The Post-American World

In March 2008, the giant Wall Street firm Bear Stearns collapsed; six months later, the same thing happened to Lehman Brothers, the fourth-largest investment bank in the United States. It later became apparent that these and other institutions had overleveraged themselves, dealing so-called “sub-prime” mortgages in the expectation that home prices would continue to rise. Instead, it created a real estate bubble that, upon bursting, had a ruinous effect on the US economy, with enormous consequences around the world. The collapse of global credit led to a decade-long crisis in the Eurozone, and global trade fell by around 15%. However, as Zakaria notes, the impact was disproportionately felt among the more developed countries of the West. Countries like China emerged better off and pointed to their own system of government-managed capitalism as superior to that of laissez-faire capitalism.

Zakaria does not use this specific term; the World Bank introduced it as he was writing the book. Still, he spends considerable time on the problem it describes: the condition whereupon a developing country is able to move from poverty into a middle-income status but cannot transition from middle-income status to high-income status. This is most frequently seen in countries that rely on the manufacturing of exports to escape poverty—this works to the extent that the sale of exports helps build reserves of foreign capital.