Wednesday, 17 August 2016 2:35:42 PM
Archived under Economics
An Extremely Rewarding Experience
Ruchir Sharma, in his debut book 'Breakout Nations', examined the scrambling pursuit of emerging economies vying to break out into the big league. In his latest book 'The Rise and Fall of Nations', he shares his acumen and experiences with the readers to tell the good economic prospects from the ugly ducklings of the world. Sharma makes important calls on the fate of several economies, both emerging and advanced, backed with usual meticulous research.
Early on in the book, Ruchir Sharma issues a caveat, one that makes immense sense in the volatile times we live in. He avers that most global trends don't last long and that it's foolhardy to make too-far-out-in-the-future forecasts. He declares, "Any forecast that looks beyond the next cycle or two is likely to be upended." By the same token, no country can stay on an upward growth trajectory forever. China is one of the few exceptions that defied the rule of impermanence for long, but, much to the dismay of its leadership, Chinese growth rate slipped into single digit for the first time last year since 2008. After three decades of incessant double-digit growth, the Chinese economy is huffing and puffing and so are a host of economies - Brazil, Chile, Indonesia, Malaysia, Australia, etc. - who all have had their fortunes entwined with China's.
The ten telltale ground rules, distilled from Sharma's twenty-five years of experience on the road, present a practical approach to distinguish the economies that are about to boom from those that are about to fizzle out. While some of these rules have been widely reported in the media and accepted to an extent, it's Ruchir Sharma's deep dive into hitherto obscure facts and actionable insights, that set this book apart.
Ruchir Sharma's emphasis on the significance of manufacturing sector to growing economies is spot on. He asserts, "Manufacturing is the ticket out of poverty for most emerging nations since no other kind of business has the proven ability to play the booster role for job creation and growth." Global trade is still based on goods, not services. Even service sectors like telecom, retail and others depend on manufactured goods. As a further evidence, almost all advanced nations of today started with a laser sharp focus on manufacturing in the past. Be it England in the 19th century, or the US, Japan, Germany in the early 20th century, or the East Asian miracle economies such as South Korea and Taiwan in the late 20th century or China of today, all kick-started their growth engine with manufacturing.
I found Sharma's unequivocal approach, that black-and-white bluntness praiseworthy. He pans the 'Make in India' initiative of Indian PM Narendra Modi for having leapt over a necessary step in the development. Instead of working towards the expansion of basic export items such as toys, clothes, gems and jewelry, etc., - sectors that could become an employment magnet for a vast majority of population - 'Make in India' initiative seems to have gone off track with the government more keen on making a pitch to advanced industries such as aerospace, defense and robotics. Author's advice: Factories first.
Where a country invests during the boom to a large extent determines where she ends up during the crisis. The commodity-driven booms, implies the author, could fool the administrators into a false sense of permanence. Russia, Brazil, Indonesia, etc., all benefited from the post-2008 boom in commodities, especially, oil. So did developed economies like Norway and Canada. The latter, however, invested wisely during the manic times to hedge themselves from coming meltdowns, whereas the former made ill-advised bets like weaning away resources from other industries for oil exploration and giving away subsidies. More often than not, funds from one bad investment binge end up in another bad spree. Billionaires flush from oil money in Russia are investing in everything from swanky yachts to plush mansions around the world. The Chinese billionaires aren't far behind either as they go shopping for football clubs - known money-pits - to apparently whet their tactical nous and know-how about the beautiful game. Sharma's tip: watch where the investments - both private and government - are going during good times.
Economies such as Russia, UAE, Venezuela, whose GDP is entirely dependent on the oil exports find themselves neck deep in trouble as they wage battles on two fronts: dipping commodity fortunes and plummeting currency. In normal circumstances, Sharma explains, cheap currency is good as it props up the exports. However, if a country hasn't built enough factories and, basically has no other major export than, let's say oil, then even 'the cheap currency' advantage vanishes.
Ruchir Sharma's assertion that the next global crisis will have its origins in China has a strong premise. China is the world's biggest trading economy. A sharp slowdown in China could possibly send other emerging economies into a tailspin. The problem is that the Politburo's fixation with growth numbers ceases to die even as the domestic consumption wanes and quality of investments declines. From investing in supply networks, attention has now shifted to building palatial megaprojects, MagLevs, and the least of them all, buying football clubs. Unless the Chinese policymakers remove their blinkers and the Chinese billionaires stop acting like drunken buccaneers, their wastefulness along with the slowing domestic consumption could lead the world into a meltdown. Author declares,"Today every one-percentage-point slowdown in China's economy reduces global GDP growth by nearly half a percentage point, with emerging markets bearing the brunt."
Sharma is excited by the economic prospects of the Philippines and Vietnam. The two Southeast Asian economies riding low inflation and high growth seem to have flown under the media's radar, something the author says works to their advantage. On the other hand, two European economies that could trend further downwards in the next five years are Russia and France. Russia for its failure to focus away from oil and France for its bloated government spending, almost 57% of GDP. However, the part of the world ripe for a steady growth, notes Sharma, is South Asia. Pakistan, Bangladesh and Sri Lanka thus far have skipped media glare, but are growing at an average annual clip of 6%, helped by the falling commodity prices, strong population trends and manageable credit growth. India though leads the South Asian pack, but it has many voids of its own to plug, e.g. Lack of adequate supply networks, burgeoning black economy and the occasional penchant for nationalist populism, etc., to name a few. Author mentions that since 2010 India has implemented over 500 protectionist measures, more than any other country in the world.
Ruchir Sharma is an awesome writer with a wealth of incisive ideas to share, the result is a book that feels less like a weighty tome on economics than a provocative X-ray of current global realities. He writes in an unobtrusive but compelling fashion that carries the reader along with unforced ease. The narrative is simple and riveting. At no point, does the author overwhelm you with a barrage of numbers, however, if you have little inclination towards economics and geopolitics, this book could be a little hard to digest. All in all, 'The Rise and Fall of Nations' provides an extremely rewarding experience.