I am looking at the upcoming month with a sense of foreboding. For on the second day, this dear digital corner of mine completes a mighty four years. But, as I looked back, all I saw was the number of posts going down. Gradually, as is generally the case, my internal voice split into two. One kept hyperventilating about how I am letting go of the one thing I have stuck to. The other was like a cooling sage to tell me that enough people start a blog but life generally takes over. Just sticking it out, even with a few longish barren stretches of no posts, is something to build on.

Why would I start with this kind of a justification built in? That’s because not only does this post come after my going MIA for all of August, it is also just the second Book Babble post for 2021!!!! I know!

But enough said.  Today, after ages, I have a book to talk about in the Personal Finance space because even economics feeds into our decisions in that space. Growing up, I have not taken much to economics. Even within the discipline, micro economics seemed far more relatable than the grandiose, abstract world of macro economics. One of the first books which got me hooked to the latter though was the funkily drawn out Naked Money, by Charles Wheelan.

Some days back, a friend gave me this tiny book with a lofty title – 10 rules of successful nations by Ruchir Sharma. Flipping through the pages, I realised after a long time there was something new for me to wrap my head around which could also be shared here.

What’s the book all about?

The 10 rules of successful nations is an adaptation from the authors’ previous, highly popular tome – The Rise and Fall of Nations. Both the books are a result of his observations, experiences and freakish amount of data crunching on a topic that he is passionate about. As for the purpose of the book, he makes it pretty clear on the first page itself with these words:

This book, culled from my quarter century in the game, outlines ten rules for spotting whether a country is on the rise, on the decline, or just muddling through. Together, the rules work as a system for spotting change.

-The 10 Rules of Successful Nations, Ruchir Sharma

The data pooled together is a result of looking at 56 post-war success stories or economies which have had atleast one patch of more than a decade of average real GDP growth of 6{76b947d7ef5b3424fa3b69da76ad2c33c34408872c6cc7893e56cc055d3cd886} per annum.  This was looked at over a period of 70 years! As per the author the data is sufficient to validate most cases, barring possible outliers or black swan events.

For the uninitiated, the book is a whirlwind trip of global economic history in the post second World War era. The author seems to have a knack of coming up with these apt anecdotes or examples, replete with perfect numbers to make his point.

What really fascinated me was the way he joined the dots across seemingly disconnected aspects. Since I read the concise version, the prognosis and the input factors were also very clearly laid out.

Three points to remember

Sharma makes a few points very clear in the introduction itself and I took them away in my own way merging a few.

1. Impermanence of economic change

Once we or even the business media starts getting excited about a trend, they often choose to believe in it far longer than warranted. What they forget is the classic truism about cycles in economics. Howard Marks went on to write a book about it with respect to markets. But, Ruchir Sharma goes on to postulate that it holds true for entire economies.

The question to ask is never What will the world look like if current trends hold? It is, rather, What will happen if the normal pattern holds and cycles continue to turn? In a sense, the rules are all about playing the right probabilities, based on the cyclical patterns of an impermanent world.

-The 10 Rules of Successful Nations, Ruchir Sharma

The circle of life also helps explain why so few booms last long enough to vault developing economies into the developed ranks, and why those that make the leap are called “miracles”: they have defied the natural complacency and decay that kills most long booms.

-The 10 Rules of Successful Nations, Ruchir Sharma

Hence, it is very difficult for emerging markets to make that jump into the developed categories, South Korea being one of few such “miracle economies”. Similarly, it’s pretty rare to go down the ladder from developed to emerging, although Greece has done that quite famously.

2. Market is a worthy mirror

Being in India and having witnessed our muddle through important data points, we of all people should know, that official figures on headline numbers for an economy may not always give the true picture. As Sharma puts it, it’s better to get real-time intelligence from the field and also try to sniff out the direction in which the market is headed.

All told, though, the market accurately signalled coming recession 60 percent of the time. Economists as a group got it right zero percent of the time.

-The 10 Rules of Successful Nations, Ruchir Sharma

So the markets may not be perfect in their forecasts either but their track record does seem to be better probably because they have more on the line in real terms – money.

3. Assume a practical time frame

While as humans looking at things in a short time frame is a weakness, the situation turns on it’s head when it comes to academicians. Most of them like to make lofty models peering into the future. That is another pitfall Sharma warns against with the caution that all trends should be looked at with about a 5-year time frame.

Noted psychologist Philip Tetlock has put thousands of predictions to test, and in his book Superforecasting he presents evidence confirming that forecasts get less reliable the farther they reach into the future, and that they become no more accurate than random guesses beyond five years.

-The 10 Rules of Successful Nations, Ruchir Sharma

In the same vein, he also points out that we need to rule out any impact of trends which show results in a much longer run. For instance, investment in education will really start showing it’s true colours atleast a decade or two down the line. However, by then the cycle may have turned to being unsupportive and it may not really go as planned.

Some rules of successful nations

With such pearls of wisdom, you can see why I was hooked through the introduction itself. Although I generally like to talk about 5 major points from any book I discuss here, in this case I will limit it to 3 meaty aspects so that it whets your appetite and you go ahead and pick up this book.

1. Population

Sharma gives a eureka-moment like equation neatly pointing out economic growth equals population growth times productivity growth. In this case, population is the far easier metric to measure whereas a lot of ancilliary measures will be used to feed into the fuzzy idea of productivity.

As I started reading about population, it seemed that there was a lot to unlearn for me. In school, when we were taught about this number, it was always about how the growing, burgeoning people are a burden on the resources of this country.  But as Sharma points out,

The impact of population growth on the economy is very straight-forward and very large. If more workers are entering the labour force, they boost the economy’s potential to grow, while fewer will diminish that potential.

-The 10 Rules of Successful Nations, Ruchir Sharma

However, he does point out that it is only one part of the equation and the “demographic dividend” pays off only if the environment is made conducive for productivity growth as well.

He points out three main factors for population growth – fertility, longevity and immigration adding on two bonus ancilliary measures to increase labour force from the existing pool – increasing participation by women and robots. Beyond that, Sharma makes some bold claims and basic equations across two pages:

A 1 percent decline in the working-age population growth rate will shave about 1 percentage point off economic growth, which is roughly the story of the last fifteen years.

-The 10 Rules of Successful Nations, Ruchir Sharma

In short, if a country’s working age population growth rate is not above 2 percent, the country is not likely to enjoy a long economic boom.

-The 10 Rules of Successful Nations, Ruchir Sharma

Since this post is already quite long and I want this to only whet your curiosity about the book enough to read it yourself, I will be pretty brusque about this.

When it comes to fertility, or the organic growth rate of a country’s population you would be well aware that it has been falling quite sharply and below the “replacement rate” of 2.1 children per woman in some cases. While China made news with abandoning it’s one-child policy, there are quite a few developed countries incentivising families to produce future labour force.

The race to fight the baby bust is already on. According to the United Nations, 70 percent of developed countries today have implemented policies to boost their fertility rate, up from about 30 percent in 1996.

-The 10 Rules of Successful Nations, Ruchir Sharma

When it comes to longevity, here again, the author is talking about the population’s longevity at work. Think about it. Even though our average life spans have extended elastically, retirement age has remained pretty static. What it does is increase the dependency ration of elders and minors on the working age populace supporting them. Germany was one country mentioned which is has increased the retirement age from 65 to 70. For a person who wants to never retire, I thought that’s a welcome development.

And finally, immigration. With the number of friends and families we are losing to the charms of Canada and Australia, do I really need to detail out this point as to how some developed countries are realising the lack of labour force and happily opening their doors to skilled workers?

2. Inequality

To me, this was quite an eye-opening chapter especially with the metrics mentioned by Sharma. Personally, the tilting scales on income inequality have always bothered me. As this article shows with very solid numbers, unfortunately Covid-19 has set us Indians back even further in this struggle to narrow the gap. 

But, before I digress, check out just how much weight the author puts on this metric:

Until recently, wealth inequality was often downplayed as a social issue, too soft to shape an economic forecast, despite the growing body of research showing that rising inequality can undermine growth in at least three ways: by discouraging mass consumption, rewarding corruption, and fueling political resentment against wealth creation.

-The 10 Rules of Successful Nations, Ruchir Sharma

However, the conventional measure for income inequality, Gini Coefficient is more of a hindsight metric with trailing numbers. The author instead comes up with three ways to pseudo assess how the country is faring on inequality in real-time terms.

One, to check the proportion of wealth commanded by billionaires in the country. The global average stands at 10 percent and anything lower is obviously healthy whereas as it gets higher, am sure you get the picture.

Two, to see how entrenched is this clan of billionaires by calculating the dependency on family wealth using the Forbes data for “self-made” or “inherited” wealth. This is one of those data points where the range is pretty wide from about 15{76b947d7ef5b3424fa3b69da76ad2c33c34408872c6cc7893e56cc055d3cd886} in Britain and Japan to 70{76b947d7ef5b3424fa3b69da76ad2c33c34408872c6cc7893e56cc055d3cd886} in Indonesia. Although the author does mention a lot of T&Cs to see this data qualitatively, very high numbers still seem like a red flag all the way.

Three, is an interesting distinction made between good and bad billionaires. In a way he describes bad billionaires as the ones which may be in more of “rent-seeking” businesses that depend on natural resources. This would include industries like real estate, oil, mining etc. On the other hand, good billionaires are those who are increasing the overall productivity for the country (especially through technology) or those that make popular consumer products. In some ways, it’s like the distinction between cyclical and consumption stocks.

It’s a bad sign if the billionaire class controls too fat a share of national wealth, becomes an entrenched and inbred elite, and builds fortunes mainly from politically connected industries. A healthy economy needs an evolving cast of productive industrialists, not a fixed cast of corrupt tycoons.

-The 10 Rules of Successful Nations, Ruchir Sharma

This made me wonder if in Sharma’s books this meant that Mukesh Ambani is transitioning from a bad billionaire to a good billionaire.

3. Debt

When we look at the covid crisis, one of the aspects often discussed is the rising debt-to-GDP ratio in multiple countries across the globe. In that background, reading Sharma’s views on debt made even more sense. Check out what he says as he succinctly put across debt as a lead indicator to where an economy could find itself soon enough:

The clearest signal of coming trouble is the pace of increase in debt, not the size of the debt. Size matters, but pace matters more. Government debt plays a role but usually rises later, after trouble starts in the private sector. A sharp increase in private debt is the leading indicator.

-The 10 Rules of Successful Nations, Ruchir Sharma

After some fascinating number jugglery which he takes the reader through (making the book a must-read for anyone interested in data intricacies), he comes across a certain conclusion – if private credit (as a share of GDP) grows by 40{76b947d7ef5b3424fa3b69da76ad2c33c34408872c6cc7893e56cc055d3cd886} over a 5-year period, GDP growth rate is bound to fall by more than half in the next 5 years! Of the 30 economies where he saw evidence of the former, the latter happened in all instances. Scary, eh?

He goes on to investigate why private enterprises would be the Pied Piper in this case, leading all down a path of economic doom. But, as he and most investors now understand, that is just one phase of the cycle.

The upside of the rule is that if private credit has been growing much slower than the economy for five years, the economy could be headed for recovery, because banks will have rebuilt deposits and will feel comfortable lending again. Borrowers, having reduced their debt burden, will feel comfortable borrowing again.

-The 10 Rules of Successful Nations, Ruchir Sharma

Although the gradual recovery after a debt bust comes with a debtophobia, it is after all the circle of (economic) life that we might as well make our peace with.

When I got this book, I looked at it and thought it’s a tiny little thing and I could pretty much ingest it in no time. Boy, was I wrong. This is a kind of book that you should read when you are in a mind frame to learn and your brain is set to focus mode. In fact, take a pencil and make your notes even if not in economics then in just how to unearth a wealth of information from seemingly innocent data points.

Have you read this or any other of Ruchir Sharma’s books? What did you make of them? Let me know in the comments below.