The Rise and Fall of Nations: Forces of Change in the Post-Crisis World. Ruchir Sharma. 2016.
Ruchir Sharma, head of emerging markets and chief global strategist at Morgan Stanley Investment Management, spent 25 years traveling to analyze the economies of the world for investment. As an unsentimental businessman, he presents ten rules, each with its own chapter, to use in identifying the next big winners and losers in the global economy.
1. People Matter: Is the talent pool growing? The portion of working age people (15-65) who drive the economy is decreasing, while the portion of nonproductive older people is increasing. Births per woman have decreased globally from 4.9 to 2.5, even in India and Mexico. The fertility rate is actually less than the replacement rate of 2.1 in 83 countries. Immigration has partly offset this problem in some developed countries. Automation may actually be important to counter workforce shortages, although it is viewed as a threat to jobs (47% at risk in the US in one to two decades).
2. The Circle of Life: Particularly in developing countries, bold new leaders often have early successes from reform followed by staleness and corruption. Many examples of this pattern are reviewed, such as Putin in Russia, Erdogan in Turkey, Suharto in Indonesia, and Mohamad in Malaysia. Vladimir Putin’s election to the presidency in 2000 led to reforms that increased average Russian annual salaries from $2,000 to $12,000, but by 2008, increasing demagoguery and corruption initiated falling average income to $8,000, negative growth, 16% inflation, and billionaire oligarchs. Even worse, populists without reform arise in some countries, such as Chavez in Venezuela and Kirchner in Argentina.
3. Good Billionaires, Bad Billionaires: “Low levels of inequality fuel long runs of strong economic growth, and….high or rapidly rising inequality can prematurely snuff out growth.” Inequality is presently very high and getting higher. In 2014, the top 1% had 48% of global wealth. The number of billionaires has doubled in the last 5 years and tripled in the last 10. Good billionaires make positive contributions to productivity and have fewer corrupt ties to government. Bad billionaires in rent seeking industries like construction, real estate, gambling, mining, metals, oil, and gas compete for access to national wealth and may be tied to government corruption. Russia has by far the largest portion of bad billionaires at 70%.
4. Perils of the State: The checklist for governments includes the following: 1) the level of government spending, 2) misuse of state companies and banks, 3) activities that are either choking or encouraging private business. For spending in developed nations, France tops the list with 57%, followed by Sweden, Finland, Belgium, Denmark, and Italy with around 50%. For spending in developing nations, Russia probably tops the list at close to 50% (official figures claim only 36%), followed by Brazil, Argentina, Poland, Saudi Arabia, and Turkey with 41-35%. Too much spending may include lavish subsidies, wasteful state corporations, and other inefficiencies. Too little spending may include inadequately funded law enforcement, large black markets, and civil war. Reportedly, China’s recent stimulus to maintain unrealistically high growth targets has generated $6.8 trillion in wasted investment, including a great deal of empty real-estate.
5. The Geographic Sweet Spot: Nations that qualify as geographic sweet spots combine the pure luck of an advantageous location for trade with the good sense to make the most of it. For the largest emerging nations, combined import and export trade account for 70% of GDP. Profitability from proximity has occurred between Dubai and Iran, Hong Kong and China, Eastern Europe and Western Europe, Southeast Asia and the US, and Mexico and the US. To benefit from their locations, countries must open their borders to trade with their neighbors, the wider world, and their own provinces and second cities.
6. Factories First: Is investment rising or falling as a share of the economy? For emerging countries, investments are optimal at 25-35% of GDP and weak at 20% or less. For developed countries, investments average only about 20% of GDP. Investment becomes increasingly nonproductive above about 35% and results in slower economic growth. This is particularly concerning for China, where investments have grown to 47% of GDP to maintain unrealistic growth targets. It is becoming tougher for developing nations to get into manufacturing due to shrinkage from 24% to 18% of global GDP since 1980 and other structural reasons. Also, for developing countries, the rise of service industries has been insufficient to drive mass modernization, even for India’s IT services, which employ less than 1% of the workforce.
7. The Price of Onions: Is inflation high or low? In the postwar era, low inflation has been a hallmark of every long run of strong economic growth. South Korea, Taiwan, Singapore, and China had booms lasting three decades or more and rarely saw inflation at greater than the emerging-world average. After 1933, rising inflation peaked at 15% in 1974 then fell to 2% since 1991 for developed countries and peaked at a staggering 87% in 1994 then fell to 6% since 2002 for developing countries. Inflation was tamed largely by the rise of politically independent central banks that enforce inflation targets of around 2%. Bad extensive deflation has been rare after World War II, with exceptions in Hong Kong and Japan. Deflation may be good, such as in the English industrial revolution when prices fell by half and output rose sevenfold and in the digital revolution when prices plummeted as quality skyrocketed.
8. Cheap is Good: Does the country feel cheap or expensive? An overpriced currency will encourage locals and foreigners to move money out of a country and sap its economic growth. A currency that feels cheap will draw money into a country and boost its economic growth. The critical category to watch is the current account, which captures how much a nation is producing compared to how much it is consuming. This consists of the trade balance (exports minus imports) plus other currency flows. A country with a current account deficit of 5% for five years is highly likely to have a significant slowdown and some kind of crisis. To predict changes, watch whether the locals are moving money into or out of the country, including by illicit channels. China is the leading exporter of illicit capital at $125 billion per year until 2013, increasing to an annual rate of $320 billion at the beginning of 2015—an alarming sign. Overpriced currency may lead to collapse, crisis, and contagion to other emerging countries.
9. The Kiss of Debt: Is debt growing faster or slower than the economy? Economic slowdowns and financial crises are most often preceded by excessive growth of private debt (companies and individuals) not government debt. Eventually, some financial accident occurs, typically after the central bank is forced to raise interest rates, and the bubble bursts. Subsequently government debt increases due to decreased tax revenues, increased public safety net spending, and shifting of bad debt to government books. The magic number for spotting coming trouble is a five year increase in private credit of 40% as a share of GDP (or 20% per year). The most alarming credit binge is in China, with a record 80% five-year increase of private debt by 2013 with associated real-estate and stock market bubbles. Failure to reverse course could result in an outcome like that of Japan, where growth was stagnant for two decades and total debt increased from 250% of GDP in 1990 to 400% today.
10. The Hype Watch: How is the country portrayed by global opinion makers? The basic rule: the global media’s love is a bad sign, and its indifference is a good one. Studies of the covers Time and other publications show that economic growth is more likely to slow when the story is upbeat and more likely to rise when it is downbeat. Trends are often near the ends of their runs by the time they come to the attention of the media. Mainstream opinion tends to extrapolate recent trends into the unknowable future. Rapid “catch-up” growth of poor economies is likely to slow when per capita GDP reaches 75% of that of the US.
11. The Good, the Average, and the Ugly—Summary. For three decades before 2008, global economic annual growth was 3.5%. However, the future potential growth rate is estimated to be limited to 2.5% due to structural changes of depopulation, deglobalization, and the need for deleveraging. Although the post 2008 recovery has been weak, recovery in the US has been stronger than in most developing nations and needs to be judged by the new standards. The “kiss of debt” rule of growth of debt by over 40% of GDP in five years is the single most reliable indicator of a coming major economic slowdown. China’s economic growth prospects now rank among the ugliest in the emerging world. Selected countries are listed below according to the author’s view of their economic prospects:
31. The Rise and Fall of Nations (national policies that lead to economic failure)
