The Rise and Fall of Nations: Forces of Change in the Post-Crisis World

by Ruchir Sharma

Nations have been turning inward, rebuilding barriers to trade and fencing themselves off from their neighbors. In the 2010s, for the first time since the 1980s, global trade has been growing more slowly than the global economy.

For practical purposes, then, it can be said that there have been five worldwide recessions since 1970, and they had one thing in common. They all originated in the United States.

Recognizing that this world is impermanent leads to the second principle, which is to never forecast economic trends too far into the future.

The habit of hanging on to a poorly chosen and improbable anchor is compounded by the phenomenon of “confirmation bias,” the tendency to collect only the data that confirm one’s existing beliefs.

Public disillusion with the economics profession has been growing, since it failed to foresee not only the events of 2008 but also the many crises that have shaken the world before and since.

Economists are under attack even within their own ranks for being too academic and for being too focused on elegant mathematical models and theories that pretend humans always act rationally and on historical data that change too slowly to capture what may come next.

It’s important to understand economic theories, but it is equally important to learn how to apply them and in what combinations and situations. An economy’s growth rate is the product of multiple factors, and the balance of these factors will shift over time, as a country grows richer and as global conditions change.

This is a classic case of Goodhart’s Law, which says that once a measure becomes a target, it ceases to be useful, partly because so many people have an incentive to doctor numbers to meet it.6

These are the basic principles: Avoid straight-line forecasting and foggy discussions of the coming century. Be skeptical of sweeping single-factor theories. Stifle biases of all kinds, be they political, cultural or “anchoring.” Avoid falling for the assumption that the recent past is prologue for the distant future, and remember that churn and crisis are the norm. Recognize that any economy, no matter how successful or how broken, is more likely to return to the long-term average growth rate for its income class than to remain abnormally hot (or cold) indefinitely.

Growth can be defined as the sum of spending by government, spending by consumers, and investment to build factories or homes, buy computers and other equipment, and otherwise build up the nation.

Investment typically represents a much smaller share of the economy than consumption, often around 20 percent, but it is the most important indicator of change, because booms and busts in investment typically drive recessions and recoveries.

In the United States, for example, investment is six times more volatile than consumption, and during the typical recession it contracts by more than 10 percent; while consumption doesn’t actually cont...

Growth can also be broken down as the sum of production in various industries, such as farming, services, and manufacturing. Of these, manufacturing has been declining worldwide—it’s now less than 18 percent of global GDP, down from more than 24 percent in 1980—but it is still the most significant force of change, because it has...

So the rules have a lot to say about investment and factories and much less about consumers and farmers. Some say manufacturing is going the way of farming, as machines largely replace jobs, and my rules are evolving to account for this shift. But for ...

a case in point, textbooks talk about the importance of savings in driving investment and growth, because banks funnel the money saved by households and companies into investments in roads, factories and new technology. But savings is a chicken-or-egg issue: It is not at all clear which comes first, strong growth or high savings.

The payoff from investment 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. Many studies have linked the post–World War II booms in the United States and Britain to the advent of mass public education, but that change began before World War I.

A recent study by the Centre for Cities think tank found that the British cities that grew fastest in the 2000s were the same ones that had invested most in education—in the early 1900s. The economist Eric Hanushek found in a 2010 report that a twenty-year education reform program could result in an economy one-third larger—but that increase would register seventy-five years after the reform program began.

Investing in education is often seen as a sacred obligation, like defending motherhood, and too few questions are asked about whether it is getting the job done. In some countries huge expenditures on the university system have had almost no economic impact, even over the long term.

The emerging nation in which the population has the highest average years of schooling (11.5) and the largest share of university grads (6.4 percent) is Russia, where the Soviet era legacy of excellence in science and technology education has yet to affect the economy. Russia is still dependent on raw materials, and although it has a few dynamic Internet companies, it lacks a tech sector to speak of and has been one the world’s slowest-growing economies in the 2010s.

I also see limited use for various surveys that try, in essence, to make a science of measuring some of the factors th...

The World Economic Forum’s Global Competitiveness Report focuses on twelve basic categories, but many are slow-moving forces like institutions and education. Finland, for example, has been near the top of the forum’s ranking system for a long time, and in 2015 it ranked fourth in the world and first in a dozen subcategories ranging from primary schools to antimonopoly policies. Finland was also the survey’s top-ranked European Union country. Yet it suffered one of the slowest recoveries from the crisis ...

Finland was paying the price for having let its debts and wages rise quickly and for its heavy dependence on exports of timber and other raw materials at a time when global prices for these commodities was collapsing. Having good primary schools was no de...

In 2012 President Vladimir Putin set a goal of raising Russia’s rank for “ease of doing business” from 120 to top 20 within six years, and he soon saw results. By 2015, Russia was ranked at 51—more than thirty places ahead of China, and sixty places ahead of Brazil and India. That raised a question: If it was so easy to do business in Russia, why wasn’t anyone doing business there?

Another simple way to define economic growth is as the sum of the hours that people work plus their output per hour or productivity. But productivity is hard to measure, and the results are subject to constant revision and debate.

On the other hand, the number of hours people work reflects growth in the workforce, which is driven by population growth, which is relatively easy to count.

Unlike economic forecasts, population forecasts depend on a few simple factors—mainly fertility and longevity—and h...

Before the start of the new millennium, the United Nations predicted global population for the year 2000 a total of twelve times going back to the 1950s, and all but one of ...

The first rule addresses the economic impact of population growth, and most of the others deal one way or another with productivity. But I don’t use productivity growt...

In a way, population trends are half the story. Since 1960 the global economy, including both developed and developing countries, has had an average ...

Half of it came from population growth, more specifically labor force growth, or more people working more hours. The other ha...

This 50-50 split still holds, with one distressing change, which is that both sides of ...

The impact of population is very straightforward: a 1 percentage point decline in growth in the labor force will shave about 1 percentage point off economic growth. That is rou...

Global GDP growth has been trending lower and is now running more than a full percentage point below its long-term pre-crisis average. It is no coincidence that since 2005 the growth in the global labor force, ages 15 to 64, has slowed to 1.1 percent, from 1.8 percent over the previous five decades. The implications of this...

The working-age population is already shrinking in Germany and China; it is growing, but very slowly, in the United States; and it is still booming in Nigeria, the Philippines, and a few other countries. Slower growth in the world populatio...

The rest of the rules deal one way or another with the other half of the global growth story, which is captured in a loose way...

Here too the global picture appears at best mixed. Between 1960 and 2005, the average annual productivity growth rate was around 2 percent, but that rate downshifted by almos...

Like population growth rates, officially recorded productivity growth rates have fallen by varying degrees, from less than a percentage point in the United States to more than 2 poi...

But while the demographic downshift is indisputable, debate rages as to whether the pro...

Productivity growth is the sum of hard-to-quantify improvements in the skill of workers, in the number and power of the tools they use, and in an elusive x factor that tries to cap...

That x factor, which can be influenced by everything from experience using a computer to better management or better roads to get workers to their workplaces faster, is t...

Technoskeptics say that the last decade’s decline in productivity growth reflects the fact that most recent innovations involve relatively trivial advances in communications an...

Optimists respond that productivity growth measurements aren’t capturing the cost and time savings produced by new technologies, ranging from artificial intelligence to increasingly powerful broadband connections and the nascent “Internet of things.”

All the rules try to capture the delicate balances of debt, investment, and other key factors required to keep an economy humming.

Over the course of this book, it will—I hope—become clear how the ten rules work together as a system. To foreshadow the story in brief, an economy is most likely to begin rising steadily when the nation is emerging from crisis, has fallen off the radar of the global markets and media, and has chosen a democratic leader with a mandate to reform. That leader will create the business conditions to attract productive investment, particularly in factories, roads, and technologies that will strengthen supply networks and thus help contain inflation.

The probability that a boom is about to end will rise as a nation gets too comfortable and as private companies and individuals run up debts to buy frivolous luxuries, particularly imported luxuries. This period of extravagance will make it impossible for the nation to pay its foreign bills, while widening the gap between billionaires and the rest, and between the countryside and the nation’s capital, pr...

Working-age populations are already shrinking in some advanced countries, including Japan, Italy, and Germany, and while that shrinkage has been obvious for years, the same process is now unfolding or is poised to unfold even faster in many large emerging nations, including China and India. Moreover, the global population growth rate is projected to keep falling over the next decade and beyond. This changes the planet’s economic prospects in fundamental ways.

What all these alarms miss is that while ten billion sounds like a lot of people, the slowing rate of growth is what matters for the economy, including the food supply.

Slower population growth means there will be less pressure on the entire chain of production, which doesn’t have to supply as much clothing or housing or food. Farms won’t have to increase production as fast as they have in the past to feed everyone, and they will have to expand mainly to meet the needs of elderly people, who consume up to a third fewer calories than young people.

I don’t want to minimize the real problems of hunger in many countries, but the economic driver of these problems is not population. For most countries, the primary economic threat is not too many people but rather too few young people, and the arrival of robots may simply help relieve t...

In a world where more and more countries are going to face labor shortages, the current controversies over “marauding” migrants will give way to—or perhaps rage alongside of—aggressive campaigns to a...