Published in June of 2016.
"There are some mistakes only someone with a Ph.D. can make."
--Daniel Patrick Moynihan
Ruchir Sharma cites this famous Moynihan quote in explaining high level economic policy makers -- a class that is well represented by holders of doctorate degrees from prestigious institutions -- tend to make bad decisions in managing their nation’s economies.
The problem, as outlined by Sharma, is that classically trained economists are likely to base their policy recommendations on a set of theoretical assumptions -- assumptions that may not be relevant to the messy realities of modern economies.
Sharma, not being a Ph.D. trained economist (he started working for Morgan Stanley at age 22, and is now the firm’s chief global strategist), argues for a more pragmatic approach.
The method that Sharma follows in his economic forecasting makes for an entertaining read. Sharma spends one week every month traveling to the to countries that he analyzes. This ground-level research, combined with the economic and social data that Sharma obsessively tracks, allows him to make some convincing predictions.
Sharma keeps his forecasts to a time span of 5 years or less - arguing that any predictions longer than 5 years are meaningless. This is because large-impact unpredictable events, such as the 9/11 terrorist attacks, will swamp the impact of secular trends (such as population growth etc.).
To me, limiting our predictions to 5 years seems sensible if our goal is to maximize our investments - but this approach seems unnecessarily constrained if our goals are to lay the foundations for organizational change and and long-term institutional viability.
Higher ed people should be cautious about our predictions past 2022 - but we should still make them.
In order to make sense of the world, Sharma offers 2 frameworks - the 4D’s and the 10 Rules. Sharing these frameworks with you will in no way spoil the pleasures of the Rise and Fall of Nations, as it is the specifics of Sharma’s first-hand and data driven observations that make the book a valuable read.
The 4D’s are: de-globalization (a shrinking of international trade), de-population (the decline in the growth rate - and in some cases an absolute decline - in the working age population, deleveraging (the need for nations to pay off debt), and de-democratization (the tendency towards autocratic rule). (I wonder what an equivalent 4D's would be to predict the decline of a college or university?).
Sharma makes the case that economic growth over the foreseeable future will be limited by the presence in most countries of these 4D’s. He sees the rapid growth of China over the past few decades as an aberration, one that is unlikely to continue. Rather than expecting fast growth of 7% or more amongst emerging world stars, and 3% or more in the developed world, we should instead expect (and be happy with) growth rates of 5% in the fastest growing economies and 1.5% in the rich world.
A quick aside - this weekend the NYTimes has an interesting article We’re in a Low-Growth World. How Did We Get Here? The article points out that if economic growth from 1950 on had been as slow as growth since 2000, then the average American would have only been able to afford a home worth $130,500 vs. the median sale price of a home today of $249,000. What slow long-term growth (wage stagnation and under/volatile employment) means for future higher ed budgets can't be good. How we connect big macro economic trends to our own institutional economic stories is a line of discussion worth pursuing.
Back to the book. While Sharma does not expect that any country will grow as fast in the future as China has done in the last few years, (or as South Korea and Taiwan did a generation ago), there will be countries that are likely to have big problems. Sharma is mildly bearish in China, harshly critical of Russia and Turkey, and only guardedly positive about the U.S. and India.
The 10 variables (or rules) that Sharma puts forth to guide his forecasts include:
1. Demographics: Including the TFR (total fertility rate) which, along with migration, determines population growth or decline (Russia and Japan are in big trouble - China will struggle to get rich before it gets old - and the U.S. better be thankful for immigration). The other key demographic measure is the age structure, particularly the percentage of the population of working age.
2. Good and Bad Billionaires: According to Sharma, the U.S. is lucky to have lots of “good billionaires.” These are very rich people who have made their fortune by creating new businesses, as opposed to either inheriting their money, or building their wealth through political connections and by controlling monopoly pricing in extractive industries (such as oil or coal). Russia has lots of bad billionaires, Japan doesn’t have enough billionaires (the culture does not reward risk taking).
3. The Cover Story Curse: Any country that ends up on the cover of Time magazine as the “new economic miracle” is likely to have peaked - and will have a bad time of it in the future. No word about the future success of a book if it ends up in a technology and learning blog.
4. Asset Price Inflation: Asset prices include things like housing, as well as a the cost of financial instruments such as stocks. Big run ups in house prices and the stock market may mask problems, as general inflation (which takes into account the changing prices of ordinary goods and services), may stay modest.
5. The Kiss of Debt: When private debt is growing much faster than the economy as a whole a country is in for an eventual reckoning. The growth of private debt is one of the indicators coming out of China that has Sharma particularly worried about the ability of that country to maintain its role as a driver of the global economy in the years to come.
6. The Second City Rule: Any country where the capital city is dramatically larger (5 to 10 times) than the next largest city is likely to suffer from levels of economic and political inequality that will hamper effective governance and long-term economic growth.
7. Follow the Locals: Sharma is a big believer that the actions of local residents are the best indicators of future local economic trends. It is a bad sign when local business people refuse to invest in their own country, or when anyone with money tries to park their assets oversees in houses or bank accounts.
8. Stale Leaders: Putin has been running Russia since 1999, Erdogan Turkey since 2003. Sharma points to these two countries as examples of what happens to economic performance when those at the top hold on to power for too long.
9. Good vs. Bad Binges: The tech bubble of the 1990s was a good binge (or bubble) as lots of fiber optic connections were laid and other digital infrastructure was built. Real estate binges, conversely, create residential and commercial square footage that nobody really needs or wants.
10. Cheap Currency: Sharma uses the strength of a nation's currency as a proxy for the level of government interference with monetary policy. A currency that feels cheap is usually one that has been allowed to find its market value -as opposed to being artificially propped up by central bankers.
If you don't think that the 4D's and the 10 Rules make much sense, I recommend that you withhold judgement until you read the book. Sharma spends 16 hours and 7 minutes (I listened to the audiobook version) in making his case.
How Morgan Stanley uses the scores derived from Sharma’s indicators (1 being the worst, 10 being the best) is never answered in the Rise and Fall of Nations. Sharma’s unit at Morgan Stanley is in charge of investing some $20 billion in assets. His group consists of 25 researchers and portfolio managers, a research team that would make any academic envious.
Are books like Rise and Fall of Nations read and discussed by academics?
Does a book by a non-Ph.D. and non-academic enter into our academic debates?
Will social scientists reject Sharma’s arguments because his methods involve non-systematic observation (traveling and reporting what he sees) and simple math (no regression model or complex equation appears anywhere in this book)?
Maybe the people reading books like Sharma’s should be the people managing our university endowments.
What books would you recommend to get our heads around the future of the global economy?
What are you reading?
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