Rise and Fall of Nations by Ruchir Sharma

The Rise and Fall of Nations - Ten Rules of Change in the Post-Crises World - by Ruchir Sharma

I heard the story of a King who sends his son out to learn the rhythms of the jungle. On his first outing, against the din of buzzing insects and singing birds, the young prince can make out only the roar of the lions and the trumpet of the elephants. The boy returns again and again and begins to pick up less obvious sounds, until he can hear the rustle of a snake and the best of a butterfly's wings. The King tells him to keep going back until he can sense the danger in the stillness and the hope in the sunrise. To be fit to the rule, the prince must be able to hear that which does not make a sound.

1. People Matter: To access which nations are best or worst positioned to grow, look first at projections for growth or shrinkage in the working age population, to gauge the potential baseline gain for future economic growth. Just as important, track which countries are doing the most or the least to leverage whatever population gains they will enjoy. Are they opening the workforce to the elderly, to women, to foreigners? Are they taking steps to increase the talent level of the workforce, particularly by attracting highly skilled migrants? In a world facing a future of growing labour shortages, it's all hands - human or automated - on deck. 

                  

2. The circle of life: Even the most promising reformers tend to grow stale and arrogant with time. Crises forces a nation to reform, reform leads to growth andgood times, and good times encourage an arrogance and complacency that leads to a new crises. The circle of life captured broad, cyclical swings in the popular will, which have their greatest impact when new leaders have the charisma and good sense to translate a popular desire for change into concrete reform agenda. The most auspicious moment is the arrival of the right and fresh leader while the least comes under stale leader who hang on to power. 

3. Good Billionaires Bad Billionaires: The basic question: Is inequality threatening the economy? This is one of those issues that need to be addressed more by political art than by economic science. Inequality starts to threaten growth in part when the population turns suspicious of the way wealth is being created. If an entrepreneur is creating new products that benefit the consumer or building manufacturing plants and putting people to work, that form of wealth creation tends to be widely accepted. However, if a tycoon is making a fortune by cozying up to politicians and landing contracts from the government or worse by capitalising on Daddy's contracts, then resentment surfaces, and the nation's focus turns to redistributing rather than creating wealth. The process of growth and wealth creation is more likely to remain popular if the largest pockets of wealth do not come to dominate the economy. A healthy economy needs an evolving cast ofproductive tycoons, not a fixed cast of corrupt tycoons. 

4. Perils Of The State: Is the government meddling more or less? In general, and particularly in a period like the current one, when many governments have been intervening so aggressively, less is better. Government attempts to manage economic growth come in many and varied forms, but I watch three basic trends: change in the level of government spending as a share of GDP, coupled with an assessment of whether that spending is going to productive ends; the misuse of state companies and banks to achieve essentially political goals and the extent to which the government allows private companies room to grow. Less meddling and more founded government spending would make for better economic and political outcomes. Check to be made on whether the spending is going to productive investment or giveaways by the government, whether the government is using state companies and banks as tools to artificially pump up growth and contact inflation and whether it is choking or encouraging private businesses. 

 

5. The Geographic Sweet Spot: Is the nation making the most of its location? A country that is an open house especially in a closed neighbourhood can produce fabulous wealth. Nations that qualify as geographic sweet spots combine the pure luck of advantageous location with the good sense to make the most of it by opening their doors to the world, particularly to their neighbours and also making sure that even their own most remote provinces are entering the global mainstream. Taking full advantage of geography to crave out a commercial sweet spot is important for nation's long term growth prospects. 

6. Factories First: Is investment riding or falling as a share of the economy? Two kinds of spending drive any economy - consumption and investment - andwhile in most economies people and government spend more on consumption, investment is the more important driver of growth and business cycles. Investment spending is usually more volatile than consumption spending and it helps create the new businesses and jobs that put money in consumers pockets. It includes investment by both the government and private business in construction of roads, railways and. The like in plants and equipments from office machines to drill presses, and in buildings from school to private homes. The basic question for a nation's economic prospect: Is investment rising or falling as a share of economy? When it is rising, growth is much more likely to accelerate. 

7. The Price of Onions: An economy is in a sweet spot when inflation is low and GDP growth is high, especially when growth has recently started to take-off. A high rate of inflation is a cancer that kills growth, attacking the living organism of the economy through several channels. Inflation can be kept in control by opening to global trade, by having demand supply ratio in check and by having the inflation targets, provided that the central bank is prepared to increase the price of money and induce the pain necessary to control inflation if need be. In many countries, inflation has been as inevitable as death for only one lifetime. Before that, deflation was just as common. And deflation can be bad too as consumers start to delay purchases, waiting for the prices to become more cheaper. Consumer prices aren't the whole story, today changes in assets prices - stocks and houses - are just as important. In today's globalised world, in which cross border trade and money flows often tend to restrain consumer prices but magnify asset prices, watching the price of stocks and houses is as important as tracking the price of onions. 

8. Cheap Is Good: Does the country feel cheap or expensive? If the country has an overpriced currency, it will encourage both locals and foreigners to move money out of the country, eventually sapping domestic economic growth. A currency that feels cheap will draw money into the economy through exports, tourism and other channels that's result in boosting of the economy. The country will be poised to grow not when the currency start falling but when it has stabilised again at a cheaper and more competitive value. If the currency feels cheap and the economy is reasonably healthy, the bargain hunters will pour money in. If the currency feels cheap yet money is still fleeing the county, something is seriously wrong. To spot the beginning or the end of currency trouble in emerging markets, follow the locals. They are the first to know when a nation is in crises or recovery, and they will be first to move. The big global players mostly follow.

9. The Kiss of Debt: The critical question to ask about debt: Is private debt growing faster or slower than the economy for a sustained period? A country in which private credit has been growing much faster than the economy for five years should be placed on watch for a sharp slowdown in the economic growth rate andpossibly for a financial crises as well, because lending is running out of control. On the other hand, if private credit has been growing much slower than the economy for five years, the economy should be put on watch for a recovery, because creditors likely have cleaned up their books an are near ready to lend again. 

There are four basic signs of a stock market bubble: prices rising at a pace that can't be justified by the underlying rate of economic growth; high levels borrowings for stock purchase; over trading by retail investors; and exorbitant valuations. 

10. The Hype Watch: How is the country portrayed by global opinion makers? Investors focus on the future, while the news media focus on the present. The longer an economic boom lasts, the more credible a country's track record appears to the media and more warmly they embrace it as the economy of the future. The more this love deepens, the more alarmed I get.  Long runs of sustained growth are rare. The basic rule: the global media's love is a bad sign for any economy and its indifference is a good one. Countries that are cold in or decade do not necessarily stay cold the next. In any five year economic cycle, the competitive landscape can change completely. More often than not, countries are at the verge of disappearing from the list when the global media are most in love with them, and they are preparing to join the list when they are in the shadows. 

11. The Good, The Average, And The Ugly: A disciplined, balanced and timely perspective works better than any single metric. 

Good: The United States, Argentina, Peru, Mexico, Spain, Poland, India

Average: Colombia, 

Ugly: Brazil, China, Vietnam, Turkey, France, Russia, Australia

The best time to buy is 'when there is blood in the streets' and prices are presumably at rock bottom. 

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