The Rise and Fall of Nations: Book Review

As a student of economics, I must confess, that books written by economists are not exactly page turners. In this case it was different.I chanced upon The Rise and Fall of Nations by Ruchir Sharma and started flipping through the Prologue. That got me hooked. Ruchir begins with the story of the African king who sends his son out to learn the rhythms of the jungle. In the first year the boy could identify the lion’s roar and the elephant’s trumpet. Each year as the boy goes back, he learns to hear the rustle of a snake - what remains unknown to the untrained. The king tells his son to keep going back until he can hear “danger in the stillness and hope in the sunrise”.

Factories and onions

If you keep your highlighter handy, you will pick up the signs that spell “danger in the stillness and hope in the sunrise”. For instance, his observation that the last five recessions (global growth less than 2%) since 1970, have originated in US. The next recession will originate in China.Or that the S&P 500 Index starts to turn down seven months before the peak of an expansion and turn up four months before a recession bottoms out.Or that leaders would do well to invest in manufacturing because the masses while services usually need a better educated population to draw from. Investing in technology is the next best option. Real estate and commodities are cursed. It is always factories first says Ruchir.There is of course the danger that once a measure becomes a target, it ceases to be useful. Too many people have an incentive to doctor numbers to meet it. In China, analysts who were skeptical of the official GDP figures started checking other indicators such as growth in cargo traffic and electricity consumption. In 2015 reports emerged that “government authorities were instructing developers to keep the lights on even in empty apartment complexes. The aim was to drive up electricity consumption data so that it would confirm official growth claims.”

Danger in the stillness

Ruchir creates a dashboard of ten rules that explain the post-crisis world. These range from the obvious measures like inflation. That could be the equivalent of hearing the roar of the lion or trumpet of the elephant. High inflation is kills growth while low inflation (around 2%) allows the government to invest in infrastructure that can be used when the economy slows down. The chapter called “The Price of Onions” talks about the price of onions as a measure that could provide a pulse (no pun intended) of the public mood. Just what Manmohan Singh and his advisors missed.“In today’s globalized world, in which cross-border trade and money flows often tend to restrain consumer prices but magnify asset prices, watching the price of stocks and houses is as important as tracking the price of onions.”For me the most valuable insights came from the chapter titled People Matter. The trigger for economic growth lies in a 2% increase in working population. A baby takes almost 20 years before he/she enters the work force. Falling birthrates plus longevity is a lethal combination that slows down growth.In the next decade from 2020-2030 only one will grow at that rate - Nigeria. The political leaders have to create the economic conditions necessary to attract investment and generate jobs. The recent influx of refugees may actually be an answer to Germany’s depleting working-age population. But is it enough to have people without their having the necessary skills? A dropping population does not bode well for the world.Ruchir argues in his book that investment in the university system as was the huge investment Russia did in science and tech education has not created growth in Russia.  It lacks a tech sector even today.The pay off in education is so slow and variable that it is almost useless as a predictor of economic change over a five-to-ten-year period. Beyond that it is risky to make predictions about economic growth anyway. I wonder how this will play out as the digital tsunami creates disproportionate opportunities for developing nations to catch up.I emailed Ruchir to ask him why he had dismissed the importance of skills. He emailed back to say:

“…yes skills matter but countries like Germany and Japan are facing such a demographic challenge, particularly for some low end workers that any additions to their depleting labor force will be a net positive for the economy as long as they can assimilate the workers well - something admittedly historically European countries have not been great at doing. So assimilation more than skills is the challenge for them.”

What did I not like about the book? Applying each rule to dozens of countries in each chapter tends to amuse and then starts to get tedious. The book dazzles in the beginning but frazzles towards the end. If you never read books written by economists, give this one a shot.-------Read: The myth of demographic dividendJoin me on Twitter @AbhijitBhaduriDownload the sketchnote <click here>