INSIGHT 05 May 2016

The Indigo Generation. Admission Free

Something strange is happening to our world. Everyone is talking about it: politicians and scientists, businessmen and philosophers, brokers and journalists.

A feeling has been spreading like a virus though countries and continents, that everything we thought of as the lasting and reliable foundations of existence — principles, values and rules — has become unstable and uncertain. It is especially noticeable in the politics of developed democratic countries. Decades of domination by solid and respectable European parties are being replaced by the noise, wolf whistles and obscenity (in a politically correct sense) of yesterday’s fringe politicians confidently flocking into the political arena representing the extreme right or left (according to current definition). Greece (Syriza) and Spain (Citizens and Podemos), France (Front National) and Hungary (Fidesz) — the list of destroyers of the established electoral landscape could go on...

In the USA, a country founded on principles of the capitalist free market and openness to immigrants of any ethnicity or confession, hugely popular presidential contenders are declaring explicitly socialist views or proposing to isolate America from newcomers of a certain skin color or religious belief... Populism of all stripes and varieties is on a decisive offensive throughout the world. This offensive, in my opinion, reflects an obvious and sad fact — good old decades-tested truths and concepts no longer suit modern society and demand urgent review and rethinking.

The economic situation is no less confusing. High volatility on all markets has turned into a norm of economic life. Usually, two critical factors underlying current economic instability are distinguished:

  1. A steep drop in price of raw materials, and resulting slowdown of raw materials export-oriented economies.
  2. Slowdown of China’s economy.

It is worth noting that these events somewhat contradict each other: economic logic suggests that cheaper raw materials should positively affect China, the largest net importer of raw materials. And the main consumers of Chinese products — developed Western countries — in principle should benefit significantly from falling energy prices, although this is not yet happening in reality. There are numerous theoretical justifications for these obvious contradictions but none of them, in my opinion, provide an overall explanation for current developments.

I don’t take it on myself to provide an exhaustive reply to those questions occupying thousands of gifted and well-educated economists, analysts and political scientists... I would merely like to offer readers my somewhat simple and dilettantish considerations, which someone may find useful for their own conclusions... What is going on after all? To my mind, it’s nothing supernatural. We are merely entering a new epoch: the Indigo epoch.

What is the Indigo epoch, and how does it differ from what went before?

For millennia, since humankind first began recording events, the history of human society has been a history of struggle between separate groups for expanding access to natural resources or, in simple terms, for territories possessing those resources. A territory could be attractive thanks to fertile soil or advantageous geographic location for marine and land trade; it could have gold and silver, minerals and chemical elements, oil and gas... Throughout history, land was and remained the main (although not the only) source of any country’s national wealth. It is still so today...

The sacred significance of inviolable borders as the backbone of national identity reflects this manifest truth. However, eventually this gradually-formed balance began to change. Leading countries in economic development began building models largely based not on (domestic or imported) natural resources, but on the considerable added value generated by industrial and, later, post-industrial (service) sectors. Nevertheless, it was impossible to imagine even the most successful country economy ever losing the critical need for permanent access to at least limited natural resources. For this reason ‘bubbles’ appeared periodically on commodity markets, as well as ‘areas of vital importance’ to great powers and Hollywood dystopias about fuel wars... Sooner or later it seemed the economy would experience a shortage of something critical and an uncompromising struggle for some fast-depleting natural element would begin. But so far this combination of circumstances has been avoided; some alternative has always been found to cope with the next bottleneck, be it silk moths, Indian spices, natural rubber or conventional oil and gas.

It seems to me that the new epoch — the Indigo epoch — means that the hypothesis that depleting natural resources will interrupt economic development moves into the realm of historical delusion, the scrapyard of history...

This tectonic shift in human consciousness occurs for a simple reason. Rapidly developing societies are emerging whose innovative potential allows them to discard the phobia about shortage or lack of access to natural resources because they can quickly build the capacity to find efficient alternatives to any deficit.

Does this mean primary commodities are no longer needed? Of course not. It merely means that real or imaginary deficits will disappear, as well as the excess profits made by primary commodity manufacturers related to that deficit (we can see this is already happening). Oil and gas, it seems to me, were the last bulwark of the ‘bottleneck’ theory, and it has fallen under the onslaught of the Indigo economy.

Gradually but inevitably, social infrastructure will turn into the main source of national wealth, as it creates a nourishing environment for unlocking the potential of social development’s key element — the creative and intellectual abilities of every person. In this sense, prime examples are the new leaders in (market capitalism) ratings of the world’s largest corporations. The champion for many years — raw materials giant Exxon — has been replaced by Apple and Google, built by the creative genius of pre-eminent individuals. Let’s try to analyze what underlies this revolutionary change.

Key assumptions underlying Indigo economy development

Analyzing the success of these current leaders (Арple and Google) and many other companies that have implemented revolutionary change in business via innovation (hereafter referred to as Indigo companies), in my opinion we can define three key factors for achieving results:

  1. Authors of ideas should not only be talented inventors and creators, but also highly educated people working with a team of no less educated, creative, gifted staff.
  2. Implementing even the most brilliant idea quickly needs a ‘cloud’ or well-developed infrastructure for doing business: a smoothly operating legal system that reliably protects ownership rights (title and copyright), an effective competitive environment offering small companies the opportunity to turn into giants within a short period of time without fear of being taken over at the initial stage, etc. Moreover, the ecosystem of the Indigo economy requires hundreds and thousands of suppliers operating in a highly competitive environment and delivering high-standard services of venture funding, marketing, Т-service, staff recruitment, web design and so on. Thanks to these myriad companies, a champion may within a very short period — several years — develop from an idea discussed in a garage to a global product capturing global markets.
  3. Availability of a global digital infrastructure for global distribution of products. The global digital world has already been created, and continues to extend rapidly — Internet and cellular networks have reached even the remotest corners of the earth. Good education opportunities do not of course exist everywhere, but there are serious universities in almost all large developing countries, while more and more people from those countries have the opportunity to study abroad or, as is becoming increasingly popular, study online at the world’s best educational institutions.

It is well known that talented people exist everywhere and in sufficiently large numbers. Obviously the biggest challenges to establishing an Indigo economy are the inevitable problems associated with creating a ‘cloud’. This process is a continuation and intrinsic part of the deep social transformation implemented over hundreds of years by those countries that have built such an infrastructure. Modern Western society, with its legal environment, competition, and system of checks and balances, has been evolving for centuries; nevertheless far from all Western countries have enclaves comparable to Silicon Valley for efficiency in producing Indigo companies. However, undoubtedly these are the (developed) countries where conditions are most favorable to continued stunning breakthroughs in branches of human activity, whether logistics (Uber) or transport (Tesla), biotechnology or robotics. It is no less obvious that countries lacking an Indigo infrastructure are in a far less advantageous position: creating a complex, well-balanced public system with a well-developed competitive environment requires fundamental shifts in public consciousness; a major overhaul in perceptions of the ‘correct’ world structure that have been shaped over centuries; a tectonic shift in the basic values and principles of whole nations.

Where may these obviously unequal start positions lead to? What are the practical implications of the Indigo hypothesis?

What does tomorrow hold?

Over recent decades, world economic development has been largely governed by globalization and economic cooperation between developed and developing countries. A simplified model looks as follows: developing countries exported primary resources and a cheap labor force to developed countries. Excess profit gained and redistributed by the state was invested into building a modern physical infrastructure — roads, airports, logistic centers, cities. Creating jobs and attractive conditions for foreign investment, these facilities became a cradle for the emerging modern middle class. The latter grew in turn, developed and got wealthier, which had a negative effect on the cost of labor but at the same time created a potent and stable source of domestic demand. Authorities, as a rule, gave decided preference to building physical infrastructure facilities at the fastest possible pace.

Changes in social order, an independent and stable legal system and an efficiently operating competitive environment were (and remain) a far lower priority. Their development was considered a long, complex process inconsistent with traditional values, and sometimes in direct contradiction to the interests of the ruling elite. In the best case, authorities substituted institutional development of public infrastructure with directives ensuring targeted care for foreign investors (usually the largest and most noticeable ones). China may serve as the clearest example here. By sacrificing development of social institutions for rapid construction of cities and roads using centralized methods, China will face (or already faces) great difficulties with building an Indigo economy. Recognizing the contours of future problems related to weak institutions, the authorities have started to address them using their habitual methods of still greater centralization and repression (including inside the power structure), etc.

I am afraid we will not soon see a repetition of the ‘Chinese economic miracle’ of recent decades.

This conclusion, in my opinion, is universal for developing economies (except perhaps India). Slowing development is due to falling excess profits from raw materials exports and, as a consequence, reduction in personal income to support at least somewhat efficient export of goods and services. There will not be many sources to fund the building of modern public institutions in developing countries — they, like Munchausen, will have to pull themselves up from the swamp of corruption and protectionism by their hair... They seem incapable of meeting this challenge fast enough.

This dispiriting argument has an important conclusion: the growth rates of developing countries will steadily lag behind developed economies, thus increasing the already significant difference in incomes and living standards. On one hand, contradictions and mutual discontent dictated by envy and the feeling that the gap cannot quickly be reduced, and a wish to be insulated from increasingly impoverished neighbors on the other, will obviously only accrue and provoke explosive tension in international affairs.

Globalization, like so many other things in our world, has turned out to be a cyclical rather than a linear process. At one stage it appeared to be a driver to reduce the lag of developing countries behind their Western neighbors. However, in the short term it may turn into a factor aggravating inequality, since it is most likely to be used as a channel to sell the products of the Indigo economy to countries that have no opportunity to offer competitive products comparable in price and quality. Escalated tension and mutual enmity give a stronger push for populists to enter the political arena. There they play on fears, envy and the feeling that it is impossible to change one’s own society, thus exciting an ardent longing to destroy foreign societies that are so happy, flourishing and unattainable... They are already at the doors promising simple recipes to address complicated matters... A dangerous potion...

What is to be done?

Of course, I don’t know the answer to this question in a global sense: I am not a politician, a diplomat or an economist. I am doing practical business and will continue using the points I make in this article as important arguments when taking investment decisions. Analyzing the discouraging conclusions of my own reasoning concerning the not-so-distant future, nevertheless I would like to share one optimistic thought.

Over centuries a state governed by rule of law, honest competition and inviolability of civil rights has been viewed primarily through the prism of building a more honest, fair society. The economic feasibility of a modern pluralistic, open society remains a matter for permanent debate in different parts of the world. From time to time, this or that country has seen an authoritarian leader who concentrated all power in his own hands and, by making efficient use of resources, managed to achieve impressive success in fast economic development, thus posing a challenge to ‘fabled Western democracy’. As a Soviet student, I could confidently explain the benefits of a socialist economy which, unlike capitalist chaos, could accurately calculate when and in what quantity products should be manufactured, thus using resources in a far more rational manner. True, these studies were made against a background of endless queues for goods quickly disappearing from the shelves of Soviet grocers, so already nobody really believed in the economic postulates of Socialism any longer... 

Nevertheless, the short-term economic successes of authoritarian and even totalitarian regimes still sometimes tempt societies yearning for a strong hand and ready to sacrifice the civil rights of their citizens for the sake of economic achievement. I hope that the epoch towards which we are dashing at full speed will put a final end to this dangerous illusion. Perhaps, in theory, one can imagine a clever, talented dictator creating a relatively efficient though short-term system of centralized distribution and use of national natural resources. Or a dictator gathering a team of scientists behind barbed wire and, simultaneously threatening and tempting them with additional rations, creating by an incredible concentration of resources nuclear weapons and ballistic missiles to protect his regime. However, even in theory it seems to me impossible to create an economy which is based on the creative energy of millions of individuals free to express themselves, and yet which strictly blocks most citizens from participating in decisions of social significance.

Therefore, the economy of the future emerging before our eyes – the Indigo economy – is an economy of free people. This means that the world painfully but inevitably is becoming more and more free. I believe it.


Mikhail Fridman - Non-Executive member of ABHH’s Board of Directors and one of the original founders of the Alfa Banking Group