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

by Ruchir Sharma

Between 2005 and 2010 net migration from developing to developed countries totaled 16.4 million people, but from 2010 to 2015 that total fell by nearly five million.

On a trip to Peru in January 2014, I was surprised to discover that by some rankings, Lima is home to three of the world’s top twenty restaurants, a result of the mixing of Latin and Asian styles that has its roots in the migration of labor from China and Japan back in the nineteenth century.

The joke in the AI field is that if you say AI is coming in twenty years, you can get investors to fund your work; if you say five years they will remember and expect you to deliver, and if you say one hundred years they won’t be interested.

Addressing the predictions of a jobless future, the Harvard economist Lawrence Katz has remarked, “We never run out of jobs. There is no long-term trend of eliminating work for people.”13

Soon after his trip to Delhi, Bell offered pretty much the same advice to the newly self-installed leader of Indonesia, General Suharto, and got the opposite response. Suharto was so impressed, says Nehru, he called World Bank chief Robert McNamara and asked him to appoint Bell as the bank’s representative in Jakarta. Bell served in Jakarta from 1968 to 1972 and, along with a circle of U.S.-educated Indonesian technocrats who came to be known as the “Berkeley Mafia,” helped transform the impoverished country into a mini-Asian miracle over the next two decades.

The former Indonesian finance minister Muhamad Chatib Basri has come close to capturing the full circle in a favorite saying: “Bad times make for good policy, and good times make for bad policy.”

WhatsApp gained seven hundred million followers in its first six years in business, which is more than Christianity gained in its first nineteen centuries, as Forbes magazine has pointed out.

Large black economies can breed social resentment, since the art of dodging taxes is often most refined among the rich. In India, the government manages to collect income taxes equal to only 3 percent of GDP, and the size of the black economy is estimated to account for around 30 percent of GDP. This is one reason India suffers from chronic government deficits. The culture of avoiding taxes starts at the top: In a vast population with more than 250,000 millionaires, only 42,000 individuals report incomes of $150,000 or more, as economist Tushar Poddar has pointed out. He argues that tax dodging at the top creates a strong disincentive for any Indian citizen to pay up, in turn perpetuating tax evasion.

Georges Clemenceau, an early-twentieth-century French president, described France as “a very fertile country: you plant bureaucrats and taxes grow.” A few decades later the comedian Michel Coluche quipped that if there was a tax on stupidity, the state would pay for itself. And a modern writer, Frédéric Dard, remarked, “It’s when you are paying your taxes that you realize you can’t afford the salary you earn.”

Worldwide, flows of goods amount to about $18 trillion a year, significantly greater than flows of both services and capital, which account for about $4 trillion each.

The port at Jebel Ali is entirely man-made and is now the world’s seventh busiest, deep enough to host U.S. aircraft carriers and large enough to handle new supersize container ships that are causing traffic jams at American ports, which are too shallow to unload such large vessels at the docks.

Over the same time period in India, only two towns of under a quarter-million have emerged as cities of more than one million—Mallapuram and Kollam in Kerala state—and their emergence is due largely to a redrawing of the local administrative map. If it were not for a widening of their boundaries in 2011, these two cities’ populations would still fall well short of the one million

Outside the lucky cases of small countries that hit the lottery by discovering oil or natural gas, most nations have found it impossible to even begin the process of breaking out from poverty without building manufacturing industries as an initial step.

The United States is now a major customer for goods manufactured in the emerging world as well as a rival to emerging-world manufacturers. By 2015 there were even stories about a few U.S. companies making a comeback in simple industries like clothes and sneakers.

Only six other developed nations have manufacturing sectors that account for nearly 20 percent of GDP or more—Singapore, Germany, Japan, Austria, Switzerland, and Liechtenstein.

The discovery of oil has stunted development, which is why it has come to be seen as a curse. The way the curse works is that the production of oil sets off a scramble among elites to secure shares of the profits rather than invest to build roads, power plants and factories. In oil-exporting countries, the leadership becomes decreasingly reliant on revenue from taxpayers, then less inclined to listen to them as voters; instead it quiets their rumblings by spending a part of its oil revenue on subsidized gas, cheap food, and other unproductive freebies. Meanwhile other industries suffer. Foreigners pump in money to buy the oil, which drives up the value of the currency, in turn making it difficult for local factories—what few exist—to export their goods. The oil windfall tends to undermine every local industry other than oil.

Africa’s richest man, Aliko Dangote, who has interests in everything from food processing to cement manufacturing, told me in July 2015 that in his home state of Kano in Nigeria, twenty million people get by on forty megawatts of power, which in a developed country is the standard capacity for a town of forty thousand.

Rulers have often been toppled when the poor rose up against high prices for food. One of the seminal events that ended British rule in India was Gandhi’s Salt March against imperial taxes that were driving up the price of that staple seasoning. In a poor country such as India, basics like salt and onions are pillars of national identity, ingredients without which comfort meals, including daal and kebabs, would “lose their self-respect,” as the essayist Nilanjana Roy once put

Inflation discourages savings, because it erodes the value of money sitting in the bank or in bonds, in turn shrinking the pool of money available to invest. Eventually, high inflation will force the central bank to take action by increasing the price of money through higher interest rates, which will make it more expensive for businesses to expand and for consumers to buy homes and cars; as a result, the growth boom will stall. When inflation is very high—say, in the double digits—it also tends to be volatile, dropping suddenly or accelerating into hyperinflation, adding new hurdles to growth in the economy. In an environment where prices are prone to wild swings, businesses find it difficult to get financing for their projects and also can’t be confident of the likely return on their investments. If businesses are afraid to build new supply networks or improve old ones, those networks continue to fall short of meeting demand, which keeps driving up prices. The economy then becomes permanently inflation prone.

Still, we live in a much more globalized world than we did before 2008, and the integration of cheap labor from China and other big emerging nations continues to put heavy downward pressure on both wages and consumer prices around the world. It is now difficult for local prices to rise quickly, because if they do, local wholesalers are no longer yoked to local suppliers. They can shop around overseas for cheaper suppliers of clothes or hammers or TV sets. For similar reasons, it is difficult for local wages to soar because producers can shut factories at home and contract production out to countries with lower wages. These are market forces, largely beyond the control of political leaders.

Former Malaysian central bank governor Jaffer Hussein told me before the Asian financial crisis in 1997, “Good bankers, like good tea, are best appreciated when they are in hot water.”

In 2015, for example, consumer demand was weak around the world, and debts were rising in China and other emerging countries—both signs of bad deflation. But there were also signs of good deflation. For example, one of the most important contributors to the falling inflation rate was the collapse in the price of

One rule of thumb is that the bigger the run-up in home or stock prices, the more likely a crash. History shows that many long runs of economic growth ended in a house price bust, so the real estate market is worth especially close watching. In general, if for an extended period of time home prices grow at a faster annual rate than the economy, be on the alert. In a 2011 paper looking into potential causes of the global debt crisis, the IMF studied seventy-six cases of extreme financial distress across forty countries and found several key indicators that seem to rise before these meltdowns, including home prices.

coffee, stock in a company, or even a factory. This is a critical question for understanding a nation’s economic prospects: Does the country feel cheap or expensive? If the country has an overpriced currency, it will encourage both locals and foreigners to move money out of the country, eventually sapping domestic economic growth. A currency that feels cheap will draw money into the economy, through exports, tourism, and other channels, boosting its growth.

Of course, a free fall in a currency is not a good sign, particularly if the country has substantial foreign debt and does not have a manufacturing base for exports that can benefit from a cheap exchange rate. The ideal mix is a market-determined cheap currency in a stable financial environment underpinned by low inflationary expectations: That combination will give local businesses the confidence to build, banks the confidence to disburse loans at reasonable rates, and investors the confidence to make long-term commitments to the rise of a nation.

Investors focus on the future, while the news media focus on the present.

Their perspectives diverge because their incentives are different. Market players make money by being early to the next big trend, while media commentators make their reputation by credibly explaining the day’s headlines.

The next stars often emerge from among countries that have fallen off the media radar—or were never on it in the first place. They start to flourish—or recover momentum—when left alone to put their economic house in order, and it is only after they record several years of strong growth that the media discover them. By then, the run may be nearing exhaustion. The basic rule: the global media’s love is a bad sign for any economy, and its indifference is a good one.

Pundits of the 1950s and ’60s paid very little attention to Asia, and when they did pay any mind they celebrated the prospects of the Philippines and Burma, both rich in metals, gems and other natural resources. They pitied China and India, and into the mid-1960s many economists dismissed Taiwan as a “basket case” devoid of natural resources, lacking in capital, with a corrupt and discredited government presiding over a largely illiterate population.2 The world took a similarly dim view of South Korea, seen by commentators in the United States as a “hopeless and bottomless pit,” a frontline Cold War state into which Washington was dumping foreign aid dollars with little prospect of generating any economic turnaround. Donors spoke of pouring money down the Korean “rat hole.”3 These assessments misfired on every salient point—wrong on the future of continents and of countries. Since the 1970s, Asia’s average income has been catching up to the West, but Latin America has fallen behind. Argentina continued to tread water, and Venezuela hit the wall when oil prices collapsed in the 1980s. Within Asia, Burma faltered even before the government fell in a 1962 coup that created the failed military state which the generals later renamed Myanmar. The Philippines followed Burma down the tubes three years later, when the kleptocrat Ferdinand Marcos and his equally corrupt wife took power. Meanwhile, their less-noticed Asian neighbors, led by Taiwan the “basket case” and South Korea th...

One of the big wildcards for the United States is the rise of angry populism, a bad sign according to the circle of life rule. Prospects for major reform rise when new leaders are coming to power, particularly after an economic crisis and when they have a mandate to revive growth. But often is not always. In other post-crisis environments, the electorate may demand something more like retribution, rather than reform, if they are angry over rising inequality or fearful of foreign threats. That is the mood in many countries now, the United States included. To an extent not seen in many decades, the 2016 U.S. presidential campaign has been dominated by populists, led on the right by the real estate billionaire Donald Trump and on the left by Bernie Sanders, who is calling for a political revolution against the “billionaire class.”