ONE OF the lessons from the financial crisis is the impermanence of the economic order. What was considered as the order of the day, such as the Great Moderation, developed cracks with the fall of Lehman Brothers.
The Rise and Fall of Nations:
Ten Rules of Change in the Post-Crisis World
ONE OF the lessons from the financial crisis is the impermanence of the economic order. What was considered as the order of the day, such as the Great Moderation, developed cracks with the fall of Lehman Brothers. This theory is further buttressed by the fissures in the China model with a lot of wisdom being quoted in hindsight. The idea of the BRIC nations dominating the global growth arena looks diluted today. This is the central theme that Ruchir Sharma develops in his rather remarkable book, The Rise and Fall of Nations. The 10 chapters that are built on this foundation tackle the rules that are going to dominate the global stage in the years to come. The distinction between the good, average and ugly nations will be decided by how these tenets are practised.
Let us examine these themes. The first is demography, which has been recognised as a limiting factor to growth by all analysts. It is agreed today that the rate of growth of population will determine the rate of growth of output in most countries, which is more a necessary condition, though not a sufficient one. This issue has been well documented in the concept of demographic dividend, which is lacking in developed countries. But Sharma adds that we need to combine this dividend with better education and higher productivity to make a perceptible difference.
The second rule pertains to whether countries will embrace reforms to bring about the desired growth. It is true, as per the author, that when there are crises, governments are able to be effective in terms of initiating and implementing reforms. Reagan, Thatcher and Deng managed deep reforms when the chips were down. But there is a modicum of staleness that enters the genealogy and rulers could get despotic, like Endrogan of Turkey or Chavez of Venezuela, which leads to stagnancy and a closed mind. He also gives examples of the difference between what the market likes and the political reality, which will resonate well with readers in India over the issue of the RBI governor. Technocrats with backgrounds of working in the IMF or World Bank are loved by the markets, but rarely survive, as politics is not always governed by economic reason. Mario Monti of Italy and Papademos of Greece are examples of rulers who lasted for just a little over a year for the same reasons. Therefore, politics will direct the efficacy of future reforms and hence growth.
Inequality is the third pillar that has received a lot of attention after Piketty’s book, Capital in the 21st Century. This has increased over time across all countries and can be potentially destabilising. QE policies have actually made the rich richer, as the money has flowed to stocks, financial assets and luxury homes that are the domain of the rich. Here, the author focuses quite a bit on the growth of the billionaire class, which does inspire awe. When countries talk of the pre-eminence of this set of people, it generally indicates the exacerbation of inequality.
Crony capitalism is the reason behind this phenomenon and can be traced to fortunes made in rent-seeking sectors like oil, mining, steel, construction, etc, where the role of the state matters a lot. He has an interesting analysis here on ‘good’ and ‘bad’ billionaires, with the former being those in, say, the IT space, who have added value, rather than the latter, who have extracted the same at the expense of society. Similarly, inherited wealth is okay from the social point of view in case it is in productive sectors, not otherwise. This has to be controlled to eschew social upheavals.
Next, he speaks of meddlesome states and how they influence the economy. He blows hot and cold here on whether they should be spending more or less and pitches for productive expenditure rather than freebies. This can lead to some debate over the earlier point on inequality, as the quantum of freebies is proportional to inequalities in any economic system. His comment on the morass in state-controlled banks would, however, find acceptance, especially if one looks at our system.
Fifth, nations have to make use of what he calls geographic ‘sweet spots’ to break barriers to higher growth. Trade is the way forward and those that forge such regional links would gain. Vietnam with China, or intra-regional trade among Asean countries, or Mexico and US are such examples, and given that the WTO will take a long time to work out, countries should work on leveraging such opportunities.
Sixth, countries need investment to grow and this has to come from both the public and private sectors. Investment always helps to create jobs, consumption, growth in services allied to such activity, development of a middle class and so on. This becomes a necessary condition for future growth.
Sharma’s seventh point concerns inflation and its control. Here, his take can foment debate, as he supports the conventionally held view that inflation results from easy policies through government spending and liberal monetary stance. The point that is missed, which also holds for several economic analysts, is that inflation since the time of the crisis has been driven by crop failures in India and is not quite demand-led, as core inflation has largely been under control.
The next two rules pertain to stability of the currency and growth of debt. These would hold for any nation as large current account deficits are not sustainable. Further, we need to have our policies in place to meet emergency situations like those invoked when the Federal Reserve announced the tapering programme. On the other side, the euro crisis is best exemplified by the debt explosion, which led to the contagion through what are known as the PIGS countries. China at a different level is facing the same problem from another viewpoint, that is, build-up of NPAs.
The last rule of ‘global opinion makers’ may not fit with the other nine rules delineated. Sharma says one should be wary of the media and the hype created around countries, as they tend to be misleading. It started with Japan, after which the Asian tigers were the main players, followed by the US, which was succeeded by China and the famous BRIC quartet.
Sharma has taken a lot of effort to write this book, which is well researched. Hence, while all the points made are common economic sense, he has argued why nations should be watchful and how they could slip up in case these rules are not obeyed. His vast experience in investment banking, as well as his travels and encounters with economists and politicians, makes the narrative engaging.
In the end, he sticks his neck out and tells us which nations will go where. India, the US, Argentina, Vietnam are some of the good guys. Among the average nations are Columbia, South Korea and Japan, while the ugly are South Africa, Russia, China, Turkey, etc. Time will tell if these predictions are largely right. Perhaps we could review this when the author pens his next book.
Madan Sabnavis is chief
economist, CARE Ratings