Book Review: The Rise and Fall of Nations: Ten Rules of Change in the Post-Crisis World by Ruchir Sharma, London: Allen Lane, 2016; pp 464, £25.
Ruchir Sharma grew up between Mumbai, Delhi and Singapore. He entered the world of international investment in the early 1990s as a specialist in emerging markets. He has travelled a lot ever since—around one week a month on average. He was also an active journalist at ﬁrst, posting vignettes drawn from his travels in the mass media. In 2012, he published Breakout Nations: In Pursuit of the Next Economic Miracles which is said to have broken sales records. He is now the head of emerging markets and chief global strategist at Morgan Stanley Investment Management in New York. In his earlier book, he reported the views of village barbers as well as celebrities, but in the present one, we just get the celebrities.
Ten Thumb Rules
According to Sharma, the ﬁnancial crisis of 2008 and after was a watershed. Before it, some 60 countries were growing at 7% or more a year, now just nine. Trade is stagnant and capital ﬂows have halved. The BRICS (Brazil, Russia, India, China and South Africa)—a term that Sharma never liked because they had little in common—are in poor shape. China is heading for a credit crunch, Russia is a busted autocracy, Brazil is in rapid political and economic decline, India is chugging along at its own pace, and South Africa is a mess. So what is an emerging markets investor going to recommend? Long-term predictions are out. We must respect the logic of the trading ﬂoor where short-term bets rule. Most boom/bust cycles last no more than 5–10 years. The smart investor gets in before anyone else and sells at the boom’s peak. Sharma recommends 10 rules of thumb as a guide to a country’s likely success or failure. He scores individual countries on a scale of 1–10 points for each rule. Readers are not admitted to this level of detail which presumably must be paid for. Some factors—(“rules” is to put them too strongly)—are taken to be more critical than others, depending on circumstances. Thus, China’s debt trap will cancel out its pretensions to world leadership. The 10 factors are: population growth, political cycles, inequality, state intervention, geography, manufacturing, inﬂation, exchange rates and the cost of living, debt, and media hype. Long-run developments and social classes are ignored, and the politics of reform and inequality are reduced to individual leaders and “good” or “bad” billionaires. The lack of social depth to these analyses, which are just indicators supported by unsystematic analysis and enlivened by anecdotes, is signalled early on by Sharma’s use of African wildlife as a metaphor for the big cats and herds of ﬁnance. This is not to say that the contents of each chapter are worthless. Many sections have catchy headings and the ordering of priorities often shows keen intellectual judgment, as one might expect of someone given responsibility by a big Wall Street ﬁrm for channeling capital investment to the world or at least to those parts deemed to be worth betting on. For example, after a chapter on “impermanence”—(nothing lasts, so forget the hype suggesting otherwise)—the chapter on population is full of good sense. Economic growth has always been linked historically to population growth. Sharma goes on to make some astute observations that contradict attitudes now rampant in our times, especially in the West, with regard to overpopulation hysteria, the failure of public attempts to boost fertility, the delayed economic effects of educational expansion, the positive inﬂuence of immigration, women’s changing role in the labour force and so on. Much of this is too long term for his investment perspective, so he has to come up with meaningful short-term indicators. But his overall assessment here is both humane and realistic.
No Engagement with History
One might think that a book with this title would have to engage with history. But that is not Sharma’s method. He frankly admits that he did not anticipate some of the big busts when they occurred and relies on hindsight most of the time. As Reinhart and Rogoff’s historical analysis of many examples of the boom/bust cycle demonstrates, against the few oddballs who insist that “what goes up comes down,” there are always many more for whom “this time it’s different”—this boom is robust and durable. Sharma has a hidden weapon, however, which he occasionally reveals in this book. As a big fund manager, he has an army of assistants at his disposal who can research any question. For a suitably long period, they have identiﬁed four signs of a stock market bubble: prices rising faster than the underlying rate of economic growth; high rates of borrowing to buy stocks; overtrading by retail investors; and ridiculous valuations. Another example is that a major slowdown always follows when the national debt grows by more than 40% over a ﬁve-year period; and this rule currently applies to only one country, China. As Sharma surely knows, this kind of analysis depends heavily on getting the timing right. Keynes discovered this unpleasant truth when shorting the deutschmark after the Versailles treaty punished Germany. He lost his shirt when the German banks somehow kept its exchange rate up for another year. His father remortgaged the house to bail him out. In 1923 at a Cambridge party, someone with the Weimar inﬂation in mind told him that in the long run he was right. This was the context for his most famous saying, “in the long run (of markets) we are all dead.” Keynes never made bets with his own money again.
The economic historian, R H Tawney once said of a rival, that his writing reminded him of a Chinese opera, “three hours of curtain-raising and the action over before some might have thought it properly begun.” If the proof of the pudding is in the eating, the eating here lasts only for a ﬁnal chapter of some 40 pages (less than a 10th of the book), “The good, the average and the ugly.” Readers might want to mark their race cards before ﬁnding out who won. Remember that any forecast is limited to the next ﬁve years. Sharma tells us that he ﬁnished writing the book in March last year. Given his breathless take on events, much of what he has to say here comes across as yesterday’s news. The United States (US) gets good marks, a position Donald Trump and I would agree with, but for very different reasons from those on offer here. The American empire rests on mercantilism (use of its third of the global market to bully dependent countries), militarism (all those weapons and bases), intellectual property (its three leading exports are movies, music and software), and control of the world currency (alluded to by Sharma). It produces most of the content, hardware, software and giant ﬁrms of the digital economy, which is rapidly becoming the world economy. There is nothing liberal, neo- or otherwise, about any of this.
Distracts with Complications
The failing BRICS I have already mentioned. Latin America gets the thumbs down. India receives a middling mark, but South Asia as a region (Pakistan, Bangladesh and Sri Lanka) is identiﬁed as a major growth spot in the coming period. Southeast Asia is less promising, with a rank order of Philippines, Indonesia, Vietnam and Thailand. East Asia is in trouble because of China’s impending collapse, Japan marginally less so, and Australia, after 25 years without a recession, is heading for the precipice. In Europe, Germany is alright, but France is inevitably a loser since it is the world’s most statist economy. Eastern Europe has some bright spots, including the Czech Republic and Romania. Turkey gets a bad write-up here, and the West Asia is largely ignored (Dubai was singled out earlier as a prime example of exploiting a favourable geographical location). Africa is too fragmented and half its countries have economies about a third the size of Vermont’s. The biggest, Nigeria and South Africa, do not seem to be going anywhere. East Africa is promising, especially Kenya. Nothing is made of Africa’s rapid adoption of cell phone technology, with Kenya as the world leader in mobile banking. This relative indifference to the impact of information technology, especially in favour of manufacturing, is a consistent feature of the book. Africa is given headline treatment for media hype about “Africa Rising” based on permanent extrapolations from commodity prices that have fallen drastically in recent years. One useful by-product of the Morgan Stanley research team is an analysis of the world’s fastest-growing countries in a given decade over the last half century. Africa ﬁgured prominently on this list in the ﬁrst decade after the millennium with seven out of the 10 fastest-growing economies. None of the leaders in any decade kept up a similar rate in the following one. In this respect, China’s rise was matched by Russia in 1890–1913 with average annual growth rates of around 10%. We all know what happened next. The book’s main message is that it is easy but invariably false to make long-term extrapolations from short-term trends. The emerging markets of yester-year are not converging with traditional capitalist powers, even less replacing them, at least not the US . The norm today is once again uncoordinated booms and busts of the sort that characterized the world economy for 150 years before the global settlement after 1945. Nietzsche said, “intellectuals simplify.” This book distracts with its complications.
Failed Political Sociology
To all intents and purposes, history began for this book with the neo-liberal counter revolution of 1979–80 against the era of developmental states in the industrial West, the Soviet bloc and newly independent countries that preceded it. Reagan, Thatcher and Deng are presented as political leaders with the vision to implement structural “reforms” liberating markets from state control, especially money markets. I once saw a televised dinner given in the City of London for Denis Thatcher. He was a ﬁgure of fun in the British media at the time, but here he entered like a Renaissance prince and was given a standing ovation by the assembled masters of the ﬁnancial universe. His wife’s achievements in the service of ﬁnance included the legalisation of gambling on stocks in London’s “Big Bang” and her unconstitutional massing of the national police force to defeat the coal miners’ strike. If the world economy is in the doldrums after 2008, this has not checked the ascendancy of global capital over all forms of opposition. As Philip Mirowski puts it, “Never let a serious economic crisis go to waste.” Far from being weakened by the ﬁnancial crisis, the super-rich have been emboldened by it to make the working poor and middle classes pay for their debts while continuing to enrich themselves through political privilege. Apart from its lack of historicism and unreﬂecting ideology of economic liberalism, the political sociology of this book is its principal failing. Nation states were the dominant social form in the second half of the 20th century; but even then supranational entities emerged such as the Cold War coalitions mobilised by the US and Soviet Union, the non-aligned movement, regional trade federations like the European Common Market, Association of Southeast Asian Nations ( ASEAN ), North American Free Trade Agreement ( NAFTA ) and Mercosul (South American Common Market) (which were supposed to protect weak nation states from a lawless global money circuit), the ﬁnancial and trade architecture designed at Bretton Woods and the administration of global “development” through United Nations agencies. Is undiluted nationalism congealed forever in a world without signiﬁcant wars, revolutions and historical movement? I think not. Sharma, having framed the population question so well, misses out the major scenario for our century. Asia (60%) and Africa (15%) currently account for three out of four human beings alive. By 2100, they are forecast to have 82% between them, but shared equally. All of America, Europe, Russia and the Paciﬁc will account for only 18% of world population. At least in population terms, the relationship that will count is the one between Asia and Africa. This is because Africa is the only major region whose population is growing (at 2.5% a year). No wonder the white racists are worried. Given Sharma’s acknowledgement that population and economic growth are closely linked, even if the trend is too long-term for him, much in the coming century will depend on how this all works out. Certainly the Asian manufacturers, led by China, know that Africa will be the most buoyant sector of demand in the world market. Of course, a lot depends on political developments; but if Germany could go from 40 states to one in half a century, something similar in Africa is not to be ruled out. There is no precedent in the last two centuries for Sharma’s assumption that nation states will remain the dominant political form indeﬁnitely. Indeed, as we have seen, it has never been so, even in the last half century. Why would he make such an assumption? For one possible answer, we must pay attention to a gaping hole in his book’s cast of economic actors today. There are no transnational corporations here, apart from our author’s occasional reference to working for one. Of the 100 largest economic entities on the planet, almost two-thirds are corporations when compared with governments. The ratio is about half and half when corporations are compared with national economies. But this does not take into account the scale of offshore ﬁnance which serves the corporations and dwarfs government revenues. A Cambridge economist, James Mirlees, won a Bank of Sweden Prize for demonstrating that the rich could not be forced to pay more tax than they want to. The US , with some backup from the European Union and a high level of corporate participation, has been pushing in great secrecy for transatlantic and transpaciﬁc trade and investment treaties, now called into question by Trump. The decades since 1980 have seen enormous shifts in the balance of power between governments and businesses under a regime of neo-liberal globalisation that dismantled the ability of governments to protect their peoples from global capital which was granted almost perfect mobility around the world. This was in stark contrast with the era of developmental states that preceded ours, with their focus on public infrastructure, popular spending power, managed currencies, and capital controls that launched the biggest boom in world history from the late 1940s to the early 1970s.
In recent decades, inward investment by corporations around the world ran up against an absence of effective government everywhere as a result of policies hostile to governments known as “structural adjustment.” This led to a rethink—the corporations did not want to have to adjust to separate legislation in all the countries where they now operated, but they did need local police enforcement of a favourable social order, as capitalists always have. International agencies such as the World Bank, International Labour Ofﬁce and World Trade Organization acted as coordinators of transnational rule systems in which the legislative powers of governments were curtailed and their police operations dovetailed with the needs of major corporations.
The Transatlantic Trade and Investment Partnership takes this to another level, where corporations would be allowed to sue individual governments if legislation increases their costs, not just their actual costs, but potential costs for up to 30 years. This is hearsay of course, given the secrecy surrounding negotiations.
Global capital ﬂows are governed by short-term decisions on a massive scale. The largest of these, foreign exchange transactions, had a daily turnover in 2013 of $5.3 trillion! A focus on this level cannot possibly comprehend the social forces that are already shaping our century. Sharma’s myopia might be put down to the trivialisation intrinsic to ﬁnance. But his main readership is not you or me, unless we are gullible or daft. The political and legal structures of nation states remain an obstacle to the formation of a world society where corporations are the only effective citizens and the rest of us have lost whatever social guarantees we won after World War II . We are sleepwalking into an awesome struggle to deﬁne humanity’s future. Sharma’s book is a sleeping pill for themasses in that struggle. He cannot help show his acumen and judgment at times throughout this book. But its purpose is not public education. At most it is a confusing entertainment—let them eat cake, bread and circuses, reality television perhaps—but deﬁnitely not a guide to what is going in our world. I have so far managed to unearth reviews of the book only in Wall Street Journal, Economist and Financial Times, whose main readership actually makes no appearance in The Rise and Fall of Nations whatsoever. Democracy’s fragile toehold on this planet has hitherto been carried by “national capitalism,” an attempt to control markets, money and accumulation through central bureaucracies organised by elected governments in the interest of national citizens. This was launched by an alliance of capitalists and military landowners in a group of leading countries during the 1860s and early 1870s. It became more general after World War I , but reached its apogee in the decades after World War II . Thomas Jefferson considered that the three main threats to democracy were central government, organised religion and commercial monopolies. He sought to introduce constitutional limits on the powers of all three, but was defeated by the Federalists on the third—which he called “pseudo-aristocrats,” instinctively favouring monarchy and rule by the few.If Hitler, Stalin and their allies posed a lethal threat to global democracy in the mid-20th century, a new and more plausible “thousand years Reich” is being planned and implemented under our noses now. Nothing in Sharma’s book alerts us to this fact. Instead, we are distracted by tales of celebrities caught up in an endless oscillation of short-term economic cycles that it would be futile to try to understand. The real purpose of this book is to undermine collective democratic solutions to humanity’s problems while disguising the plot of big capital to steal the world.
Keith Hart is International Director, Human Economy Programme, University of Pretoria and Centennial Professor of Economic Anthropology, London School of Economics. He has taught at a number of universities, for the longest time at Cambridge. He contributed the idea of an informal economy to Development Studies and has written extensively on money. His recent books include The Human Economy (2010) and Economic Anthropology (2011).