Today I am reviewing Ruchir Sharma’s book on macroeconomics and international development. I am doing this for 3 main reasons. First, the book is superb in that it provides numerous examples of how different political decisions can deliver different economic outcomes. Second, as someone averaging a book a month it was an easy way for me to improve my recall of the content and third, I believe sometimes the ideas expressed by an author are too good not to share!
The book is written in the aftermath of the Global Financial Crisis (GFC) and uses many country examples to show how national leaders can pull themselves out of the mess. Interesting enough the book was published prior to the current pandemic although its lessons are still very valuable today. The 10 rules of change discussed are the following:
1. People Matter
2. The Circle of Life
3. Good Billionaires, Bad Billionaires
4. Perils of the State
5. The Geographic Sweet Spot
6. Factories First
7. The Price of Onions
8. Cheap is good
9. The Kiss of Debt
10. The Hype Watch
I will outline each very briefly to give you a flavour of my understanding of the content.
1. People matter –
This rule is all about demographics in that rapid population growth is a precondition of economic growth but not a guarantee. A population grow rate of 2% seems to be the magic number to sustain economic growth although there are other considerations. These include incentives to young people for them to have children, increasing female participation of the workforce and encouraging migration. A fun fact here is that a quarter of new businesses in Turkey were started by Syrians with the fastest growing regions of Turkey being those housing the most refugees. It’s not all about unskilled labour and refugees though as some countries have made a huge effort to attract skilled labour such as Canada and Australia.
2. The Circle of Life –
This chapter was fascinating. Sharma is talking about the political circle of life. Basically, things get really bad and there is some sort of crisis or need to reform. Typically an inept government is removed and replaced with a reformer. The reformer is able to turn the country’s fortunes around but then becomes stale and comfortable. In many cases they put up an oppressive regime in a desperate bid to cling to power. There are many examples you are probably aware of. Key takeouts are that the fortunes of a nation are likely to turn when a new leader rises in the wake of a crisis. However, country’s with democratic values grow faster than those with autocratic leaders.
3. Good billionaires, bad billionaires
An extremely interesting chapter! Have you ever thought about which industries the rich people in your country made their money from? Usually there is trouble ahead of the billions have been made in extractive industries such as commodities or government sponsored construction. Some countries also have a very high share of billionaires wealth vs the general population. This is not necessarily a bad thing. All depends on how the billions were actually made. PS/ Robert Mugabe gets a special mention in this chapter🤔
4. Perils of the State –
It is fashionable these days for people to advocate for less government interference in the economy. However, this is not an easy conclusion to come to because in some areas the country’s welfare could be greatly increased by an increase in government expenditure. In some countries a drastic reduction or realignment of government expenditure is required. A key thought, however, is in an era of very low borrowing costs, countries with strong fiscal positions could benefit more from expansionary economic policy than through austerity.
5. The geographic sweet spot –
This is all about whether a nation maximises its geographic location. Some nations such as Mexico are fortunate in that they are in the doorstep of the world’s biggest economy. However, as Sharma mentions advantages and disadvantages of location can be replaced by good policies.
6. Factories first –
By far the most important concept in my opinion. Sharma shows how industrialisation is the key to economic development. Many countries have thought they could “skip” industrialisation and head straight to tertiary industry and knowledge work. However, the data shows that the level of development is greatly linked to the level of manufacturing. Especially when it comes to the ability to create jobs and skills in the economy. In the same way a country blessed with natural resources will need at least 20% of GDP to be invested in infrastructure improvements. Where investment is under 20% you get a situation of private solutions to public problems e.g. generate your own electricity, drill your own boreholes and repair your own roads.
7. The price of onions –
Inflation is the silent killer of growth and Sharma uses the price of onions as a metaphor for affordability. The other inflation to watch is asset prices and where asset prices rise faster than economic growth this typically signifies a bubble. Those reading in 2021 may say this sounds familiar.
8. Cheap is Good –
Does the country feel like it is a cheap place to live or does it feel expensive? Where a currency is overvalued and goods and services feel expensive this has the effect of limiting domestic consumption and investment. Ultimately if a currency strength is not backed by productivity it will lead to a currency devaluation that can destroy wealth in an instant. If you want a view of when is the right valuation to invest the best instinct is to follow the locals. If the locals are pouring their own money in that is a good sign. If the locals are taking their money out as fast as they can make it that is a very concerning sign.
9. The Kiss of Debt –
Debt is kissing us because it is seductive. You know you shouldn’t but you do anyway. Where domestic private credit is growing faster than the economy for a long time this is usually the precursor of a debt crisis. Sound familiar to 2008? Ironically, the private sector tends to binge on debt long before the public sector. In many cases after the debt situation is corrected countries are so afraid to take on any debt that they miss opportunities. Currently developed nations can borrow at almost zero interest rates and invest that money as a sovereign wealth fund, with returns far exceeding the cost of the debt.
10. The Hype Watch –
The most interesting anecdote of the whole book. As soon as you see a country or region begin to be hyped up by consultants and analysts it could signal trouble. Remember the “Africa Rising” and “Lions of Africa” narratives sold to us by Time magazine and McKinsey? Once your country is on the cover of Time magazine it could spell great trouble ahead. It usually means whatever measure of growth being achieved is not being done in a sustainable way. The cure for the hype is to apply the 10 rules.
The summary of the summary-
If you really want an in depth review of how the global economy has progressed post the financial crisis, what countries have done well and what they have done poorly I highly recommend this book. It will shift you from round the braai stand news headline conversation to questioning our understanding of how the world works.
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