Ebbs and Tides of Countries

Debashis Basu 24 June 2016

Ruchir Sharma is a head of emerging markets and chief global strategist of Morgan Stanley Investment Management. His previous book, Breakout Nations, appeared in 2010 (and was reviewed in Moneylife) to great critical acclaim. This book is even better. It is a kind of macro checklist of the ebbs and tides in the life of nations. In his own words, “over the past twenty-five years, I have spent long hours on the road, trying to build a system of rules for spotting telltale shifts in political and economic conditions. This is my guide to identifying the ten signs of major turns, for better or worse, in the fates of nations.” What are these 10 signs to watch out for? These are demographics, reformers, inequality, State interventions, geography, manufacturing as a share of GDP, inflation, currency value, debt levels and media hype. I have picked a few to elaborate.

Demographics: The world still echoes with recurring fear about the ‘population bomb’ scenarios which suggest that the number of people will outstrip supplies of food and other resources, with explosive results. Those scenarios rely on the United Nations’ oft-cited forecast for the year 2050 which shows that population will rise by 2.4 billion people, from 7.3 billion to 9.7 billion. However, the reality is different. All over the world, including in India, population growth is slowing down. In some parts of India, there is no growth in population. Fewer young people are entering the working force while people are living longer; it is a sure recipe for slower economic growth.

Reformers: “The essential question to ask about the impact of politics on the prospects for any economy is this one: Is the nation ready to back a reformer? To answer it, the first step is to figure out which position the nation occupies on the circle of life,” writes Sharma. “Countries most likely to do well are those struggling to recover from crisis. When a country’s back is against the wall, the general public and the political elites are most likely to accept tough economic reform. Nations are most likely to change for the worse in boom times, when the populace is sinking into complacency, too busy enjoying its good fortune to understand that in a competitive global economy, the need to reform is constant.”

Currency: A country’s currency is critical for understanding its economic prospects. If it has an overpriced currency, it will encourage both locals and foreigners to move money out, eventually sapping domestic economic growth. A currency that feels cheap will draw money into the economy, through exports, tourism, and other channels, boosting its growth.

Debt: “The decay produced by debt is a progressive disease. Its symptoms become gradually more intense, depending on how fast the debt is growing and for how long.” Sharma’s research shows that “if private credit grew by just 15 percentage points as a share of GDP over five years, the GDP growth rate eased in the next five years, slowing on average by 1 percentage point a year during that period. As the pace of private credit growth picked up, the scale and likelihood of an economic slowdown increased as well. If private credit grew by 25 percentage points as a share of GDP over five years, the slowdown was quite significant.”

Media Hype: The longer an economic boom lasts, the more credible a country’s track-record appears to the media and the more warmly they embrace it as the economy of the future, writes Sharma. “The more this love deepens, the more alarmed I get.” Sharma argues that if a period of strong growth approaches the five-year mark, the assumption should be that the growth spurt is nearing its end. “And, yet, many observers assume that strength will build on strength. The praise they shower on economies in the midst of growth booms only sows the seeds of collapse—it makes national leaders too complacent to keep pushing reform and attracts more foreign capital than the country can handle. When a crisis hits, the media's love turns at first to hate.”

This brief review does not do justice to the enormous work that has gone into this 464-page tome. It should be on the shelf of every global investor.

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