If you look past Azerbaijan’s 4,471% growth in money supply over this period, China is looking pretty good. I’ll flag as well that at 1,654% and 860%, respectively, Qatar and the United Arab Emirates also had some substantial money supply growth.
Now, my initial plan was to look at money supply and labor force growth and then see how actual economic growth has correlated with what we might have imputed from looking only at those two factors. Before we do that, let’s look at how global GDP was distributed in 1999.
And compare that to how it’s distributed now.
The timescale here is an interesting one for the purposes of this comparison. During the transition from the Pac-Man distribution of GDP to the eccentric pizza distribution, the world has gone through nearly two complete economic cycles. As you can sense from these two point-in-time illustrations, the gap in growth has been substantial.
It’s getting easier and easier for me to assume you agree that the OECD is not the engine of global growth — and, hopefully, that you’re willing to hang on for one more chart, tops. So here you go:
The Gap between What You’d Expect from Money Supply and Labor Force Growth and What Actually Happened
This chart has a straightforward question underpinning it: where did GDP growth not map roughly to money supply and labor force growth?
To answer that, I did something really lazy. I just took the average of the money supply and labor force growth rates, and subtracted that from the growth rate in GDP. In most cases, I got a relatively small number, indicating that GDP growth was basically in line with money supply and labor force growth. It’s important to note, of course, that this does not necessarily imply a causal relationship.
In a few cases though, I saw something interesting. In the countries that are colored deep green (like Indonesia), economic growth was much faster than the growth in labor and the money supply. Conversely, with ruby red countries like Azerbaijan, economic growth was much slower.
These extreme readings suggest that something (which is up to you to determine) is happening in these countries. Fortunately I’m not allowed to make macro calls from my current seat, so I’m conveniently absolved of the responsibility to tell you exactly what to do.
This is also, as I said, a massively “back-of-the-envelope” exercise, so it’s a bit premature to pairs trade the Ukraine against Angola . . . and even if you think you should, I’ll note that these index ratings are not actually meaningful except in reference to the other numbers published in the chart.
There are a couple of good takeaways though. One that I think should be considered is how well this actually relates to growth in many advanced economies. This method is only off by 5% in computing the actual growth rate of the United States economy over this period, and off by almost exactly the same amount in Japan. Is it possible that economic growth is just a function of money supply and labor force growth in these advanced economies?
The former Soviet Union is also (pardon the pun) covered in red. This should be intuitive for those who remember the Russian Financial Crisis of 1998, which put many of these countries at a disadvantage over this time period.
It should also be straightforward that there is a glut of supply in the Middle Eastern labor market, and an interesting question for those who make money with capital should also be straightforward. Is there an investment that will harness the implicit human capital of this rapidly growing labor force?
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