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2012 Bridgewater Associates, LP. Any publication or other use (including, without limitation, distribution via email or anyinternet posting) of Bridgewater Daily Observations without prior written consent from Bridgewater Associates, LP isprohibited by U.S. and foreign copyright laws. Bridgewater is a registered service mark of Bridgewater Associates, LP.All rights are reserved.1Bridgewater Daily Observations 10/31/12BridgewaterDaily ObservationsOctober 31, 2012 2012 Bridgewater Associates, LP(203) 226-3030 Ray DalioBob ElliottMark DinnerJacob KlineFormula for Economic SuccessAs you know, we think the economy works like a machine and we think of ourselves as practicalmechanics or, if you prefer, we think it works like a body and we operate like a doctor. We believethat there is no point in fact we think its dangerous and costly to wish the economy works someway differently than it really does. Too often we hear people say I believe based on adherence toa belief system and without substantiating why they have that belief. We dont want to do that. Wethink that it is our responsibility to clearly explain how the economic machine works by describing thecause/effect relationships that make it up, and to do that for everyone to examine and poke at. Weknow that we all will learn more that way.To us the existing discussion about what should be done to make our countries successful lacks thespecificity and the testing of predictability that is necessary to make the discussion useful. Forexample, everyone knows that having a more educated population is better than having a lesseducated population, so naturally we hear that improving education is important to improvingcompetitiveness. However, measurements of the value of education are lacking. If we simplyeducate people without considering the costs and paybacks of that education, we will wasteresources and become less competitive even though we will become more educated. So theproductive value of the education in relation to its costs is a more sensible way of measuring it. Whenmeasured, we should see how predictive it is.What are the Keys to Success? Its seems intuitively obvious, and is in keeping with ourexperiences as a practitioners operating in many countries over several decades, that four factorsdrive relative growth: they are competiveness, indebtedness, culture and luck. In a study that we didthat we will send you shortly, we will show how we measured each of these and how they predictedsubsequent growth, so we wont go into that now. However, we would like to now have you focus onone of the components of our Formula for Economic Success self-sufficiency because wethink its interesting enough to stand on its own.Self-SufficiencyIt is both logical and consistent with the evidence to believe that self-sufficiency is an importantingredient for individuals and societies to be successful. Self-sufficiency encourages productivity bytying the ability to spend to the need to produce, it allows people to be free rather than dependent onothers and it gives people self-respect. It is not controversial to say that people spend the money thatthey earn differently than the money that others give them i.e., that the connection between earningand spending is a healthy one. If people have to earn money to spend it, they have to be moreproductive. Over the long run increases in living standards rise as a function of increases inproductivity. So, it is not a big leap to presume that countries with greater amounts of self-sufficiency2Bridgewater Daily Observations 10/31/12do better than those with less. Since self-sufficiency creates capability and independence it producesself-esteem. Studies on happiness have shown that once income levels surpass those required forsubsistence, that these factors are more highly correlated with happiness levels than the amount ofmoney one has. For these reasons, it is logical to conclude that self-reliance is both productive andsatisfying.In this Daily Observations we will show you how self-sufficiency varies by country and how it hasbeen correlated with economic growth. You will see that there are significant divergences in how self-sufficient individuals are in different countries and that these differences occur for different reasons.For example, in some cases they are chosen (e.g., the amounts of transfer payments developedeconomies have are largely chosen) while in other cases that they are not (e.g., high self-sufficiencyin the poorest societies is primarily the result of necessity rather than choice). Nonetheless, theevidence is clear. Societies in which individuals are more responsible for themselves grow morethan those in which they are less responsible for themselves. To be clear, by self-sufficiency, we donot necessarily mean leaving people on their own. Cases in which people are helped to stand ontheir own and the help proves to be cost-effective encourage growth.Which Countries Are Most Self-sufficient and How Has Self-sufficiency BeenCorrelated With Growth?To determine the answer to these questions we created indicators which we aggregated into a self-sufficiency barometer. We will explain how we did that and what the individual indicators showed, butto cut to the chase:3Bridgewater Daily Observations 10/31/12Which countries are most self-sufficient?The chart shown below conveys those which are most-self-sufficient. As shown, Asian economiesare measured as most self-sufficient, followed by Latin American countries. The English speakingdeveloped world generally comes next. Finally, European countries, with the large Europeanperiphery countries like Spain and Italy, are the least self sufficient. The chart below shows theseratings. Look at it to see if you are surprised and note those surprises so that you can see what theyare attributable to when we show you the composition of our barometer. For example, you might findit notable that communist China has greater self-sufficiency than the capitalist US.TLDSGPINDMEXKORCHNHKGIDRTAIPHPCOLJPNCHEUSARUSAUSBRZARGCANNZLGBRSAFNLDCZKVEZPLDPRTNORDEUGRCHUNIREESPFRAITASWEBELAggregate Self Sufficiency Indicator (Z-Score)-2.5 -2.0 -1.5 -1.0 -0.5 0.0 0.5 1.0 1.5 2.0 2.5EM Asia is generally at the topEnglish speaking developed world,Switzerland and Japan are most self sufficientin the developed world.Europeans are generally the least selfsufficient4Bridgewater Daily Observations 10/31/12How is this self-sufficiency barometer constructued?To measure self-sufficiency, we look at 9 indicators related to 1) how hard individuals work, 2) howlarge government supports are relative to incomes, and 3) how rigid labor markets are (e.g., howeasy/difficult it is to hire and fire). While no one of these perfectly measures self-sufficiency, togetherthey paint a picture that is highly indicative.Our measures of working hard look at how many hours individuals actually work, the percentage ofthe population that is looking to work (labor force participation), the amount of vacation and holidaysthey take, as well as the effective retirement age. We measure the size of government supports bylooking at the size of government outlays and the size of transfer payments to households. Finally,we look at three measures to examine labor market protections: unionization as a percentage of theworkforce, how hard it is for businesses to hire and fire, and how high the minimum wage is relative tothe average income. To come up with an overall gauge, we weigh 50% our measures of how hardindividuals in a society work and 50% the system of supports and protections, i.e., 25% forgovernment supports and 25% for labor market rigidity. Within each gauge we mostly give equalweight to the individual indicators.Self-Sufficiency Indicators and Growth WeightIndicatorAggregate Self-Sufficiency IndicatorHard Working 50%Average Hours Worked 25%Labor Force Participation 8%Effective Retirement Age (% of Life Expectancy) 8%Actual Vacation + Holidays Per Year 8%Government Support 25%Transfer Payments to HH, %PGDP 13%Gov Outlays as % of PGDP 13%Rigidity of Labor Market 25%Unionization as % of Workforce 8%Ease of Hiring/Firing 8%Minimum Wage as % of Average Income 8%5Bridgewater Daily Observations 10/31/12How well does a countrys self-sufficiency predict its next ten years growthrate?To answer this question we gathered these indicators and put them together into the previouslyshown gauges and constructed this barometer in past years so that we could see how well theycorrelated with subsequent period growth rates. We saw that the most self-sufficient countriesnotably outperformed the less self-sufficient ones, with an the overall correlation of about 43% tosubsequent 10-year real growth in income per capita across all countries and time. As you will see inour subsequent study, other measures of competiveness, indebtedness, culture and luck explainedmost of the rest. Self-sufficiency is a reasonably good predictor of growth in both the developed andemerging worlds when looked at on their own (33% and 39% correlated, respectively). Below weshow the relationship of our aggregate self-sufficiency indicator against future growth for all countriesacross time. We then show the relationship of our individual guages and indicators to subsequentgrowth. Our data set includes over 40 countries since 1960.`Self Sufficiency Against Future GrowthCorrel. = 43%-4%-2%0%2%4%6%8%10%12%-2 -1.5 -1 -0.5 0 0.5 1 1.5 2 2