How the Economic Machine Works – Leveragings and Deleveragings

Transcript

1 Productivity and Structural Reform: Why Countries Succeed & Fail, and What Should Be Done So Failing Countries Succeed by Ray Dalio In this report the drivers of productivity are shown and are used to create an economic health index. That index gauges made up of 81 indicators, as measured by 19 economic health shows how 20 major countries are doing and it shows what these gauges portend for real GDP growth in each of these countries over the next 10 years. As you will see, past predictions based on this process have been highly reliable. For this reason this economic health index provides both a reliable prognosis for each of these country’s growth rates over the next 10 years and a reliable formula for success. By looking at these cause-effect relationships in much the same way as a doctor looks at one’s genetics, blood tests and regimes for exercise and diet, we can both see each country’s anges each can make so that thes health prospects and know what ch e countries can become economically healthier. it will facilitate the very important discussions about We are making this research available in the hope that both the public and policy makers to look past their structural reforms that are now going on and will help onomy as a machine in much the same way as doctors see bodies as a ideological differences to see the ec tionships of cholesterol and heart attacks analytically rather than ideologically. machine and look at the rela The Template This study is presented in three parts: • In Part 1, “The Formula For Econom ic Success,” we show how indicators of countries’ productivity and indebtedness would have predicted their subsequent 10-year growth rates going back 70 years, and how these economic health indicators can be used to both predict and shape the long-term economic health of countries. By knowing the linkages between a) indicators of productivity such as the costs of educated people, the amount of bureaucracy in the government, the amount of corruption in the system, life, etc., and b) the subsequent 10-year economic how much people value working relative to enjoying ese determinants to affect long-term outcomes. outcomes, policy makers can decide how to change th • In Part 2, “Economic Health Indices by Country, and the Prognoses That They Imply,” we show each of the 20 countries’ economic health indices by comp onent and aggregated, and how these lead to the projected growth over the next 10 years. In this section you can see a synthesis for each country based on an objective review of each of the indicators and their relative importance. Because our understanding has been completely systematized, ther e is no qualitative judgment used in describing these estimates. In fact, the texts have been computer generated. • In Part 3, “The Rises and Declines of Economies Over the Last 500 Years,” we look at how different countries’ shares of the world economy have changed over the last 500 years and why these changes have occurred. © 2017 Ray Dalio 24

2 Part 1: The Formula for Economic Success ries don’t? What determines different countries’ What determines which countries prosper and which count future growth rates? For our investment purposes we l ook at relationships between causes and effects that we hope will be useful to others in answering these questions. countries succeed and fail economically, they have not While many people have provided opinions about why eir opinions can be misleading. Often, even commonly shown linkages between causes and effects. As a result, th agreed-upon indicators of what is good for an economy have not been properly analyzed and correlated with lation is better than having subsequent results. For example, everyone knows that having a more educated popu a less educated population, so naturally we hear th at improving education is important to improving productivity. However, indicators of the cost-effecti veness of education are lacking and correlations of the factors with subsequent growth don’t exist, at least to my knowledge. That is dangerous . For example, if policy makers simply educate people without considering the costs and paybacks of that education, they will waste resources and make their economies less productive even though we will become more educated people. To make matters worse, the views of those who influence policie s typically reflect their ideological inclinations (e.g., being politically left or right), which divides people. For this reason, I believe that objective good indicators that are correlated with subsequent results are needed so that the facts speak for themselves and help people reach agreement about what should be done. That is what I believe I provide here. The economic health indicators that I will show would have predicted the subsequent 10-year re al growth of the 20 countries shown over the last 70 years within 2% of the realized growth about 85% of th e time and within 1% two-thirds of the time, with the average miss of less than 1%. While I believe that the body of evidence I will show yo u is compelling, I certainly don’t claim to have all the answers or expect people to blindly follow what is presen ted here without poking at it. On the contrary, I am putting these cause-effect relationships on the table to help foster the debate to bring about progress. I hope that people of divergent views will explore and debate how the economic machine works by looking at both the logic and the evidence presented here, then see what it portends for the fu ture, and then explore what can be done to make the future better. Havi ng said that, we are confident enoug h in these estimates to bet on their accuracy, which we do in our investments. The Determinants of Economic Health Are Timeless and Universal fferent countries have worked in essentially the same As with human bodies, I believe that the economies of di important cause-effect relationships are timeless and ways for as far back as you can see so that the most universal. In this section I review these cause-effect relationships and look at many countries in different for you to consider. I don’t believe that it’s good timeframes to show how they worked. I will lay these out these factors and their outcom es. I believ e that it’s enough to just show the correlations between changes in necessary to be so clear on the fundam ental cause-effect relationships that it seems obvious that they must be so; otherwise you can’t be confident that a relationship is timeless and that y ou aren’t missing something. I will first present the concepts and then take you into the indi cators to show how they worked in the past and what they portend for the future. What Are the Keys to Success? I Will Start with a Top-Down Perspective: As with health, many factors (refle cted in many statistics) produce good and bad outcomes. You can approach them by lookin g down on the forest or building up from the trees. In presenting them I wrestled with whether to start at the top and work our way down through all the pieces or start with all the pieces and work ourselves up to the big pictur e. I chose to approach this from the top down as that’s the perspective that I’m more comfortab le with. I prefer to simplify and th en flesh out the picture. Receiving © 2017 Ray Dalio 25

3 information presented this way will require you to be pa tient with the sweeping generalizations I make until I get h will show both the norms and the exceptions. down to the particulars that make them up, whic While my objective is to look at Productivity Influences on Growth Are Intertwined with Debt Influences: at into looking at the drivers of growth over the next 10 productivity in this section, in doing so I wanted to tie th years, which is affected by debt as well as the drivers of productivity. In other words, productivity influences on growth and debt influences on growth are unavoidably entangled. As ex plained in “How the Economic Machine Works,” while productivity growth is ultimately what matters for long-term prosperity, and the effects of debt end arising from debt cycles cancel around that productivity long-term tr cycles cancel out over time, the swings out over such long amounts of time (upwards of 100 years because of long-term debt cycles) that it is impossible to look at growth periods without debt cycles playing a role in driving the outcomes. Of course, when one latility that is due to debt swings diminishes in lengthens the observed timeframe, the shorter-term vo of 20 countries which gave us a sample size of 150 importance. We chose to look at rolling 10-year periods observations (where we measure every 5 years). The Big Picture: Stepping away from the wiggles of any given da y, and looking from the top down, one can see that the big shifts in economic growth are about two-th irds driven by productivity and one-third driven by indebtedness. “Luck” (e.g., having a lot of resources when the resources are valuable) and “conflict” (especially wars) are also drivers. Productivity A country’s production (GDP) will equal its number of workers times the output per worker (productivity). One can increase one’s productivity either by working harder or by working smarter. Productivity is driven by how cost-effectively one can produce, so, relative productivity—i.e., competitiveness—will have a big effect on relative growth. In a global economy those producers who are more competitive will both 1) sell more in their own country and other countries, and 2) move their prod uction to countries where they can produce more cost- effectively. Likewise, investors will follow these opportunities. Competitiveness (i.e., relative productivity levels) is dr iven by what you get relative to what you pay in one of the people and the companies that make them up. country versus another. Countries are just the aggregates products you buy, those that offer the most value for As you know with the individuals you hire and from the money are the most competitive and do better than those that don't. Since people are the largest cost of production, it follows that those countries that offer the Specific Indicators: best “value” (i.e., the most productive workers per dollar of cost) will, all else being equal, experience the most demand for their people. That is why the per-hour-worked cost differences of educated people (i.e., their income after adjusting for hours worked each ye ar) is one of the best indicators of productivity. Other obvious and important factors that influence produc tivity include cost of uneducated people, levels of bureaucracy, attitudes about work, raw material costs, lending, and capital market efficiencies—i.e., everything that affects the value of what is produced relative to the cost of making it. In other words, there is a world market for productive resources that increases the demand, and hence the growth rates, for the countries that are most competitive because of “the cost of production arbitrage.” That cost of production arbitrage has been a big driver of growth—in fact overwhelmingly the largest. To reiterat e, the magnitude of this competitiveness arbitrage is driven more by the cost of the workers relative to how hard they work, their educat ion, and investment levels, than by anything else. These variables characterize the value of hiring a worker in a given country and doing business there (i.e., what you pay for what you get). Of course, barriers to the flow of trade and capital (l ike China’s closed door policies until the early 1980s, geographic isolation, etc.) can stand in the way of people, companies, and countries being allowed to compete. As these barriers break down (e.g., transportation be comes cheaper and quicker, telecommunications reduce © 2017 Ray Dalio 26

4 impediments to intellectual competition, etc.) or increase up), the ability to arbitrage (e.g., trade barriers are put the costs of production, and in turn the relative growth rates, is affected. While countries that operate efficiently will grow at faster paces than countries that operate inefficiently, the countries that will grow the fastest are those that have big inefficiencies that are disposed of. As an example, in the 1970s and 1980s, China had a well-educated, intel ligent labor force that could work for cheap, but faced a closed-door policy. Opening the door unleashed China’s great potential. Looking forward, while the United States is relatively efficient, it w ould not grow as fast as Russia (i.e., which has competitively priced educated people with low debt) if Russia could significantly reduce its barriers to productivity (e.g., corruption, lack of development of its debt/capital market s, lack of investment, lack of innov ation, bad work attitudes, lack of adequate private property laws, etc.). That is why I am most optimistic about inefficient countries that are undertaking the sort of reforms that are described in this section. Culture is one of the biggest drivers of productivity It’s intuitive that what a country’s people value and how . ountry’s competitive position. Culture influences the decisions people make they operate together matters for a c work each week. Culture can also help explain why about factors such as savings rates or how many hours they a country can appear to have the right ingredients for grow th but consistently underperform, or vice versa. For example, in Russia, which has a lot of untapped potential, the culture that affects lifestyles (e.g., alcoholism, the low drive to succeed, etc.) causes it to substantially und er-live its potential, while in Singapore, where high income levels make their labor relatively uncompetitive, their lifestyles and values (e.g., around working, saving, and investing) allow them to realize a higher percentage of their potential. While lots of elements of culture can matter, the ones that I find matter most are: 1) the extent to which individuals enjoy the rewards and suffer the penalties of their productivity (i.e., the degrees of their self-sufficiency), 2) how much the people value savoring life versus achieving, 3) the extent to which innov ation and commercialism are valued, 4) the degree of bureaucracy, 5) the extent of corruption, and 6) the extent to which there is rule of law. Basically, countries that have people who earn their keep, strive to achieve and innovate, and facilitate an efficient market-based et forces through highly economy will grow faster than countries that prioritize savoring life, undermine mark redistributive systems, and have inefficient institutions. To be clear, I am not making any value judgments. It would be illogical for me to say that people who savor non-wo rk activities are making a mistake relative to people who love working. It is, however, not illogical for me to say that people who savor non-work activities are likely to be less productive than those who love working. Indebtedness At the risk of repeating myself too many times, I will review the way I look at debt cycles because I carry that perspective into my calculations in explaining 10-year growth rates. As explained, short-term volatility is more due to debt cy cles than productivity, but this volatility cancels out over time because credit allows people to consume more than they produce when they acquire it, and it forces people they pay it back. Undulations around to consume less than they produce when long-term productivity are driven by debt cycles. Reme to increase your spending is to produce mber, in an economy without credit, the only way more, but in an economy with credit, you can also increa se your spending by borrowing. That creates cycles. When debt levels are low relative to income levels and are rising, the upward cycle is self-reinforcing on the upside because rising spending genera tes rising incomes and rising net worth, which raise borrowers’ capacity to borrow, which allows more buying and spending, etc. However, since debts can’t rise faster than money and income forever, there are limits to debt growth. Think of debt growth that is faster than income grow th as being like air in a scuba bottle—there is a limited amount of it that you can use to get an extra boost, but you can’t live on it forever. In the case of debt, you can take it out before you put it in (i.e., if you don’t have an y debt, you can take it out), but you are expected to return what you took out. When you are taking it out, you can spend more than is sustainable, which will give you the appearance of being prosperous. At such times, you and those who are lending to you might mistake you as © 2017 Ray Dalio 27

5 being creditworthy and not pay enough attention to what paying back will look like. When debts can no longer be raised relative to incomes and the time for payi ng back comes, the process works in reverse. You can get a picture of where countries stand in the l ong-term debt cycle and the likelihood of debt being a the past reliance on debt to support incomes and the support or detriment to future growth by assessing I expect countries that have a) low amounts of debt attractiveness of taking on new debt. For these reasons relative to incomes, b) debt growth rates that are low in relation to income growth rates, and c) easier monetary policies to grow faster over the next 10 years than countries with d) high amounts of debt relative to incomes, e) debt growth rates that are high in relati on to income growth rates, and f) tighter monetary policies. That is true with one exception, which is when adequate financial intermediaries don’t exist. Institutions and capital markets that fa cilitate these transactions have to be in place for the system to work. For tes, we have taken into consideration the levels of that reason, when forecasting long-term future growth ra development of countries’ financial intermediaries. : As mentioned, they can play a role. For example, the US having shale gas was lucky. Potential Luck and Wars conflicts should always be watched. While to some exte nt these can be anticipated, they are not part of our formula and they don’t typically matter much—i.e., they are exceptional. The Interaction of These Forces Is Driven by Human Nature While productivity and indebtedness can be thought of as separate concepts, they ar e ultimately a function of the choices people make and their psychology. I briefly touched on culture as an influence on these choices and their outcomes. Also, I observe important shifts in atti tudes from one generation to the next, which are due to their different experiences. In Part 3, “The Rises and Declines of Economies Over th e Last 500 Years,” I show how psychology tends to shift as countries move through their economic life cycles. It is worth touching on this influence here before I delve into an examination of what all the economic health indicators are pointing to for the 20 major economies. about, there tends to be a ps ychologically motivated cycle In addition to productivity and the debt cycles I spoke that occurs as a function of one’s past level of prospe rity and whether one experienced improving or worsening economic conditions. When a country is poor and focused on survival, its people who have subsistence lifestyles on’t have any debt to speak of because savings are short don’t waste money because they value it a lot and they d and nobody wants to lend to them. Even though the country’s labor is low-cost, it is not competitive, and the lack of investment stymies future productivi age and others don’t, with culture and ty gains. Some emerge from this st location being two of the biggest determinants. For those that do—either because a country removes a big barrier like being closed to the world (as China did in 1980) or simply because a mo re gradual evolution makes their labor attractive—a virtuous cycle can kick in. At th is stage, the investments are not just inexpensive; the stock of infrastructure and other physical capital is also typically low and there is lots of room to adopt existing technologies that can radically improve the country’s pote ntial. Leveraging up (increasing one’s indebtedness) can feed back into higher productivity and competitiven ess gains, which produce high returns that attract more investment at a time when the capacity to leverage is high . The key is that this money and credit must be used to produce investments that yield enough returns to pay for the debt service and finance further growth (so that incomes rise as fast as or faster than debts). Yet as countries grow wealthier, more and more of the credit tends to fuel consumption rather than investment. A process that was once virtuous can become self-destructive. The decreased investment in quality projects means productivi ty growth slows, even as the borrowing and spending makes incomes grow and labor more expensive. People feel rich and begin taking more leisure—after all, asset prices are high—even though their balance sheets are starting to deteriorate. At this point, debt burdens start to compound and incomes grow faster than productivity growth. In other words, the country tends to become over-indebted and uncompetitive. The country is becoming poor even though it is still behaving as though it is rich. Eventually the excess tends to lead to bubbles bursti ng, a period of slow decline and deleveraging. Suffice it to say that when looking at a country’s potential to grow, it is critical to look at the country’s productivity and indebtedness holistically, as part of its stage of development. © 2017 Ray Dalio 28

6 A Formula for Future Growth As explained, my research team and I built the formula fo r future growth from the top down. We started with my concepts of how productivity and in debtedness affect growth, then fleshed these forces out with specific indicators, and then saw how the formula created this wa y worked. I followed this approach because I believe that one should be able to describe the cause-effect relationships and the logic behind them without looking at the data and that only after doing that should one look at the data to see how well the descriptions square with what happened because otherwise one would be inclined to be blinded by data and not force oneself to objectively test one’s understanding of the cause-effect relationships. As mentioned, from what I can tell, about two-thirds of a country’s 10-year growth rates will be due to productivity and about one-third will be due to indebt edness. The visual below conveys these two forces. Our productivity indicators aim to measure how steep the productivity growth line will be over time, and our indebtedness measures aim to measure how debt cy cles will influence growth over the medium term. Productivity Indebtedness © 2017 Ray Dalio 29

7 of the indices my research things along with the names Below is a list of what I have come to learn about these team and I created to reflect them. Based on the reasons outlined there, we created a simple logic-weighted index of productivity and a simple logic-weighted index of indebtedness. We used the same set of factors weighed the same way for each gauge across all the countr ies and across all timeframes. That way, there was no d indebtedness are timeless and universal. We put two- fitting the data and our measures for productivity an 380 After creating these indices, we observed thirds of the weight on productivity and a third on indebtedness. years’ growth rates for each country (which we measure every 5 years). how each predicted the subsequent 10 In other words, we observed rather than fit the data. The table below shows the concepts, their weights, and their correlations with the next 10 years’ per capita grow th rates for our universe of 20 countries. Together these indicators were 86% correlated with the countries’ subsequent growth rates. Below we show how well these 381 measures related to future gr owth across countries and time. Future Growth Estimate - A Summary of Our Reasons Gauge Weight Correlation Concept - Aggregate Estimate 100% 86% Productivity: Producing more by working harder or smarter. - 65% 71% I. Value: What You Pay vs What You Get: Countries that offer the most value for money do better than those that don't. The most - 45% 67% important attributes are whether their people work hard, invest, and are educated and productive in their jobs. i. Education: A better educated worker will likely be more effective today and offers Cost of a Quality-Adjusted 11% 66% more promise for tomorrow than his/her peer. Educated Worker ii. Labor Productivity: A worker of similar education who produces more in the same Cost of a Productivity- 11% 57% amount of time is more attractive than the one producing less. Adjusted Educated Worker iii. Working Hard: Working Hard Relative to Hard workers will generally produce more and find ways to improve 11% 64% Income (2 pcs) faster than those who opt more for leisure. iv. Investing: Countries that save and invest in productive capital and infrastructure will Investing Relative to 11% 58% improve their potential more than those that don't. Income (2 pcs) II. Culture: - 62% 20% Culture influences the choices people make and the effectiveness of an economic system. i. Self-Sufficiency: The need and the ability to independently support oneself is healthy Self-Sufficiency ex-Inc 42% 3% and important to being successful. (3 pcs, 9 sub-pcs) ii. Savoring Life vs. Achieving: Those who value achievement over savoring the fruits of Savoring vs Achieving ex- 3% 37% life will be more successful in finding ways to work harder and smarter. Inc (2 pcs, 8 sub-pcs) iii. Innovation & Commercialism: Countries that value new ideas and invest in them will Innovation & Commerc. ex- 3% 65% find new better ways to produce faster. Inc (2 pcs, 10 sub-pcs) Bureaucracy ex-Inc iv. Bureaucracy: Lots of red tape and regulation stymies business activity. 43% 3% (3 sub-pcs) Corruption ex-Inc v. Corruption: Corruption deters investment and distorts market incentives. 3% 63% (4 sub-pcs) Investors and business people need to feel secure their agreements and Rule of Law ex-Inc vi. Rule of Law: 59% 3% (4 sub-pcs) property will be protected. - Swings in credit drive swings in spending and economic growth. Indebtedness: 35% 49% I. Debt and Debt Service Levels: Debt and Debt 12% 41% Service Levels Countries with high debt burdens have less room to leverage and take on new debt. II. Debt Flow: Debt Flow A country can rely on credit growth to boost spending above incomes, but only for so long. 6% -12% When that rate of credit cannot be sustained, spending must slow. III. Monetary Policy: Monetary Policy 25% 18% Monetary policy can make new borrowing more or less attractive. 380 As mentioned, our gauges of productivity and indebtedness are constructed using simple logic-based weights. Within productivit y, we put two-thirds weight on what you pay versus what you get and one-third on culture. Within each of these gauges we put equal weig ht on the . different sub-pieces. Within our indebted ness gauge, we put half the weight on debt cycle dynamics and half on monetary policy 381 k through what makes sense to me and then to My approach to research is to first thin ng. This is a look at the data to stress test my thinki very different approach compared to optimi zation methods (or data mining) which typically go to the data first, and fish for re lationships and conclusions. Because I was asked how much better the results would be if we let the computer fit the equations, we ran the data -fitting of 80-90% the correlations with future gr exercise and observed that if we do that, owth don't change much (they’re likewise in the range depending on the process used). correlated with future growth © 2017 Ray Dalio 30

8 measures of productivity and indebtedness can be used to predict each country’s absolute and relative These growth rates over the next 10 years, or longer periods. They also can be used by policy makers to indicate what levers they can move to influence future growth. To reiterate, my goal is to get the big picture right—i.e., to reliably be approximately right by focusing on the most im portant drivers rather than to try to be precise by focusing on the details. Before looking at the picture we will show you how our aggregate indicator would have predicted growth versus what actually occurred. While staring at the observations helps us ground ourselves in reality and test our logic, we know there is no precision in the sp ecific numbers and what matters most to us is whether our logic is strong. Our examination covers 150 separate observations across 20 different countries over the last 70 years, which provides a wide range of different environments to test our indicator. Along with the correlation of our wn below), another test is how reliably we predicted predictions and what growth actually materialized (sho set, our aggregate predictions for a country’s average something reasonably close to what happened. In our growth over the next decade were within 1% of the actu al growth two-thirds of the time, and within 2% about 85% of the time. Aggregate Estimate of Futu re Growth (x-axis) Against Subsequent 10yr Growth 12% 10% 8% 6% 4% 2% 0% Correlation: 86% -2% -4% 2% 0%1 %1 %8 %6 %4 %2 -2%0 Note: For periods where we have productivity and indebtedness. 150 data points over 20 countries. perspective for each of our ss gauges, comparing what productivity and indebtedne Below we show the same they implied individually for a country’s growth versus what happened. As you can see our measure of productivity is more strongly correlated with each co untry’s growth than our indebtedness measure is (71% versus 49%), which makes sense given it is the more import ant driver over the timefram es tested. Still, each has a fairly good relationship on its own. Indebtedness Estimate of Future Growth Productivity Estimate of Future Growth Against Subsequent 10yr Growth Against Subsequent 10yr Growth 12% 12% 10% 10% 8% 8% 6% 6% 4% 4% 2% 2% 0% 0% Correlation: 71% Correlation: 49% -2% -2% -2%0%2%4%6%8%10%12% -2%0%2%4%6%8%10%12% Note: Growth is measured as growth in income per worker in above charts 31 © 2017 Ray Dalio

9 them to be just as important in developed countries Because these are timeless and universal drivers, we expect as they are in emerging ones. The type of investment or education that matters may shift, but ultimately whether a country sees productivity growth is still going to be largely a function of th e basic building blocks of - w h e t h e r i t s w o r k e r s o f f e r v a l u e , w h e t h e r i t i s i n v e s t i n g a n d c r e a t i n g a c u l t u r e o f s u c c e s s ---- -as well p r o d u c t i v i t y ---- as how its indebtedness is evolving. Across the countries we have examined, our aggreg ate indicator is about as countries (72% correlated with the growth in income correlated with future growth for developed and emerging per worker in developed countries and 84% correlated in emerging countries). Of course, which countries are ‘‘developed’’ or ‘‘emerging’’ changes over very long periods as discussed in ‘‘The Ri ses and Declines of Economies we adjust for that, for example excluding Japan in the over the Last 500 Years.’’ So in the tests shown below, 1960s when it was much more like an emerging country. DW Aggregate Estimate of Future Growth EM Aggregate Estimate of Future Growth Against Subsequent 10yr Growth Against Subsequent 10yr Growth 6% 12% 5% 10% 4% 8% 3% 6% 2% 4% 1% 2% 0% 0% -1% Correlation: 72% Correlation: 84% -2% -2% 2% 3% 4% 5% 6% -2% -1% 0% 1% -2%0%2%4%6%8%10%12% critical to understanding and predicting the growth of To reiterate, I believe getting to this fundamental level is th—for example just income on its own or a country’s countries. Naïve measures of a country’s future grow trailing growth—won’t get you much because they won’t help you get at the drivers. They also tend to be much bout 25% as good by traditi onal statistical measures). worse predictors than the formula I have described here (a Looking at the economy as a machine and granularly measuring the cause-effect relationships makes all the difference. Dalio 32 © 2017 Ray

10 Projections I will start with our projections and then explain how they were derived. As discussed, by looking at the elements that drive productivity and indebtedness you can arrive at a view of how fast a country will grow its output per worker. Since economic growth is mechanically ju st a function of growth in a simple step for us to estimate economic growth. In its a) output per worker and b) number of workers, it’s then tions show. We go into greater depth on the reasons the following section we quickly scan what our projec behind them in Appendix A. The following chart shows our estimate in aggregate for real GDP growth over 10 years in these major countries. t same formula for all countries and one that is that We provide two estimates: one that is based on the exac estimate corrected for the average past error. This a dditional step notes whether we were systematically over- optimistic or pessimistic in our predictions for a given co account for the fact that untry, and adjusted for that, to 382 We simply found how much the universal formula was off we may be missing a factor specific to that country. in the past on average (i.e., 1%) and assumed that it would be off by that amount over the next ten years. That adjustment is meant to account for unexplained factors. These two estimates typically don’t yield meaningful differences and don’t affect the order of the countries’ rankings much. re RGDP Growth (10 Years) Aggregate Estimate of Futu No Error Adjustment With Error Adjustment India: IN / 9.2% 7.2% / 4.2% 4.0% China: CN Mexico: MX / 5.5% 4.0% Argentina: AR / 3.6% 3.6% Thailand: TH 3.5% / 4.4% 3.2% / 3.6% Singapore: SG 2.8% / 2.9% Brazil: BR 1.9% / 2.3% Korea: KR 1.6% / 1.7% Russia: RU United Kingdom: GB 1.6% / 1.7% 1.6% / 1.9% United States: US 1.5% / 1.6% Australia: AU 1.4% / 1.4% Hungary: HU France: FR 0.4% / 1.0% Germany: DE 0.3% / 0.8% Japan: JP 0.8% / 0.9% 0.8% / 1.0% Canada: CA 0.2% / 0.7% Spain: ES -0.6% / -0.2% Italy: IT -1.0% / -0.9% Greece: GR -2%0%2%4%6%8%10% 382 Note: In studying our misses, we realized that sometimes for a given country we were systematically over-optimistic about it s growth or pessimistic. Overall these biases are pretty small but they also raise the question of whether we are missing a specific factor that is particularly important for that country (w correlation shown above of 86% includes our e know we can’t capture everything). The adjustment for these country-specific misses (for lack of a better term our ‘error adjustme nt’). It’s not a big deal—if we don’t make this adjustment the r a country’s growth in income per worker over the next de correlation is 79% (i.e., a 79% correlation between our prediction fo cade and the of 20 countries and 150 datapoints). This allows us to show a type of growth in income per worker that materialized, across our sample we have gotten wrong in the past and its magnitude. range in our estimates for countries, which highlights what © 2017 Ray Dalio 33

11 On the basis of productivity and indebtedness alone, the countries which have the elements to grow incomes per worker fastest today are India, China, Mexico, Argentin a, and Thailand. Based on these elements, peripheral European countries and Canada are expect ed to grow slowest. We expect India to grow strongly (7% or so), primarily because of India’s low indebtedness and significant cost advantage relative to the rest of the world even accounting for its poor education (its income per capita is just $1,500, four times less than China’s). While incomes have grown very fast in China and there has been a material leveraging, we still expect fairly strong growth of a little over 4% due to Ch ina’s strong competitive position. The Chinese labor force remains highly attractive as a result of their work ethic and how educated they are relative to the cost, and they continue to save at a high rate, providing capital that is invested in projects that will improve productivity in the future. China’s culture of self-sufficiency and achievement also provides a material support. Of course the policies of these countries can shift these growth rates. This formula projects productivity growth in the US to be around 1.6%-1.9%, in the middle of the pack globally, e US has fallen a bit behind other competitive world and near the top of the list for other rich nations. Th economies; in the last few years, rising incomes and falling innovation have primarily acted as a downward pressure on US growth, in addition to a well-educated bu t expensive workforce, and a shifting preference among American workers for leisure and very low savings rates. While it is managing its deleveraging beautifully, it remains relatively highly indebted. We expect growth in Germany to be a bit lower than in the US. Germany is expensive relative to the US, though central bank (ECB) stimulation is more stimulative at this point, and this combined with its relatively low levels of debt shoul d act as a tailwind for growth. Healthy household savings rates, a culture of innovation and commercialism, and good governance are all also positive supports for hern European countries, all of which are globally Germany's growth. On the lowest end we see the sout uncompetitive and highly indebted, and have a history of experiencing monetary policy that is tight relative to conditions, though this has been shifting in recent ye ars with aggressive easing by the ECB. The growth prospects of Italy and Spain, along with France and a numb er of Latin American countries are also hindered by a culture that values savoring life ov er achievement or self-sufficiency. Dalio 34 © 2017 Ray

12 How We Came to Our Estimates workers, that estimate includes two major pieces: is just output per worker times the number of Because GDP demographic trends (or, more specifically, the expected change in workers), and an estimate of future growth per worker. We show the chart of the expected change in workers below. On this measure, you can see that shrinking workforce, while countries like Europe, Russia, and Japan’s ch allenges are compounded by an aging and Mexico and India will enjoy a growth in workers supporting their potential growth. Annual Expected Growth in Working-Age Population IN MX AR AU BR GB US SG CA FR CN ES GR TH IT KR JP DE HU RU 1.5% 1.0% 0.5% 0.0% -0.5% -1.0% -1.5% 35 © 2017 Ray Dalio

13 The next chart gives a picture of what we would project in come growth per worker to be over the next 10 years, d without the error adjustment. again highlighting our estimates with an Aggregate Estimate of Future Growth per Worker (10 Years) With Error Adjustment No Error Adjustment 5.9% 7.9% / IN CN 4.2% / 4.4% TH 3.9% / 4.8% SG 3.0% 3.5% / KR 2.5% / 3.0% 2.7% / 4.2% MX RU 2.7% / 2.6% 2.6% / 2.6% AR HU 2.2% / 2.2% 2.2% / 2.2% BR DE 1.1% / 1.6% JP 1.5% / 1.6% US 1.5% / 1.8% GB 1.3% / 1.4% ES 0.6% / 1.0% FR 0.4% / 1.0% AU 0.8% 0.9% / CA 0.7% / 1.0% -0.2% / 0.2% IT -0.6% / -0.5% GR %1 -2%0 %2 %4 %6 %8 0% 36 © 2017 Ray Dalio

14 includes tw o major components: a productivity estimate, and an Our future growth per worker estimate below. They highlight the ge indebtedness estimate. We show both of these estimates neral attractiveness of the labor arbitrage between most emerging countries relative to the developed world. There is also much more room for these countries to leverage up whereas much of the developed world has reached its long-term debt d room for spending and income growth to come from top and is deleveraging, which means there is more limite credit expansion. Productivity Estimate Indebtedness Estimate of Future Growth of Future Growth With Error Adjustment No Error Adjustment With Error Adjustment No Error Adjustment IN IN AR CN HU TH TH SG MX KR CN RU DE MX ES BR US AR RU HU JP DE IT JP FR GB SG CA GB AU KR US BR FR AU ES CA IT GR GR -2%0%2%4%6%8%10% -2%0%2%4%6%8%10% res of productivity—both what you pay for what you get, describe in depth our measu In the following section, we our underlying indicators, see Appendix A. and culture. For a detailed review of all of 37 © 2017 Ray Dalio

15 Productivity and Competiveness Measures A country’s competitiveness is driven by the value of all th at it offers relative to th e value of what others offer eir cost. In a global economy, countries that are more —most importantly the value of its people relative to th productive will not only produce better value products, but they will also attract investment and new businesses, and they will compel the means of production to move. We expect the producers who are more competitive to both 1) sell more in their own country and other countries , and 2) move their production to countries where they can produce more cost-effectively. As explained, the most important way countries differentiate themselves is through their labor: whether it is more attractive for a company to hire their workers than to hire workers in a different country. This is not just a function of whether the workers are more productive today. It’s a function of the attributes that make them more attractive to hire and invest in over the long term . Since ultimately the only way one can become more productive is through working harder or working smarter, it makes intuitive sense to us that education and work ethic are the most important attributes that matter. T hose countries that offer these most cost-competitively tend to do the best. A country may also be more attr active because it’s a cheap place to build a factory or because the returns of building new ca pital and technologies are higher. A dditionally, countries that save and invest more tend to grow faster by creating new innovations, capital equipment, and infrastructure that help d investment rates. her countries with more limite improve the productivity of their workforce relative to ot growth of a country. But that’s not all there is to it. These are the most important ingredients for the productivity Partly, culture drives the decisions people make about factors like savings rates or how many hours they work each week. But culture can also help explain why a coun try can appear to have the right ingredients for growth but consistently underperform. Culture matters a lot . Ultimately how a country develops is a function of human behavior and the decisions its people make. Many of those decisions are captured in the attributes that go into a country’s relative productivity (like how much people save or how hard they work). But you can learn a lo t about the psychology of the different players in the economy and their motivations by staring at different cultural elements. Over very long stretches s long-term cycles (from being of time a country’s cultural evolution is at the core of it poor and believing it’s poor to becoming rich). Over any decade, the way we think about culture is that it can help explain why a country can istently underperform or outperform. For us it makes appear to have the right ingredients for growth but cons intuitive sense that countries that emphasize individual self-reliance and striving to achieve are more likely to succeed by creating a meritocratic environment where in centives are based largely on market forces. Countries can also outperform if they are more innovative in producing new products and ideas of value and more commercially minded in harvesting them. On the other hand, countries can underperform if they are corrupt or bureaucratic, or if the rule of law is unsound. To be clear, we are not a ssessing whether one culture is good or bad; our focus is on the cultural elements that are most important for economic prosperity. 38 Dalio © 2017 Ray

16 Our Productivity Gauge For these reasons, when we look at gauging the productivity of a country we create a measure of 1) the relative nce it is the most important value it offers and 2) its culture. We weigh the relative value of a country the most si determinant. Our productivity gauge is just based on the logic we have described. It is mostly a function of the relative value of a country’s workers (the labor arbitrage aspect): how ed ucated they are relative to their cost and how hard the people work relative to their cost. whether a country’s workers have the These measures give us a sense of ingredients to grow their productivity by working harder or smarter. To triangulat e the cost of an educated worker we look at two measures, one that adjusts for the quality of education and one that looks at their observed productivity today. Moving beyond a country’s human capital, we also look at investment relative to the cost, which gives us a lens into whether a country is investing to grow its productivity in the future and whether the returns are likely to be attractive (i.e., anot her perspective on the “cost of production arbitrage”). To measure culture, we create a gauge for each of the concepts we have outlined: 1) whether a country values of life or achieving, 3) whether it is innovative and self-sufficiency, 2) whether it values savoring the fruits commercially oriented, 4) its degree of bureaucracy, 5) corruption, and 6) rule of law. Self-sufficiency encourages productivity by tying the ability to spend to the need to produce. The concept of savoring life versus achieving captures how much the people in a country are focused on enjoyi ng the things they have versus trying to increase their success and achieve, earn, and create more. Innovation and comm ercialism capture whether a society is oriented toward seeking profit or generating new insights. The last three get at the basic questions of how difficult it is to get business done in a country—i .e., whether a given country is one where businesses could get off the ground and operate smoothly, where busine ss can be conducted fairly (without corruption), and whether investors and businesses can be confident that contracts and laws will be well enforced. Together our indicators of productivity were 71% related to countries’ subsequent growth rates. To repeat, these estimates were made by applying the exact same factors to all countries in all time periods to determine their subsequent growth. Contribution Productivity Correlation to Estimate Aggregate 71% 65% Value: What You Pay vs What You Get 67% 45% Cost of a Quality-Adjusted Educated Worker 66% 11.3% Cost of a Productivity-Adjusted Educated Worker 57% 11.3% 11.3% Working Hard Relative to Income (2 pieces) 64% Investing Relative to In 58% 11.3% come (2 pieces) Culture 62% 20% Self-Sufficiency ex-Income Effect (3 pieces, 9 sub-pieces) 42% 3.3% Savoring Life vs Achieving ex-Inc (2 pieces, 8 sub-pieces) 37% 3.3% Innovation & Commercialism ex-Inc (2 pieces, 10 sub-pieces) 65% 3.3% 3.3% Bureaucracy ex-Inc (3 pieces) 43% Corruption ex-Inc (4 pieces) 63% 3.3% Rule of Law ex-Inc (4 pieces) 59% 3.3% © 2017 Ray Dalio 39

17 The chart below gives a picture of how we would rate countries today on productivity based on the same logic described above. Our ratings are represented in terms of what a given country’s productivity would imply for that country’s future growth the next 10 years. in income per worker over placed to see productivity growth at this point—driven by a very cheap According to our measures, India is best r poor education, chronic corruption, etc. Together and achievement-oriented labor force, even accounting fo these factors imply India has the ingredients to grow income per worker around 9% annually over the next decade. It also has sizable potential to boost its growth rate if it can reduce its inefficiencies through reforms. China is also highly competitive by our measures, with a growth rate implied by its competitiveness/productivity of about 6%. Its workforce is inexpensive and fairly well educated relative to its cost, works hard, and provides huge savings for investments. Moreover, as a country that is becoming rich and starting to realize it, China has a huge amount of potential to realize by adopting existing technologies, and investing in businesses to serve a massive population that is quickly accumulating spendi ng power. Nearly all developed world countries are measured to be relatively uncompetitive, with Italy, Greece, France, and Spain uniquely uncompetitive (we explain our reasoning in detail in Appendix A). Most importantly, these countries’ labor is expensive, they don’t work that hard, and they invest less than most other countries. This is compounded by a social system that prioritizes savoring life over achieving and insulates wo rkers from market forces with rigid labor markets and substantial government safety nets, low levels of innovati on, and high levels of bureaucracy. It should be noted oductivity and competitiveness, especially in Spain, and that we have seen some structural reforms to improve pr that such reforms have the potential to considerably b oost growth because the barrier s that reforms would bring down are drags on growth. Japan is the most competitive of the major developed countries we measure, especially after recent declines in Japan’s exchange rate. Productivity Estimate of Future Growth IN CN TH SG MX RU BR KR AR HU JP US CA AU GB DE ES FR GR IT 0% %1 %8 %6 %4 %2 -2%0 © 2017 Ray Dalio 40

18 each country stands on our assessment of value (i.e., The following two charts give you a summary of where what you pay for what you get) and whether its culture is a support to or drag on income growth. Overall, the strong value proposition of Asia’s workers—especially how hard they work and their level of investment relative to their expense—is supported by cultural attitudes around achievement. In contrast, Europe, once on the frontier of productivity, now invests little and takes more leisure than any other region. And after years of incomes rising faster than underlying productivity, its workers are some of the most expensive in the world and the vibrancy of its labor market is undermined by a syst em of protections. Japan an d Singapore are in the middle of the pack when you look at their high cost of labor and low levels of investment, but we expect them to be helped by cultural factors (e.g., their orientation toward innovation an d commercialism and ru le of law). In contrast, cultural factors—like corruption, a desire fo r leisure over achievement—act as a drag for otherwise competitive workforces in Russia and Argentina. Value: What You Pay vs What You Get Culture SG IN IN CN TH TH CN MX KR RU US BR JP AR AU SG CA KR MX HU GB JP DE GR BR CA AR AU RU ES HU US FR GB ES IT FR GR DE IT -2%0%2%4%6%8%10% 0.0% 1.0% -2.0% 2.0% -1.0% our estimates, please see Appendix A. Next, we walk For a fuller description of the components that make up through our health indices for each country. © 2017 Ray Dalio 41

19 Part 2: Economic Health Indices by Country, and the Prognoses That They Imply rked, in this part I break it down country by country. While in Part 1 I explained how the economic health index wo By turning to the countries that you are interested in, you will be able to see all of the influences and what they of those countries in one simple table. They are shown imply for economic growth over the next 10 years for each in the order of projected economic growth rates and can be found by looking at the table of contents on the next page. The projected economic growth rates fo ed to a) the average annual growth r each country are shown and attribut rate of the working population and b) the projected av erage annual change in the output per worker. The projected change in the average annual output per worker is determined two-thirds by that country's projected s debt burdens. The determ productivity growth and one-third by the size of it inants of each country's productivity growth are shown in several gauges that reflect each of the drivers (e.g., cost competitiveness, work : 1) the deviation of that country's determinant from the attitudes, etc.). These are conveyed in tables that show the ranking of that country (among the 20 countries world average (shown in standard deviation terms), and 2) mple table will provide you virtually all that you need to shown) for that indicator. In other words, this one si know to gauge each country's economic health and its prospects for the next 10 years. By scanning the table and reading the accompanying text, you will be able to s ee a country’s biggest strengths and biggest weaknesses. The projections do not take into consideration exogenou s factors such as the discoveries of natural resources and wars which will influence growth rate s and are beyond my ability to forecast. The table will not provide the thinking or the individual statistics that are behind each of these gauges. Should you wish to see a deeper explanation of the thinking behind each indicator, please see Appendix A. If you just want to see the individual statistics behind these gauges, you can find them in Appendix B. Unfortunately, we are not able to share the statistics underlying ou r indebtedness measures, which are proprietary. To be clear, these health indicators show where the cu rrent conditions will lead, not what is inevitable. If viduals who stop smoking and start exercising, they can countries change the influences on their health, like indi we expect the countries that are more efficient (as measured by our improve their prognoses. In fact, while gauges) to do better than those that are less efficient, we expect those that remove their impediments to have the biggest improvements to growth – just as China’s strong growth over the last couple decades resulted from it ending its closed-door policy. used in coming up with these numbers, or even in It should be noted that there was no subjective judgment coming up with the text that explains these indicators. Both the numbers and the text were computer generated. As explained in Part 1 my process of converting indicators into health gauge measures and in turn into projections for growth is very straightforward. To help it to be better understood and to provide each person with their own abilities to vary the processes in the ways they prefer, I am willing to make these statistics and processes open to those who are interested so that they can assess the relationships and change the weights in the ways they think are best. © 2017 Ray Dalio 42

20 Table of Contents Country Rank Page Projected Real Growth Rate India 7.2% to 9.2% 1 21 China 4.0% to 4.2% 2 23 Mexico 4.0% to 5.5% 3 25 Argentina 3.6% 4 27 Thailand 5 29 3.5% to 4.4% Singapore 3.2% to 3.6% 6 31 Brazil 2.8% to 2.9% 7 33 Korea 1.9% to 2.3% 8 35 Russia 1.6% to 1.7% 9 37 1.6% to 1.7% 39 United Kingdom 10 USA 11 41 1.6% to 1.9% Australia 1.5% to 1.6% 12 43 Hungary 1.4% 13 45 France 0.4% to 1.0% 14 47 Germany 0.3% to 0.8% 15 49 Japan 16 0.8% to 0.9% 51 Canada 17 53 0.8% to 1.0% Spain 0.2% to 0.7% 18 55 Italy -0.6% to -0.2% 19 57 Greece -1.0% to -0.9% 20 59 © 2017 Ray Dalio 43

21 India India's Future Growth Based on our economic health index, we project that India's real growth rate over the next 10 years will be in the vicinity of 7.2% to 9.2%. This growth rate is well above the global average, ranked 1 out of 20 major economies, estimate (and this writing) is based on our computer- and 1 out of 9 emerging countries. As a reminder, this and doesn't account for exogenous shocks (like commodity generated analysis of the statistics detailed in Part 1, or political shocks, or wars). In India’s case, our grow th estimate comes from combining our expectation of a average, and a labor force growth rate of 1.3% which 5.9% growth rate per worker, which is well above the global will boost growth. The growth in output per worker is driven significantly by productivity and indebtedness. Over the long term, productivity matters most, while swings in indebtedness tend to be an important driver in the short term. Given that we are lookin g at a 10-year time frame, we weigh our productivity measures about two- thirds and our indebtedness measure about one-third (though there is no precision here). Over the next 10 years, we expect India’s productivity to be much better than most major countries (implying a growth rate of 9.3% on its own), and indebtedness conditions to be better than other countries (implying a growth rate of 5.1% on its own). As shown below, India’s biggest relative st rengths are the value its workers provide relative to education levels and its levels of investment, and its biggest relative problems are its level of bureaucracy cially poorly on this measure). The various gauges and (though compared to other countries it doesn't rate espe weights are shown below. The individual indicators that are behind them are explained in Part 1 of this study, and listed in the appendix of this section. Please review this table to understand our comments. Economic Health Index: India Score (Standard Deviation) +4 -4 Rank Projected 10-Year Real Growth Rate : 7.2% to 9.2% 1 Growth in Working-Age Population : 1.3% 1 5.9% Projected Real Growth per Worker : 1 Component of Growth per Worker Estimate Weight Productivity 65% 1 70% 1 I. Value: What You Pay vs What You Get i. Education 25% 1 ii. Labor Productivity 25% 1 iii. Working Hard 1 25% a. Avg Hours Worked 67% 1 b. Demographics 33% 1 iv. Investing 25% 1 a. Investment ex-Housing 50% 1 b. Household Savings 1 50% II. Culture 30% 2 i. Self-Sufficiency 17% 4 a. Work Ethic 4 50% b. Government Support 25% 8 c. Rigidity of Labor Market 25% 5 ii. Savoring Life vs Achieving 3 17% a. Observed Outcomes (Work Ethic) 4 50% b. Expressed Values 50% 2 iii. Innovation & Commercialism 17% 1 a. Outputs (e.g., patents, trademarks) 50% 1 b. Inputs (e.g., R&D, # of researchers) 50% 3 iv. Bureaucracy 14 17% v. Corruption 17% 1 vi. Rule of Law 17% 4 Indebtedness 1 35% I. Debt and Debt Service Levels 35% 4 II. Debt Flow 15% 8 III. Monetary Policy 50% 7 Scores shown as number of standard deviations away from the average observation across countries and time. © 2017 Ray Dalio 44

22 India More Detail that are conveyed in gaug As mentioned, the descriptions below are based on influences es that are made up of a composite of indicators, shown both in Part 1 and in the appendix. So, if you want to see why we are saying what we are saying, you can trace them through by looking at those statistics. Productivity Value: What You Pay Versus What You Get I. of the relative value it offe rs, especially for its labor. As A country's productivity and competitiveness are mostly a function shorthand for this, we refer to our gauge of this relative value as "what you pay versus what yo u get"; it reflects a) the cost and value of employees and b) the levels of investment. Co untries that have well-educated workers who are relatively inexpensive and that have higher investment ra tes grow faster than those that don't. India offers much better than averag e value, ranked 1 among the countries we measure. Its workers are very inexpensive, even taking into consideration India's low le vels of education and very poor quality of education. Further, people in India work very hard relative to the cost of their labor—the average male of working age works 36 hours per week (2 out of 20 countries), and the demogr aphics of the workforce are very favorable. Levels of saving and investing are high given India's very low per capita income levels, with investment at about 14% of GDP (15 out of 20 countries). II. Culture Just looking solely at the relative value of a country's workers misses the role that the culture plays in determining how much a country will grow. As I've discussed, culture influences the decisions people make about fa ctors like savings rates or how many hours they work each week, which we measure in the previously shown indicators, but culture can also influence work attitudes, levels of efficiency, reliability, and other such influences on whether countries underperform or outperform. India's culture looks to be a significant support to growth in coming years, ranked 2 out of 20 countries in this e India to countries of similar levels of economic culture gauge. Note that our culture measures compar development. Starting with self-sufficiency, India is rate d pretty well on this measure, weighing that its workers have a somewhat strong work ethic, its level of govern ment support is neutral (with government outlays at 27% of GDP), and its labor markets are very flexible. India al so seems to value achieving a bit more than savoring— s suggest that its people value accomplishment and again, its work ethic is somewhat strong, and survey achievement. Furthermore, innovation an d commercialism are very strong in In dia relative to income. We see the country investing very heavily in research and innovation, and its outputs from innovation, including inventions and earnings, are very high. Finally, relative to its in come, India has somewhat high bureaucracy and red tape, very low corruption, and somewhat strong rule of law, according to the international measures we are using. Indebtedness Think of debt growth that is faster than income growth as being like air in a scuba bottle—there is a limited amount of it forever. When you are taking it out, you can spend more than that you can use to get an extra boost, but you can't live on it is sustainable, but when debts can no longer be raised relati ve to incomes and the time for paying back comes, the process works in reverse. You can get a picture of where countries stan d in the long-term debt cycle and the likelihood of debt being a support or detriment to future growth by assessing the past reliance on debt to support incomes and the attractiveness of taking on new debt. The other major piece of our economic health index looks at the likelihood of debt being a support or detriment to future growth. India's indebtedness position is better than other countries, ranked 1 out of the 20 countries we look at. The country has a bit of room to lever up in the future, with a total debt burden of around 133% of GDP, compared to the global average of 200-250%. In the past few years, its growth was neither supported nor ly, the stance of monetary policy is depressed by credit creation, which is neutral for growth going forward. Last generally a bit stimulative. © 2017 Ray Dalio 45

23 China China's Future Growth real growth rate over the next 10 years will be in the Based on our economic health index, we project that China's vicinity of 4.0% to 4.2%. This growth rate is well abov e the global average, ranked 2 out of 20 major economies, estimate (and this writing) is based on our computer- and 2 out of 9 emerging countries. As a reminder, this generated analysis of the statistics detailed in Part 1, and doesn't account for exogenous shocks (like commodity or political shocks, or wars). In China’s case, our growth estimate comes from combining our expectation of a obal average, and a labor force growth rate of -0.2% 4.4% growth rate per worker, which is well above the gl which will moderately weigh on growth. Th e growth in output per worker is dr iven significantly by productivity ers most, while swings in indebtedness tend to be an and indebtedness. Over the long term, productivity matt important driver in the short term. Given that we are looking at a 10-year time frame, we weigh our productivity measures about two-thirds and our in debtedness measure about one-third (though there is no precision here). Over the next 10 years, we expect China’s productivity to be much better than most major countries (implying a growth rate of 5.8% on its own), and indebtedness conditi ons to be slightly worse than other countries (implying a growth rate of 1.2% on its own). As shown below, China’ s biggest relative strengths are its levels of investment and the value its workers provide relative to education le vels, and its biggest relative problems are its debt and debt service levels and its reliance on credit flows for growth. The various gauges and weights are shown below. The individual indicators that are behind them are explaine d in Part 1 of this study, and listed in the appendix of this section. Please review this table to understand our comments. Economic Health Index: China -4 Score (Standard Deviation) +4 Rank Projected 10-Year Real Growth Rate : 4.0% to 4.2% 2 Growth in Working-Age Population : -0.2% 11 Projected Real Growth per Worker : 4.4% 2 Component of Growth per Worker Estimate Weight 2 65% Productivity I. Value: What You Pay vs What You Get 70% 2 i. Education 25% 3 ii. Labor Productivity 25% 4 iii. Working Hard 4 25% a. Avg Hours Worked 3 67% b. Demographics 6 33% iv. Investing 25% 2 a. Investment ex-Housing 50% 1 b. Household Savings 1 50% II. Culture 30% 4 i. Self-Sufficiency 17% 6 a. Work Ethic 7 50% b. Government Support 25% 4 c. Rigidity of Labor Market 25% 9 ii. Savoring Life vs Achieving 17% 2 a. Observed Outcomes (Work Ethic) 50% 7 b. Expressed Values 50% 4 iii. Innovation & Commercialism 2 17% a. Outputs (e.g., patents, trademarks) 50% 2 b. Inputs (e.g., R&D, # of researchers) 50% 2 iv. Bureaucracy 17% 6 v. Corruption 17% 2 vi. Rule of Law 2 17% Indebtedness 35% 16 I. Debt and Debt Service Levels 35% 8 II. Debt Flow 15% 20 III. Monetary Policy 11 50% Scores shown as number of standard deviations away from the average observation across countries and time. © 2017 Ray Dalio 46

24 China More Detail that are conveyed in gaug As mentioned, the descriptions below are based on influences es that are made up of a composite of indicators, shown both in Part 1 and in the appendix. So, if you want to see why we are saying what we are saying, you can trace them through by looking at those statistics. Productivity Value: What You Pay Versus What You Get I. of the relative value it offe rs, especially for its labor. As A country's productivity and competitiveness are mostly a function shorthand for this, we refer to our gauge of this relative value as "what you pay versus what yo u get"; it reflects a) the cost and value of employees and b) the levels of investment. Co untries that have well-educated workers who are relatively inexpensive and that have higher investment ra tes grow faster than those that don't. China offers much better than average value, ranked 2 among the countries we measure. Its workers are somewhat inexpensive, even taking into consideration China's low levels of education and poor quality of education. Further, people in China work an average am ount relative to the cost of their labor—the average male of working age works 35 hours per week (3 out of 20 countries), and the demographics of the workforce are unfavorable. Levels of saving and investing are high give n China's low per capita income levels, with investment at about 30% of GDP (1 out of 20 countries). II. Culture Just looking solely at the relative value of a country's workers misses the role that the culture plays in determining how much a country will grow. As I've discussed, culture influences the decisions people make about fa ctors like savings rates or how many hours they work each week, which we measure in the previously shown indicators, but culture can also influence work influences on whether countries underperform or outperform. attitudes, levels of efficiency, reliability, and other such years, ranked 4 out of 20 countries in this culture China's culture looks to be a support to growth in coming countries of similar levels of economic development. gauge. Note that our culture measures compare China to this measure, weighing that its workers have a roughly Starting with self-sufficiency, China is rated pretty well on average work ethic, its level of government support is low (with government outlays at 29% of GDP), and its labor markets are very flexible. China also seems to value savoring about the same as it values achieving—again, its work ethic is roughly average, and surveys suggest that its people value accomplishment and achievement. lism are very strong in China relati ve to income. We see the country Furthermore, innovation and commercia investing very heavily in research and innovation, and its outputs from innovation, including inventions and earnings, are about average. Finally, relative to its in come, China has somewhat lo w bureaucracy and red tape, very low corruption, and very strong rule of law, ac cording to the international measures we are using. Indebtedness Think of debt growth that is faster than income growth as being like air in a scuba bottle—there is a limited amount of it forever. When you are taking it out, you can spend more than that you can use to get an extra boost, but you can't live on it is sustainable, but when debts can no longer be raised relati ve to incomes and the time for paying back comes, the process works in reverse. You can get a picture of where countries stan d in the long-term debt cycle and the likelihood of debt being a support or detriment to future growth by assessing the past reliance on debt to support incomes and the attractiveness of taking on new debt. The other major piece of our economic health index looks at the likelihood of debt being a support or detriment to future growth. China's indebtedness position is slightly worse than other countries, ranked 16 out of the 20 countries we look at. The country has very little room to lever up in the future, with a total debt burden of around 249% of GDP, compared to the global average of 200-25 0%. In the past few years, its growth was supported by ing forward. Lastly, the stance of monetary policy is high credit creation, which is restrictive for growth go generally neutral. © 2017 Ray Dalio 47

25 Mexico Mexico's Future Growth real growth rate over the next 10 years will be in Based on our economic health index, we project that Mexico's the vicinity of 4.0% to 5.5%. This growth rate is we ll above the global average, ranked 3 out of 20 major er, this estimate (and this writing) is based on our economies, and 3 out of 9 emerging countries. As a remind computer-generated analysis of the statistics detailed in Part 1, and doesn't account for exogenous shocks (like commodity or political shocks, or wars). In Mexico’s case, our growth estimate comes from combining our expectation of a 2.7% growth rate per worker, which is somewhat above the global average, and a labor force th in output per worker is driven significantly by growth rate of 1.3% which will boost growth. The grow productivity and indebtedness. Over the long term, productivity matters most, while swings in indebtedness tend to be an important driver in the short term. Given that we are looking at a 10-year time frame, we weigh our productivity measures about two-thirds and our inde btedness measure about one-third (though there is no precision here). Over the next 10 years, we expect Mexico’s productivity to be somewhat better than most major countries (implying a growth rate of 3.9% on its own), and indebtedness conditions to be better than other countries (implying a growth rate of 4.8% on its own). As shown below, Mexico’s biggest relative strengths are its debt and debt service levels and the value its workers provide relative to education levels, and its biggest relative problems are its reliance on credit flows for growth and its level of innovation/commercialism. The various gauges and weights are shown below. The individu al indicators that are behind them are explained in Part 1 of this study, and listed in the appendix of th is section. Please review this table to understand our comments. Economic Health Index: Mexico -4 Score (Standard Deviation) +4 Rank Projected 10-Year Real Growth Rate : 4.0% to 5.5% 3 Growth in Working-Age Population : 1.3% 2 Projected Real Growth per Worker : 2.7% 6 Component of Growth per Worker Estimate Weight 5 65% Productivity I. Value: What You Pay vs What You Get 70% 4 i. Education 25% 5 ii. Labor Productivity 25% 5 iii. Working Hard 3 25% a. Avg Hours Worked 4 67% b. Demographics 2 33% iv. Investing 25% 6 a. Investment ex-Housing 50% 7 b. Household Savings 5 50% II. Culture 30% 10 i. Self-Sufficiency 17% 2 a. Work Ethic 2 50% b. Government Support 25% 5 c. Rigidity of Labor Market 25% 4 ii. Savoring Life vs Achieving 17% 4 a. Observed Outcomes (Work Ethic) 50% 2 b. Expressed Values 50% 6 iii. Innovation & Commercialism 17 17% a. Outputs (e.g., patents, trademarks) 50% 15 b. Inputs (e.g., R&D, # of researchers) 50% 18 iv. Bureaucracy 17% 8 v. Corruption 17% 13 vi. Rule of Law 15 17% Indebtedness 35% 2 I. Debt and Debt Service Levels 35% 2 II. Debt Flow 15% 19 III. Monetary Policy 10 50% Scores shown as number of standard deviations away from the average observation across countries and time. © 2017 Ray Dalio 48

26 Mexico More Detail that are conveyed in gaug As mentioned, the descriptions below are based on influences es that are made up of a composite of indicators, shown both in Part 1 and in the appendix. So, if you want to see why we are saying what we are saying, you can trace them through by looking at those statistics. Productivity Value: What You Pay Versus What You Get I. of the relative value it offe rs, especially for its labor. As A country's productivity and competitiveness are mostly a function shorthand for this, we refer to our gauge of this relative value as "what you pay versus what yo u get"; it reflects a) the cost and value of employees and b) the levels of investment. Co untries that have well-educated workers who are relatively inexpensive and that have higher investment ra tes grow faster than those that don't. nked 4 among the countries we measure. Its workers are Mexico offers somewhat better than average value, ra somewhat inexpensive, even taking into consideration Mexico's somewhat low levels of education and very poor st of their labor—the average male of quality of education. Further, people in Mexico work hard relative to the co working age works 35 hours per week (4 out of 20 countri es), and the demographics of the workforce are about average. Levels of saving and investing are somewhat high given Mexico's low per capita income levels, with investment at about 14% of GDP (16 out of 20 countries). II. Culture Just looking solely at the relative value of a country's workers misses the role that the culture plays in determining how much a country will grow. As I've discussed, culture influences the decisions people make about fa ctors like savings rates or how many hours they work each week, which we measure in the previously shown indicators, but culture can also influence work influences on whether countries underperform or outperform. attitudes, levels of efficiency, reliability, and other such Mexico's culture looks to be neutral for growth in coming years, ranked 10 out of 20 countries in this culture countries of similar levels of economic development. gauge. Note that our culture measures compare Mexico to Starting with self-sufficiency, Mexico is rated very well on this measure, weighing that its workers have a strong work ethic, its level of government support is low (w ith government outlays at 28% of GDP), and its labor markets are very flexible. Mexico also seems to value achi eving a bit more than savoring—again, its work ethic is strong, and surveys suggest that its people moderately value accomplishment and achievement. Furthermore, innovation and commercialism are somewh at weak in Mexico relative to income. We see the country investing lightly in research and innovation, and its outputs from innovation, including inventions and earnings, are very low. Finally, relative to its income, Mexico has averag e levels of bureaucracy and red tape, somewhat high corruption, and somewhat weak rule of law, accord ing to the international measures we are using. Indebtedness Think of debt growth that is faster than income growth as being like air in a scuba bottle—there is a limited amount of it that you can use to get an extra boost, but you can't live on it forever. When you are taking it out, you can spend more than is sustainable, but when debts can no longer be raised relati ve to incomes and the time for paying back comes, the process works in reverse. You can get a picture of where countries stan d in the long-term debt cycle and the likelihood of debt being a support or detriment to future growth by assessing the past reliance on debt to support incomes and the attractiveness of taking on new debt. The other major piece of our economic health index looks at the likelihood of debt being a support or detriment to future growth. Mexico's indebtedne ss position is better than other countries, ranked 2 out of the 20 countries we look at. The country has a moderate amount of room to lever up in the future, with a total debt burden of around 101% of GDP, compared to the global average of 200-250%. In the past few years, its growth was supported by high credit creation, which is restrictive fo r growth going forward. Last ly, the stance of monetary policy is generally a bit stimulative. © 2017 Ray Dalio 49

27 Argentina Argentina's Future Growth a's real growth rate over the next 10 years will be in Based on our economic health index, we project that Argentin the vicinity of 3.6%. This growth rate is well above th e global average, ranked 4 out of 20 major economies, and 4 out of 9 emerging countries. As a reminder, this estimate (and this writing) is based on our computer- and doesn't account for exogenous shocks (like commodity generated analysis of the statistics detailed in Part 1, s from combining our expectation of a or political shocks, or wars). In Argentina’s case, our growth estimate come 2.6% growth rate per worker, which is somewhat above the global average, and a labor force growth rate of 1.0% which will boost growth. The growth in output per work er is driven significantly by productivity and indebtedness. Over the long term, productivity matter s most, while swings in indebtedness tend to be an important driver in the short term. Given that we are looking at a 10-year time frame, we weigh our productivity measures about two-thirds and our in debtedness measure about one-third (though there is no precision here). Over the next 10 years, we expect Argentina’s productivity to be about average compared to most major countries (implying a growth rate of 1.9% on its own), and indebtedness conditions to be better than other countries (implying a growth rate of 3.8% on its own). biggest relative strengths As shown below, Argentina’s are its debt and debt service levels and the value its work ers provide relative to education levels, and its biggest relative problems are its monetary policy and its levels of investment (though compared to other countries it doesn't rate especially poorly on these measures). The various gauges and weights are shown below. The individual indicators that are behind th em are explained in Part 1 of this stud y, and listed in the appendix of this section. Please review this ta ble to understand our comments. Economic Health Index: Argentina -4 Score (Standard Deviation) +4 Rank Projected 10-Year Real Growth Rate : 3.6% 4 Growth in Working-Age Population : 1.0% 3 Projected Real Growth per Worker : 2.6% 8 Component of Growth per Worker Estimate Weight 9 65% Productivity I. Value: What You Pay vs What You Get 70% 7 i. Education 25% 9 ii. Labor Productivity 25% 8 iii. Working Hard 6 25% a. Avg Hours Worked 67% 6 b. Demographics 4 33% iv. Investing 25% 12 a. Investment ex-Housing 50% 17 b. Household Savings - 50% II. Culture 30% 14 i. Self-Sufficiency 17% 10 a. Work Ethic 8 50% b. Government Support 25% 6 c. Rigidity of Labor Market 25% 18 ii. Savoring Life vs Achieving 17% 10 a. Observed Outcomes (Work Ethic) 50% 8 b. Expressed Values 50% 16 iii. Innovation & Commercialism 8 17% a. Outputs (e.g., patents, trademarks) 50% 8 b. Inputs (e.g., R&D, # of researchers) 50% 8 iv. Bureaucracy 17% 16 v. Corruption 17% 18 vi. Rule of Law 18 17% Indebtedness 35% 3 I. Debt and Debt Service Levels 35% 1 II. Debt Flow 15% 9 III. Monetary Policy 19 50% Scores shown as number of standard deviations away from the average observation across countries and time. © 2017 Ray Dalio 50

28 Argentina More Detail that are conveyed in gaug es that are made up of a As mentioned, the descriptions below are based on influences composite of indicators, shown both in Part 1 and in the appendix. So, if you want to see why we are saying what we are saying, you can trace them through by looking at those statistics. Productivity I. Value: What You Pay Versus What You Get rs, especially for its labor. As A country's productivity and competitiveness are mostly a function of the relative value it offe u get"; it reflects a) the cost as "what you pay versus what yo shorthand for this, we refer to our gauge of this relative value and value of employees and b) the levels of investment. Co untries that have well-educated workers who are relatively tes grow faster than those that don't. inexpensive and that have higher investment ra Argentina offers around average value, ranked 7 among the countries we measure. Its workers are somewhat inexpensive, even taking into consideration Argentina's low levels of education and poor quality of education. tive to the cost of their labor—the average male of Further, people in Argentina work an average amount rela es), and the demographics of the workforce are about working age works 30 hours per week (7 out of 20 countri average. Levels of saving and investing are roughly av erage given Argentina's about average per capita income levels, with investment at about 17 % of GDP (9 out of 20 countries). Culture II. of a country's workers misses the role that the culture plays in determining how much Just looking solely at the relative value a country will grow. As I've discussed, culture influences the decisions people make about fa ctors like savings rates or how many hours they work each week, which we measure in the previously shown indicators, but culture can also influence work attitudes, levels of efficiency, reliability, and other such influences on whether countries underperform or outperform. Argentina's culture looks to be a headwind to growth in coming years, ranked 14 out of 20 countries in this culture gauge. Note that our cultur e measures compare Argentina to count ries of similar levels of economic rated about average on this measure, weighing that its development. Starting with self-sufficiency, Argentina is government support is neutral (with government outlays workers have a somewhat weak work ethic, its level of at 36% of GDP), and its labor markets are moderately rigi d. Argentina also seems to value savoring a bit more than achieving—again, its work ethic is somewhat we ak, and surveys suggest that its people don't value ion and commercialism are about average in Argentina accomplishment and achievement. Furthermore, innovat in research and innovation, though its outputs from relative to income. We see the country investing heavily innovation, including inventions and ea rnings, are low. Finally, relative to its income, Argentina has somewhat high bureaucracy and red tape, somewhat high corruption, and somewhat weak rule of law, according to the international measures we are using. Indebtedness Think of debt growth that is faster than income growth as being like air in a scuba bottle—there is a limited amount of it that you can use to get an extra boost, but you can't live on it forever. When you are taking it out, you can spend more than is sustainable, but when debts can no longer be raised relati ve to incomes and the time for paying back comes, the process works in reverse. You can get a picture of where countries stan d in the long-term debt cycle and the likelihood of debt being a support or detriment to future growth by assessing the past reliance on debt to support incomes and the attractiveness of taking on new debt. The other major piece of our economic health index looks at the likelihood of debt being a support or detriment to future growth. Argentina's indebtedness position is better than other countries, ranked 3 out of the 20 countries we look at. The country has plenty of room to le ver up in the future, with a total debt burden of around 77% of GDP, compared to the global average of 200- 250%. In the past few years, its growth was neither supported nor depressed by credit creation, which is ne utral for growth going forward. Lastly, the stance of monetary policy is generally a bit tight. © 2017 Ray Dalio 51

29 Thailand Thailand's Future Growth oject that Thailand's real growth rate over the next 10 years will be in Based on our economic health index, we pr the vicinity of 3.5% to 4.4%. This growth rate is somewhat above the global average, ranked 5 out of 20 major er, this estimate (and this writing) is based on our economies, and 5 out of 9 emerging countries. As a remind Part 1, and doesn't account for exogenous shocks (like computer-generated analysis of the statistics detailed in case, our growth estimate comes from combining our commodity or political shocks, or wars). In Thailand’s r worker, which is well above the global average, and a labor force growth expectation of a 3.9% growth rate pe owth in output per worker is driven significantly by rate of -0.4% which will moderately weigh on growth. The gr productivity and indebtedness. Over the long term, productivity matters most, while swings in indebtedness that we are looking at a 10-year time frame, we weigh our tend to be an important driver in the short term. Given productivity measures about two-thirds and our inde btedness measure about one-third (though there is no precision here). Over the next 10 years, we expect Th ailand’s productivity to be much better than most major countries (implying a growth rate of 5.6% on its own), and indebtedness conditions to be slightly better than s own). As shown below, Thailand’s biggest relative other countries (implying a growth rate of 3.3% on it strengths are the value its workers provide relative to education levels and its levels of investment, and its biggest relative problems are its reliance on credit flows for growth and its monetary policy (though compared to other countries it doesn't rate especially poorly on these measures). The various gauges and weights are shown below. The individual indicators that are behind them ar e explained in Part 1 of this study, and listed in the appendix of this section. Please review this table to understand our comments. Economic Health Index: Thailand Score (Standard Deviation) -4 Rank +4 3.5% to 4.4% Projected 10-Year Real Growth Rate : 5 Growth in Working-Age Population : -0.4% 14 Projected Real Growth per Worker : 3.9% 3 Component of Growth per Worker Estimate Weight 65% 3 Productivity I. Value: What You Pay vs What You Get 70% 3 i. Education 25% 4 ii. Labor Productivity 3 25% iii. Working Hard 2 25% a. Avg Hours Worked 67% 2 b. Demographics 33% 5 iv. Investing 25% 3 a. Investment ex-Housing 4 50% b. Household Savings 50% 4 II. Culture 30% 3 i. Self-Sufficiency 17% 3 a. Work Ethic 3 50% b. Government Support 25% 3 c. Rigidity of Labor Market 25% 10 ii. Savoring Life vs Achieving 5 17% a. Observed Outcomes (Work Ethic) 50% 3 b. Expressed Values 50% 13 iii. Innovation & Commercialism 17% 5 a. Outputs (e.g., patents, trademarks) 50% 6 b. Inputs (e.g., R&D, # of researchers) 50% 4 iv. Bureaucracy 2 17% v. Corruption 17% 4 vi. Rule of Law 17% 3 Indebtedness 5 35% I. Debt and Debt Service Levels 35% 5 II. Debt Flow 15% 12 III. Monetary Policy 50% 13 Scores shown as number of standard deviations away from the average observation across countries and time. © 2017 Ray Dalio 52

30 Thailand More Detail that are conveyed in gaug As mentioned, the descriptions below are based on influences es that are made up of a composite of indicators, shown both in Part 1 and in the appendix. So, if you want to see why we are saying what we are saying, you can trace them through by looking at those statistics. Productivity Value: What You Pay Versus What You Get I. of the relative value it offe rs, especially for its labor. As A country's productivity and competitiveness are mostly a function shorthand for this, we refer to our gauge of this relative value as "what you pay versus what yo u get"; it reflects a) the cost and value of employees and b) the levels of investment. Co untries that have well-educated workers who are relatively inexpensive and that have higher investment ra tes grow faster than those that don't. Thailand offers much better than average value, rank ed 3 among the countries we measure. Its workers are somewhat inexpensive, even taking into consideration Thailand's somewhat low levels of education and very poor quality of education. Further, people in Thailand work hard relative to the cost of their labor—the average male of working age works 36 hours per week (1 out of 20 countries), and the demographics of the workforce are about average. Levels of saving and investing are somewhat high given Thailand's low per capita income levels, with investment at about 19% of GDP (6 out of 20 countries). II. Culture Just looking solely at the relative value of a country's workers misses the role that the culture plays in determining how much a country will grow. As I've discussed, culture influences the decisions people make about fa ctors like savings rates or how many hours they work each week, which we measure in the previously shown indicators, but culture can also influence work influences on whether countries underperform or outperform. attitudes, levels of efficiency, reliability, and other such Thailand's culture looks to be a support to growth in coming years, ranked 3 out of 20 countries in this culture gauge. Note that our culture measures compare Thailand to countries of similar leve ls of economic development. Starting with self-sufficiency, Thailand is rated pretty well on this measure, weighing that its workers have a somewhat strong work ethic, its level of government su pport is low (with government outlays at 22% of GDP), and its labor markets are very flexible. Thailand also seems to value savoring about the same as it values achieving—again, its work ethic is somewhat strong, t hough surveys suggest that its people don't especially value accomplishment and achievement. Furthermore, innovation and commercialis m are about average in Thailand relative to income. We see the country invest ing very heavily in research and innovation, though its outputs from innovation, including inve ntions and earnings, are low. Finally, relative to its income, Thailand has very low bureaucracy and red tape, somewhat low corrupti on, and very strong rule of law, according to the international measures we are using. Indebtedness Think of debt growth that is faster than income growth as being like air in a scuba bottle—there is a limited amount of it that you can use to get an extra boost, but you can't live on it forever. When you are taking it out, you can spend more than is sustainable, but when debts can no longer be raised relati ve to incomes and the time for paying back comes, the process works in reverse. You can get a picture of where countries stan d in the long-term debt cycle and the likelihood of debt being a support or detriment to future growth by assessing the past reliance on debt to support incomes and the attractiveness of taking on new debt. The other major piece of our economic health index looks at the likelihood of debt being a support or detriment to future growth. Thailand's indebtedness position is slightly better than other countries, ranked 5 out of the 20 countries we look at. The country has a bit of room to le ver up in the future, with a total debt burden of around 192% of GDP, compared to the global average of 200- 250%. In the past few years, its growth was neither utral for growth going forward. Lastly, the stance of supported nor depressed by credit creation, which is ne monetary policy is generally neutral. © 2017 Ray Dalio 53

31 Singapore Singapore's Future Growth Based on our economic health index, we project that Singapore's real growth rate over the next 10 years will be in the vicinity of 3.2% to 3.6%. This growth rate is some what above the global average, ranked 6 out of 20 major er, this estimate (and this writing) is based on our economies, and 1 out of 11 developed countries. As a remind Part 1, and doesn't account for exogenous shocks (like computer-generated analysis of the statistics detailed in commodity or political shocks, or wars). In Singapore’ s case, our growth estimate comes from combining our well above the global average, and a labor force growth expectation of a 3.0% growth rate per worker, which is rate of 0.1% which will moderately boost growth. The gr owth in output per worker is driven significantly by productivity and indebtedness. Over the long term, productivity matters most, while swings in indebtedness tend to be an important driver in the short term. Given that we are looking at a 10-year time frame, we weigh our productivity measures about two-thirds and our inde btedness measure about one-third (though there is no precision here). Over the next 10 years, we expect Singapore’s productivity to be somewhat better than most own), and indebtedness conditions to be slightly better major countries (implying a growth rate of 4.0% on its Singapore’s biggest relative than other countries (implying a growth rate of 2.6% on its own). As shown below, strengths are its rule of law and its level of bureaucracy, and its biggest relative problems are how hard its people work and its debt and debt service levels. The various gauges and weights are shown below. The individual indicators that are behind them are explained in Part 1 of this study, and listed in the appendix of this section. Please review this table to understand our comments. Economic Health Index: Singapore Score (Standard Deviation) +4 -4 Rank Projected 10-Year Real Growth Rate : 3.2% to 3.6% 6 Growth in Working-Age Population : 0.1% 8 3.0% Projected Real Growth per Worker : 4 Component of Growth per Worker Estimate Weight Productivity 65% 4 70% 8 I. Value: What You Pay vs What You Get i. Education 25% 10 ii. Labor Productivity 25% 11 iii. Working Hard 8 25% a. Avg Hours Worked 67% 7 b. Demographics 33% 20 iv. Investing 25% 5 a. Investment ex-Housing 50% 5 b. Household Savings - 50% II. Culture 30% 1 i. Self-Sufficiency 17% 1 a. Work Ethic 1 50% b. Government Support 25% 1 c. Rigidity of Labor Market 25% 1 ii. Savoring Life vs Achieving 1 17% a. Observed Outcomes (Work Ethic) 1 50% b. Expressed Values 50% 3 iii. Innovation & Commercialism 17% 9 a. Outputs (e.g., patents, trademarks) 50% 7 b. Inputs (e.g., R&D, # of researchers) 50% 11 iv. Bureaucracy 1 17% v. Corruption 17% 3 vi. Rule of Law 17% 1 Indebtedness 8 35% I. Debt and Debt Service Levels 35% 7 II. Debt Flow 15% 10 III. Monetary Policy 50% 14 Scores shown as number of standard deviations away from the average observation across countries and time. © 2017 Ray Dalio 54

32 Singapore More Detail that are conveyed in gaug As mentioned, the descriptions below are based on influences es that are made up of a composite of indicators, shown both in Part 1 and in the appendix. So, if you want to see why we are saying what we are saying, you can trace them through by looking at those statistics. Productivity Value: What You Pay Versus What You Get I. of the relative value it offe rs, especially for its labor. As A country's productivity and competitiveness are mostly a function shorthand for this, we refer to our gauge of this relative value as "what you pay versus what yo u get"; it reflects a) the cost and value of employees and b) the levels of investment. Co untries that have well-educated workers who are relatively inexpensive and that have higher investment ra tes grow faster than those that don't. ranked 8 among the countries we measure. Its workers are somewhat Singapore offers around average value, inexpensive, taking into consideration Singapore's high levels of education and very good quality of education. Further, people in Singapore e cost of their labor—the average male of don't work especially hard relative to th working age works 34 hours per week (5 out of 20 count ries), and the demographics of the workforce are very unfavorable. Levels of saving and investing are somewhat high given Singapore's very high per capita income levels, with investment at about 25 % of GDP (4 out of 20 countries). II. Culture Just looking solely at the relative value of a country's workers misses the role that the culture plays in determining how much a country will grow. As I've discussed, culture influences the decisions people make about fa ctors like savings rates or how many hours they work each week, which we measure in the previously shown indicators, but culture can also influence work attitudes, levels of efficiency, reliability, and other such influences on whether countries underperform or outperform. Singapore's culture looks to be a significant support to gr owth in coming years, ranked 1 out of 20 countries in this culture gauge. Note th at our culture measures compare Singapore to countries of similar levels of economic development. Starting with self-suffi ciency, Singapore is rated very well on this measure, weighing that its workers have a strong work ethic, its level of government support is very low (with government outlays at 16% of GDP), and its labor markets are very fl exible. Singapore also seems to value achieving a bit more than savoring— again, its work ethic is strong, and surveys suggest th at its people value accomplishment and achievement. Furthermore, innovation and commerci alism are about average in Singapor e relative to income. We see the country investing neither lightly nor heavily in research and innovation, and its outputs from innovation, including inventions and earnings, are low. Finally, relative to it s income, Singapore has very low bureaucracy and red tape, somewhat low corruption, and very strong rule of law, according to the international measures we are using. Indebtedness Think of debt growth that is faster than income growth as being like air in a scuba bottle—there is a limited amount of it that you can use to get an extra boost, but you can't live on it forever. When you are taking it out, you can spend more than is sustainable, but when debts can no longer be raised relati ve to incomes and the time for paying back comes, the process works in reverse. You can get a picture of where countries stan d in the long-term debt cycle and the likelihood of debt being a support or detriment to future growth by assessing the past reliance on debt to support incomes and the attractiveness of taking on new debt. The other major piece of our economic health index looks at the likelihood of debt being a support or detriment to future growth. Singapore's indebtedness position is slightly better than other countries, ranked 8 out of the 20 countries we look at. The country has a moderate amount of room to lever up in the future, with a total debt burden of around 246% of GDP, compar ed to the global average of 200-250%. In the past few years, its growth which is neutral for growth going forward. Lastly, the was neither supported nor depressed by credit creation, stance of monetary policy is generally neutral. © 2017 Ray Dalio 55

33 Brazil Brazil's Future Growth real growth rate over the next 10 years will be in the Based on our economic health index, we project that Brazil's vicinity of 2.8% to 2.9%. This growth rate is somewhat above the global average, ranked 7 out of 20 major er, this estimate (and this writing) is based on our economies, and 6 out of 9 emerging countries. As a remind computer-generated analysis of the statistics detailed in Part 1, and doesn't account for exogenous shocks (like commodity or political shocks, or wars). In Brazil’s case, our growth estimate comes from combining our oughly in line with the global average, and a labor force expectation of a 2.2% growth rate per worker, which is r growth rate of 0.6% which will boost growth. The grow th in output per worker is driven significantly by productivity and indebtedness. Over the long term, productivity matters most, while swings in indebtedness tend to be an important driver in the short term. Given that we are looking at a 10-year time frame, we weigh our productivity measures about two-thirds and our inde btedness measure about one-third (though there is no precision here). Over the next 10 years, we expect Brazil’s productivity to be somewhat better than most major , and indebtedness conditions to be worse than other countries (implying a growth rate of 3.0% on its own) countries (implying a growth rate of 0.8% on its own). As shown below, Brazil’s biggest relative strengths are the value its workers provide relative to education levels and its levels of investment, and its biggest relative problems are its monetary policy and its debt and debt service levels. The various gauges and weights are shown e explained in Part 1 of this study, and listed in the below. The individual indicators that are behind them ar appendix of this section. Please review this table to understand our comments. Economic Health Index: Brazil Score (Standard Deviation) -4 Rank +4 Projected 10-Year Real Growth Rate : 2.8% to 2.9% 7 Growth in Working-Age Population : 0.6% 5 2.2% Projected Real Growth per Worker : 10 Component of Growth per Worker Estimate Weight Productivity 65% 7 70% 6 I. Value: What You Pay vs What You Get i. Education 25% 6 ii. Labor Productivity 25% 7 iii. Working Hard 5 25% a. Avg Hours Worked 67% 5 b. Demographics 33% 3 iv. Investing 25% 4 a. Investment ex-Housing 50% 6 b. Household Savings - 50% II. Culture 30% 13 i. Self-Sufficiency 17% 13 a. Work Ethic 12 50% b. Government Support 25% 14 c. Rigidity of Labor Market 25% 17 ii. Savoring Life vs Achieving 14 17% a. Observed Outcomes (Work Ethic) 12 50% b. Expressed Values 50% 19 iii. Innovation & Commercialism 17% 7 a. Outputs (e.g., patents, trademarks) 50% 11 b. Inputs (e.g., R&D, # of researchers) 50% 5 iv. Bureaucracy 20 17% v. Corruption 17% 10 vi. Rule of Law 17% 13 Indebtedness 17 35% I. Debt and Debt Service Levels 35% 6 II. Debt Flow 15% 17 III. Monetary Policy 50% 20 Scores shown as number of standard deviations away from the average observation across countries and time. © 2017 Ray Dalio 56

34 Brazil More Detail that are conveyed in gaug As mentioned, the descriptions below are based on influences es that are made up of a composite of indicators, shown both in Part 1 and in the appendix. So, if you want to see why we are saying what we are saying, you can trace them through by looking at those statistics. Productivity Value: What You Pay Versus What You Get I. of the relative value it offe rs, especially for its labor. As A country's productivity and competitiveness are mostly a function shorthand for this, we refer to our gauge of this relative value as "what you pay versus what yo u get"; it reflects a) the cost and value of employees and b) the levels of investment. Co untries that have well-educated workers who are relatively inexpensive and that have higher investment ra tes grow faster than those that don't. Brazil offers somewhat better than average value, ranked 6 among the c ountries we measure. Its workers are somewhat inexpensive, even taking into consideration Brazil's low levels of education and very poor quality of education. Further, people in Brazil work an average amo unt relative to the cost of their labor—the average male of working age works 28 hours per week (9 out of 20 countries), and the demographics of the workforce are about average. Levels of saving and investing are somewhat high given Brazil's low per capita income levels, with investment at about 15% of GDP (12 out of 20 countries). II. Culture Just looking solely at the relative value of a country's workers misses the role that the culture plays in determining how much a country will grow. As I've discussed, culture influences the decisions people make about fa ctors like savings rates or how many hours they work each week, which we measure in the previously shown indicators, but culture can also influence work attitudes, levels of efficiency, reliability, and other such influences on whether countries underperform or outperform. Brazil's culture looks to be a headwind to growth in coming years, ranked 13 out of 20 countries in this culture gauge. Note that our culture measures compare Brazil to countries of sim ilar levels of econom ic development. Starting with self-sufficiency, Brazil is rated pretty po orly on this measure, weighing that its workers have a somewhat weak work ethic, its level of government support is high (with government outlays at 39% of GDP), and its labor markets are moderately rigid. Brazil also seems to value savoring much more than achieving—again, its work ethic is somewhat weak, and surveys sugge st that its people don't value accomplishment and achievement. Furthermore, innovation and commercialism are about average in Brazil relative to income. We see the country investing heavily in research and innovation, though its outputs from innovation, including inventions and earnings, are low. Finally, relative to its income, Br azil has very high bureaucracy and red tape, average levels of corruption, and average rule of law, according to the international measures we are using. Indebtedness Think of debt growth that is faster than income growth as being like air in a scuba bottle—there is a limited amount of it that you can use to get an extra boost, but you can't live on it forever. When you are taking it out, you can spend more than is sustainable, but when debts can no longer be raised relati ve to incomes and the time for paying back comes, the process works in reverse. You can get a picture of where countries stan d in the long-term debt cycle and the likelihood of debt being a support or detriment to future growth by assessing the past reliance on debt to support incomes and the attractiveness of taking on new debt. The other major piece of our economic health index looks at the likelihood of debt being a support or detriment to future growth. Brazil's indebtedness position is worse than other countries, ranked 17 out of the 20 countries we look at. The country has little room to lever up in the future, with a total debt burden of around 173% of GDP, compared to the global average of 200-250%. In the past few years, its growth was supported by high credit Lastly, the stance of monetary policy is generally a bit creation, which is restrictive for growth going forward. tight. © 2017 Ray Dalio 57

35 Korea Korea's Future Growth real growth rate over the next 10 years will be in the Based on our economic health index, we project that Korea's vicinity of 1.9% to 2.3%. This growth rate is somewhat above the global average, ranked 8 out of 20 major er, this estimate (and this writing) is based on our economies, and 7 out of 9 emerging countries. As a remind Part 1, and doesn't account for exogenous shocks (like computer-generated analysis of the statistics detailed in commodity or political shocks, or wars). In Korea’s case, our growth estimate comes from combining our r worker, which is somewhat above th e global average, and a labor force expectation of a 3.0% growth rate pe growth rate of -0.6% which will weigh on growth. The growth in output per worker is driven significantly by productivity and indebtedness. Over the long term, productivity matters most, while swings in indebtedness tend to be an important driver in the short term. Given that we are looking at a 10-year time frame, we weigh our productivity measures about two-thirds and our inde btedness measure about one-third (though there is no precision here). Over the next 10 years, we expect Korea’s productivity to be somewhat better than most major and indebtedness conditions to be slightly worse than countries (implying a growth rate of 2.9% on its own), other countries (implying a growth rate of 1.7% on its own). As shown below, Korea’s biggest relative strengths levels and its level of innov ation/commercialism, and its are the value its workers provide relative to education biggest relative problems are its debt and debt service levels and how hard its people work. The various gauges and weights are shown below. The individual indicators that are behind them are explained in Part 1 of this study, and listed in the appendix of this section. Plea se review this table to understand our comments. Economic Health Index: Korea Score (Standard Deviation) -4 Rank +4 Projected 10-Year Real Growth Rate : 1.9% to 2.3% 8 Growth in Working-Age Population : -0.6% 16 3.0% Projected Real Growth per Worker : 5 Component of Growth per Worker Estimate Weight Productivity 65% 8 70% 9 I. Value: What You Pay vs What You Get i. Education 25% 8 ii. Labor Productivity 25% 9 iii. Working Hard 10 25% a. Avg Hours Worked 67% 9 b. Demographics 33% 19 iv. Investing 25% 7 a. Investment ex-Housing 50% 3 b. Household Savings 9 50% II. Culture 30% 5 i. Self-Sufficiency 17% 5 a. Work Ethic 5 50% b. Government Support 25% 2 c. Rigidity of Labor Market 25% 12 ii. Savoring Life vs Achieving 8 17% a. Observed Outcomes (Work Ethic) 5 50% b. Expressed Values 50% 9 iii. Innovation & Commercialism 17% 3 a. Outputs (e.g., patents, trademarks) 50% 3 b. Inputs (e.g., R&D, # of researchers) 50% 1 iv. Bureaucracy 3 17% v. Corruption 17% 14 vi. Rule of Law 17% 11 Indebtedness 14 35% I. Debt and Debt Service Levels 35% 9 II. Debt Flow 15% 11 III. Monetary Policy 50% 12 Scores shown as number of standard deviations away from the average observation across countries and time. © 2017 Ray Dalio 58

36 Korea More Detail that are conveyed in gaug es that are made up of a As mentioned, the descriptions below are based on influences composite of indicators, shown both in Part 1 and in the appendix. So, if you want to see why we are saying what we are saying, you can trace them through by looking at those statistics. Productivity I. Value: What You Pay Versus What You Get rs, especially for its labor. As A country's productivity and competitiveness are mostly a function of the relative value it offe u get"; it reflects a) the cost as "what you pay versus what yo shorthand for this, we refer to our gauge of this relative value and value of employees and b) the levels of investment. Co untries that have well-educated workers who are relatively tes grow faster than those that don't. inexpensive and that have higher investment ra e countries we measure. Its workers are somewhat Korea offers around average value, ranked 9 among th ls of education and very good quality of education. inexpensive, taking into consideration Korea's high leve Further, people in Korea don't work especially hard relative to the cost of their labor—the average male of working age works 30 hours per week (6 out of 20 countri es), and the demographics of the workforce are very unfavorable. Levels of saving and investing are roughly av erage given Korea's high per capita income levels, with investment at about 27% of GDP (2 out of 20 countries). II. Culture Just looking solely at the relative value of a country's workers misses the role that the culture plays in determining how much a country will grow. As I've discussed, culture influences the decisions people make about fa ctors like savings rates or how many hours they work each week, which we measure in the previously shown indicators, but culture can also influence work attitudes, levels of efficiency, reliability, and other such influences on whether countries underperform or outperform. Korea's culture looks to be a support to growth in coming years, ranked 5 out of 20 countries in this culture countries of similar levels gauge. Note that our culture measures compare Korea to of economic development. Starting with self-sufficiency, Korea is rated pretty well on this measure, weighing that its workers have a somewhat strong work ethic, its level of government su pport is low (with government outlays at 21% of GDP), and its labor markets are moderately flexible. Korea also seems to value savoring about the same as it values somewhat strong, and surveys suggest that its people moderately value achieving—again, its work ethic is hermore, innovation and commercialis m are somewhat strong in Korea accomplishment and achievement. Furt relative to income. We see the country investing very he avily in research and innovation, and its outputs from innovation, including inventions and earnings, are about average. Finally, relative to its income, Korea has somewhat low bureaucracy and red tape, somewhat high co rruption, and average rule of law, according to the international measures we are using. Indebtedness Think of debt growth that is faster than income growth as being like air in a scuba bottle—there is a limited amount of it that you can use to get an extra boost, but you can't live on it forever. When you are taking it out, you can spend more than is sustainable, but when debts can no longer be raised relati ve to incomes and the time for paying back comes, the process works in reverse. You can get a picture of where countries stan d in the long-term debt cycle and the likelihood of debt being a support or detriment to future growth by assessing the past reliance on debt to support incomes and the attractiveness of taking on new debt. The other major piece of our economic health index looks at the likelihood of debt being a support or detriment to future growth. Korea's indebtedness position is slightly worse than other countries, ranked 14 out of the 20 countries we look at. The country has very little room to lever up in the future, with a total debt burden of around 253% of GDP, compared to the global average of 200- 250%. In the past few years, its growth was neither supported nor depressed by credit creation, which is ne utral for growth going forward. Lastly, the stance of monetary policy is generally neutral. © 2017 Ray Dalio 59

37 Russia Russia's Future Growth s real growth rate over the next 10 years will be in Based on our economic health index, we project that Russia' ughly at the global average, ranked 9 out of 20 major the vicinity of 1.6% to 1.7%. This growth rate is ro er, this estimate (and this writing) is based on our economies, and 8 out of 9 emerging countries. As a remind Part 1, and doesn't account for exogenous shocks (like computer-generated analysis of the statistics detailed in commodity or political shocks, or wars). In Russia’s case, our growth estimate comes from combining our expectation of a 2.7% growth rate per worker, which is somewhat above the global average, and a labor force growth rate of -0.9% which will weigh on growth. The growth in output per worker is driven significantly by productivity and indebtedness. Over the long term, productivity matters most, while swings in indebtedness tend to be an important driver in the short term. Given that we are looking at a 10-year time frame, we weigh our productivity measures about two-thirds and our inde btedness measure about one-third (though there is no precision here). Over the next 10 years, we expect Russia’s productivity to be somewhat better than most major countries (implying a growth rate of 3.0% on its own), and indebtedness conditions to be slightly worse than other countries (implying a growth rate of 1.8% on its own). As shown belo w, Russia’s biggest relative strengths are the value its workers provide relative to education leve ls and its debt and debt service levels, and its biggest growth. The various gauges relative problems are how hard its people work and it s reliance on credit flows for and weights are shown below. The individual indicators that are behind them are explained in Part 1 of this study, and listed in the appendix of this section. Plea se review this table to understand our comments. Economic Health Index: Russia Score (Standard Deviation) +4 Rank -4 Projected 10-Year Real Growth Rate : 1.6% to 1.7% 9 Growth in Working-Age Population : -0.9% 20 Projected Real Growth per Worker : 2.7% 7 Weight Component of Growth per Worker Estimate Productivity 65% 6 I. Value: What You Pay vs What You Get 70% 5 i. Education 25% 2 ii. Labor Productivity 2 25% iii. Working Hard 25% 7 a. Avg Hours Worked 67% 8 b. Demographics 33% 8 iv. Investing 25% 8 a. Investment ex-Housing 15 50% b. Household Savings 50% 3 II. Culture 30% 15 i. Self-Sufficiency 7 17% a. Work Ethic 50% 11 b. Government Support 25% 7 c. Rigidity of Labor Market 25% 3 ii. Savoring Life vs Achieving 13 17% a. Observed Outcomes (Work Ethic) 11 50% b. Expressed Values 15 50% iii. Innovation & Commercialism 17% 15 a. Outputs (e.g., patents, trademarks) 50% 14 b. Inputs (e.g., R&D, # of researchers) 50% 15 iv. Bureaucracy 17% 15 v. Corruption 17% 17 vi. Rule of Law 17% 14 Indebtedness 35% 13 I. Debt and Debt Service Levels 35% 3 II. Debt Flow 15% 18 50% 15 III. Monetary Policy Scores shown as number of standard deviations away from the average observation across countries and time. © 2017 Ray Dalio 60

38 Russia More Detail that are conveyed in gaug es that are made up of a As mentioned, the descriptions below are based on influences composite of indicators, shown both in Part 1 and in the appendix. So, if you want to see why we are saying what we are saying, you can trace them through by looking at those statistics. Productivity I. Value: What You Pay Versus What You Get rs, especially for its labor. As A country's productivity and competitiveness are mostly a function of the relative value it offe u get"; it reflects a) the cost as "what you pay versus what yo shorthand for this, we refer to our gauge of this relative value and value of employees and b) the levels of investment. Co untries that have well-educated workers who are relatively tes grow faster than those that don't. inexpensive and that have higher investment ra ed 5 among the countries we measure. Its workers are Russia offers somewhat better than average value, rank onsideration Russia's high levels of education and about average quality of somewhat inexpensive, taking into c don't work especially hard relative to the cost of their labor—the average education. Further, people in Russia male of working age works 26 hours per week (11 out of 20 countries), and the demo graphics of the workforce investing are roughly average given Russia's low per capita income levels, are unfavorable. Levels of saving and GDP (19 out of 20 countries). with investment at about 13% of II. Culture Just looking solely at the relative value of a country's workers misses the role that the culture plays in determining how much a country will grow. As I've discussed, culture influences the decisions people make about fa ctors like savings rates or how many hours they work each week, which we measure in the previously shown indicators, but culture can also influence work attitudes, levels of efficiency, reliability, and other such influences on whether countries underperform or outperform. years, ranked 15 out of 20 countries in this culture Russia's culture looks to be a headwind to growth in coming compare Russia to countries of sim ilar levels of economic development. gauge. Note that our culture measures Starting with self-sufficiency, Russia is rated pretty well on this measure, weighing that its workers have a somewhat weak work ethic, its level of government suppo rt is neutral (with government outlays at 35% of GDP), and its labor markets are very flexible. Russia also seems to value savoring a bit more than achieving—again, its work ethic is somewhat weak, and surveys suggest that its people don't especially value accomplishment and achievement. Furthermore, innovation and commercialism ar e somewhat weak in Russia relative to income. We see the country investing lightly in research and innovation, and its outputs from innovation, including inventions and earnings, are very low. Finally, relative to its in come, Russia has somewhat high bureaucracy and red tape, somewhat high corruption, and average rule of law, a ccording to the international measures we are using. Indebtedness Think of debt growth that is faster than income growth as being like air in a scuba bottle—there is a limited amount of it that you can use to get an extra boost, but you can't live on it forever. When you are taking it out, you can spend more than is sustainable, but when debts can no longer be raised relati ve to incomes and the time for paying back comes, the process works in reverse. You can get a picture of where countries stan d in the long-term debt cycle and the likelihood of debt being a support or detriment to future growth by assessing the past reliance on debt to support incomes and the attractiveness of taking on new debt. The other major piece of our economic health index looks at the likelihood of debt being a support or detriment to future growth. Russia's indebtedness position is slightly worse than other countries, ranked 13 out of the 20 countries we look at. The country has a moderate amount of room to lever up in the future, with a total debt burden of around 108% of GDP, compared to the global average of 200-250%. In the past few years, its growth was supported by high credit creation, which is restrictive for growth go ing forward. Lastly, the stance of monetary policy is generally neutral. © 2017 Ray Dalio 61

39 United Kingdom United Kingdom's Future Growth al growth rate over the next 10 years will be in the Based on our economic health index, we project that UK's re 10 out of 20 major economies, vicinity of 1.6% to 1.7%. This growth rate is roughly at the global average, ranked and 2 out of 11 developed countries. As a reminder, this estimate (and this writing) is based on our computer- generated analysis of the statistics detailed in Part 1, and doesn't account for exogenous shocks (like commodity or political shocks, or wars). In UK’s case, our growth g our expectation of a 1.4% estimate comes from combinin growth rate per worker, which is somewhat below the gl obal average, and a labor force growth rate of 0.2% which will moderately boost growth. The growth in output per worker is driven significantly by productivity and indebtedness. Over the long term, productivity matter s most, while swings in indebtedness tend to be an important driver in the short term. Given that we are looking at a 10-year time frame, we weigh our productivity measures about two-thirds and our in debtedness measure about one-third (though there is no precision here). be somewhat worse than most major countries (implying Over the next 10 years, we expect UK’s productivity to a growth rate of 0.8% on its own), and indebtedness condit ions to be about average compared to other countries low, UK’s biggest relative strengths are its monetary (implying a growth rate of 2.3% on its own). As shown be policy and its low reliance on credit flows for growth, and its biggest relative problems are its debt and debt gauges and weights are shown below. The individual service levels and how hard its people work. The various indicators that are behind them are explained in Part 1 of this study, and listed in the appendix of this section. Please review this table to understand our comments. Economic Health Index: United Kingdom -4 +4 Rank Score (Standard Deviation) Projected 10-Year Real Growth Rate : 1.6% to 1.7% 10 Growth in Working-Age Population : 0.2% 6 1.4% Projected Real Growth per Worker : 14 Component of Growth per Worker Estimate Weight Productivity 65% 15 70% I. Value: What You Pay vs What You Get 17 i. Education 15 25% ii. Labor Productivity 25% 16 iii. Working Hard 14 25% a. Avg Hours Worked 67% 16 b. Demographics 33% 12 iv. Investing 25% 19 a. Investment ex-Housing 16 50% b. Household Savings 50% 16 II. Culture 30% 11 i. Self-Sufficiency 17% 14 a. Work Ethic 14 50% b. Government Support 25% 12 c. Rigidity of Labor Market 25% 6 ii. Savoring Life vs Achieving 12 17% a. Observed Outcomes (Work Ethic) 50% 14 b. Expressed Values 50% 11 iii. Innovation & Commercialism 17% 13 a. Outputs (e.g., patents, trademarks) 50% 9 b. Inputs (e.g., R&D, # of researchers) 50% 14 iv. Bureaucracy 9 17% v. Corruption 17% 7 vi. Rule of Law 17% 5 Indebtedness 10 35% I. Debt and Debt Service Levels 35% 20 II. Debt Flow 15% 2 III. Monetary Policy 50% 3 Scores shown as number of standard deviations away from the average observation across countries and time. © 2017 Ray Dalio 62

40 United Kingdom More Detail that are conveyed in gaug es that are made up of a As mentioned, the descriptions below are based on influences see why we are saying what composite of indicators, shown both in Part 1 and in the appendix. So, if you want to we are saying, you can trace them through by looking at those statistics. Productivity I. Value: What You Pay Versus What You Get rs, especially for its labor. As A country's productivity and competitiveness are mostly a function of the relative value it offe u get"; it reflects a) the cost as "what you pay versus what yo shorthand for this, we refer to our gauge of this relative value and value of employees and b) the levels of investment. Co untries that have well-educated workers who are relatively inexpensive and that have higher investment ra tes grow faster than those that don't. UK offers somewhat worse than average value, ranked 17 among the countries we measure. Its workers are neither expensive nor inexpensive, taking into consideration UK's about average levels of education and good quality of education. Further, people in UK don't work hard relative to th e cost of their labor—the average male of working age works 23 hours per week (14 out of 20 countries), and the demographics of the workforce are unfavorable. Levels of saving and investing are somewhat low given UK's high per capita income levels, with investment at about 13% of GDP (17 out of 20 countries). II. Culture Just looking solely at the relative value of a country's workers misses the role that the culture plays in determining how much a country will grow. As I've discussed, culture influences the decisions people make about fa ctors like savings rates or how many hours they work each week, which we measure in the previously shown indicators, but culture can also influence work attitudes, levels of efficiency, reliability, and other such influences on whether countries underperform or outperform. UK's culture looks to be neutral for growth in coming year s, ranked 11 out of 20 countries in this culture gauge. ic development. Starting Note that our culture measures compare UK to countries of similar levels of econom out average on this measure, weighing that its workers have a weak work with self-sufficiency, UK is rated ab ethic, its level of government support is high (with government outlays at 42% of GDP), and its labor markets are very flexible. UK also seems to value savoring a bit mo re than achieving—again, its work ethic is weak, and surveys suggest that its people moderately value accomplishment and achievement. Furthermore, innovation income. We see the country investing neither lightly and commercialism are somewhat weak in UK relative to nor heavily in research and innovation, and its outputs from innovation, including inventions and earnings, are low. Finally, relative to its income, UK has average levels of bureaucracy and red tape, average levels of corruption, and somewhat strong rule of law, according to the intern ational measures we are using. Indebtedness Think of debt growth that is faster than income growth as being like air in a scuba bottle—there is a limited amount of it that you can use to get an extra boost, but you can't live on it forever. When you are taking it out, you can spend more than is sustainable, but when debts can no longer be raised relati ve to incomes and the time for paying back comes, the process works in reverse. You can get a picture of where countries stan d in the long-term debt cycle and the likelihood of debt being a support or detriment to future growth by assessing the past reliance on debt to support incomes and the attractiveness of taking on new debt. The other major piece of our economic health index looks at the likelihood of debt being a support or detriment to future growth. UK's indebtedness position is about aver age compared to other countries, ranked 10 out of the 20 countries we look at. The country has very little room to lever up in the future, with a total debt burden of around 435% of GDP, compared to the global average of 200-25 0%. In the past few years, its growth was very depressed by low credit creation, which is very support ive for growth going forwar d. Lastly, the stance of monetary policy is generally a bit stimulative. © 2017 Ray Dalio 63

41 United States United States Future Growth oject that USA's real growth rate over the next 10 years will be in the Based on our economic health index, we pr 11 out of 20 major economies, vicinity of 1.6% to 1.9%. This growth rate is roughly at the global average, ranked and 3 out of 11 developed countries. As a reminder, this estimate (and this writing) is based on our computer- generated analysis of the statistics detailed in Part 1, and doesn't account for exogenous shocks (like commodity or political shocks, or wars). In USA’s case, our growth g our expectation of a 1.5% estimate comes from combinin growth rate per worker, which is somewhat below the global average, and a labor force growth rate of 0.1% which will moderately boost growth. The growth in output per worker is driven significantly by productivity and s most, while swings in indebtedness tend to be an indebtedness. Over the long term, productivity matter important driver in the short term. Given that we are looking at a 10-year time frame, we weigh our productivity measures about two-thirds and our in debtedness measure about one-third (though there is no precision here). USA’s productivity to be somewhat worse than most major countries Over the next 10 years, we expect (implying a growth rate of 1.2% on its own), and inde btedness conditions to be slightly better than other countries (implying a growth rate of 2.9% on its own). As shown below, USA’s biggest relative strengths are its monetary policy and its level of self-sufficiency, and its biggest relative problems are its debt and debt service levels and how hard its people work. The various gauges and weights are shown below. The individual indicators and listed in the appendix of this section. Please review that are behind them are explained in Part 1 of this study, this table to understand our comments. Economic Health Index: United States Score (Standard Deviation) -4 Rank +4 1.6% to 1.9% Projected 10-Year Real Growth Rate : 11 Growth in Working-Age Population : 0.1% 7 Projected Real Growth per Worker : 1.5% 13 Component of Growth per Worker Estimate Weight 65% 12 Productivity I. Value: What You Pay vs What You Get 70% 16 i. Education 25% 14 ii. Labor Productivity 12 25% iii. Working Hard 15 25% a. Avg Hours Worked 67% 15 b. Demographics 33% 16 iv. Investing 25% 18 a. Investment ex-Housing 18 50% b. Household Savings 50% 14 II. Culture 30% 6 i. Self-Sufficiency 17% 8 a. Work Ethic 10 50% b. Government Support 25% 9 c. Rigidity of Labor Market 25% 2 ii. Savoring Life vs Achieving 6 17% a. Observed Outcomes (Work Ethic) 50% 10 b. Expressed Values 50% 1 iii. Innovation & Commercialism 17% 4 a. Outputs (e.g., patents, trademarks) 50% 4 b. Inputs (e.g., R&D, # of researchers) 50% 6 iv. Bureaucracy 7 17% v. Corruption 17% 15 vi. Rule of Law 17% 7 Indebtedness 6 35% I. Debt and Debt Service Levels 35% 15 II. Debt Flow 15% 7 III. Monetary Policy 50% 2 Scores shown as number of standard deviations away from the average observation across countries and time. © 2017 Ray Dalio 64

42 United States More Detail that are conveyed in gaug es that are made up of a As mentioned, the descriptions below are based on influences see why we are saying what composite of indicators, shown both in Part 1 and in the appendix. So, if you want to we are saying, you can trace them through by looking at those statistics. Productivity I. Value: What You Pay Versus What You Get rs, especially for its labor. As A country's productivity and competitiveness are mostly a function of the relative value it offe u get"; it reflects a) the cost as "what you pay versus what yo shorthand for this, we refer to our gauge of this relative value and value of employees and b) the levels of investment. Co untries that have well-educated workers who are relatively tes grow faster than those that don't. inexpensive and that have higher investment ra 16 among the countries we measure. Its workers are USA offers somewhat worse than average value, ranked ation USA's high levels of neither expensive nor inexpensive, taking into consider education and about average quality of education. Further, people in USA don't work hard relative to th e cost of their labor—the average male of working age works 24 hours per week (12 out of 20 countries), and the demograp hics of the workforce are low given USA's very high per capita income levels, unfavorable. Levels of saving and investing are somewhat GDP (14 out of 20 countries). with investment at about 14% of II. Culture Just looking solely at the relative value of a country's workers misses the role that the culture plays in determining how much a country will grow. As I've discussed, culture influences the decisions people make about fa ctors like savings rates or how many hours they work each week, which we measure in the previously shown indicators, but culture can also influence work attitudes, levels of efficiency, reliability, and other such influences on whether countries underperform or outperform. s, ranked 6 out of 20 countri USA's culture looks to be neutral for growth in coming year es in this culture gauge. Note that our culture measures compar e USA to countries of similar levels of economic development. Starting with self-sufficiency, USA is rated pretty well on this measure, weighing that its workers have a somewhat weak work ethic, its level of government support is neutral (with government outlays at 37% of GDP), and its labor markets are very flexible. USA also seems to value achiev ing a bit more than savoring—again, its work ethic is somewhat weak, though surveys suggest that its peop le highly value accomplishment and achievement. Furthermore, innovation and commercialism are somewhat strong in USA rela tive to income. We see the country investing heavily in research and innovation, and its outputs from innovation, including inventions and earnings, are about average. Finally, relative to its income, US A has somewhat low bureaucracy and red tape, somewhat high corruption, and somewhat strong rule of law, a ccording to the international measures we are using. Indebtedness Think of debt growth that is faster than income growth as being like air in a scuba bottle—there is a limited amount of it forever. When you are taking it out, you can spend more than that you can use to get an extra boost, but you can't live on it is sustainable, but when debts can no longer be raised relati ve to incomes and the time for paying back comes, the process works in reverse. You can get a picture of where countries stan d in the long-term debt cycle and the likelihood of debt being a support or detriment to future growth by assessing the past reliance on debt to support incomes and the attractiveness of taking on new debt. The other major piece of our economic health index looks at the likelihood of debt being a support or detriment to future growth. USA's indebtedness position is slight ly better than other countries, ranked 6 out of the 20 countries we look at. The country has very little room to lever up in the future, with a total debt burden of around 327% of GDP, compared to the global average of 200-25 0%. In the past few years, its growth was depressed by low credit creation, which is supportive for growth goin g forward. Lastly, the stance of monetary policy is generally a bit stimulative. © 2017 Ray Dalio 65

43 Australia Australia's Future Growth 's real growth rate over the next 10 years will be in Based on our economic health index, we project that Australia the vicinity of 1.5% to 1.6%. This growth rate is roug hly at the global average, ranked 12 out of 20 major economies, and 4 out of 11 developed countries. As a remind er, this estimate (and this writing) is based on our computer-generated analysis of the statistics detailed in Part 1, and doesn't account for exogenous shocks (like commodity or political shocks, or wars). In Australia’s comes from combining our case, our growth estimate expectation of a 0.8% growth rate per worker, which is well below the global average, and a labor force growth rate of 0.7% which will boost growth. The growth in output per worker is driven significantly by productivity and indebtedness. Over the long term, productivity matter s most, while swings in indebtedness tend to be an important driver in the short term. Given that we are looking at a 10-year time frame, we weigh our productivity measures about two-thirds and our in debtedness measure about one-third (though there is no precision here). vity to be somewhat worse than most major countries Over the next 10 years, we expect Australia’s producti (implying a growth rate of 1.1% on its own), and inde btedness conditions to be worse than other countries (implying a growth rate of 0.5% on its own). As shown below, Australia’s biggest relative strengths are its level ve problems are its debt and debt service levels and how of bureaucracy and its rule of law, and its biggest relati hard its people work. The various gauges and weights are shown below. The individual indicators that are behind them are explained in Part 1 of this study, and listed in th e appendix of this section. Please review this table to understand our comments. Economic Health Index: Australia Score (Standard Deviation) -4 Rank +4 Projected 10-Year Real Growth Rate : 1.5% to 1.6% 12 Growth in Working-Age Population : 0.7% 4 0.8% Projected Real Growth per Worker : 17 Component of Growth per Worker Estimate Weight Productivity 65% 14 70% 14 I. Value: What You Pay vs What You Get i. Education 25% 16 ii. Labor Productivity 25% 19 iii. Working Hard 13 25% a. Avg Hours Worked 67% 11 b. Demographics 33% 15 iv. Investing 25% 13 a. Investment ex-Housing 50% 10 b. Household Savings 10 50% II. Culture 30% 8 i. Self-Sufficiency 17% 12 a. Work Ethic 9 50% b. Government Support 25% 10 c. Rigidity of Labor Market 25% 16 ii. Savoring Life vs Achieving 7 17% a. Observed Outcomes (Work Ethic) 9 50% b. Expressed Values 50% 5 iii. Innovation & Commercialism 17% 10 a. Outputs (e.g., patents, trademarks) 50% 13 b. Inputs (e.g., R&D, # of researchers) 50% 9 iv. Bureaucracy 4 17% v. Corruption 17% 9 vi. Rule of Law 17% 8 Indebtedness 19 35% I. Debt and Debt Service Levels 35% 13 II. Debt Flow 15% 15 III. Monetary Policy 50% 16 Scores shown as number of standard deviations away from the average observation across countries and time. © 2017 Ray Dalio 66

44 Australia More Detail that are conveyed in gaug As mentioned, the descriptions below are based on influences es that are made up of a composite of indicators, shown both in Part 1 and in the appendix. So, if you want to see why we are saying what we are saying, you can trace them through by looking at those statistics. Productivity I. Value: What You Pay Versus What You Get of the relative value it offe A country's productivity and competitiveness are mostly a function As rs, especially for its labor. shorthand for this, we refer to our gauge of this relative value as "what you pay versus what yo u get"; it reflects a) the cost and value of employees and b) the levels of investment. Co untries that have well-educated workers who are relatively inexpensive and that have higher investment ra tes grow faster than those that don't. Australia offers somewhat worse than average value, rank ed 14 among the countries we measure. Its workers are somewhat expensive, even taking into consideration Au stralia's somewhat high levels of education and good quality of education. Further, people in Australia don't work especially hard relative to the cost of their labor— the average male of working age works 27 hours per week (10 out of 20 countries), and the demographics of the workforce are unfavorable. Levels of saving and investin g are roughly average given Australia's very high per capita income levels, with investment at about 26% of GDP (3 out of 20 countries). II. Culture Just looking solely at the relative value of a country's workers misses the role that the culture plays in determining how much a country will grow. As I've discussed, culture influences the decisions people make about fa ctors like savings rates or how many hours they work each week, which we measure in the previously shown indicators, but culture can also influence work attitudes, levels of efficiency, reliability, and other such influences on whether countries underperform or outperform. Australia's culture looks to be neutral for growth in comi countries in this culture ng years, ranked 8 out of 20 gauge. Note that our culture measures compare Australia to countries of similar levels of ec onomic development. Starting with self-sufficiency, Australia is rated about av erage on this measure, weighing that its workers have a roughly average work ethic, its level of government supp ort is neutral (with government outlays at 37% of GDP), and its labor markets are moderately ri gid. Australia also seems to value savoring about the same as it values achieving—again, its work ethic is roughly average, and surveys suggest that its people moderately value accomplishment and achievement. Furt hermore, innovation and commercialis m are about average in Australia relative to income. We see the country investing heavily in research and innovation, though its outputs from innovation, including inventions and earnings, are low. Fi nally, relative to its income, Australia has somewhat low bureaucracy and red tape, average levels of corruption, and somewhat strong rule of law, according to the international measures we are using. Indebtedness Think of debt growth that is faster than income growth as being like air in a scuba bottle—there is a limited amount of it that you can use to get an extra boost, but you can't live on it forever. When you are taking it out, you can spend more than is sustainable, but when debts can no longer be raised relati ve to incomes and the time for paying back comes, the process d in the long-term debt cycle and the likelihood of debt being works in reverse. You can get a picture of where countries stan a support or detriment to future growth by assessing the past reliance on debt to support incomes and the attractiveness of taking on new debt. The other major piece of our economic health index looks at the likelihood of debt being a support or detriment to future growth. Australia's indebtedness position is worse than other countries, ranked 19 out of the 20 countries we look at. The country has very little room to lever up in the future, with a total debt burden of around 355% of GDP, compared to the global average of 200-25 0%. In the past few years, its growth was supported by ing forward. Lastly, the stance of monetary policy is high credit creation, which is restrictive for growth go generally neutral. © 2017 Ray Dalio 67

45 Hungary Hungary's Future Growth Based on our economic health index, we project that Hungary's real growth rate over the next 10 years will be in the vicinity of 1.4%. This growth rate is somewhat below the global average, ranked 13 out of 20 major er, this estimate (and this writing) is based on our economies, and 9 out of 9 emerging countries. As a remind computer-generated analysis of the statistics detailed in Part 1, and doesn't account for exogenous shocks (like commodity or political shocks, or wars). In Hungary’s case, our growth estimate comes from combining our oughly in line with the global average, and a labor force expectation of a 2.2% growth rate per worker, which is r growth rate of -0.8% which will weigh on growth. The growth in output per worker is driven significantly by productivity and indebtedness. Over the long term, productivity matters most, while swings in indebtedness tend to be an important driver in the short term. Given that we are looking at a 10-year time frame, we weigh our productivity measures about two-thirds and our inde btedness measure about one-third (though there is no Hungary’s productivity to be about average compared to precision here). Over the next 10 years, we expect most major countries (implying a growth rate of 1.7% on its own), and indebtedness conditions to be better than other countries (implying a growth rate of 3.3% on it s own). As shown below, Hungary’s biggest relative strengths are its monetary policy and the value its worker s provide relative to education levels, and its biggest relative problems are its debt and debt service levels and how hard its people work. The various gauges and weights are shown below. The individual indicators that are behind them are explained in Part 1 of this study, and listed in the appendix of this section. Please review this table to understand our comments. Economic Health Index: Hungary Score (Standard Deviation) -4 Rank +4 Projected 10-Year Real Growth Rate : 1.4% 13 Growth in Working-Age Population : -0.8% 19 2.2% Projected Real Growth per Worker : 9 Component of Growth per Worker Estimate Weight Productivity 65% 10 70% 10 I. Value: What You Pay vs What You Get i. Education 25% 7 ii. Labor Productivity 25% 6 iii. Working Hard 11 25% a. Avg Hours Worked 67% 12 b. Demographics 33% 7 iv. Investing 25% 9 a. Investment ex-Housing 50% 9 b. Household Savings 6 50% II. Culture 30% 16 i. Self-Sufficiency 17% 15 a. Work Ethic 15 50% b. Government Support 25% 17 c. Rigidity of Labor Market 25% 8 ii. Savoring Life vs Achieving 17 17% a. Observed Outcomes (Work Ethic) 15 50% b. Expressed Values 50% 14 iii. Innovation & Commercialism 17% 14 a. Outputs (e.g., patents, trademarks) 50% 16 b. Inputs (e.g., R&D, # of researchers) 50% 12 iv. Bureaucracy 11 17% v. Corruption 17% 11 vi. Rule of Law 17% 16 Indebtedness 4 35% I. Debt and Debt Service Levels 35% 11 II. Debt Flow 15% 5 III. Monetary Policy 50% 1 Scores shown as number of standard deviations away from the average observation across countries and time. © 2017 Ray Dalio 68

46 Hungary More Detail that are conveyed in gaug es that are made up of a As mentioned, the descriptions below are based on influences see why we are saying what composite of indicators, shown both in Part 1 and in the appendix. So, if you want to we are saying, you can trace them through by looking at those statistics. Productivity I. Value: What You Pay Versus What You Get rs, especially for its labor. As A country's productivity and competitiveness are mostly a function of the relative value it offe u get"; it reflects a) the cost as "what you pay versus what yo shorthand for this, we refer to our gauge of this relative value and value of employees and b) the levels of investment. Co untries that have well-educated workers who are relatively inexpensive and that have higher investment ra tes grow faster than those that don't. Hungary offers around average value, ranked 10 among the countries we measure. Its workers are somewhat age levels of education and poor quality of education. inexpensive, taking into consideration Hungary's about aver especially hard relative to the cost of their labor—the average male of Further, people in Hungary don't work working age works 20 hours per week (16 out of 20 c ountries), and the demographics of the workforce are unfavorable. Levels of saving and investing are roughly average given Hungary's about average per capita income levels, with investment at about 15 % of GDP (11 out of 20 countries). II. Culture Just looking solely at the relative value of a country's workers misses the role that the culture plays in determining how much a country will grow. As I've discussed, culture influences the decisions people make about fa ctors like savings rates or how many hours they work each week, which we measure in the previously shown indicators, but culture can also influence work attitudes, levels of efficiency, reliability, and other such influences on whether countries underperform or outperform. ng years, ranked 16 out of 20 countries in this culture Hungary's culture looks to be a headwind to growth in comi compare Hungary to countries of similar levels of economic development. gauge. Note that our culture measures Starting with self-sufficiency, Hungary is rated pretty p oorly on this measure, weighing that its workers have a weak work ethic, its level of government support is high (with government outlays at 50% of GDP), and its labor voring much more than achieving—again, its work ethic markets are very flexible. Hungary also seems to value sa especially value accomplishment and achievement. is weak, and surveys suggest that its people don't Furthermore, innovation and commerci alism are somewhat weak in Hungar y relative to income. We see the country investing neither lightly nor heavily in research and innovation, and its outputs from innovation, including inventions and earnings, are very low. Finally, relative to its income, Hungary has average levels of bureaucracy and red tape, average levels of corruption, and somewhat weak rule of law, acco rding to the international measures we are using. Indebtedness Think of debt growth that is faster than income growth as being like air in a scuba bottle—there is a limited amount of it that you can use to get an extra boost, but you can't live on it forever. When you are taking it out, you can spend more than is sustainable, but when debts can no longer be raised relati ve to incomes and the time for paying back comes, the process works in reverse. You can get a picture of where countries stan d in the long-term debt cycle and the likelihood of debt being a support or detriment to future growth by assessing the past reliance on debt to support incomes and the attractiveness of taking on new debt. The other major piece of our economic health index looks at the likelihood of debt being a support or detriment to future growth. Hungary's indebtedness position is better than other countries, ranked 4 out of the 20 countries we look at. The country has very little room to lever up in the future, with a total debt burden of around 216% of GDP, compared to the global average of 200-25 0%. In the past few years, its growth was depressed by low credit creation, which is supportive for growth goin g forward. Lastly, the stance of monetary policy is generally simulative. © 2017 Ray Dalio 69

47 France France's Future Growth 's real growth rate over the next 10 years will be in Based on our economic health index, we project that France the vicinity of 0.4% to 1.0%. This growth rate is somewh at below the global average, ranked 14 out of 20 major economies, and 5 out of 11 developed countries. As a remind er, this estimate (and this writing) is based on our computer-generated analysis of the statistics detailed in Part 1, and doesn't account for exogenous shocks (like commodity or political shocks, or wa estimate comes from combining our rs). In France’s case, our growth expectation of a 1.0% growth rate per worker, which is somewhat below the global average, and a labor force The growth in output per worker is driven significantly growth rate of 0.0% which will modestly impact growth. by productivity and indebtedness. Over the long term, productivity matters most, while swings in indebtedness tend to be an important driver in the short term. Given that we are looking at a 10-year time frame, we weigh our btedness measure about one-third (though there is no productivity measures about two-thirds and our inde precision here). Over the next 10 years, we expect France’s productivity to be much worse than most major countries (implying a growth rate of -0.5% on its ow n), and indebtedness conditions to be about average compared to other countries (implying a growth rate of 2.0% on its own). As shown below, France’s biggest th, and its biggest relative relative strengths are its monetary policy and its low reli ance on credit flows for grow rd its people work. The various gauges and weights are problems are its debt and debt service levels and how ha shown below. The individual indicators th at are behind them are explained in Part 1 of this study, and listed in the appendix of this section. Please review this table to understand our comments. Economic Health Index: France Score (Standard Deviation) +4 -4 Rank 0.4% to 1.0% Projected 10-Year Real Growth Rate : 14 0.0% Growth in Working-Age Population : 10 Projected Real Growth per Worker : 1.0% 16 Component of Growth per Worker Estimate Weight Productivity 18 65% I. Value: What You Pay vs What You Get 19 70% i. Education 25% 20 ii. Labor Productivity 20 25% iii. Working Hard 25% 19 a. Avg Hours Worked 67% 20 b. Demographics 33% 14 iv. Investing 25% 11 a. Investment ex-Housing 11 50% b. Household Savings 50% 7 II. Culture 30% 17 i. Self-Sufficiency 17% 20 a. Work Ethic 20 50% b. Government Support 25% 20 c. Rigidity of Labor Market 25% 19 ii. Savoring Life vs Achieving 20 17% a. Observed Outcomes (Work Ethic) 50% 20 b. Expressed Values 50% 17 iii. Innovation & Commercialism 17% 16 a. Outputs (e.g., patents, trademarks) 50% 17 b. Inputs (e.g., R&D, # of researchers) 50% 17 iv. Bureaucracy 13 17% v. Corruption 17% 12 vi. Rule of Law 17% 12 Indebtedness 12 35% I. Debt and Debt Service Levels 35% 17 II. Debt Flow 15% 6 III. Monetary Policy 50% 6 Scores shown as number of standard deviations away from the average observation across countries and time. © 2017 Ray Dalio 70

48 France More Detail that are conveyed in gaug es that are made up of a As mentioned, the descriptions below are based on influences see why we are saying what composite of indicators, shown both in Part 1 and in the appendix. So, if you want to we are saying, you can trace them through by looking at those statistics. Productivity I. Value: What You Pay Versus What You Get rs, especially for its labor. As A country's productivity and competitiveness are mostly a function of the relative value it offe u get"; it reflects a) the cost as "what you pay versus what yo shorthand for this, we refer to our gauge of this relative value and value of employees and b) the levels of investment. Co untries that have well-educated workers who are relatively inexpensive and that have higher investment ra tes grow faster than those that don't. France offers somewhat worse than average value, rank ed 19 among the countries we measure. Its workers are somewhat expensive, taking into consideration France's somewhat low levels of education and good quality of education. Further, people in France don't work hard relative to the cost of their labor—the average male of working age works 17 hours per week (20 out of 20 c ountries), and the demographics of the workforce are unfavorable. Levels of saving and investing are roughly aver age given France's high per capita income levels, with investment at about 17% of GDP (8 out of 20 countries). II. Culture Just looking solely at the relative value of a country's workers misses the role that the culture plays in determining how much a country will grow. As I've discussed, culture influences the decisions people make about fa ctors like savings rates or how many hours they work each week, which we measure in the previously shown indicators, but culture can also influence work attitudes, levels of efficiency, reliability, and other such influences on whether countries underperform or outperform. France's culture looks to be a headwind to growth in coming years, ranked 17 out of 20 countries in this culture compare France to countries of sim gauge. Note that our culture measures ilar levels of economic development. Starting with self-sufficiency, France is rated very poorly on this measure, weighing that its workers have a weak work ethic, its level of government support is very high (with government outlays at 57% of GDP), and its labor markets are very rigid. France also seems to value savori ng much more than achieving—again, its work ethic is lue accomplishment and achievement. Furthermore, weak, and surveys suggest that its people don't va at weak in France relative to income. We see the country investing innovation and commercialism are somewh lightly in research and innovation, and its outputs from innovation, including inventions and earnings, are very low. Finally, relative to its income, France has average levels of bureaucr acy and red tape, average levels of corruption, and average rule of law, according to the international measures we are using. Indebtedness Think of debt growth that is faster than income growth as being like air in a scuba bottle—there is a limited amount of it forever. When you are taking it out, you can spend more than that you can use to get an extra boost, but you can't live on it is sustainable, but when debts can no longer be raised relati ve to incomes and the time for paying back comes, the process works in reverse. You can get a picture of where countries stan d in the long-term debt cycle and the likelihood of debt being a support or detriment to future growth by assessing the past reliance on debt to support incomes and the attractiveness of taking on new debt. The other major piece of our economic health index looks at the likelihood of debt being a support or detriment to future growth. France's indebtedness position is about average compared to other countries, ranked 12 out of the 20 countries we look at. The country has very little room to lever up in the future, with a total debt burden of around 323% of GDP, compared to the global average of 200-250%. In the past few years, its growth was depressed by low credit creation, which is supportive for growth going forward. Lastly , the stance of monetary policy is generally a bit stimulative. © 2017 Ray Dalio 71

49 Germany Germany's Future Growth s real growth rate over the next 10 years will be in Based on our economic health index, we project that Germany' ranked 15 out of 20 major the vicinity of 0.3% to 0.8%. This growth rate is somewh at below the global average, economies, and 6 out of 11 developed countries. As a remind er, this estimate (and this writing) is based on our computer-generated analysis of the statistics detailed in Part 1, and doesn't account for exogenous shocks (like commodity or political shocks, or wars). In Germany’ comes from combining our s case, our growth estimate expectation of a 1.6% growth rate per worker, which is r oughly in line with the global average, and a labor force on growth. The growth in output per worker is driven significantly by growth rate of -0.8% which will weigh productivity and indebtedness. Over the long term, productivity matters most, while swings in indebtedness tend to be an important driver in the short term. Given that we are looking at a 10-year time frame, we weigh our btedness measure about one-third (though there is no productivity measures about two-thirds and our inde precision here). Over the next 10 years, we expect Germany’s productivity to be somewhat worse than most major countries (implying a growth rate of 0.2% on its own), and indebtedness conditions to be slightly better than other countries (implying a growth rate of 2.6% on its own). As shown below, Germany’s biggest relative strengths are its monetary policy and its low reliance on cred it flows for growth, and its biggest relative problems are its debt and debt service levels and how hard its people work. The various gauges and weights are shown below. The individual indicators that are behind them ar e explained in Part 1 of this study, and listed in the appendix of this section. Please review this table to understand our comments. Economic Health Index: Germany Score (Standard Deviation) +4 -4 Rank 0.3% to 0.8% Projected 10-Year Real Growth Rate : 15 -0.8% Growth in Working-Age Population : 18 Projected Real Growth per Worker : 1.6% 11 Component of Growth per Worker Estimate Weight Productivity 16 65% I. Value: What You Pay vs What You Get 20 70% i. Education 25% 18 ii. Labor Productivity 17 25% iii. Working Hard 25% 20 a. Avg Hours Worked 67% 19 b. Demographics 33% 17 iv. Investing 25% 17 a. Investment ex-Housing 20 50% b. Household Savings 50% 8 II. Culture 30% 12 i. Self-Sufficiency 17% 16 a. Work Ethic 17 50% b. Government Support 25% 15 c. Rigidity of Labor Market 25% 13 ii. Savoring Life vs Achieving 15 17% a. Observed Outcomes (Work Ethic) 50% 17 b. Expressed Values 50% 7 iii. Innovation & Commercialism 17% 11 a. Outputs (e.g., patents, trademarks) 50% 10 b. Inputs (e.g., R&D, # of researchers) 50% 10 iv. Bureaucracy 10 17% v. Corruption 17% 5 vi. Rule of Law 17% 9 Indebtedness 7 35% I. Debt and Debt Service Levels 35% 14 II. Debt Flow 15% 4 III. Monetary Policy 50% 5 Scores shown as number of standard deviations away from the average observation across countries and time. © 2017 Ray Dalio 72

50 Germany More Detail that are conveyed in gaug es that are made up of a As mentioned, the descriptions below are based on influences see why we are saying what composite of indicators, shown both in Part 1 and in the appendix. So, if you want to we are saying, you can trace them through by looking at those statistics. Productivity I. Value: What You Pay Versus What You Get rs, especially for its labor. As A country's productivity and competitiveness are mostly a function of the relative value it offe u get"; it reflects a) the cost as "what you pay versus what yo shorthand for this, we refer to our gauge of this relative value and value of employees and b) the levels of investment. Co untries that have well-educated workers who are relatively inexpensive and that have higher investment ra tes grow faster than those that don't. Germany offers somewhat worse than average value, ra nked 20 among the countries we measure. Its workers rmany's about average levels of education and good are somewhat expensive, taking into consideration Ge in Germany don't work hard relative to the cost of their labor—the average quality of education. Further, people male of working age works 18 hours per week (19 out of 20 countries), and the demo graphics of the workforce are unfavorable. Levels of saving and investing are somewhat low given Germany's high per capita income levels, with investment at about 13% of GDP (18 out of 20 countries). II. Culture Just looking solely at the relative value of a country's workers misses the role that the culture plays in determining how much a country will grow. As I've discussed, culture influences the decisions people make about fa ctors like savings rates or how many hours they work each week, which we measure in the previously shown indicators, but culture can also influence work attitudes, levels of efficiency, reliability, and other such influences on whether countries underperform or outperform. years, ranked 12 out of 20 countries in this culture Germany's culture looks to be neutral for growth in coming of similar leve ls of economic gauge. Note that our culture measures compare Germany to countries development. Starting with self-sufficiency, Germany is rated pretty poorly on this measure, weighing that its level of government support is high (with government outlays at 44% of workers have a weak work ethic, its Germany also seems to value savoring much more than GDP), and its labor markets are neither rigid nor flexible. achieving—again, its work ethic is weak, and surveys suggest that its people moderately value accomplishment and achievement. Furthermore, innovation and commercialism are about average in Ge rmany relative to income. We see the country investing neither lightly nor heavily in research and innovation, and its outputs from innovation, including inventions and earnings, are low. Fi nally, relative to its income, Germany has average levels of bureaucracy and red tape, somewhat low corruption, and somewhat strong rule of law, according to the international measures we are using. Indebtedness Think of debt growth that is faster than income growth as being like air in a scuba bottle—there is a limited amount of it that you can use to get an extra boost, but you can't live on it forever. When you are taking it out, you can spend more than is sustainable, but when debts can no longer be raised relati ve to incomes and the time for paying back comes, the process works in reverse. You can get a picture of where countries stan d in the long-term debt cycle and the likelihood of debt being a support or detriment to future growth by assessing the past reliance on debt to support incomes and the attractiveness of taking on new debt. The other major piece of our economic health index looks at the likelihood of debt being a support or detriment to future growth. Germany's indebtedness position is slightly better than other countries, ranked 7 out of the 20 countries we look at. The country has very little room to lever up in the future, with a total debt burden of around 246% of GDP, compared to the global average of 200-25 0%. In the past few years, its growth was depressed by low credit creation, which is supportive for growth goin g forward. Lastly, the stance of monetary policy is generally a bit stimulative. © 2017 Ray Dalio 73

51 Japan Japan's Future Growth oject that Japan's real growth rate ov er the next 10 years will be in the Based on our economic health index, we pr ranked 16 out of 20 major vicinity of 0.8% to 0.9%. This growth rate is somewhat below the global average, economies, and 7 out of 11 developed countries. As a remind er, this estimate (and this writing) is based on our computer-generated analysis of the statistics detailed in Part 1, and doesn't account for exogenous shocks (like case, our growth estimate comes from combining our commodity or political shocks, or wars). In Japan’s expectation of a 1.5% growth rate per worker, which is roughly in line with the global average, and a labor force growth rate of -0.7% which will weigh on growth. The gr owth in output per worker is driven significantly by productivity and indebtedness. Over the long term, productivity matters most, while swings in indebtedness tend to be an important driver in the short term. Given that we are looking at a 10-year time frame, we weigh our btedness measure about one-third (though there is no productivity measures about two-thirds and our inde precision here). Over the next 10 years, we expect Ja pan’s productivity to be about average compared to most own), and indebtedness conditions to be slightly worse major countries (implying a growth rate of 1.6% on its than other countries (implying a growth rate of 1.6% on its own). As shown below, Japan’s biggest relative strengths are its monetary policy and its rule of law, an d its biggest relative problems are its debt and debt service levels and its aging workfo rce. The various gauges and weights are shown below. The individual indicators that are behind them are explained in Part 1 of this study, and listed in the appendix of this section. Please review this table to understand our comments. Economic Health Index: Japan Score (Standard Deviation) -4 Rank +4 0.8% to 0.9% Projected 10-Year Real Growth Rate : 16 Growth in Working-Age Population : -0.7% 17 Projected Real Growth per Worker : 1.5% 12 Component of Growth per Worker Estimate Weight 65% 11 Productivity I. Value: What You Pay vs What You Get 70% 11 i. Education 25% 12 ii. Labor Productivity 14 25% iii. Working Hard 9 25% a. Avg Hours Worked 67% 10 b. Demographics 33% 13 iv. Investing 25% 16 a. Investment ex-Housing 12 50% b. Household Savings 50% 15 II. Culture 30% 7 i. Self-Sufficiency 17% 9 a. Work Ethic 6 50% b. Government Support 25% 13 c. Rigidity of Labor Market 25% 11 ii. Savoring Life vs Achieving 9 17% a. Observed Outcomes (Work Ethic) 50% 6 b. Expressed Values 50% 12 iii. Innovation & Commercialism 17% 6 a. Outputs (e.g., patents, trademarks) 50% 5 b. Inputs (e.g., R&D, # of researchers) 50% 7 iv. Bureaucracy 12 17% v. Corruption 17% 6 vi. Rule of Law 17% 10 Indebtedness 15 35% I. Debt and Debt Service Levels 35% 19 II. Debt Flow 15% 14 III. Monetary Policy 50% 4 Scores shown as number of standard deviations away from the average observation across countries and time. © 2017 Ray Dalio 74

52 Japan More Detail that are conveyed in gaug As mentioned, the descriptions below are based on influences es that are made up of a composite of indicators, shown both in Part 1 and in the appendix. So, if you want to see why we are saying what we are saying, you can trace them through by looking at those statistics. Productivity I. Value: What You Pay Versus What You Get A country's productivity and competitiveness are mostly a function rs, especially for its labor. As of the relative value it offe shorthand for this, we refer to our gauge of this relative value as "what you pay versus what yo u get"; it reflects a) the cost and value of employees and b) the levels of investment. Co untries that have well-educated workers who are relatively inexpensive and that have higher investment ra tes grow faster than those that don't. Japan offers around average value, ra nked 11 among the countries we measure. Its workers are neither expensive nor inexpensive, taking into consider ation Japan's somewhat high levels of education and very good quality of education. Further, people in Japan don't work especially hard relative to the cost of their labor—the average male of working age works 29 hours per week (8 out of 20 countries), and the demo graphics of the workforce are unfavorable. Levels of saving and investing are some what low given Japan's high per capita income levels, with investment at about 19% of GDP (5 out of 20 countries). II. Culture Just looking solely at the relative value of a country's workers misses the role that the culture plays in determining how much a country will grow. As I've discussed, culture influences the decisions people make about fa ctors like savings rates or how many hours they work each week, which we measure in the previously shown indicators, but culture can also influence work influences on whether countries underperform or outperform. attitudes, levels of efficiency, reliability, and other such Japan's culture looks to be neutral for growth in coming years, ranked 7 out of 20 count ries in this culture gauge. e Japan to countries of similar levels of economic development. Starting Note that our culture measures compar with self-sufficiency, Japan is rated about average on this measure, weighing that its workers have a roughly average work ethic, its level of government support is high (with government outlays at 40% of GDP), and its labor markets are moderately flexible. Japan also seem s to value savoring about the same as it values achieving—again, its work ethic is r oughly average, and surveys suggest that its people don't especially value accomplishment and achievement. Fu rthermore, innovation and commerci alism are about average in Japan relative to income. We see the country investing heav ily in research and innovation, and its outputs from innovation, including inventions and earnings, are about av erage. Finally, relative to its income, Japan has average levels of bureaucracy and red tape, somewhat low corrupti on, and somewhat strong rule of law, according to the international measures we are using. Indebtedness Think of debt growth that is faster than income growth as being like air in a scuba bottle—there is a limited amount of it that you can use to get an extra boost, but you can't live on it forever. When you are taking it out, you can spend more than is sustainable, but when debts can no longer be raised relati ve to incomes and the time for paying back comes, the process works in reverse. You can get a picture of where countries stan d in the long-term debt cycle and the likelihood of debt being a support or detriment to future growth by assessing the past reliance on debt to support incomes and the attractiveness of taking on new debt. The other major piece of our economic health index looks at the likelihood of debt being a support or detriment to future growth. Japan's indebtedness position is slightly worse than other countries, ranked 15 out of the 20 countries we look at. The country has very little room to lever up in the future, with a total debt burden of around 395% of GDP, compared to the global average of 200- 250%. In the past few years, its growth was neither utral for growth going forward. Lastly, the stance of supported nor depressed by credit creation, which is ne monetary policy is generally stimulative. © 2017 Ray Dalio 75

53 Canada Canada's Future Growth real growth rate over the next 10 years will be in Based on our economic health index, we project that Canada's the vicinity of 0.8% to 1.0%. This growth rate is well below the global average, ranked 17 out of 20 major economies, and 8 out of 11 developed countries. As a remind er, this estimate (and this writing) is based on our Part 1, and doesn't account for exogenous shocks (like computer-generated analysis of the statistics detailed in case, our growth estimate comes from combining our commodity or political shocks, or wars). In Canada’s expectation of a 0.7% growth rate per worker, which is well below the global average, and a labor force growth rate of 0.1% which will modestly impact growth. The gr owth in output per worker is driven significantly by productivity and indebtedness. Over the long term, productivity matters most, while swings in indebtedness tend to be an important driver in the short term. Given that we are looking at a 10-year time frame, we weigh our productivity measures about two-thirds and our inde btedness measure about one-third (though there is no precision here). Over the next 10 years, we expect Canada’s productivity to be somewhat worse than most major countries (implying a growth rate of 1.2% on its ow n), and indebtedness conditions to be worse than other countries (implying a growth rate of 0.7% on its own). As shown below, Canada’s biggest relative strengths are its rule of law and its level of bureaucracy, and its biggest relative problems are its debt and debt service levels and how hard its people work. The various gauges and we ights are shown below. The individual indicators that are behind them are explained in Part 1 of this study, and listed in the appendix of this section. Please review this table to understand our comments. Economic Health Index: Canada Score (Standard Deviation) +4 Rank -4 Projected 10-Year Real Growth Rate : 0.8% to 1.0% 17 Growth in Working-Age Population : 0.1% 9 Projected Real Growth per Worker : 0.7% 18 Component of Growth per Worker Estimate Weight Productivity 13 65% I. Value: What You Pay vs What You Get 70% 13 i. Education 25% 13 ii. Labor Productivity 25% 15 iii. Working Hard 16 25% a. Avg Hours Worked 67% 13 b. Demographics 33% 18 iv. Investing 25% 15 a. Investment ex-Housing 50% 13 b. Household Savings 13 50% II. Culture 30% 9 i. Self-Sufficiency 17% 11 a. Work Ethic 13 50% b. Government Support 25% 11 c. Rigidity of Labor Market 25% 7 ii. Savoring Life vs Achieving 17% 11 a. Observed Outcomes (Work Ethic) 13 50% b. Expressed Values 10 50% iii. Innovation & Commercialism 12 17% a. Outputs (e.g., patents, trademarks) 50% 12 b. Inputs (e.g., R&D, # of researchers) 50% 13 iv. Bureaucracy 17% 5 v. Corruption 17% 8 vi. Rule of Law 6 17% Indebtedness 35% 18 I. Debt and Debt Service Levels 35% 10 II. Debt Flow 15% 16 III. Monetary Policy 17 50% Scores shown as number of standard deviations away from the average observation across countries and time. © 2017 Ray Dalio 76

54 Canada More Detail that are conveyed in gaug As mentioned, the descriptions below are based on influences es that are made up of a composite of indicators, shown both in Part 1 and in the appendix. So, if you want to see why we are saying what we are saying, you can trace them through by looking at those statistics. Productivity Value: What You Pay Versus What You Get I. of the relative value it offe rs, especially for its labor. As A country's productivity and competitiveness are mostly a function shorthand for this, we refer to our gauge of this relative value as "what you pay versus what yo u get"; it reflects a) the cost and value of employees and b) the levels of investment. Co untries that have well-educated workers who are relatively inexpensive and that have higher investment ra tes grow faster than those that don't. Canada offers somewhat worse than average value, rank ed 13 among the countries we measure. Its workers are neither expensive nor inexpensive, taking into consider ation Canada's somewhat high levels of education and very good quality of education. Further, people in Canada don't work hard re lative to the cost of their labor—the average male of working age works 24 hours per week (13 out of 20 countries), and the demographics of the workforce are very unfavorable. Levels of saving and inve sting are somewhat low given Canada's high per capita income levels, with investment at about 18% of GDP (7 out of 20 countries). II. Culture Just looking solely at the relative value of a country's workers misses the role that the culture plays in determining how much a country will grow. As I've discussed, culture influences the decisions people make about fa ctors like savings rates or how many hours they work each week, which we measure in the previously shown indicators, but culture can also influence work influences on whether countries underperform or outperform. attitudes, levels of efficiency, reliability, and other such Canada's culture looks to be neutral for growth in coming years, ranked 9 out of 20 countries in this culture gauge. Note that our culture measures compare Canada to of economic development. countries of similar levels Starting with self-sufficiency, Canada is rated about average on this measur e, weighing that its workers have a somewhat weak work ethic, its level of government supp ort is neutral (with government outlays at 40% of GDP), and its labor markets are very flexible. Canada also seems to value savoring a bit more than achieving—again, its work ethic is somewhat weak, and surveys suggest that its people moderately value accomplishment and achievement. Furthermore, innovation and commercialism are about average in Canada relative to income. We see the country investing neither lightly nor heavily in re search and innovation, and its outputs from innovation, including inventions and earnings, are low. Finally, relati ve to its income, Canada has somewhat low bureaucracy and red tape, average levels of corruption, and somewhat strong rule of law, according to the international measures we are using. Indebtedness Think of debt growth that is faster than income growth as being like air in a scuba bottle—there is a limited amount of it that you can use to get an extra boost, but you can't live on it forever. When you are taking it out, you can spend more than is sustainable, but when debts can no longer be raised relati ve to incomes and the time for paying back comes, the process works in reverse. You can get a picture of where countries stan d in the long-term debt cycle and the likelihood of debt being a support or detriment to future growth by assessing the past reliance on debt to support incomes and the attractiveness of taking on new debt. The other major piece of our economic health index looks at the likelihood of debt being a support or detriment to future growth. Canada's indebtedness position is worse than other countries, ranked 18 out of the 20 countries we look at. The country has very little room to lever up in the future, with a total debt burden of around 319% of GDP, compared to the global average of 200-250%. In the past few years, its growth was supported by high credit creation, which is restrictive for growth going forward. La stly, the stance of monetary policy is generally neutral. © 2017 Ray Dalio 77

55 Spain Spain's Future Growth project that Spain's real growth rate Based on our economic health index, we over the next 10 years will be in the vicinity of 0.2% to 0.7%. This growth rate is well below the global average, ranked 18 out of 20 major economies, and 9 out of 11 developed countries. As a reminder, this estimate (and this writing) is based on our computer- generated analysis of the statistics detailed in Part 1, and doesn't account for exogenous shocks (like commodity or political shocks, or wars). In Spain’s case, our grow th estimate comes from combining our expectation of a 1.0% growth rate per worker, which is somewhat below th e global average, and a labor force growth rate of - 0.3% which will moderately weigh on growth. The growth in output per worker is driven significantly by productivity and indebtedness. Over the long term, productivity matters most, while swings in indebtedness tend to be an important driver in the short term. Given that we are looking at a 10-year time frame, we weigh our productivity measures about two-thirds and our inde btedness measure about one-third (though there is no precision here). Over the next 10 years, we expect Spain’s productivity to be much worse than most major countries (implying a growth rate of -0.3% on its ow n), and indebtedness conditions to be about average compared to other countries (implying a growth rate of 2.2% on its own). As shown below, Spain’s biggest relative strengths are its low reliance on credit flows for growth and its monetary policy, and its biggest relative problems are its debt and debt service levels and how ha rd its people work. The various gauges and weights are shown below. The individual indicators th at are behind them are explained in Part 1 of this study, and listed in the appendix of this section. Please review this table to understand our comments. Economic Health Index: Spain Score (Standard Deviation) +4 Rank -4 Projected 10-Year Real Growth Rate : 0.2% to 0.7% 18 Growth in Working-Age Population : -0.3% 12 Projected Real Growth per Worker : 1.0% 15 Component of Growth per Worker Estimate Weight Productivity 17 65% I. Value: What You Pay vs What You Get 70% 15 i. Education 25% 17 ii. Labor Productivity 25% 13 iii. Working Hard 17 25% a. Avg Hours Worked 67% 18 b. Demographics 33% 10 iv. Investing 25% 10 a. Investment ex-Housing 50% 8 b. Household Savings 11 50% II. Culture 30% 18 i. Self-Sufficiency 17% 18 a. Work Ethic 18 50% b. Government Support 25% 16 c. Rigidity of Labor Market 25% 15 ii. Savoring Life vs Achieving 17% 16 a. Observed Outcomes (Work Ethic) 18 50% b. Expressed Values 8 50% iii. Innovation & Commercialism 18 17% a. Outputs (e.g., patents, trademarks) 50% 18 b. Inputs (e.g., R&D, # of researchers) 50% 16 iv. Bureaucracy 17% 18 v. Corruption 17% 16 vi. Rule of Law 17 17% Indebtedness 35% 11 I. Debt and Debt Service Levels 35% 16 II. Debt Flow 15% 1 III. Monetary Policy 9 50% Scores shown as number of standard deviations away from the average observation across countries and time. © 2017 Ray Dalio 78

56 Spain More Detail that are conveyed in gaug As mentioned, the descriptions below are based on influences es that are made up of a composite of indicators, shown both in Part 1 and in the appendix. So, if you want to see why we are saying what we are saying, you can trace them through by looking at those statistics. Productivity I. Value: What You Pay Versus What You Get A country's productivity and competitiveness are mostly a function rs, especially for its labor. As of the relative value it offe shorthand for this, we refer to our gauge of this relative value as "what you pay versus what yo u get"; it reflects a) the cost and value of employees and b) the levels of investment. Co untries that have well-educated workers who are relatively inexpensive and that have higher investment ra tes grow faster than those that don't. Spain offers somewhat worse than average value, ranked measure. Its workers are 15 among the countries we neither expensive nor inexpensive, taking into considerat ion Spain's about average leve ls of education and about average quality of education. Further, people in Spain don't work hard relative to the cost of their labor—the average male of working age works 19 hours per week (1 8 out of 20 countries), and the demographics of the workforce are unfavorable. Levels of saving and invest ing are roughly average given Spain's high per capita income levels, with investment at about 16% of GDP (10 out of 20 countries). II. Culture Just looking solely at the relative value of a country's workers misses the role that the culture plays in determining how much a country will grow. As I've discussed, culture influences the decisions people make about fa ctors like savings rates or how many hours they work each week, which we measure in the previously shown indicators, but culture can also influence work attitudes, levels of efficiency, reliability, and other such influences on whether countries underperform or outperform. in coming years, ranked 18 out of 20 countries in this Spain's culture looks to be a significant headwind to growth culture gauge. Note that our culture measures compar e Spain to countries of si milar levels of economic development. Starting with self-sufficiency, Spain is rated very poorly on this measure, weighing that its workers is high (with government outlays at 45% of GDP), and have a weak work ethic, its level of government support its labor markets are neither rigid nor flexible. Spain also seems to value savoring much more than achieving— again, its work ethic is weak, and surveys suggest that its people moderately value accomplishment and achievement. Furthermore, innovation and commercialism are very weak in Spain relative to income. We see the country investing lightly in research and innovation, an d its outputs from innovation, including inventions and earnings, are very low. Finally, relative to its inco me, Spain has somewhat high bureaucracy and red tape, somewhat high corruption, and somewhat weak rule of law, according to the international measures we are using. Indebtedness Think of debt growth that is faster than income growth as being like air in a scuba bottle—there is a limited amount of it forever. When you are taking it out, you can spend more than that you can use to get an extra boost, but you can't live on it is sustainable, but when debts can no longer be raised relati ve to incomes and the time for paying back comes, the process works in reverse. You can get a picture of where countries stan d in the long-term debt cycle and the likelihood of debt being a support or detriment to future growth by assessing the past reliance on debt to support incomes and the attractiveness of taking on new debt. The other major piece of our economic health index looks at the likelihood of debt being a support or detriment to future growth. Spain's indebtedness position is about average compared to other countries, ranked 11 out of the 20 countries we look at. The country has very little room to lever up in the future, with a total debt burden of around 329% of GDP, compared to the global average of 200-250%. In the past few years, its growth was very d. Lastly, the stance of depressed by low credit creation, which is very support ive for growth going forwar monetary policy is generally a bit stimulative. © 2017 Ray Dalio 79

57 Italy Italy's Future Growth real growth rate over the next 10 years will be in the Based on our economic health index, we project that Italy's vicinity of -0.6% to -0.2%. This growth rate is well below the global average, ranked 19 out of 20 major economies, and 10 out of 11 developed countries. As a remi nder, this estimate (and this writing) is based on our computer-generated analysis of the statistics detailed in Part 1, and doesn't account for exogenous shocks (like commodity or political shocks, or wars). In Italy’s case, our growth estimate comes from combining our well below the global average, and a labor force growth expectation of a 0.2% growth rate per worker, which is rate of -0.5% which will moderately weigh on growth. The gr owth in output per worker is driven significantly by productivity and indebtedness. Over the long term, productivity matters most, while swings in indebtedness tend to be an important driver in the short term. Given that we are looking at a 10-year time frame, we weigh our productivity measures about two-thirds and our inde btedness measure about one-third (though there is no precision here). Over the next 10 years, we expect Italy’s productivity to be much worse than most major countries (implying a growth rate of -1.5% on its own), and indebtedness conditions to be about average compared to other countries (implying a growth rate of 2.4% on its own). As shown below, Italy’s biggest th, and its biggest relative relative strengths are its monetary policy and its low reli ance on credit flows for grow problems are its debt and debt service levels and how ha rd its people work. The various gauges and weights are at are behind them are explained in Part 1 of this study, and listed in the shown below. The individual indicators th appendix of this section. Please review this table to understand our comments. Economic Health Index: Italy Score (Standard Deviation) -4 Rank +4 Projected 10-Year Real Growth Rate : -0.6% to -0.2% 19 Growth in Working-Age Population : -0.5% 15 0.2% Projected Real Growth per Worker : 19 Component of Growth per Worker Estimate Weight Productivity 65% 20 70% 18 I. Value: What You Pay vs What You Get i. Education 25% 19 ii. Labor Productivity 25% 18 iii. Working Hard 18 25% a. Avg Hours Worked 67% 17 b. Demographics 33% 11 iv. Investing 25% 14 a. Investment ex-Housing 50% 14 b. Household Savings 12 50% II. Culture 30% 20 i. Self-Sufficiency 17% 19 a. Work Ethic 19 50% b. Government Support 25% 18 c. Rigidity of Labor Market 25% 20 ii. Savoring Life vs Achieving 19 17% a. Observed Outcomes (Work Ethic) 19 50% b. Expressed Values 50% 18 iii. Innovation & Commercialism 17% 20 a. Outputs (e.g., patents, trademarks) 50% 19 b. Inputs (e.g., R&D, # of researchers) 50% 20 iv. Bureaucracy 19 17% v. Corruption 17% 20 vi. Rule of Law 17% 20 Indebtedness 9 35% I. Debt and Debt Service Levels 35% 12 II. Debt Flow 15% 3 III. Monetary Policy 50% 8 Scores shown as number of standard deviations away from the average observation across countries and time. © 2017 Ray Dalio 80

58 Italy More Detail that are conveyed in gaug As mentioned, the descriptions below are based on influences es that are made up of a composite of indicators, shown both in Part 1 and in the appendix. So, if you want to see why we are saying what we are saying, you can trace them through by looking at those statistics. Productivity Value: What You Pay Versus What You Get I. of the relative value it offe rs, especially for its labor. As A country's productivity and competitiveness are mostly a function shorthand for this, we refer to our gauge of this relative value as "what you pay versus what yo u get"; it reflects a) the cost and value of employees and b) the levels of investment. Co untries that have well-educated workers who are relatively inexpensive and that have higher investment ra tes grow faster than those that don't. 18 among the countries we measure. Its workers are Italy offers somewhat worse than average value, ranked somewhat expensive, taking into consideration Italy' s somewhat low levels of education and about average in Italy don't work hard relative to th e cost of their labor—the average male quality of education. Further, people of working age works 19 hours per week (17 out of 20 countries), and the demographics of the workforce are unfavorable. Levels of saving and investing are somewhat low given Italy's high per capita income levels, with investment at about 15% of GDP (13 out of 20 countries). II. Culture Just looking solely at the relative value of a country's workers misses the role that the culture plays in determining how much a country will grow. As I've discussed, culture influences the decisions people make about fa ctors like savings rates or how many hours they work each week, which we measure in the previously shown indicators, but culture can also influence work attitudes, levels of efficiency, reliability, and other such influences on whether countries underperform or outperform. Italy's culture looks to be a significant headwind to growth in coming years, ranked 20 out of 20 countries in this culture gauge. Note that our culture measures compar e Italy to countries of similar levels of economic development. Starting with self-sufficiency, Italy is rate d very poorly on this measure, weighing that its workers have a weak work ethic, its level of government support is very high (with government outlays at 51% of GDP), and its labor markets are very rigid. Italy also seems to value savoring much more than achieving—again, its work ethic is weak, and surveys suggest that its people don' t value accomplishment and achievement. Furthermore, innovation and commercialism are very weak in Italy relati ve to income. We see the country investing very lightly in research and innovation, and its outputs from innovation, including inventions and earnings, are very low. Finally, relative to its income, Italy has very high bureau cracy and red tape, very high corruption, and very weak rule of law, according to the inte rnational measures we are using. Indebtedness Think of debt growth that is faster than income growth as being like air in a scuba bottle—there is a limited amount of it forever. When you are taking it out, you can spend more than that you can use to get an extra boost, but you can't live on it ve to incomes and the time for paying back comes, the process is sustainable, but when debts can no longer be raised relati works in reverse. You can get a picture of where countries stan d in the long-term debt cycle and the likelihood of debt being a support or detriment to future growth by assessing the past reliance on debt to support incomes and the attractiveness of taking on new debt. at the likelihood of debt being a support or detriment The other major piece of our economic health index looks to future growth. Italy's indebtedness position is about av erage compared to other countries, ranked 9 out of the 20 countries we look at. The country has very little room to lever up in the future, with a total debt burden of around 308% of GDP, compared to th e global average of 200-250%. In th e past few years, its growth was , the stance of monetary depressed by low credit creation, which is supportive for growth going forward. Lastly policy is generally a bit stimulative. © 2017 Ray Dalio 81

59 Greece Greece's Future Growth Based on our economic health index, we project that Greece's real growth rate over the next 10 years will be in ranked 20 out of 20 major the vicinity of -1.0% to -0.9%. This growth rate is we ll below the global average, economies, and 11 out of 11 developed countries. As a reminder, this estimate (and this writing) is based on our computer-generated analysis of the statistics detailed in Part 1, and doesn't account for exogenous shocks (like commodity or political shocks, or wars). In Greece’s case, our growth estimate comes from combining our average, and a labor force growth r worker, which is well below the global expectation of a -0.6% growth rate pe rate of -0.4% which will moderately weigh on growth. The gr owth in output per worker is driven significantly by productivity and indebtedness. Over the long term, productivity matters mo st, while swings in indebtedness tend to be an important driver in the short term. Given that we are looking at a 10-year time frame, we weigh our btedness measure about one-third (though there is no productivity measures about two-thirds and our inde precision here). Over the next 10 years, we expect Greece’s productivity to be much worse than most major countries (implying a growth rate of -0.6% on its own) , and indebtedness conditions to be worse than other countries (implying a growth rate of -0.2% on its own). As shown below, Greece’s biggest relative strengths are the value its workers provide relative to education leve ls and its reliance on credit flows for growth (though compared to other countries it doesn't rate especially we ll on these measures), and its biggest relative problems are its debt and debt service levels and how hard its people work. The various gauges and weights are shown e explained in Part 1 of this study, and listed in the below. The individual indicators that are behind them ar Please review this table to understand our comments. appendix of this section. Economic Health Index: Greece -4 Score (Standard Deviation) +4 Rank Projected 10-Year Real Growth Rate : -1.0% to -0.9% 20 Growth in Working-Age Population : -0.4% 13 Projected Real Growth per Worker : -0.6% 20 Weight Component of Growth per Worker Estimate Productivity 65% 19 I. Value: What You Pay vs What You Get 70% 12 i. Education 25% 11 ii. Labor Productivity 10 25% iii. Working Hard 25% 12 a. Avg Hours Worked 67% 14 b. Demographics 33% 9 iv. Investing 25% 20 a. Investment ex-Housing 19 50% b. Household Savings 50% 17 II. Culture 30% 19 i. Self-Sufficiency 17 17% a. Work Ethic 50% 16 b. Government Support 25% 19 c. Rigidity of Labor Market 25% 14 ii. Savoring Life vs Achieving 17% 18 a. Observed Outcomes (Work Ethic) 16 50% b. Expressed Values 50% - iii. Innovation & Commercialism 17% 19 a. Outputs (e.g., patents, trademarks) 50% 20 b. Inputs (e.g., R&D, # of researchers) 50% 19 iv. Bureaucracy 17% 17 v. Corruption 17% 19 vi. Rule of Law 17% 19 Indebtedness 35% 20 I. Debt and Debt Service Levels 35% 18 II. Debt Flow 15% 13 50% 18 III. Monetary Policy Scores shown as number of standard deviations away from the average observation across countries and time. © 2017 Ray Dalio 82

60 Greece More Detail As mentioned, the descriptions below are based on influences that are conveyed in gauges that are made up of a composite of indicators, shown both in Part 1 and in the appendix. So, if you want to see why we are saying what we are saying, you can trace them through by looking at those statistics. Productivity Value: What You Pay Versus What You Get I. of the relative value it offe rs, especially for its labor. As A country's productivity and competitiveness are mostly a function shorthand for this, we refer to our gauge of this relative value as "what you pay versus what yo u get"; it reflects a) the cost and value of employees and b) the levels of investment. Countries that have well-educated workers who are relatively inexpensive and that have higher investment ra tes grow faster than those that don't. Greece offers somewhat worse than average value, ranked 12 among the countries we measure. Its workers are somewhat inexpensive, taking into c ls of education and poor quality of onsideration Greece's somewhat high leve education. Further, people in Greece don't work especially hard relative to the cost of their labor—the average male of working age works 21 hours per week (15 out of 20 countries), and the demographics of the workforce are unfavorable. Levels of saving and investing are somewhat low given Greece's about average per capita income levels, with investment at about 9% of GDP (20 out of 20 countries). II. Culture Just looking solely at the relative value of a country's workers misses the role that the culture plays in determining how much a country will grow. As I've discussed, culture influences th e decisions people make about fa ctors like savings rates or how many hours they work each week, which we measure in the previously shown indicato rs, but culture can also influence work attitudes, levels of efficiency, reliability, and other such influences on whether countries underperform or outperform. Greece's culture looks to be a significant headwind to grow th in coming years, ranked 19 out of 20 countries in this culture gauge. Note that our culture measures comp are Greece to countries of similar levels of economic development. Starting with self-sufficiency, Greece is rated very poorly on this measure, weighing that its workers have a weak work ethic, its level of government support is very high (with government outlays at 52% of GDP), and its labor markets are neither rigid nor flexible . Greece also seems to value savoring a bit more than achieving—again, its work ethic is weak, and surveys suggest that its people moderately value accomplishment and achievement. Furthermore, innovat ion and commercialism are very weak in Greece relative to income. We see the country investing lightly in research and innovati on, and its outputs from innovation, including inventions and earnings, are very low. Finally, relative to its inco me, Greece has somewhat high bureaucracy and red tape, very high corruption, and very weak rule of law, a ccording to the international measures we are using. Indebtedness Think of debt growth that is faster than income growth as bein g like air in a scuba bottle—there is a limited amount of it that you can use to get an extra boost, but you can't live on it forever. When you are taking it out, you can spend more than is sustainable, but when debts can no longer be raised relative to incomes and the time for paying back comes, the process works in reverse. You can get a picture of where countries sta nd in the long-term debt cycle and the likelihood of debt being a support or detriment to future growth by assessing the past reliance on debt to support inco mes and the attractiveness of taking on new debt. The other major piece of our economic health index looks at the likelihood of debt being a support or detriment to future growth. Greece's indebtedness position is worse than other countries, ranked 20 out of the 20 countries we look at. The country has very little room to lever up in the future, with a total debt burden of around 312% of GDP, compared to the global average of 200-250%. In th e past few years, its growth was neither supported nor depressed by credit creation, which is neutral for growth going forward. Lastly, the st ance of monetary policy is generally neutral. © 2017 Ray Dalio 83

61 Appendix A Below you’ll find more detailed descriptions of the piec es we used to construct our productivity gauge. We suggest skimming this section, perhaps tracking how a particular country does thr ough the different metrics. Table of Contents Value: What You Pay Versus What You Get ... 62 Cost of a Quality-Adjust ... 65 ed Educated Worker ... Cost of a Productivity-Adjusted Educated Worker ... ... 68 Working Hard Relative to Income ... ... 69 Average Hours Worked Relative to Income ... ... 70 Demographics Relative to Income ... ... 71 Investing Relative to Income ... ... 72 Investing as a Percent of GDP ... ... 73 ... 74 Household Savings ... ... Culture 75 ... ... 77 Self-Sufficiency ... Savoring Life ... 92 vs Achieving... Innovation and Commercialism ... ... 96 Bureaucracy ... ... 101 Corruption ... ... 103 Rule of Law ... ... 105 84 © 2017 Ray Dalio

62 Value: What You Pay Versus What You Get As previously discussed, a country’s productivity and competitiveness are mostly a function of the relative value we refer to our gauge of this it offers, especially for its labor. As shorthand for this, relative value as “what you pay versus what you get”; it reflects a) the co st and value of employees and b) the levels of investment. Countries that have well-educated workers that are relatively inexpensive and that have higher investment rates grow faster than those that don’t. To construct this gauge we first looked at the average co st of an educated worker, adjusted for the average hours worked (including the average workw eek, vacation time, and holidays) and adjusted for the quality of education (based on international tests). We also created a gauge of the productivity-adjusted cost of labor (a spot picture of how much workers offer relative to what you pay). And we created a gauge of work ing hard, where we look at the portion of the population working, and then how many hours each of those workers puts in (again adjusting for things like vacation). In addition, this gauge considers demographic sh ifts that change according to how much that society is of working age relative to those who are very young or old and dependent. We weighted these equally. This gives us perspective on the cost an d value of employees. We also added in a gauge of savings and investment that was also weighted equally. As shown in the correlations, all of these measures were individually highly effective predictors of future growth, as was the aggregate of them. On its own this gauge is 67% correlated to future growth. Most interesting are the individual country rankings by measure, which are w countries that you are most interested in and seeing shown in the charts that follow. We suggest picking a fe h the charts in this section, clear pictures will emerge. where they stand in these rankings. As we progress throug Correlation to Contribution Value: What You Pay vs What You Get Growth to Estimate 67% 45% Aggregate 66% 11.3% Cost of a Quality-Adjusted Educated Worker 57% Cost of a Productivity-Adjusted Educated Worker 11.3% 64% 11.3% Working Hard Relative to Income (2 pieces) Avg. Hours Worked Rel. Inc. 63% 7.5% Demographics Rel. Inc. 50% 3.8% Investing Relative to Income (2 pieces) 58% 11.3% 5.6% Investing %NGDP 42% Household Savings 5.6% 64% 85 © 2017 Ray Dalio

63 a country is cheap or expensive. India’s work ethic is India and China rank at the top of our measure of whether very strong, and they’re investing a lot in their economy. And while their education scores in absolute terms are not very strong, their income levels are low enough to mo adjusting for cost, China re than compensate. Before scores better than India along most measures of wh at a country offers, but Chinese incomes have grown considerably over the last two decades and India’s workforce is cheaper. Japan scores at the top of the developed countries thanks to a well-educated workforce that is fa irly cheap compared to othe r developed countries. Spain rates better in the cut below, which doesn’t weigh cultural elements like Spanish attitudes toward savoring life is expensive compared to workers of similar education versus achieving and self-sufficiency. With labor that levels elsewhere, Germany and Fran ce are at the bottom of the list. Value: What You Pay vs What You Get IN CN TH MX RU BR AR SG KR HU JP GR CA AU ES US GB IT FR DE %1 0% %2 %6 -2%0 %8 %4 : what you pay versus what you get” indicator. at the components of our “value Next, we look © 2017 Ray Dalio 86

64 A Simple Measure of Cost: Per Cap ita Income any assessment of value we want to look at the a ttributes of a country relative to their costs. Absent To make other indications of productivity or indications of what you get for workers, we’d expect relative income levels tive future growth, albeit a naïve one. Through time, alone to give you some indication of a country’s rela countries with cheap workers and low skills can leverage existing technology to increase their productive ability. Similarly, the richest countries generally do not continue to outperform the rest of the world, as their competitive less competitive economies, and the normal behavior of advantages are eaten away by technology transfers to most economies is to increasingly savor the fruits of success by working and investing less. Our measure of cost simply compares the nominal GDP pe r capita of a given country relative to the developed world average in log terms, which we believe is more refl ective of the impact of differences in income levels. ,000 difference is more meaningful a competitiveness perspective, a $2 That’s based on our intuition that, from between one country that makes $500 and one that make s $2,500 than between countries that make $40,000 and $42,000. Again, this measure of cost is one side of the picture. We combine it with our assessment of various indications of what a country offers to understan d its productivity and competitiveness (what it offers relative to its cost). Today, India is by far the lowest-cost country in our sa P is about $1,500, which is mple. Indian per capita GD much lower than that of many of the major developing Mexico, Brazil, Russia, or world countries like China, cent years, China’s cost is still one of the lowest in the Thailand. Even with its significant increase in cost in re below Mexico. However, the differences in cost by world, with per capita income of about $8,000, modestly area are significant, so that growth in China will largely depend on how de velopment will occur in areas and with people that are inexpensive. While developed world count ries in general have high incomes, it’s worth noting e, GDP per capita in the poorest European countries some differentiation between those countries—for exampl incomes of the richest developed countries, like the US and like Spain and Italy is quite a bit lower than per capita Japan. You’ll see below that based on how we look at cost, we don’t make much of the difference in cost between the developed countries—all are pretty expensiv e—but we believe there is a big difference between the cheapest emerging countries, like India and China, and the rest (including other countries like Argentina and Brazil). Per Capita Income Relative to DWA (ln, Z) NGDP Per Capita (USD) IN IN TH TH CN BR BR CN RU MX MX RU HU HU AR AR GR GR ES ES KR KR IT IT JP JP FR FR CA CA DE DE GB GB AU AU SG SG US US -1 1 2 3 4 -4 -3 -2 0 60,000 40,000 0 20,000 © 2017 Ray Dalio 87

65 Education: Cost of a Quality-Adjusted Educated Worker Our single best measure of productivity is the relative cost of a country’s educated workforce adjusted for the quality of that education. To construct our measure we lo ok at the relative cost of different cohorts of educated .g., college, high school, those without education), allowing us to get closer to the and uneducated workers (e individuals where the competition occurs. We can then look at the average cost of those workers per hour worked (adjusting for differences like vacation). Further, we take into ac count the quality of education in one as one in France, we also want to country versus another (e.g., if a high school graduate in the US costs the same ask whether the quality of high school education is the same in both countries). For this adjustment, we use an 383 That allows us to compare for a given cohort the internationally accepted measure of education quality. relative quality of workers’ education compared to the rela tive cost. To come up with an aggregate measure for a country we weight proportionally how much of its population is in each group because if a country’s workforce is highly educated, then most of the labor competition happ ens with other countries at those levels (e.g., between peers in Germany). Of course we re cognize there is some labor arbitrage drug researchers in the US and their ch lets us capture the dyna across cohorts, but this approa mic reasonably well. While there is, if anything, a negative relationship between a country’s level of education and its level of future growth (because more expensive countries tend to have more educated people who are more expensive), there of a country’s educated people and that country’s is a high correlation between the relative cheapness subsequent growth rate. To convey how important it is to consider whether these educated people are expensive e level of a country’s education and or cheap, consider that while there is a -17% correlation between the averag een cost-adjusted education le vels and a country’s future its future growth rate, there is a +66% correlation betw growth rate. 384 We show our aggregate measure below on the righ t, next to our measure of education quality on its own for perspective. Overall, India looks to have the most attr actively priced educated population, followed by Russia, with China and Mexico not far behind. Looking across educ ation levels, workers in India with similar levels of th ). When we adjust for the quality of education cost a fraction of what their peers in the US cost (around 1/20 education in India being about 50% worse on average, the cost of a quality-adjusted worker in India is still about th that of a worker in the US. This isn’t all that di fferent from how China’s workers looked 20 years ago. 1/10 Remarkably, even as wages in China have risen substant ially, so too have education levels and the quality of education—today the quality-adjusted cost of a worker in ve, though they have slipped China is still highly attracti slightly below Russia on a cost basis in the last few year s. Within the developed world, the US looks to have some of the most attractive educated workers, despit e the quality of a US high school education now being worse than in other developed countries. In contrast, Eur ope’s educated labor appears to be the most expensive in the world by this measure, even account ing for its good quality of education. 383 ity measures of the OECD’s Program for International Student Our measure of education quality is based on the education qual Assessment (PISA). PISA’s assessments are designed to test the ability to apply knowledge rather than mastery of a specific curriculum. Our aggregate measure takes into account PISA’s measures of educati on quality across mathematics, science, and reading. While we w ould not put too much weight on the specific placement/ranking of a count ry, where countries place across the range is indicative. Seven ty-two countries participated in the most recent PISA section in 2015. The PISA surveys are designed in coordination with participati ng countries and reviewed to minimize cultural bias. In some cases, as in China, recent assessments have only been conducted in a few citie s, which we make an adjustment for. 384 While we would not put too much weight in the specific placemen t/ranking of a country for educational quality, where countries place across the range is indicative. © 2017 Ray Dalio 88

66 Cost of a Quality Adjusted Educated Worker Education Quality Relative to the US (wgted by education le vel; rel. to the US) SG IN JP RU CA CN KR TH DE MX AU BR GB HU FR KR RU AR ES SG US GR IT CA HU JP CN US GR GB AR AU MX ES TH DE BR IT IN FR 100% -100% 50% -100% -50% 0% 50% 100% 0% -50% Cost of a Quality-Adjusted Educated Worker RU CN TH MX BR HU KR AR SG IN CA JP US GB AU ES DE IT FR Country GR -93% -85% -83% -81% -76% -69% -58% -57% -54% -36% -28% -10% -10% 0% 4% 12% 30% 45% 56% 77 % Cost of a Quality-Adjusted Educated Worker rel. to the US 10% -43% -21% -21% -26% -4% 9% -19% 18% -8% -6% 12% 0% 4% 4% 1% 6% -1% 2% 1% Education Quality Relative to the US 65% 97% 86% 75% 80% 80% 100% 96% 92% 82% 94% 97% 97% 99% 97% 97% 89% 97% 93% 97% % of Working-Age Pop Attained at least Primary School 76% 34% 55% 32% 36% 36% 70% 77% 42% 68% 54% 83% 72% 90% 73% 69% 44% 76% 46% 61% % of Working-Age Pop Attained at Least Secondary School 10% 5% 25% 3% 10% % of Working-Age Pop Attained at Least Tertiary School 6% 15% 30% 3% 30% 23% 23% 19% 27% 15% 19% 15% 13% 7% 11% NGDP Per Capita rel. to US 3% 14% 11% 14% 15% 22% 48% 21% 90% 31% 75% 68% 100% 73% 89% 47% 76% 54% 67% 15% Cohort Level Costs Country RU CN TH MX BR HU KR AR SG GR CA JP US GB AU ES DE IT FR IN -61% -96% -87% -90% -80% -67% -74% -71% -69% -51% -86% -37% -53% 0% -18% -23% -38% -16% -21% 1% Cost of Tertiary Educated Worker rel. to the US, Adj. for Ed. Quality Cost of Secondary Educated Worker rel. to the US, Adj. for Ed. Quality -94% -86% -84% -84% -77% -66% -63% -59% -54% -45% -39% -15% -25% 0% -2% 10% 1% 35% 29% 56% 26% Cost of Primary Educated Worker rel. to the US, Adj. for Ed. Quality -79% -74% -68% -60% -41% -33% -47% -5% 2% -80% 46% 0% 32% 41% 77% 1 07% 98% 131% -88% Cost of Literate, Uneducated Worker rel. to the US -93% -80% -87% -85% -84% -85% -51% -37% -82% -9% -40% 16% 67% 0% 0% -9% 12% 93% 3% 53% -38% Cost of Illiterate, Uneducated Worker rel. to the US -79% -91% -89% -89% -93% -47% -38% -86% -94% -44% 12% 78% 0% -5% -18% -8% 101% -8% 57% © 2017 Ray Dalio 89

67 Below we take a more granular look at our measure for ea which we use to build up ch cohort of education level, For example, in the US college-educated to the aggregate picture. This approa ch gives us a much richer picture. workers adjusted for quality are more expensive than college-educated workers in Spain. But at the high school level and below, workers in the US are much cheaper than those in Spain. And since that’s where the competition occurs between most workers for these countr ies, overall the US comes out more attractive. We show below some other points we find interesting. Educated Persons Cost Per Hour Worked, Adjusted for Education Quality (Indexed to US, by Education Level) Both India and Country Wt Avg Literate Illiterate Tertiary Secondary Primary Russia’s workers cost -94% -93% -94% -96% -88% -93% IN a fraction relative to RU -79% -85% -86% -86% -80% -80% the US, and India’s 1/25 CN -83% -87% -84% -79% -87% -91% workers are 2/3 the the US cost of Russia’s when -89% -90% -85% -74% -84% TH -81% adjusting for quality. -68% -84% -89% MX -76% -80% -77% India’s workers are -60% BR -69% -67% -66% -85% -93% least costly at higher levels of education -58% -41% -47% HU -74% -63% -51% (especially tertiary). KR -38% -37% -33% -59% -71% -57% -82% -47% -69% -54% -54% -86% AR -5% -9% -36% -38% SG -45% -51% GR -28% -61% -39% 2% -40% -44% 16% 12% 26% -15% -37% -10% CA Less educated -25% 46% 67% 78% -10% JP -53% workers in the US US 0% 0% 0% 0% 0% 0% appear much lower cost than in the rest of 4% -18% -2% 32% 0% -5% GB the developed world -23% 10% -9% AU 41% -18% 12% (though less so than 77% 12% -8% ES -38% 30% 1% in the past). European labor looks especially DE 45% -16% 101% 35% 107% 93% expensive at these IT 56%-21%29%98% 3% -8% levels. 56% FR 77% 1% 131% 53% 57% 94% 22% -16% 54% 41% Dev. World 58% EM. World-68%-75%-70%-57%-68%-72% Cost of labor in the emerging world is less than half the cost of the developed world, and least expensive at lower education levels. © 2017 Ray Dalio 90

68 Cost of a Pr oductivity-Adjusted Educated Worker To triangulate our picture of the cost of an educated wo rker, we also look at the cost adjusting for observed than education quality. With this measure, we take differences in productivity (output per hour worked) rather the same approach of looking at the cost of the differ ent cohorts. By adjusting for differences in observed two workers of the same productivity today we can get a better sense of the effective cost. Imagine you hire oductive from day one on the job. This measure helps cost: one has a better education, but the other is more pr incomes than our quality- us weigh that second perspective, though it is somewhat less correlated with future adjusted measures—about 57%. Our measures are below. The overall picture isn’t all th at different. India looks tivity is quite strong. In contrast, Japan falls lower even stronger on this measure since their observed produc down. Observed Productivity-Adjusted Cost Cost of a Prod-Adjusted Educated Worker (rel. to the US) (wgted by education level; rel. to the US) HU IN IN RU RU TH TH CN MX MX FR HU SG BR IT AR DE KR ES GR GR SG GB US KR ES US CA BR JP JP GB CA DE CN IT AR AU AU FR 50% 100% -100% -50% 0% 100% 0% -50% 50% -100% Cost of a Productivity-Adjusted Educated Worker Country IN RUTHCNMXHUBRARKRGRSGUS ESCA JP GBDE IT AUFR -97% -90% -88% -82% -82% -79% -75% -57% -50% -47% -40% 0% 5% 12% 17% 20% 29% 34% 49 %50% Cost of a Productivity-Adjusted Educated Worker rel. to the US -7% 45% 40% 39% -8% 36% 52% -2% -10% 5% 22% 26% 0% 25% -7% Observed Productivity-Adjusted Cost rel. to the US 9% 26% 26% -21% 28% Cost of Tertiary Educated Worker rel. to the US -98% -92% -88% -84% -75% -76% -74% -68% -64% -42% 0% -37% -31% -48% -15% -11% -22% -20% 3% -86% -35% Cost of Secondary Educated Worker rel. to the US -87% -85% -82% -65% -75% -62% -55% -44% -86% 0% 2% -6% -16% 2% 42% 28% 14% 60% -97% Cost of Primary Educated Worker rel. to the US -93% -79% -80% -80% -75% -43% -71% -57% -26% -6% 12% 0% 79% 39% 63% 36% 119% 96% 47% 136% -9% Cost of Literate, Uneducated Worker rel. to the US -85% -87% -84% -51% -85% -82% -37% -40% -80% 0% 12% 16% 67% 0% 93% 3% -9% 53% -93% 57% -94% -79% -89% -91% -89% -47% -93% -86% -38% -44% -38% 0% -8% 12% 78% -5% 101% -8% -18% Cost of Illiterate, Uneducated Worker rel. to the US © 2017 Ray Dalio 91

69 Working Hard ardworking countries will generally be more productive and find ways to Just like hardworking individuals, h improve faster than those that are less hardworking. We believe a country’s work ethic impacts both the level of its relative advantage today and the pace at which it learns and improves over time. Working hard doesn’t just hic, a determination to achieve quality outcomes, and to mean working a lot of hours; it means having a certain et ct the work ethic of a society—when a society ages and the number of improve. Demographics can also impa dependents rises relative to those in the workforce, it can impact the overall work ethic of the society. Similarly, when there is a boom of young professionals, it can improve the vibrancy, initiative, and determination of the society. We expect a country with a hardworking society that is low-cost to be more competitive and grow faster than a country with a population that prefers leisure and is expensive. erage weekly hours of actual work by To construct a simple measure of working hard, we look at two pieces: 1) av men in the labor force, adjusting for things like vacation time and holidays, and 2) shifts in the amount of the population as a whole that is working. While the number of hours worked is just one measure of the effort a country puts in, and doesn’t account for the determination and effort put in during those hours, it gives us a decent starting point; we return to some other measures that triangulate our picture when we look at culture. This gauge, when income-weighted, has a 64 % correlation with subsequent 10-year growth. We look at our aggregate measure below first, followe Asian workers are generally d by components. Emerging the hardest workers in the world, including China, India, and Thailand. Mexico also stands out as particularly hardworking. Among the richer countries , Singapore is by far the hardest working (competitive with much poorer countries), and Japanese workers are some of the most hardworking of developed countries, followed by the English-speaking developed countries. Continental Europea n workers are generally the least hardworking in the s in place, though India’s relative cheapness makes it world. Adjusting for cost largely keeps these divergence look more attractive. Working Hard Working Hard (Income Adjusted) IN IN MX TH TH MX CN CN SG BR AR AR BR RU JP SG KR JP AU KR RU HU GB GR US AU CA GB GR US HU CA ES ES IT IT FR DE DE FR 1 0 -1 -2 -3 2 3 4 4 3 2 1 0 -1 -2 -3 -4 -4 © 2017 Ray Dalio 92

70 Working Hard Subcompone nt: Average Hours Worked the portion of the population working, and then how When looking at whether a country works hard, we look at many hours each of those workers puts in. Regrettably, we must look at this measure for just men in the labor force because different social norms across countries around women in the workforce distort the numbers, and where data is limited. we must adjust for things like labor force participation, vacation time, and holidays Thailand, India, and Ch ina are at the top, with Mexico not far behind When we look at hours worked on its own, and Singapore by far the hardest working of the wealthier countries. The Europeans work the least. Japanese workers, who used to be among the very hardest working in the world, still rank well on this metric but are now toward the middle. When we look at this measure of wo rking hard adjusted for cost, we see some countries ou will, is particularly attractive in India, and especially really stand out on either end—the dollar cost of effort, if y bad in Europe. Average Hours Worked (Cost Adjusted) Average Hours Worked IN TH TH IN CN CN MX MX BR SG KR AR SG AR JP RU BR KR AU JP AU RU HU US CA CA GB GR US GR HU GB IT IT ES ES DE DE FR FR 2 4 1 0 -1 -2 -3 -4 3 3 2 1 0 -1 -2 -3 -4 4 Avg. Hours Worked Country TH IN CN MX SG KR AR JP BR AU RU US CA GB GR HU IT ES DE FR Avg. Actual Hours Worked per Working-Aged Male 36 35 35 34 30 30 29 28 27 26 24 24 23 21 20 19 19 18 17 36 38 Male Reported Avg. Hours Worked (ex-Vacation) 47 46 46 43 43 44 38 39 47 37 36 37 41 37 36 35 29 30 45 Male Labor Force Participation 81% 80% 78% 80% 77% 72% 75% 70% 81% 72% 72% 69% 71% 69% 63% 60% 60% 66% 66% 61% 5% Unemployment Rate (10yr Avg.) 4% 4% 5% 2% 3% 8% 4% 9% 1% 6% 7% 7% 7% 17% 9% 9% 18% 7% 9% © 2017 Ray Dalio 93

71 Working Hard Subcomponent: Demographics what they contribute, and typically one’s working years There is a natural cycle to how hard a person works and ve ones. So it follows that societies go through long ebbs and flows in are the hardest working and most producti terms of how hard they work in aggregate, based on how much of that soci ety is of working age versus very young or old and dependent. Demographic pressures are measured by the projected change in the dependency ratio over the next 10 years. This represents the projected rise or decline in the pr oportion of a country’s population that is young or old relative to those of working age. Our expectation is that a rise in the proportion of dependents (e.g., elderly e overall work effort in society and th ereby for growth, all else equal. individuals) would be a negative for th In general, most countries in the world today—and partic ularly developed countries—are likely to see a drag on their future growth in income per worker from these demo graphic shifts, due to aging populations. This impact is particularly acute for Canada but significant for the US, Europe, the UK, and Japan as well. The picture is more mixed in the emerging world. Demographic pressures are a support in India and Mexi co but a drag in China, Russia, and Korea due to their aging populations. Adjustin g for cost levels exacerbates the negative picture for Mexico are the two countries that stand out as having a the developed world. In the emerging world, India and oks more muted in most of the rest, including China. positive pressure after adjusting for cost; the pressure lo Demographics (Cost Adjusted) Proj. Annual Change in Dependency Ratio IN IN MX MX BR AR AR BR ES TH GB CN HU GR RU IT GR CN TH ES HU IT FR GB JP JP AU FR RU AU US US DE DE CA CA SG KR SG KR 3 2 1 0 -1 -2 -3 -4 1.0% 1.5% 4 0.5% 0.0% -0.5% © 2017 Ray Dalio 94

72 Investi ng ow faster by creating capita l equipment and infrastructure Countries that save and invest in their future tend to gr that helps improve the productivity of their workforce re lative to other countries with more limited investment rates. Further, high rates of savings provide the capital needed to invest in the most innovative companies. Of course, there are always risks that this investment is unp roductive. Typically, the investments that yield the most productivity gains occur in emerging countries that are ju st becoming rich. At this stage, the investments are not just inexpensive; the stock of infrastructure and other phys ical capital is also typically low and there is lots of ry’s potential. room to adopt existing technologies that can radically improve the count fixed investment in a given economy and 1) the rate of total non-residential Investing is measured by looking at 2) the househ with future old savings rate. Looking at investing on its own has historically had a 20% correlation hen combined with cost it ha growth, but w s had a 58% correlation with future growth. The rate of Chinese investment and savings is the hig t in the world, though increasingly inefficient. The hes siness investment have been important contributors to development of modern infrastructure and increasing bu the productivity growth of the Chinese workforce over the last few decades—though an increasing share of this investment is going to less productive uses. The UK, Germany, and the US are on the lower end of investing rates for the developed world once adjusted for income. Argentina, Hungary, and Russia have some of the lowest investment rates in the emerging world (wit h investment in Argentina and Hungary particularly toward resources and related infrastructure). When depressed and much of the investment in Russia oriented in many emerging countries, you consider how inexpensive it is to make investments how limited their existing existing technologies, not to mention building their own, stock of capital is, and how early they are in adopting India and China really stand out. On the flip side, we become more concerned about the US and the UK maintaining their technology advantage when we consider their expense and their lower levels of investment. (The innovativeness of countries is a question we return to in culture, and on that dimension both countries look more promising.) Investing Investing (Cost Adjusted) CN IN CN SG TH IN BR KR SG AU MX FR BR KR RU US HU TH ES ES CA FR DE AR AU MX IT JP GB CA JP IT HU DE US RU AR GB GR GR -3 -2 0 -4 -4 -3 -2 -1 0 1 2 3 4 1 2 3 4 -1 © 2017 Ray Dalio 95

73 Investi ng Subcomponent: Aggregate Fixed Investment Rates to flow through, so when we look at investment rates The impact of investing on long-term prosperity takes time in a country we want to see what the trend has been, not just what happened recently. And we want to pay . Moreover, not all types of investment produce income. attention to the level of investment rates, not the wiggles While it’s hard to assess that well, one thing we know is that real estate investments are generally not to exclude those as best we can. productivity enhancing, so we want For these reasons, we measure the rate of investment for a given country by looking at the average level of fixed investment as a percentage of stripping out residential real estate. GDP in the economy over the last seven years, As highlighted above, on this measure China is ranked at the top. The US and Germany are below the cut— investment levels in those countries stagnated for some ti me. The impact of adjusting for cost puts India at the top just above China, and Germany an d the US move closer to the bottom, with Japan modestly above them. Investment ex-Housing %GDP Investment ex-Housing %GDP (Cost Adjusted) CN IN SG CN KR KR ES TH FR SG GB BR JP MX TH ES AU HU MX AU US FR CA JP BR CA IN IT IT RU HU GB DE AR RU US GR GR AR DE 1 2 3 4 20% 30% 10% -4 -3 -2 -1 40% 0% 0 © 2017 Ray Dalio 96

74 ng Subcomponent: Household Savings Rates Investi Savings provide financing for investments, so measuring savings provides another perspective into the resources a country has to productively invest. When you look at a count ry that is saving a lot when it is still poor, that is oductivity gains, for the re asons we have explained. the period when its savings typically yield the highest pr rough the process described previously—countries that are Patterns of savings also relate to countries moving th fast becoming rich tend to save a lot, and richer countries past their peak tend to draw down their savings. vings as a percentage of We measure the propensity for households to save by l ooking at average household sa household income over the last seven years. d savings. Major European countries measure as having Once again, China and India rank at the top for househol fairly high household savings rates relative to other de veloped countries, while household savings rates in the UK and Japan are notably lower. Adjusting for cost levels again widens the differences between the emerging and l of Indian and Chinese savings standing out and savings developed world along this dimension, with the high leve rates in the US and Japan quite low. Household Savings Rate (Cost Adjusted) Household Savings Rate IN CN CN IN RU RU TH DE MX FR HU KR FR AU DE US KR HU AU MX ES CA IT TH CA IT US ES JP JP GB GB GR GR 0 -3 -4 4 3 2 1 -1 -2 40% 20% 0% -20% © 2017 Ray Dalio 97

75 Culture Just looking solely at the relative value of a country ’s workers misses the role that the culture plays in determining how much a country will grow. As I’ve discussed, culture influences the decisions people make about factors like savings rates or how many hours they work each week, which we measure in the previously shown indicators, but culture can also influence work atti tudes, levels of efficiency, reliability, and other such influences on whether countries underperform or outperform. While some people shy away from examining culture because it is perceived as a sensitive subject and/or difficult to measure, I think those views are mistaken. I don’t see any reason why we shouldn’t look at culture objectively as we do any other element of an economy; also, it can be well measured. I think that it’s unfortunate that this important influence on economic well-being has not been well studied. To be clear, I don’t mean to judge whether a culture is good or bad any more than I could judge whether working hard is a better way to live one's life than savoring the pleasures of life. I am, however , confident that people who will work and produce differently in ways that we should understand. prefer savoring life over working hard Similarly, it makes intuitive sense that countries that emphasize individual self-reliance and striving to achieve are more likely to succeed than countries that don't. Countries can also outperform if the people in them are more innovative in producing new products and ideas of value and are more commercially minded in harvesting them. On the other hand, it makes sense that countries w ill underperform if they are co rrupt, bureaucratic, or if the rule of law is unsound. In this section we will look at the relationships between measures of such factors and future growth, and we will examine how different countri es stack up against these measures and what that implies for their future growth rates. Some additional observations worth noting are as follows: people in poorer countries typically appear to value achieving because they need to work hard to sustain them selves, but as countries get richer, people tend to put more emphasis on enjoying their success. On an individu al level, people spend more time relaxing; nationally, you can see it in countries turning away from policies th at maximize growth toward policies that try to make society more equal or protect the environment. There is a strong correlation between the quality of a system’s institutions (whether the system works) and a country’s le vel of income. Similarly, richer countries seem more innovative because they can afford to invest more in conducting research or educating researchers, and to start businesses and reap the potential rewards. developed capital markets in rich countries make it easier Our goal with the culture indicator is to capture the essence of whether a country’s culture is conducive to dimension of our culture gauge, we growth, regardless of the influence of it s stage of development. So, for each oxy for the country’s development stage). me on that dimension (using income as a pr take out the effect of inco For the reasons we have described above, the culture gauge focused on the elements of culture we believe matter most for a country’s future grow th: 1) self-sufficiency, 2) savoring life versus achieving, 3) whether its society fosters innovation and commercialism, 4) bureaucracy, 5) corruption, and 6) rule of law. For simplicity, ich balances measures related to the motivations of the we put equal weight on each of our culture indicators, wh individual and how the system operates. Because we t ook out the effect of income, each of the pieces is correlated to growth without being correlated at all to the income level of the country. The table below summarizes our weighting of the various gauges. Overall this gauge is about 62% correlated with future growth. Contribution Correlation to Culture Growth to Estimate 62% 20% Aggregate Self-Sufficiency ex-Income Effect (3 pieces, 9 sub-pieces) 42% 3.3% Savoring Life vs Achieving ex-Inc (2 pieces, 8 sub-pieces) 3.3% 37% Innovation & Commercialism ex-Inc (2 pieces, 10 sub-pieces) 65% 3.3% Bureaucracy ex-Inc (3 pieces) 43% 3.3% 3.3% Corruption ex-Inc (4 pieces) 63% 3.3% 59% Rule of Law ex-Inc (4 pieces) 98 © 2017 Ray Dalio

76 Again, the way we think about culture is that a country’s competitiveness and producti vity are mainly a function of its value proposition, but culture can be a drag or additional boost. So we use our gauge of culture to adjust our measure of a country’s productivity by shifting it up or down based on whether the country’s culture is likely to be a pressure for the country to perform above or below its potential. In the following paragraph, we look at our culture indica tor’s current readings before diving into its individual pieces and describing our logic behind them in more depth. Culture shifts our predictions for future growth some. Based on this gauge, culture is the strongest support to , China, and Korea. Singapore’s culture is strong across growth in Asia, particularly in Singapore, India, Thailand all four of our measures. In contrast, China’s institutio ns aren’t nearly as effective (due to bureaucracy and work ethic, desire to achieve, and self-sufficiency. corruption), but China’s culture shows an extremely strong For Korea, its orientation toward innovation and work ethi c offsets relatively weak institutions. The US stands hievement orientation, but with a system that prioritizes just behind Korea, with a highly innovative spirit and ac moderate support in Japan, more neutral in the rest of redistribution over maximizing growth. Culture is a more the English-speaking developed world and Germany, and a drag in Latin America and most European countries, especially the periphery. In Europe’s periphery, corruption, a focus on savoring life, relatively low self-sufficiency, and stagnant commercial and scientific environments appear to be material drags on growth. Russia and Argentina, two of the countries where our measures of what you pay versus what you get are attractive, also score near the bottom of the list because of corruption in Russia and low self-sufficiency and a high value on savoring life relative to achieving in Argentina. Culture SG IN TH CN KR US JP AU CA MX GB DE BR AR RU HU FR ES GR IT 2.0% -1.5% 1.5% 1.0% 0.5% 0.0% -0.5% -1.0% -2.0% © 2017 Ray Dalio 99

77 ncy Self-Sufficie eve that self-sufficiency (i.e It is both logical and consistent with the evidence to beli ., the need and the ability to independently support oneself) is an important ingredient for individuals and societies to be successful. It is not controversial to say that people spend the money that th ey earn differently than the money that others give them—i.e., that the connection between earning and spending is a healthy one. If people have to earn money to run, living standards rise as a function of increases in spend it, they have to be more productive. Over the long countries with greater amounts of self-sufficiency do better productivity. So, it is not a big leap to presume that capability and independence in addition to fostering than those with less. Since self-sufficiency creates self-esteem. For these reasons, it is increased production, it also produces logical to conclude that self-reliance is rewarding, both economically an d psychologically. The evidence clearly shows this to be true. and how it has been correlated with subsequent economic Below, we show how self-sufficiency varies by country gnificant differences in self-sufficien cy levels between countries and that growth. You will see that there are si e, in some cases they are chosen (e.g., the amounts of these differences occur for different reasons. For exampl transfer payments developed economies have are largely chosen) while in ot her cases they are not (e.g., high self-sufficiency in the poorest societies is primarily the re sult of necessity rather than choice). Nonetheless, the evidence is clear. Societies in which individuals are mo re responsible for themselves grow more than those in which they are less responsible for themselves. To measure self-sufficiency, we weig hted 50% on how hard a society works and 50% on the system of supports and protections, which is a function of the magnitude of government supports and how rigid labor markets are these perfectly measures self-sufficiency, together they (e.g., how easy it is to hire and fire). While no one of paint a picture that is highly indicative. Once we used the process below to construct a score, we took out the ufficiency and used the resulting measur e in our culture indicator. Overall role income plays in encouraging self-s our indicator of self-sufficiency is about 42% correlated to growth once you strip out the effect income has on self-sufficiency. Correlation to Contribution Self-Sufficiency to Estimate Growth 42% 100% Aggregate ex-Income Effect Aggregate 52% -- Work Ethic 50% 49% Average Hours Worked 53% 25% Labor Force Participation 32% 8.3% Effective Retirement Age (% of Life Expectancy) 32% 8.3% Actual Vacation + Holidays Per Year 8.3% 46% Government Support 44% 25% 12.5% Transfer Payments to HH, % PGDP 60% 12.5% 46% Gov Outlays as % of PGDP Rigidity of Labor Market 9% 25% Collective Bargaining as % of Workforce 40% 8.3% Ease of Hiring/Firing 26% 8.3% 8.3% -15% Minimum Wage as % of Average Income Note: the correlation of transfers s and smaller sample set, and will have some bia to future growth is for a shorter time period because of countries with lower growth having higher transfers. © 2017 Ray Dalio 100

78 The charts below convey those countries that are most se hown, Singapore and Thailand lf-sufficient today. As s are measured as most self-sufficient, followed by other Asian countries and Mexico. The US is in the middle, and European countries are the least self-sufficient. The chart be low shows these ratings. Look at it to see if you are surprised and note those surprises so that you can see what they are attributable to when we show you the composition of our barometer. For ex ample, you might find it notable that “communist” China has greater self- sufficiency than the capitalist US. This is the case in both outright terms and once you adjust for income. Self-Sufficiency (ex-Income Effect) Self-Sufficiency SG SG MX TH TH MX IN IN KR CN CN KR RU RU US AR JP US AR JP CA BR AU CA BR AU GB GB HU HU DE DE GR GR ES ES IT IT FR FR -1 0 1 2 3 4 -4 -3 -2 -2 -4 4 3 2 1 0 -1 -3 © 2017 Ray Dalio 101

79 ncy Subcomponent: Work Ethic Self-Sufficie Societies that are self-sufficient have a high percentage of their populati on working hard each day to be self- produce more in the near-term and gene reliant. People who work hard both rally find ways to improve faster through time than those that care more for leisure. They also tend to exhibit a drive to earn what they consume, which is an essential quality of being self-reliant and generally successful in a market-based system. goal within productivity of getting a gauge of how While we think average hours worked accomplished our basic hard people worked, here we wanted to capture a little more richness about the work ethic of each country, so cation days people in each country we also looked at measures like the typical retirement age, how many va Again, regrettably we must look at our hours worked and typically take male labor force participation on its own. labor force measures for just men because different social norms across countries on female participation in the workforce distort the numbers. Since we expect richer count ries to take more leisure than poorer ones, this is rong relationship with a country’s income level. one of the measures we expect to have a fairly st When we scan across countries, we see emerging countries at the top of the list, including India, Thailand, and Mexico. Overall, emerging Asia and Latin America come through as working the hardest. Among rich countries, hardworking among developed countries, Singapore and then Japan have the ha rdest workers. The US is fairly whereas workers in Europe appear to opt for leisure more than anyone else based on these measures. Once we take more leisure time, Japan really stands out as take into account the tendency for wealthier countries to exceptionally hardworking (as do Korea and Singapore). Br azil moves down a bit. Still, the relative ordering of most countries is fairly stable since the differences in how hard each country works are fairly extreme. Any way working countries and workers in Europe some of the you cut it, Mexico and India remain among the hardest- most leisure-taking. Self-Sufficiency: Work Ethic Self-Sufficiency: Work Ethic (ex-Income Effect) MX SG TH MX IN TH SG IN KR KR CN JP JP CN AR AR RU AU BR US AU RU US BR CA CA GB GB HU HU GR GR ES DE DE ES IT IT FR FR 3 2 1 0 -1 -2 -3 -4 4 4 3 2 1 0 -1 -2 -3 -4 eces of our work ethic gauge. Below, we show the individual pi Work Ethic Measures Country MXTHINSGKRCNJPARRUBRAUUS CAGBHUGRESDE IT FR Avg. Actual Hours Worked (Hrs/wk) 35 36 34 30 35 29 30 26 28 27 24 24 23 20 21 19 18 19 17 36 39 Male Reported Avg. Hours Worked (ex-Vacation) 47 46 43 47 44 43 38 38 45 37 36 37 37 41 35 29 36 30 46 Labor Force Participation (% Working-Age Population) 80% 81% 80% 77% 72% 78% 70% 75% 72% 81% 72% 69% 71% 69% 60% 63% 66% 66% 60% 61% 79% Effective Retirement Age (% of Life Expectancy) 84% 82% 90% 82% 84% 83% 84% 81% --- 81% 78% 78% 81% 76% 76% 77% 74% 72% 88% 8.4 4.1 6.0 6.7 5.2 5.1 4.4 5.0 7.0 7.4 6.5 4.9 4.8 4.6 6.5 8.2 7.8 8.0 6.9 6.9 Actual Vacation+Holidays Per Year (Weeks) © 2017 Ray Dalio 102

80 Self-Sufficie ncy Subcomponent: Wo rk Ethic—Average Hours Worked eliant, that he or she has grit. This determination is Hard work is a sign that someone is driven to be self-r essential to having a society where self-sufficiency is promoted and rewarded. A simple way to see it is just by looking at how many hours those who have a job put in. This gives us a sense of how hardworking the employed members of a society are (and, more loosely, the society in aggregate). Below we zoom in on the simple ure with a broader set of measures next). On this measure: the average work week (we triangulate our pict e top of the list, including China, In dia, and Mexico. Overall, emerging measure we see emerging countries at th Asia comes through as working the hardest, followed by Latin America. Among rich countries, Singapore and The US is fairly hardworking among developed countries (though Australia then Japan have the hardest workers. comes out reasonably ahead), whereas workers in Europe opt for leisure more than anyone else based on these measures. Average Hours Worked (Hrs/wk) CN IN MX SG TH JP AR KR GR AU BR RU HU US GB CA IT ES FR DE 50 30 20 40 Avg. Hours Worked TH IN CN MX SG Country AR JP BR AU RU US CA GB GR HU IT ES DE FR KR Avg. Actual Hours Worked per Working-Aged Male 36 36 35 35 34 30 30 29 28 27 26 24 24 23 21 20 19 19 18 17 38 Male Reported Avg. Hours Worked (ex-Vacation) 47 46 46 43 43 44 38 39 47 37 36 37 41 37 36 35 29 30 45 Male Labor Force Participation 81% 80% 78% 80% 77% 72% 75% 70% 81% 72% 72% 69% 71% 69% 63% 60% 60% 66% 66% 61% 5% Unemployment Rate (10yr Avg.) 4% 4% 5% 2% 3% 8% 4% 9% 1% 6% 7% 7% 7% 17% 9% 9% 18% 7% 9% © 2017 Ray Dalio 103

81 Self-Sufficie ncy Subcomponent: Work Ethic—Labor Force Participation Remember, what we are trying to get at with this concept is the work ethic of a society, not just how much it is ation is one indication (albeit crude) of how much a society wants to work. actually working. Labor force particip It gives you a rough sense of what proportion of the society is actively looking for a job (though it may miss some who have the drive but are in the in formal economy). Because of cultural differences across countries and data ing at male labor force participation. By and large the limitations, here again we are unfortunately limited to look emerging world has much higher male labor force particip ation rates than the developed world, though there are ve some of the highest rate s (all around 80%). There is exceptions. Brazil, Thailand, Mexico, India, and China ha apore (above 75%), despite its wealth. Japan has a high still a high participation of men in the workforce in Sing though its female participation is male labor force participation rate among developed countries (above 70%, low compared to other developed countries). This me asure is a bit lower in the US and UK. Labor force particularly Italy, France, and Greece (60% to 65%), participation is lowest among men in Western Europe, parts of Eastern Europe, especially H though Germany and Spain are not far behind, along with ungary. Labor Force Participation (% of Working-Age Population) BR TH MX IN CN SG AR KR RU AU CA JP US GB DE ES GR FR HU IT 0%8 0% 0%7 0%9 50%6 © 2017 Ray Dalio 104

82 Self-Sufficie ncy Subcomponent: Work Ethic—Actual Vacation Time nother intuitive measure of how much it values leisure cation a society takes each year is just a How much va versus hard work and its rewards. When we look at this measure, the picture isn’t all that different from what we have seen so far. Mexico and China are at the top of the list, with the average vacation time taken and holidays adding up to around four weeks per year. The norm in th e US is about four to five weeks. French and Spanish Italian and Greek workers not far behind. On average, workers appear to take some of the most vacation, with Europeans take seven to eight weeks of time off work per year. Actual Vacation Time (Weeks Per Year) MX CN CA US AU JP KR SG TH BR GB IN DE IT AR RU GR ES HU FR 0123456789 © 2017 Ray Dalio 105

83 Self-Sufficie ncy Subcomponent: Work Ethic—Retirement Age n of how hard you work is how many days you put in each year, but another is how long you work One dimensio nt to look at when people tend to retire in a society over the course of your lifetime. To capture this we wa relative to their life span. We measured this by lookin g at the effective retirement age as a percentage of life expectancy. Interestingly, this picture shows some not able differences from the earlier patterns we saw and appears less related to a country’s income (a simple measure of its stage of economic development). While the countries at the top are mostly emerging, Japan and the US are in the middle of the pack. Japanese and US workers appear to work over 80% or more of their life ex pectancy before retiring. On the other hand, workers in China retire much earlier, working closer to 70% of th eir life expectancy before retirement. Consistent with other measures, Europeans fall in the bottom half of this measure. Effective Retirement Age as % of Life Expectancy MX KR RU IN AR JP HU US GB AU CA DE GR ES IT BR FR CN 70% 80% 60% 100% 90% © 2017 Ray Dalio 106

84 ncy Subcomponent: Government Supports Self-Sufficie out what it values and also shapes the incentives and vernment policy both tells you something ab A country’s go motivations of its citizens. In general, societies that value self-reliance highly will provide less public support. And large government supports, directly through transf ers that redistribute incomes or indirectly through services, are the primary means of enabling individuals to consume more than they earn. These supports risk ch a fundamental value in a market-based system (i.e., the drive to earn undermining self-reliance, which is su ainst such payments; we are ju st measuring self-sufficiency your keep). To be clear, we aren’t arguing for or ag gauge. For these reasons, we and, since this is one of the biggest influences on it, it is a significant part of our e systems, and more limited social services to would expect countries that have fewe r transfers, smaller welfar grow faster than those that place a higher priori ty on redistribution and government safety nets. supports in a society in a few ways, looking at the magnitude of its We measure the degree of government outlays (which often include indirect transfers in the way of services, for example) and the magnitude of its direct transfers to households. As countries develop and get richer, they tend to weigh considerations like redistribution more heavily, so this is another measure where we expect and find a fairly strong relationship between the country’s income and its level of government supports, which we control for to account for the stage of development the country is in and get a sense of the underlying ethic. In our current rankings, Asia holds the top four spots, wi th European co untries ranking as the least self-sufficient along this measure. Once you exclude the effect of income, this pattern basically holds, though the developed at the top, largely because its limited amount of English-speaking world moves up some. Singapore ranks government support is unusual given the wealth of the country. Greece and France en d up looking particularly bad on this measure. Self-Sufficiency: Government Supports Self-Sufficiency: Government Supports (ex-Income Effect) SG SG TH KR IN TH KR CN AR MX MX AR CN RU US IN AU US CA AU RU CA GB GB BR JP JP BR HU DE DE ES ES HU GR IT IT GR FR FR 1 4 1 0 -1 -2 -3 -4 4 3 2 2 0 -1 -2 -3 -4 3 rnment supports measure. the sub-pieces of our gove In the table below, we show how each country ranks along Government Support Measures Country SG TH IN KR AR MX CN US AU CA RU GB BR JP HU DE ES GR IT FR 12% Transfer Payments to HH, % PGDP 4% 10% 8% 8% 6% 19% 19% 17% 3% 22% 16% 22% 20% 25% 25% 26% 28% 31% 6% 57% 16% 22% 27% 21% 36% 28% 29% 37% 37% 40% 35% 42% 39% 40% 50% 44% 45% 52% 51% Gov Outlays, % PGDP © 2017 Ray Dalio 107

85 Self-Sufficie ncy Subcomponent: Government Supports—Government Expenditures a broad indication of the support a government provides to t hose in society. While not Government outlays are s are redistributive, providing, for direct (as, say, pure household income transfers), many of these outlay example, higher-value services than what a number of recipients contributed in the form of taxes. These eliance and impact these values. On this measure, we measures can both reflect societal attitudes around self-r see that many of the emerging Asian countries have ve ry small governments relative to the size of their economies. Singapore’s government spends a bit over 15 % of GDP, while China’s government has increased its outlay but is still relatively high on the list at spending a li ttle bit under 30%. India is a bit higher up in the top P. There is some variat ion among Latin American quartile, with government spending around 25% of GD countries, with Mexico’s government outlays close to In il’s governments around the dia, and Argentina’s and Braz middle of the pack. Japan and the US are also in th e middle. France and Italy are on the other end of the spectrum. Their governments spend between 50% and 60% of GDP. Government Expenditures (%GDP) SG KR TH IN MX CN RU AR US AU BR JP CA GB DE ES HU IT GR FR 40% 50% 60% 30% 20% 10% © 2017 Ray Dalio 108

86 Self-Sufficiency Subcomponent: Government Supports—Transfers to Households Household transfers are a direct subsidy and have an especially high risk of undermining self-reliance. The policy highlights the trade-off of enforcing a market-based system to maximize growth versus risking slower growth to achieve a different goal, like ensuring a social safety ne t for ethical reasons or for social stability. On this measure, we see that Thailand and India’s governments are the least redistributive, by our measures. In both countries, transfers to households are less than 5% of GDP. Transfers in the US and Japan are about four times larger, around 20% of GDP, but still much lower relative to the rest of the developed world. In Western Europe, to over 30% in France. transfers range from around 25% Government Transfers to Households (%GDP) TH IN SG CN MX AR KR RU BR CA US AU HU GB JP DE ES GR IT FR 10% 15% 20% 25% 30% 0% 5% © 2017 Ray Dalio 109

87 Self-Sufficiency Subcomponent: Labor Market Rigidity Support from the state to an individual can happen throug h either direct transfer payments and the provision of government services (as we examined above), or by regu workers with supports, e.g., lating companies to provide enforcing a minimum wage or making it difficult to fire individuals. Unions and coll ective bargaining contracts can also work to protect certain workers. To the ex tent that these structural labor market supports limit companies from engaging with employees in a free manner (m aking hiring and firing decisions), it limits the need approach limits the dynamism of corporations and individuals to respond to for individual self-reliance. And this conditions—which over time should make countries with high rates of labor ma rket rigidity grow more slowly. We measure labor market rigidity by looking at collectiv e bargaining coverage across countries, minimum wages, and limits to hiring and firing at will in a given ec onomy. Unlike hard work or government supports, these wealth and stage of development (which we proxy with measures tend to be fairly unrelated to a country’s income levels). ore, the US, and Russia rank as having the least rigid On our aggregate measure of labor force rigidity, Singap labor forces, followed by Mexico. Italy and France score es pecially poorly along this measure. Since labor force velopment, excluding income’s effect has little impact on rigidity isn’t particularly related to a county’s stage of de the rankings. Self-Sufficiency: Rigidity of Labor Force Self-Sufficiency: Rigidity of Labor Force (ex-Income Effect) SG SG US US RU RU MX MX IN IN GB GB CA CA HU HU CN CN TH TH JP JP KR KR DE DE GR GR ES ES AU AU BR BR AR AR FR FR IT IT 3 4 4 3 2 1 0 -4 -3 -2 -1 0 1 -1 -2 -3 -4 2 the three sub-pieces of labor market rigidity. Below we show the values for each country for Rigidity of Labor Market Measures FR IT Country SG US RU MX IN GB CA HU CN TH JP KR DE GR ES AU BR AR 17% Collective Bargaining as % of Workforce 12% 23% 13% 8% 29% 29% 26% 17% 1% 15% 12% 58% 50% 78% 58% 64% 64% 98% 80% 1.4 Ease of Hiring/Firing (Z) 3.2 2.5 0.8 -0.1 1.9 2.5 2.0 1.3 -0.6 1.3 -1.3 -0.6 0.8 -0.3 -0.5 -0.7 -2.7 -2.0 -1.6 28% 55% --- 18% 9% 10% 31% 29% 28% 25% Minimum Wage as % of Average Income 33% 25% 30% 30% 33% 26% 32% 23% 32% 32% © 2017 Ray Dalio 110

88 Self-Sufficiency Subcomponent: Labor M arket Rigidity—Collective Bargaining While collective bargaining rights and union membership can help give workers a stronger voice in negotiations so work to protect members from the pressure of other competitors in the workforce with their employers, they al and can restrict overall labor force participation—all of which undermines self-reliance. As with other measures of labor market rigidity, collective bargaining rates have little relationship with the income of a country. The measure shows different choices within countries of simila r income. Collective bargaining coverage is low in the , while coverage is very high in France, Italy, and US, Korea, Mexico, and Singapore (close to 15% and below) Spain (75% and higher). Collective Bargaining as % of Workforce TH IN KR US MX SG CN JP RU HU CA GB GR AU DE AR BR ES IT FR 10% 20% 30% 40% 50% 60% 70% 100% 90% 0% 80% © 2017 Ray Dalio 111

89 Self-Sufficiency Subcomponent: Labor Market Rigidity—Ease of Hiring and Firing r fire someone both increase the rigidity in the labor market Government protections that make it hard er to hire o and reduce the self-sufficiency of its wo rkers. Looking at ease of hiring/firin g, the US and Singapore rate as some of the most self-sufficient developed countries, and among the most self-sufficient of any country on this measure. China is not far behind; still in the top quartile. Protections against firing appear to be high in Europe il, France, and Spain are all in the lower half of the table. and Latin America—Argentina, Braz Ease of Hiring and Firing Index SG US GB CA IN CN TH HU DE RU MX GR ES KR JP AU IT FR AR BR 0123456 © 2017 Ray Dalio 112

90 Self-Sufficiency Subcomponent: Labor Market Rigidity—Minimum Wage The minimum wage of a country is another indication of its labor market rigidity and emphasis on supports versus market-based incentives and self-reliance. As with collective bargaining rates, we again see quite a bit of difference across countries, even within the same income group. Russia and Mexico top the list, with the US and Brazil not far behind. On the other end we see both de veloped countries, like Italy, and lower-income ones, like Thailand and Argentina, which have much higher minimum wages as a percentage of incomes. Minimum Wage as % of Average Income RU MX US BR HU JP ES CA CN GB DE KR IN AR AU FR GR TH IT 50% 60% 0% 10% 20% 30% 40% 113 © 2017 Ray Dalio

91 Savoring Life Versus Achieving It makes intuitive sense to us that those who value achievement over savoring the fruits of life will be more successful in finding ways to work harder and smarter to become more prosperous. Of course achievement means different things to different people. When I talk about a society that values achievement I imagine one where its people prioritize professional success, creati ng thriving businesses and building economic security versus other goals like enjoying leisure. What’s more, these societies tend to be ones where there is a faith that competition is fair and hard work will be rewarded (otherwi se it’s less likely for the people to be motivated). To calculate our “savoring life versus achieving” gaug e we put 50% weight on the measures of whether the culture values working hard and 50% on the values expre ssed in an international values survey. For the first gs like hours worked or vacation days), we draw on the component (the evidence we see of work ethic in thin broad measure of working hard that we discussed as part of self-sufficiency. For the latter component, the expressed values of society, survey data is difficult to compare across countries, so we triangulated with several capturing the desire of people to savor what they have different questions that were consistent with our goal of or focus on achieving more. For example, we used answers to questions like, “what should the first priority be for the future of the country,” or “economic growth is more important than the environment,” to get at how people value further success or economic growth in relation to ot her values (like the environment, people having more say in their communities, etc.). We al so look at questions about whether havi ng a good time is important relative to accomplishing and whether the respondent thinks it’s important to be successful, which are somewhat more direct. Lastly, questions like “competition is harmful” help us get a sense of people’s attitudes toward the type of environment that encourages people to push to achieve. These were combined into our overall indicator of the relative preference for savoring life versus achieving in a way that is indicated by the weights shown below. As with self-sufficiency, there is a natural tendency for people in less developed countries to value becoming more ed to developed countries, which are more inclined prosperous through hard work and achievement, compar toward leisure. Once we take into account the level of a country’s income, our indicator of savoring life versus achieving is 37% correlated to growth. Correlation to Weight Savoring Life vs Achieving Growth 100% Aggregate ex-Income Effect 37% --- Aggregate 59% 50% Observed Outcomes 49% 49% Work Ethic 50% Expressed Values 50% 59% Priority for future of country: economic growth v. having more say, 56% 7.1% defense, or making cities and countryside more beautiful Hard work leads to success 27% 7.1% 24% 7.1% Competition is harmful It is important to this person to have a good time 24% 7.1% It is important to this person to be very successful 42% 7.1% 7.1% 42% Important Child Qualit ies: Feeling of Responsibility 7.1% 11% Economic growth is more important than the environment 114 © 2017 Ray Dalio

92 ring, we see the familiar When we look at the picture of which countries prioritize achievement over savo a and China score as being phery, respectively. Indi countries at the top and bottom—Asia and the European peri d world are the US, Japan, most focused on achieving. The most achievement-oriented countries in the develope and Singapore by these measures. European countries focus more on savoring life than most countries in the world, with France and Italy at the bottom. The positions change some once we take into account the effect of also smaller). Singapore moves up income, though not all that much (the differences between the extremes are y the country is, it’s remarkable how hardworking and to the top spot—when you take into account how wealth achievement-oriented its people appe ar by our measures. India still ranks toward the top after taking into ement orientation stands out as less exceptional. account its income level, but its relative achiev Savoring vs Achieving (ex-Income Effect) Savoring vs Achieving SG IN CN CN IN TH MX MX SG TH US KR US AU AR KR AU JP AR JP CA RU BR GB CA RU GB BR DE HU ES ES DE HU GR GR IT IT FR FR 3 0 -2 -3 -4 4 3 1 4 -1 2 1 0 -1 -2 -3 -4 2 © 2017 Ray Dalio 115

93 Savoring Life Versus Achieving Subcomponent: Observed Outcomes hieving over leisure is to observe the outcomes of its One straightforward way to see whether a society values ac choices: literally how much effort they put into work. A society whose people strive hard to achieve in a market- business environment. These traits will make it more based system will likely have a more vibrant, competitive likely to improve its potential than an economy which choose s to value the fruits of life instead. Often we will see become rich begin to make this choice. countries that have acquired great wealth and For the observed piece of the concept of savoring life versus achieving, we use our broad measure of how hardworking a country is. (As discussed, th is is the same broad measure we use as part of self-sufficiency, so if it As a reminder, this measure is indicator.) is fresh in your mind you can skip down to the expresse d values of th includes a broad set of indications of a country’s work et hic, including not just the average hours worked, but also measures like the typical retirement age, how many vacati on days people in each country typically take, and male labor force participation on its own. Again, regrettably we must look at our hours worked and labor force across countries around women in the workforce distort measures for just men because different social norms the numbers. Since we expect richer c ountries to take more leisure than poorer ones, this is one of the measures we expect to have a fairly strong rela tionship with a country’s income level. When we scan across countries, we see emerging countries at the top of the list, including India and Mexico. Overall, emerging Asia and Latin America come thr ough as working the hardest. Among more developed countries, Sin irly hardworking, whereas ing people. The US is fa gapore and then Japan have the hardest work workers in Europe appear to opt for leisure more than anyone else, base d on these measures. Savoring vs Achieving: Observed Savoring vs Achieving: Observed (Hard Working) (Hard Working) (ex-Income Effect) SG MX MX TH IN TH IN SG KR KR JP CN CN JP AR AR RU AU BR US AU RU US BR CA CA GB GB HU HU GR GR ES DE ES DE IT IT FR FR -3 4 -1 -2 -3 -4 -4 1 -2 -1 0 1 2 3 4 0 2 3 Below we show the individual pieces rd-working Please see the discussion of the ha of our hard-working gauge. gauge re detailed look at each individual piece. within the self-sufficiency section for a mo Work Ethic Measures Country MXTHINSGKRCNJPARRUBRAUUS CAGBHUGRESDE IT FR 24 35 34 30 35 29 30 26 28 27 36 24 23 20 21 19 18 19 17 Avg. Actual Hours Worked (Hrs/wk) 36 Male Reported Avg. Hours Worked (ex-Vacation) 45 47 46 43 47 44 43 38 38 39 37 36 37 37 41 35 29 36 30 46 Labor Force Participation (% Working-Age Population) 80% 81% 80% 77% 72% 78% 70% 75% 72% 81% 72% 69% 71% 69% 60% 63% 66% 66% 60% 61% 79% Effective Retirement Age (% of Life Expectancy) 84% 82% 90% 82% 84% 83% 84% 81% --- 81% 78% 78% 81% 76% 76% 77% 74% 72% 88% 8.4 4.1 6.0 6.7 5.2 5.1 4.4 5.0 7.0 7.4 6.5 4.9 4.8 4.6 6.5 8.2 7.8 8.0 6.9 6.9 Actual Vacation+Holidays Per Year (Weeks) © 2017 Ray Dalio 116

94 Savoring Life Versus Ac hieving Subcomponent: Expressed Values Observing the outcomes of people’s choices is one way to see whether they value achievement over savoring; another, of course, is to ask them. A World Values Survey asks several questions related to this topic: ey agree with statements, which help reveal their respondents across many countries are asked whether th on, economic growth, etc. (listed in th attitudes towards hard work, competiti e table below). Naturally, there are challenges comparing survey data across countries, but we believe that this data combined with the observed good picture of these differences in culture. outcomes above gives a pretty In fact, the rankings for the expressed component show a similar picture as those we observe in measures of work effort. India an tin America is further down the list. Of top this gauge for the emerging world, and La d China the developed world, the US values achieving most, while Italy and France place the most emphasis on savoring life. When you exclude the effect of income, the US mo ves to the top of achievement-oriented countries, with India just behind. Savoring vs Achieving: Expressed Values Savoring vs Achieving: Expressed Values (ex-Income Effect) IN US CN IN US SG TH CN SG AU MX MX AU DE KR ES ES KR RU CA DE GB CA JP HU TH AR HU GB RU JP AR BR FR IT IT FR BR 0 1 2 -4 -3 -2 -1 0 1 2 3 4 -4 3 4 -2 -3 -1 The table belo w shows more specific information, which we triangulated to get a sense of the expressed values toward achievement versus savoring in a given society. It’s interesting how the reasons for these cultural ople express a lack of faith that hard work leads to attitudes differ across countries. For example, in Russia pe success, even though they express a desire for the country to grow, while in Canada pe ople express a high value ection over economic growth. That sa id, we don’t want to make too much on political input or environmental prot to capture is the overall essence of whether a country is of any one of these indications, since what we are trying achievement-oriented. Savoring Life vs Achieving : Expressed Values IN CN US TH SG MX AU KR ES RU DE CA HU AR GB JP BR IT FR Country For future of country, value of having more say v. economic growth, defense, and making cities and countryside more -1.2 0.7 0.9 0.2 -0.7 -1.0 -0.5 -0.7 0.5 0.3 -1.5 0.2 -0.4 -1.7 -0.3 -0.4 -1.0 -1.6 1.0 beautiful 1.0 -0.5 0.5 -1.0 -0.2 1.1 0.2 0.1 0.0 -1.3 Hard work leads to success 0.3 -0.9 -0.7 -0.3 -0.7 -0.5 -1.2 -1.3 0.7 -0.3 Competition is harmful 0.5 -1.5 -1.0 0.6 0.4 -0.2 -0.4 -0.7 0.4 0.0 -0.8 -1.4 -0.6 -0.7 -0.6 -1.0 -2.0 1.7 It is important to this person to have a good time 0.4 1.0 1.0 0.2 0.0 -1.0 1.0 -0.1 -0.4 -0.3 -0.5 0.3 -0.8 1.0 0.4 1.3 -0.9 --- -1.0 -0.1 It is important to this person to be very successful -1.0 -0.2 -0.1 0.2 -1.3 -0.2 -0.5 0.1 0.0 -0.6 -0.3 -0.9 -1.2 -1.5 -0.7 --- -0.7 1.6 -0.2 -0.4 -1.0 0.2 0.6 1.0 -0.7 -0.6 0.2 0.1 -0.2 0.5 -1.5 0.2 -1.2 -0.7 0.0 -1.0 -0.9 Economic growth is more important than the environment © 2017 Ray Dalio 117

95 Innovation and Commercialism An innovative and commercial spirit is the lifeblood of a thriving economy. The drive to tinker and invent, to this is how people learn and find new and better ways of creating things discover, to improve from prior failures— way to drive innovation is to bring new ideas to market of value. In a market-based system, the most powerful e is generally efficient in weeding out the good ideas and to commercialize and profit from them. The marketplac from the bad and pricing which innovations are most valued by society. In this way, the concepts of innovation and commercialism go hand in hand. They capture whether people in a society value finding new knowledge or e aligned to encourage them to seek a profit by creating new things, and whether their incentives ar llowing statistics measure the level of innovation and commercialism in commercializing these ideas. The fo different countries and their co rrelations with future growth. and commercial innovation, We looked at a variety of measures to triangulate these concepts. For both scientific (new inventions or businesses), and outputs we wanted to have a balance between indicators that captured inputs (values, investment, and people) that we thought would logically lead to indicators that measured innovation. We weigh the inputs and outputs equally. The pieces of our innovation and commercialism indicator cations of innovation and comm are shown in the following table. Overall, the raw indi ercialism are stronger in higher-income countries, especially measures of investment (like R&D expenditure) that require a certain level of resources, or measures of knowledge creation (like patent creation) that require a level of acquired asures, however, are the underlying values of a society knowledge. What we are focused on with our culture me proxy in a simple way with income levels). Once we independent of its wealth and development stage (which we exclude the effect of income, our gauge of innovation an d commercialism is 65% correlated to historical future e is no relationship between a country’s growth in income per capita. It’s notab le that before this adjustment ther future growth and the level of observed innovation and commercialism. Correlation to Innovation & Commercialism Growth Weight 65% 100% Aggregate ex-Income Effect Aggregate 2% --- Outputs 50% -15% # New Patents 21% 12.5% Royalty and license fees, payments -15% 12.5% # New Businesses -6% 6.3% % of People Creating New Businesses 6.3% 25% # New Major Websites -33% 6.3% New Trademark Creation -25% 6.3% Inputs 22% 50% Gross expenditure on R&D 6% 12.5% Researchers -11% 12.5% -4% Fear of Business Failure 12.5% Entrepreneurship Prevalance 12.5% 29% On the next page, we show our current measures for th e aggregate indicator with and without the effect of income, as well as for the components of our indicator. Where applicable we look at each measure that goes le in the society or the size of the economy. into these gauges relative to the number of peop © 2017 Ray Dalio 118

96 In terms of our ratings of countries on this gauge, the US and Korea ra nk as being the most innovative and s and are still near the top after we take out the effect of income. Korea commercially-minded on an absolute basi has reaped the rewards in the form of a high number of invests a lot of capital and people toward research and new patents and royalties. Along with relatively high investment in research, Americans stand out as highly en’t far behind, each investing high amounts of R&D and researchers into entrepreneurial. Germany and Japan ar the innovation process and seeing the be nefits from things like new patents, businesses, and websites. China is roughly neutral on our measures on an absolute basis, bu once you take into account t it jumps to second place the fact that its proportion of people creating new businesses and gross expe nditure in R&D are fairly high given how poor it still is. India is less innovative but it’s much poorer, so it moves ahead of China once you adjust for and emerging Europe score in the middle the effect of income. Latin America to bottom end of the range whether adjust for income, Europe’s Russia and Mexico. Once you you adjust for the effect of income or not, especially periphery fares poorly, particularly Italy, which is at the bottom of the list. Mostly, their innovation and inputs like researchers or entrepreneurship prevalence are moderate, but those aren’t leading to the commercial outputs you’d expect for countries at their income level. scientific or business Innovation & Commercialism Innovation & Commercialism (ex-Income Effect) US IN KR CN JP KR DE US AU TH GB JP CA BR SG AR FR SG HU AU CN DE TH CA ES GB BR HU AR RU IT FR IN MX GR ES MX GR RU IT 1 2 3 -3 4 -4 -2 -1 0 4 3 2 1 0 -1 -2 -3 -4 © 2017 Ray Dalio 119

97 Innovation and Com mercialism Subcomponent: Outputs d commercially minded people We would expect a country that has more innovative an to create more patents and trademarks, more businesses—in other words, that it is actively creating new ideas, protecting its intellectual property and capturing the rewards of this innovation. So we look at these outcomes as one way to get a sense of the society’s innovative and commercial spirit. Some outco mes are more directly indicative of innovation (like alism (like new businesses created or the prevalence of patent creation), others more direct signs of commerci entrepreneurs), and some show the signs of combining the two (like royalty fees). When we look at these measures on their own, they are fa irly related to a country’s income, which is intuitive st and have higher levels of education and accumulated since rich countries tend to have more resources to inve knowledge, so are more likely to lead in creating innovat ions valued in the market. On the raw measures, you see a (that might have a strong innovative spirit but you many poor countries at the bottom, like India or Chin wouldn’t expect to be leading innovators right now), behind rich countries, like France or Italy. But when we adjust for income, both India and China move up a lot, especially India, which appe ars much more innovative. Unlike in previous years, the US no longer ranks top once adjusted for income, coming below both cheaper taking out the effect of income, rich countries, like the developing countries (China and India) and Korea. After European periphery countries (G reece, Spain, and Italy) US and Japan still stand out as highly innovative. The st for their higher incomes. have the worst scores once you adju rcialism Outputs Innovation & Comme Innovation & Commercialism Outputs (ex-Income Effect) US IN JP CN GB KR DE US KR JP SG TH CA SG AU AR FR GB IT DE HU BR ES CA TH AU AR RU MX MX GR HU BR FR IN ES CN IT RU GR 3 2 1 -4 0 -1 -2 -3 4 3 4 1 0 -1 -2 -3 -4 2 how each country scored for each measure. see a more granular view of Below you can Innovation & Commercialism Outputs Country USJPGBDEKRSGCAAUFR IT HU ES THARMXGRBR IN CN RU # New Patents (per Mln Persons) 844 2,246 243 562 3,022 205 135 113 228 140 70 71 15 18 10 56 25 8 389 200 # New Businesses (per Thous Persons) --- 13 1 2 10 1 15 2 2 4 3 1 0 1 1 3 0 --- 4 0 11 # New Major Websites (per Thous Persons, Indexed) 66 59 9 28 82 69 44 24 16 30 6 3 3 13 2 1 2 4 100 % of People Creating New Businesses 8 3 4 3 5 6 10 7 4 3 5 2 4 12 16 4 7 8 7 2 -0.9 New Trademark Creation (Z - Score) 1.1 1.2 0.1 --- 1.8 1.3 0.9 0.4 0.0 -0.3 --- -0.8 -0.8 -0.9 -1.0 -1.0 -1.0 -1.1 1.8 Royalty and License Fees, Payments (USD/Person, Ann) 102 35 69 24 10 69 15 7 56 10 21 9 1 1 0 3 0 0 0 0 © 2017 Ray Dalio 120

98 Innovation and Commercialis m Subcomponent: Inputs Ultimately what matters for commercial innovation is whether there is a strong spirit of finding new things and ry is investing its resources in new innovations and building new businesses in the society. Whether a count spirit is strong. So to measure the inputs to innovation whether it has a culture of risk-taking are good signs this penditure as a percentage of GDP and the proportion of we look at human and capital investment through R&D ex ial spirit by examining whether people express a fear of researchers in the population. We look at entrepreneur failing in a new business endeavor in surveys and whet her there is a prevalence of entrepreneurs in the population. are highly correlated to income—again, to As with the outputs of innovation, the innovation inputs we measure education to devote to finding new be expected since richer countries have more resources and higher levels of ideas. To account for this and get at the underlying spirit of innovation and commercialism we simply take out the effect of income. Here again we see India and Ch ina behind many rich countries on our raw indicators, and then, at the top of the list, after taki ng into account their level of income; on the other hand, certain rich countries and France. As observed are at the bottom of the list after excluding the effect of income—for example, Italy when we looked at its score on our outcomes measure, Korea has the highest score for inputs to innovation and ’s because it devotes a high amount of spending and people to research while also having a commercialism. That healthy amount of entrepreneurship (despite some apparent fear of business failure). Within the developed world, the US, Japan, and Australia stand out as the countries most oriented toward innovation and commercialism, near the top of all countries even when adjusted for income. Japan stands out because of the resources it devotes—its level of researchers relative to its population and R&D expenditure—which outweigh an apparent fear of business failure. The US, on the other hand, is strong on all measures, with a healthy willingness to take risk. Innovation & Commercialism Inputs Innovation & Commercialism Inputs (ex-Income Effect) KR KR US CN JP IN AU TH DE BR CA US SG JP GB AR CN AU BR DE TH SG HU HU FR CA ES GB AR RU IN ES GR FR IT MX MX GR RU IT 2 1 0 -1 -2 -3 -4 4 3 4 3 2 1 0 -1 -2 -3 -4 © 2017 Ray Dalio 121

99 Below you can see a more granular view of how each country scored for each measure. Innovation & Commercialism Inputs Country US JP AU DE CA SG GB CN BR TH HU FR ES AR IN GR IT MX RU KR 0.4 4.3 3.6 2.2 2.8 1.6 2.0 1.7 2.0 1.2 2.7 1.4 2.3 1.2 0.6 0.8 0.8 1.3 0.5 1.2 Gross Expenditure on R&D (%GDP) Researchers (per Mln Persons) 6,899 4,663 5,386 4,224 4,460 4,260 6,665 4,252 1,113 698 544 2,651 4,201 2,641 1,194 137 2,699 2,007 323 3,102 -1.5 Fear of Business Failure (Z - Score) -1.1 -0.3 -0.4 1.1 -0.6 0.2 0.5 0.1 1.4 0.7 -0.8 -1.0 0.7 -0.4 -2.4 -0.8 1.3 -1.0 -0.9 Entrepreneurship Prevalance (% Population) 7% 7% 7% 9% 5% 9% 3% 5% 3% 19% 25% 6% 3% 8% 9% 6% 13% 5% 7% 4% © 2017 Ray Dalio 122

100 Bureaucrac y activity. They impact the core elements of a thriving Lots of red tape and government regulation stymie business economy by hindering people from innovating or creating new businesses, and they make running a business g with unnecessary or heavy administrative controls burdensome, requiring people to spend time complyin instead of focusing on business improvements. That’s not to say that re gulation is not important—of course, a healthy market-based economy, as we will examine good governance and the rule of law are critical to next. But excessive, time-consuming, and rigid controls gum up the wheels of the economy. to the ease of starting a business (from the World To measure bureaucracy we look at measures related dealing with construction permits (also World Bank/IFC), and the burden of Bank/IFC), the efficiency and cost of The pieces of our bureaucracy indicator are shown in government regulation (from the World Economic Forum). t in less developed countries and so is fairly related to the table below. Bureaucracy tends to be more prevalen asons, because the processes are simply less efficient and income levels. This is fairly natural for a number of re advanced or established and have more controls, or require more steps, because the market systems are less because of inter-related factors, like weaker rule of law and a higher degree of corruption leading to more controls that allow for rent-seeking. From a growth perspective, businessmen and investors will likely accept that a certain degree of bureaucracy is to be expected to do business in an emerging country that is otherwise competitive. But if the bureaucracy is exceptional even rela tive to countries of similar income, it is no doubt going Once excluding the effect of income, our gauge of to weigh on the decision to do business in that country. bureaucracy is 43% correlated to historical future growth in income per capita. Notably, it is negatively correlated to future growth when we don’t make this adjustment. Along with our measures of the rule of law and corruption, this gauge helps us triangulate the picture of how hard it is to do business in a country. Correlation to Bureaucracy Growth Weight Aggregate ex-Income Effect 43% --- Aggregate 100% -10% Starting a Business -32% 33% Dealing with Construction Permits -38% 33% Burden of Government Regulation 42% 33% © 2017 Ray Dalio 123

101 Before taking into account income levels, Singapore ranks best on our ga uge of bureaucracy, followed by the ere is it easier to start a busine English-speaking developed world. Nowh ss or run one without burden from acy is worst in Brazil and India and government regulation than in Singapor e according to our measures. Bureaucr exclude the relationship between income and bureaucracy, high in Argentina, Russia, and China as well. Once you still below par. Europe’s pe riphery (Spain, Greece, and India and China don’t look quite as ba d, though India is velopment. Italy ranks near the bottom due, in particular, Italy) all look highly bureaucratic given their stage of de to the burden government regulations place on doing business. Russia scores poorly considering its income, just a touch above Argentina. Bureaucracy (ex-Income Effect) Bureaucracy SG SG TH US KR AU CA AU GB CA DE CN US JP KR MX TH GB FR DE MX HU JP HU FR ES IN IT GR RU CN AR RU GR AR ES IT BR IN BR 4 2 1 0 4 -1 -2 -3 -4 2 3 1 0 -1 -2 -3 -4 3 how each country scored for each measure. see a more granular view of Below you can Bureaucracy Country SG US AU CA GB DE JP KR TH FR MX HU ES IT GR CN RU AR BR IN 0.4 Starting a Business 1.7 1.8 1.1 0.0 0.2 -0. 2 0.1 1.2 1.2 0.4 -0.7 0.6 -0.7 -1.8 0.4 -0.8 -2.5 -3.0 1.5 Dealing with Construction Permits 1.0 1.3 1.7 0.3 1.3 1.9 0.6 1.8 0.5 0.8 -0.1 0.3 -0.4 0.0 0.3 -3.9 -3.3 -2.3 -2.1 -5.0 -0.8 Burden of Government Regulation 1.0 0.1 1.2 0.7 0.6 1.2 0.4 1.1 -1.0 4.0 -1.4 -0.4 -2.3 -1.4 2.0 -1.1 -1.5 -2.7 0.2 © 2017 Ray Dalio 124

102 Corr uption Corruption undermines the effectiveness of a market-based system in a variety of ways, diverting resources, distorting incentives, raising the costs of doing busine ss, undermining business competition and efficiency, and d often impedes it. Small creating uncertainty for investment. Corruption also both discourages profit-seeking an the airport or to an administrative official) create types of corruption (like the bribes one may have to pay at inefficiencies that slow down the agility of businesses, raise costs, and make it more difficult to cultivate a new business. Big forms of corruption (for example, busine ss appropriation) create limits to financial success and ense) create entry barriers and lower prospective returns. others (like large bribes to enter an industry or win a lic All forms can make a country’s syst em dysfunctional and create uncertain ty around doing business in a given country. In all these ways corruption undermines productivity an d the capacity of a society to realize its potential. To measure corruption, we combine Tr ansparency International’s measures of corruption across countries with iveness index: “diversion of public funds,” “irregular three sub-indices from the World Economic Forum’s competit decisions of government officials.” These measures help us capture the payments and bribes,” and “favoritism in our corruption indicator are shown in the table below. different types of corruption (big and small). The pieces of When we look at these measures we see that poorer countr ies tend to have higher degrees of corruption. That’s for a number of reasons we won’t explore in depth here, including fewer opportunities for wealth creation, entrenched ways of operating that may have once been part of a different, non-market based system, or weaker rule of law. Businessmen and investors will likely put up with a certain degree of corruption to operate in an emerging country that is otherwise competitive. But if that country has an exceptionally high degree of corruption relative to countries of similar income, it is no doubt going to weigh on the decision to do business in that country. 63% correlated to historical future growth in income Excluding the effect of income, our gauge of corruption is without this adjustment. Along with our measures of per capita. Notably, the relationship is slightly negative bureaucracy and the rule of law, this gauge helps us triangulate the picture of how hard it is to do business in a country. Correlation to Corruption Growth Weight Aggregate ex-Income Effect 63% --- Aggregate -3% 100% Transparency Int'l Corruption Index 25% -25% Diversion of Public Funds -2% 25% Irregular Payments and Bribes -10% 25% Favoritism in Decisions of Government Officials 12% 25% © 2017 Ray Dalio 125

103 Before taking into account the income level of countries, Singapore again looks be st, with Japan, the English- speaking developed world, and Germany also near the top. Most emerging countries are toward the bottom of our rankings, which is to be expect ed given the relationship between corru ption and income levels we have discussed. When we exclude how income levels are related to corruption, the European periphery is at the bottom of our ratings. Italy and Gree ce stand out as having the highest degree of corruption of any of the behind. Italy is weak ac ross all measures, especially countries we look at, followed by Argentina and Russia just given how wealthy it is, and particularly with regard to fa voritism by government officials. India and China both face significant impediments from their levels of corrupt ion. But when we consider their levels of corruption ceptional; in fact, it’s lower than we would expect, with relative to their levels of income, their corruption is not ex her country on an income-adjusted basis. Even after India having significantly lower corruption than any ot still rate high, Singapore in particular, but also considering income levels, many developed countries commonwealth countries, Japan, and Germ any. The US rates in the bottom thir d after considering its income. Corruption (ex-Income Effect) Corruption SG IN CN AU SG DE GB TH DE JP CA JP GB FR CA US AU ES BR KR HU HU CN FR GR MX KR IN US IT TH ES BR RU MX AR RU GR AR IT 2 2 -2 -3 1 -4 4 0 4 3 3 1 0 -1 -2 -3 -4 -1 Below you can how each country scored for each measure. see a more granular view of Corruption Country SG AU DE GB JP CA FR US ES KR HU CN GR IN IT TH BR MX RU AR Transparency Int'l Corruption Index 1.7 1.4 1.3 1.2 1.5 0.8 1.1 0.2 -0.1 -0.2 -1.3 -0.9 -1.2 -0.9 -1.2 -0.9 -1.4 -1.8 -1.4 1.5 -1.2 Diversion of Public Funds 1.5 1.7 1.1 1.3 0.9 0.8 -0.2 -0.3 1.7 -0.5 -0.9 -0.7 -1.0 -0.9 -2.0 -1.4 -1.5 -2.2 2.3 Irregular Payments and Bribes 2.3 1.4 1.1 1.5 1.8 1.5 0.8 0.2 -0.1 -0.5 -0.7 -1.0 -1.5 -1.5 -1.1 -1.4 -1.4 -1.7 -2.0 -2.4 -1.5 Favoritism in Decisions of Government Officials 1.4 1.8 1.3 1.8 1.0 0.7 -0.1 -0.5 -0.4 3.0 0.2 -1.1 -0.5 -1.6 -0.7 -1.1 -1.2 -1.4 -2.4 © 2017 Ray Dalio 126

104 Rule of Law market-based system and it protects the incentives and ensure fair competition in a A strong rule of law helps can reliably and efficiently enforce agreements that efficiency of this system. When a country’s legal system can function. If there are strong businesses make and protect people’s property and investments, the economy a bankruptcy, a well-developed legal system makes working these things disagreements, a contract broken, or out fair and orderly. When the government fails to do th ese things, investing and doing business in a country is a lps stamp out corruption and other activities that discourage lot riskier and inefficient. A strong rule of law also he profit seeking and prevent the most highly valu ed products and businesses from thriving. We measure rule of law by combining measures related to the efficiency of the legal framework in settling ), protecting investors (World Bank/I disputes (WEF), property rights (WEF FC), and enforcing contracts (World Bank/IFC). The pieces of our rule of law indicator are shown in the table below. As with our measures of strongly related to a country’s income. Again, we won’t corruption and bureaucracy, the rule of law tends to be countries that have less resources and less educated delve into all the reasons here, but it’s intuitive that le of law is likely compounded by interrelated factors, populations have more immature legal systems, and the ru of law of a country taking into account its development like higher corruption. Here we want to look at the rule stage. That gives us a better sense of the underlying cultural elements that will determine its lawfulness as it develops. It’s also a more helpful perspective in looking at future growth. As with our measures of bureaucracy and corruption, we would expect that businessmen and invest ors will likely expect there to be lower rule of law in poorer countries, and so it may not impact their decision to do business or invest in an emerging country that is otherwise competitive. But if the rule of law is particularly weak in that country relative to others of similar income, that is likely a drag. Indeed, we see no relationship between the rule of law on its own and future growth. But once we exclude the effect of income, our gauge of th e rule of law is 59% correlated to historical future growth in income per capita. In other words, when countri es still fail to uphold the rule of law once they are rich, their cultures often appear to be holding back their growth. Along with our measures of bureaucracy and e of how hard it is to do business in a country. corruption, this gauge helps us triangulate the pictur Correlation to Rule of Law Growth Weight Aggregate ex-Income Effect 59% --- Aggregate 100% 7% Efficiency of Legal Framework in Settling Disputes 12% 25% Property Rights -5% 25% Protecting Investors 2% 25% Enforcing Contracts 12% 25% © 2017 Ray Dalio 127

105 Before taking into account income levels, Singapore, Ja pan, and the English-speaking developed world are at the e, Italy ranks near the bottom top of our ranking. Despite its wealth and development stag of the list, just ahead of oorly on this measure. Once we exclude the effect of Argentina. Emerging countries also tend to perform p income, Italy and Greece stand out as having an especially neral, the European periphery weak rule of law. In ge and Latin American countries rate toward the bottom, wi th the rest of the developed world and emerging Asian countries toward the top. Singapore stays at the top even after taking out income, along with other rich is just modestly strong given their levels of income. nations. The US and Japan have a rule of law rating that Rule of Law (ex-Income Effect) Rule of Law SG SG GB CN CA TH IN US GB JP DE CA AU US AU FR KR DE JP TH CN KR ES FR HU BR MX RU MX BR HU IN ES RU AR GR GR IT IT AR 3 -2 -3 -4 1 2 0 4 4 -1 1 2 0 -1 -2 -3 -4 3 how each country scored for each measure. Below you can see a more granular view of Rule of Law Country SG GB CA US JP DE AU FR KR TH CN ES HU MX BR IN RU GR IT AR Efficiency of Legal Framework in Settling Disputes 3.5 2.0 0.9 1.3 1.7 1.4 0.7 -0.9 -0.4 0.0 -1.0 -1.6 -1.6 -1.6 -0.2 -2.0 -2.4 -3.0 -2.5 2.3 -0.3 Property Rights 2.2 1.1 2.0 2.3 1.9 1.7 0.1 -1.0 2.1 0.2 -0.8 -1.3 -0.9 -0.4 -3.1 -0.5 -0.7 -3.6 2.7 Protecting Investors 2.9 1.8 2.0 1.7 0.5 -1.0 -0.5 -0.6 0.2 0.8 -1.4 -0.7 -1.7 -0.6 -0.6 -0.1 -1.3 -2.0 -0.2 -1.0 -0.1 Enforcing Contracts 0.5 -0.2 1.3 0.6 1.4 1.5 1.5 1.8 0.5 0.9 2.9 1.1 -0.1 -1.1 -4.3 1.3 -1.4 -2.5 0.1 © 2017 Ray Dalio 128

106 FR 3% % 57% 53% 28% 60% 136% FR FR 1% 2% 11% 61% 77 53% 57% 67% 56% 97% 131% %50% AU -9% 14% 47% 49 -18% -21% -20% IT IT 7% 3% -1% -8% 56% 93% 29% 54% 46% 98% -21% Worst IT 3% -8% 26% 28% 34% 96% -22% DE DE 6% 07% 13% 35% 76% 76% 97% 93% 45% -16% 101% 1 DE 26% -11% 93% 29% 42% 119% 101% ES ES 1% 1% 15% -8% 12% 77% 47% 30% 89% 44% -38% GB 2% 9% 0% -5% 36% 20% -15% AU AU 4% 12% 19% -9% 41% 10% 69% 97% 89% -18% -23% JP -7% 17% 78% 63% 67% -16% -48% GB GB 4% 4% 0% 15% -5% -2% 73% 73% 32% 97% -18% ts and gauges, see Part 1 and country. Countries that score CA 12% -7% 12% -6% 16% 39% -31% US US 0% 0% 0% 0% 0% 0% 0% 27% 90% 99% 100% ES 5% 2% -8% 12% 25% 79% -37% JP JP 12% 19% 72% 78% 97% 67% 68% 46% -10% -25% -53% US 0% 0% 0% 0% 0% 0% 0% CA CA 12% 16% 10% 76% 23% 75% 97% 26% -15% -10% -37% SG 12% -9% 26% -35% -38% -42% -40% GR GR 2% 31% -8% 23% 54% 94% -61% -39% -28% -44% -40% scussion of these concep GR -6% 22% -47% -44% -44% SG SG -64% -40% 18% -5% -9% 68% 82% 30% 90% -51% -36% -38% -45% KR 5% -55% -38% -37% -26% -50% AR AR -68% 3% 21% 42% 92% -19% -54% -82% -54% -47% -86% -69% AR -10% KR KR -57% -57% -62% -86% -82% -74% 9% 77% 30% 96% 48% -71% -37% -57% -33% -38% -59% e right. For further di BR -2% -71% -75% -75% -93% -76% -85% HU HU 15% -4% 22% 70% -51% -41% -63% -58% -47% -74% 100% 129 HU 52% BR BR -51% -65% -75% -43% -79% 6% -47% 15% 36% 80% -26% -93% -85% -67% -66% -69% -60% proprietary indebtedness gauges. MX 36% -75% -82% -82% -89% MX MX -84% -84% 14% 10% 36% 80% -21% -77% -76% -89% -68% -84% -80% CN -8% TH TH -91% -85% 11% -82% -87% -88% -80% 10% 32% our productivity gauges, showing the most recent reading for each 75% -21% -81% -85% -74% -89% -84% -90% TH 39% CN CN 3% -87% -92% -85% -89% -88% -80% -6% 14% 55% 86% -91% -83% -79% -87% -87% -84% 0% RU 7% 1% RU RU 4 -79% -79% 15% -86% -86% -90% -80% 25% 83% 9 -79% -85% -86% -86% -80% -80% Best IN IN IN 3% 5% 45% -93% -97% -97% -93% -94% -98% 65% 34% -43% -93% -93% -96% -88% -94% -94% e left, and countries that score worst are on th t share the statistics underlying our . Quality the US, Adj. for Ed. Quality Education Labor Productivity ated Worker rel. to the US Dalio Ray i. ii. Productivity—Value best on the measure appear on th © 2017 Below, we share all of the individual indicators that make up Appendix B: List of Statistics that Make Up Our Gauges Appendix A. Regrettably, we can’ Cost of Illiterate, Uneducated Worker rel. to the US Cost of Literate, Uneducated Worker rel. to the US Observed Productivity-Adjusted Cost rel. to the US Cost of Primary Educated Worker rel. to the US Cost of Secondary Educated Worker rel. to the US Cost of Tertiary Educated Worker rel. to the US Education Quality Relative to the US % of Working-Age Pop Attained at least Primary School % of Working-Age Pop Attained at Least Tertiary School Cost of Tertiary Educated Worker rel. to the US, Adj. for Ed NGDP Per Capita rel. to US % of Working-Age Pop Attained at Least Secondary School Cost of Secondary Educated Worker rel. to the US, Adj. for Ed. Quality Cost of Literate, Uneducated Worker rel. to the US Cost of Illiterate, Uneducated Worker rel. to the US Cost of Primary Educated Worker rel. to Cost of a Productivity-Adjusted Educated Worker Cost of a Quality-Adjusted Educated Worker Country Cost of a Productivity-Adjusted Educated Worker rel. to the US Country Cost of a Quality-Adjusted Educ Country Cohort Level Costs

107 17 KR 17 IT FR 30 FR 30 9% 8.4 -1.3 1.4% GR 61% 31% 61% 72% 57% 55% 11% 80% -17% Worst SG 18 IT 19 29 FR 36 DE 7% 6.9 --- -1.6 1.2% AR 51% 66% 11% 32% 28% 74% 98% 60% 19 18 CA 35 ES 29 DE AR 6.9 RU 1.2% 18% -2.0 52% 66% 77% 32% 11% 26% 66% 64% 12% IT DE 19 19 36 ES 35 BR 9% 8.0 -2.7 1.0% HU 5% 23% 25% 60% 76% 45% 66% 64% 15% US 21 37 41 20 IT GR HU 7.8 9% AU -0.7 3% 0.9% 32% 25% 63% 60% 76% 58% 44% 15% 21 41 RU ES 37 20 GR 8.2 HU GB 17% -0.5 0% 81% 63% 0.8% 26% 78% 50% 20% 60% 18% 37 23 37 AU 23 GB JP GB GR 7% 6.5 -0.3 0% 0.7% 33% 69% 78% 22% 69% 50% 40% 18% JP 36 24 36 24 DE CA CA 7% 0.8 4.6 5% 71% 71% MX 16% 0.7% 39% 78% 58% 17% 30% FR 37 24 37 US 24 KR US 7% 4.8 DE -0.6 12% 81% 69% 0.7% 22% 42% 30% 69% 14% 10% JP 38 26 27 39 HU RU 6% AU 4.9 CA 5% -0.6 17% 12% 72% 35% 72% 25% 79% 17% 0.6% 27 39 TH 1.3 28 38 BR 1% ES TH AU 6.5 5% 2% 81% 81% 17% 72% 33% 0.6% 40% 20% 28 38 CN 38 26 BR 1.4 RU CN 7.4 9% TH 5% 81% 17% 19% 37% 72% 28% 18% 0.6% 84% IT JP 29 1.3 44 43 30 AR 7.0 4% HU US 6% 19% 37% 75% 17% 25% 83% 26% 70% 0.6% JP 43 30 GR 29 44 AR --- CA BR 2.0 8% 5.0 6% 75% 16% 29% 29% 28% 0.5% 70% 84% 130 35 43 GB 30 47 KR GB FR 2.5 CN 3% 4.4 8% 72% 19% 28% 29% 78% 82% 29% 10% 0.5% ES .4% IN 34 46 5.1 43 30 1.9 SG KR 2% 8% 8% AU 6% 31% 77% 72% 18% 36% 90% 0 .2 BR 35 46 34 46 SG 5 KR 5% MX -0.1 MX 9% 13% 21% 10% 10% 0.1% 77% 82% 80% 25% 35 IN 47 36 IN 47 AR RU CN 6.7 0.8 4% 9% 4% 15% 78% 23% 27% 84% 80% 24% 1% IN 36 --- 47 36 45 --- US 2.5 TH SG 6.0 3% MX 4% 12% 8 18% 22% 80% 27% Best IN 36 35 45 --- 4.1 46 1% SG SGTHINKRARMXCNUSAUCARUGBBRJPHUDEESGRIT FR 3.2 TH CN 6% MX 15% 81% 16% 88% 35% 80% 30% -0.3% -0.3% 0.0% Investing Working Hard Self-Sufficiency ipation uctivity—Culture iii. iv. i. Prod © 2017 Ray Dalio Unemployment Rate (10yr Avg.) Male Labor Force Partic Male Reported Avg. Hours Worked (ex-Vacation) Male Reported Avg. Hours Worked (ex-Vacation) Labor Force Participation (% Working-Age Population) Minimum Wage as % of Average Income Avg. Actual Hours Worked (Hrs/wk) Ease of Hiring/Firing (Z) Effective Retirement Age (% of Life Expectancy) Transfer Payments to HH, % PGDP Gov Outlays, % PGDP Actual Vacation+Holidays Per Year (Weeks) Collective Bargaining as % of Workforce Household Savings Rate Investment ex-Housing %GDP Investing Work Ethic Measures Country Country Avg. Hours Worked Demographics Country Country Avg. Actual Hours Worked per Working-Aged Male Projected Annual Change in Dependency Ratio Country Rigidity of Labor Market Measures Government Support Measures Country

108 2 4 4 0 17 FR 30 1.2 8.4 RU RU -1.1 4% 61% -1.0 72% 200 3,102 Worst 7 2 0 IT 19 36 --- 6.9 1.3 CN 0.5 7% MX -1.0 323 389 74% 60% FR -1.3 -1.6 -1.0 -0.7 -0.2 -2.0 1 8 8 0 0 18 IT 29 IN DE 1.3 6.9 5% -1.0 77% -0.8 66% 2,007 IT --- --- -1.2 -1.0 -1.0 -0.9 3 2 7 0 19 ES 35 25 BR 8.0 GR 0.8 -1.0 -2.4 13% 76% 66% 2,699 BR -1.0 -0.5 -0.7 -0.9 -0.6 -0.4 1 3 4 21 41 13 IN GR 56 7.8 GR 137 0.8 6% 63% -0.9 76% -0.4 JP 1.3 -1.5 0.0 -0.7 -0.7 -0.3 1 3 0 37 16 10 20 8.2 HU AR 0.7 0.6 9% MX 81% -0.8 60% 1,194 GB 0.4 -1.2 -1.7 -0.3 -0.7 -0.6 1 3 0 37 12 23 18 ES GB 1.2 6.5 AR 8% -1.0 -0.8 78% 69% 2,641 1.0 AR -1.2 -1.4 -0.7 -0.9 -0.4 1 1 6 4 15 36 24 FR --- CA 4.6 2.3 TH 3% 71% -0.8 78% 4,201 0.2 0.2 HU -0.3 -0.9 -0.8 -0.8 3 2 9 71 37 24 ES US 30 1.4 4.8 HU 0.7 6% 81% -0.3 69% 2,651 CA 0.3 0.3 0.0 -1.5 -1.5 -0.6 5 4 11 27 21 39 70 AU 4.9 TH HU 0.4 -1.5 544 -0.9 72% 79% 25% DE 0.5 -1.2 -0.1 -0.5 -0.5 -0.3 3 2 IT 28 38 10 BR 1.2 24 BR 6.5 0.1 0.4 140 81% 81% 698 19% 0.1 RU 0.5 -1.3 -0.3 -0.7 -0.2 2 4 26 38 FR 56 RU 44 7.4 CN 2.0 0.5 3% 0.9 228 72% 1,113 84% ES 0.1 0.0 -0.5 -0.7 -0.4 -0.4 7 7 15 43 30 1.7 1.3 69 AR 113 7.0 GB AU 0.2 5% 75% 83% 4,252 0.1 KR 0.2 -0.1 -0.5 -0.2 -0.2 1 JP 15 10 29 82 44 1.8 5.0 SG CA 2.0 135 3% 131 -0.6 70% 84% 1.0 6,665 0.2 AU 0.4 -1.3 -1.0 -0.6 6 35 1.1 10 47 28 --- 1.6 69 CN SG 4.4 CA 9% 205 78% 82% 1.1 0.2 0.6 4,260 -1.0 MX -0.7 -0.7 5 2 9 10 5.1 30 43 KR 0.1 KR DE 2.8 5% -0.4 72% 90% 1.0 SG 3,022 0.2 0.0 -0.1 -1.0 4,460 -0.2 .2 1 3 34 59 46 SG 1.2 24 5 DE 2.2 AU 9% 562 -0.3 77% 82% TH 0.2 0.6 0.9 -1.5 -1.0 4,224 -0.2 4 13 IN 1.1 JP 36 47 66 69 6.7 GB 3.6 -1.1 7% 243 84% 80% 1.0 US 0.3 0.5 0.2 0.5 -1.0 5,386 3 1% 0 16 JP --- 36 45 35 1.4 US TH 2.7 6.0 7% 0.0 8 1.0 1.0 CN 0.7 0.4 0.0 -1.0 2,246 4,663 Best 8 35 --- 4.1 46 1.8 KR US 4.3 7% MX 102 100 IN 844 -0.9 1.7 1.6 1.0 88% 80% 0.7 0.4 -0.4 6,899 cialism r Innovation and Comme Savoring Life vs. Achieving Dalio Ray ercialism Outputs iii. ii. © 2017 Fear of Business Failure (Z - Score) Entrepreneurship Prevalance (% Population) % of People Creating New Businesses New Trademark Creation (Z - Score) # New Major Websites (per Thous Persons, Indexed) # New Businesses (per Thous Persons) # New Patents (per Mln Persons) Royalty and License Fees, Payments (USD/Person, Ann) Avg. Actual Hours Worked (Hrs/wk) Labor Force Participation (% Working-Age Population) Male Reported Avg. Hours Worked (ex-Vacation) Actual Vacation+Holidays Per Year (Weeks) Effective Retirement Age (% of Life Expectancy) Gross Expenditure on R&D (%GDP) Researchers (per Mln Persons) Competition is harmful Economic growth is more important than the environment Hard work leads to success For future of country, value of having more say v. economic beautiful It is important to this person to have a good time growth, defense, and making cities and countryside more It is important to this person to be very successful Work Ethic Measures Innovation & Comm Country Country Country Innovation & Commercialism Inputs Savoring Life vs Achieving : Expressed Values Country

109 IN 0.2 0.1 AR AR -5.0 -3.0 -1.4 -1.0 -2.2 -2.5 -3.6 -2.4 -2.4 IT BR -2.1 RU -2.7 -2.5 -1.5 -1.4 -1.8 -2.5 -0.7 -0.2 -3.0 -2.0 Worst AR -1.5 GR -2.3 -1.2 -1.7 -1.4 -1.4 -1.4 MX -0.8 -2.4 -2.0 -0.5 -1.1 RU 1.3 BR 0.4 RU -1.1 -3.3 -1.3 -3.1 -1.4 -2.0 -2.0 -0.9 IN CN 2.0 -1.8 TH -3.9 -1.2 -0.1 -1.4 -4.3 -0.7 -0.9 -0.2 -0.4 IT GR BR 0.3 -1.1 -1.4 -1.1 -1.6 -1.6 -0.7 -1.0 -0.6 -0.9 -0.9 IT IN 0.6 0.0 -2.3 -1.3 -1.2 -1.6 -1.5 MX -0.1 -0.5 -0.7 -0.6 ES 1.1 GR -1.1 HU -1.7 -1.6 -1.5 -0.7 -0.4 -0.4 -0.9 -0.9 -0.8 ES 0.3 HU 0.4 CN 0.2 -1.4 0.2 -1.3 -1.0 -0.1 -1.0 -0.7 -0.5 0.4 CN MX -0.1 HU -1.5 0.9 0.0 -1.2 -1.4 -0.8 -0.3 -0.2 -0.7 FR 1.2 KR 0.8 TH 0.8 0.5 -1.0 -0.1 -1.0 -0.3 -0.4 -0.5 -0.4 1.1 ES 0.1 1.8 TH 0.1 0.5 KR 0.2 0.2 -0.1 -0.5 -0.2 -0.9 1.1 1.8 FR KR 1.7 1.5 US 0.4 0.7 0.8 0.2 -0.1 -0.2 -0.6 JP 1.2 FR 1.5 1.9 1.4 0.6 0.2 0.7 AU 0.9 0.8 0.8 -0.5 132 1.9 1.3 DE 1.7 1.5 1.5 1.4 1.0 DE 2.3 0.6 CA 0.0 -1.0 1.1 1.1 JP JP 1.3 1.3 1.2 1.8 GB 1.8 0.7 0.5 2.0 0.6 .9 1.1 1.2 1.8 1.3 1.7 1.7 1.3 1.3 1.5 US CA 0.3 GB 0 1.1 1.7 1.7 1.5 0.1 1.8 1.4 DE 2.2 AU CA 2.0 2.0 -0.2 1.3 1.2 1.7 1.0 1.5 2.1 1.8 US 1.4 1.4 GB 2.3 AU 0.5 Best 1.5 1.7 1.0 SG SG SG 2.3 3.5 2.7 2.9 2.3 3.0 4.0 2.9 Bureaucracy Rule of Law Corruption Dalio Ray vi. v. iv. © 2017 Starting a Business Dealing with Construction Permits Burden of Government Regulation Enforcing Contracts Property Rights Protecting Investors Diversion of Public Funds Transparency Int'l Corruption Index Irregular Payments and Bribes Efficiency of Legal Framework in Settling Disputes Favoritism in Decisions of Government Officials Corruption Rule of Law Country Country Bureaucracy Country

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