10 Rules of Successful Nations

[Music] thank you having been in this business for over three decades now first as a writer and then um as an investor and a keen student of development economics what always struck me was how difficult it is for Nations to succeed and how easy it is for Nations to fail so if you look at the world today there are about more than 200 countries uh as per the uh IMF and un who keep the data on this of over these 200 countries only 39 are classified as developed markets the rest are all classified as emerging Nations and many of these countries have been emerging forever right so they have a great growth spurt they do very well one decade and then the next decade they give it all out so you have so many countries in Latin America in Africa where their per capita income today is no different compared to the United States where it was 50 or 100 or even 150 years ago so it's a complete circle that they keep moving on but we here as practitioners are more interested in what's going to happen to Nations over the next 5 or 10 years as I tell people that the old rule of forecasting used to be that you forecast as often as you can and then you remind people when you were right the new rule of forecasting came to be that you forecast so far out in the future that neither you nor I will be here to know whether we were right or wrong so how do you come up with a middle path with that what will happen in the next five or 10 years and that is a framework that I've spent a lot of time trying to develop that what are the 10 most important criteria that you should look for to to see which nations are poised to succeed or fail over a realistic and accountable time Horizon which I say is about 5 to 10 years so what I'd like to do today with you in the time I have is to take you through these 10 critical rules that I have come up with based on back testing empirical evidence of what are the 10 most important things you should look at from population to politics to debt currency and geography and inequality and which countries at the end of the day when you do this ranking rank as good average and ugly so let's get started the first rule the key for the starting point of economic growth has to be or is population growth which is that having a strong growth in your labor force is a necessary but not a sufficient condition for high economic growth so there is no country in the world that has been able to grow at a rate of more than five or 6% A Year Without its labor force growing at a rate of at least 2% a year countries which have negative demographics are rarely able to grow at a rate of above 2% one of the main reasons why I remain bearish now on countries such as China where the labor force now is actually shrinking after the big demographic dividend is over so very few countries in the world are able to grow at a rate of above 5 or 6% without at least a 2% growth in the labor force and if your labor force is Contracting forget it the chances that you're able to grow at even a rate of 2% up virtually zero because no country's been able to do that uh in history a brief glance here about which countries today have Labor Force growth projected of more than 2% as you can see they're mainly in Africa and Asia uh some in the middle of 0 to 2% and then which countries are likely to see a contraction in their labor force in the next few years and you can see many of them in Eastern Europe north Asia these countries are likely to see a contraction in their uh low so that's rule number one and demographics accounts for 2/3 uh sorry 1/3 of the total growth of a Nation the second is the politics most Nations tend to follow this circle of life which is that they tend to reform only when there is a crisis once the crisis is over then you have a lot of complacency with setson and Nations once again begin to do a lot of wrong things of spending on excesses and you know once uh they have too much money so that is my second rule that typically the best performing countries tend to be when they are facing a crisis and a new leader comes to par and changes the direction of that country that tends to be The Sweet Spot uh we've seen that in places such as Greece historically whenever a country is at the back to the wall it's at the maximum reform and when you have countries with very long- serving leaders who get complacent that's when you end up sowing the seeds of a crisis another question that people often ask me that is economic growth better under democracies or under authoritarian regimes here are the results which in share economic growth terms the results are equal that you that both are able to generate growth uh in equal terms but here is the critical difference under Democratic regimes you get more stable outcomes under authoritarian regimes you get much more varied outcomes that the leader is very good you can end up getting very high growth rates on the other hand for every good leader if you end up having a autograt who's not really listening to too many people and takes the wrong direction the maximum busts also happen under those regimes so equal outcomes in growth terms but massive variability depending on whether it's Democratic or an author gratic regime the third rule it's important to get the size of the state correct that states which are very interventionist or are spending too much and spending on welfare rather than infrastructure those are states that tend to be inimical to growth but where the states are rightly funded and not spending too much on just welfare but building infrastructure particularly on Emerging Markets you see countries like China Korea Taiwan that's what they did they virtually had no welfare state when they were growing very rapidly in the initial stages and spent a lot instead on uh infrastructure and that set the base for very high economic growth so I'm just showing you some examples here of countries where the state is far too big Brazil uh in the region Kuwait Colombia Hungary South Africa and other countries where in fact the state is relatively small and surprisingly it includes many countries in East Asia where the state is relatively small and well-managed this is another thing about which states spent too much too much stimulus that they did at the time of the pandemic uh on the right hand side as you can see here and then which states were relatively uh moderate in their spending habits I move to the fourth slide possibly like the most important here for a crisis standpoint that if there's a single most important predictor of Economic and financial crisis it is when countries accumulate too much debt over a short time Horizon no matter what the starting point if countries accumulate too much debt particularly on the private sector side um in the in in the short term which I say is 5 years those countries tend to be the most susceptible to a crisis or even uh um an economic slowdown so when I look at the countries here which are the countries which have taken on lot of debt Over The Last 5 Years Korea China Thailand Argentina Qatar possibly and then which are the countries where the balance sheets have been relatively delived uh you can see Greece Poland even turkey Egypt uh Mexico these are countries where the debt levels particularly on the private sector side which gets you into trouble the balance sheets are relatively clean and then we look for countries you know where the debt levels are very high compared to their income levels this is where China stands out that there that its debt level compared to its per capita income level is very high it's close to 300% that is comparable to the United States even though the US per capita income is five times larger so these are countries where the debt levels are relatively high and then we have countries where the debt levels are relatively low such as UAE uh you know where the debt levels are relatively low out here uh the next is about currency currency is really important which is that the cheaper the currency the more competitive it tends to be Emerging Markets usually need cheap currencies to grow China did that very successfully Korea Taiwan did that successfully of having a cheap and stable currency that is the Bedrock usually of very strong export growth and often key success stories involve that today which currencies are expensive and which are relatively cheap um you can see Saudi Arabia UAE because of the link to the US dollar and the dollar has become very very expensive today that these currencies also rank as relatively expensive on the other hand some of these currencies like uh Egypt turkey Indonesia South Africa rank is very cheap and I just use some basic indicators here like if you travel to these countries how does it feel if you use the burger index or you know how much an average hotel room or so cost so that's the key thing here and the other thing you have to look at is the current account deficit which countries have a very high current account deficit which countries are running very large surpluses so the offset for the UAE for example is the fact that even though the currency feels expensive on these indcs because it's running a very large current account Surplus uh it doesn't need that much capital inflow to try and balance its books on the other hand countries which have both a large current account deficit and its currency uh is also expensive that is real trouble for a country that's where Brazil Russia and all used to be a decade ago and I was very bearish on that investment what is the sweet spot as far as investment is concerned it's about 25 to 30% of GDP when a country has 25 to 30% of their investment uh as a share of GDP That's The Sweet Spot which countries are too high when they're above 40% China Qatar relatively low South Africa Columbia too low almost uh which is what makes them more prone to inflation when you don't invest so much uh out there and here again we see that when countries have very high investment to GDP ratios that's when they end up also having declining productivity over time inflation I think you have to watch both Consumer Price inflation and asset price inflation which countries are outliers today as far as inflation's concerned you can see it Argentina turkey Egypt Nigeria Hungary when the median inflation across Emerging Markets is about 5 or 6% which are much higher which are the relatively lwi inflation countries uh Taiwan Indonesia some of the UAE and China of course is bordering on deflation uh but the sweet spot for inflation in Emerging Markets tends to be about 4 to 5% in the developed world it's about 2% Emerging Markets tend to have somewhat higher stickier inflation about 4 5% tends to be The Sweet Spot countries very much outside that Corridor are countries that rank relatively low on my inflation score uh similarly here you have to look at asset price inflation because when countries have very strong increase in property prices or asset prices those are countries particularly when it's financed by debt which tend to be most susceptible to a crisis as well moving to my eighth Point geography it's so important if you look at the history of the world world the best growth outcomes tend to be countries which are in The Sweet Spot of geography in in the best trade Roots best linkages countries which are seeing a massive increase in their export share and here I have to say that even I was surprised how well the UAE for example is doing in terms of how its export share in the world is increasing uh along with countries such as Vietnam or so because if you look at and I like in uee it's not just oil it's I found that it's gold jewelry electronics that the export share is increasing so these countries are what rank well on the geog geographical sort of measure and which countries are losing export share in the world and you can see that which are Russia Saudi Arabia because of course A lot of it is because of oil but Colombia Argentina as well and then which countries are opening up more whether it's the this is of course you have to now in any geography it's not about trade anymore it's about the digital economy as well which countries are like imposing more restrictions on data coming in and which are relatively more liberal you can see the top five here again which are being much more restrictive including India here uh and which countries are being relatively liberal in opening up uh to uh more digital information inequality um it is countries with very high wealth inequality are susceptible to political backlash and also that M much more inimical to economic growth so I formed a billionaire index in fact with three metrics billionaire wealth is a share of GDP which countries have so-called too many billionaires coming from Industries which are rent seeking and which countries the billionaire wealth is inherited or self-created so you put these three together and here are the results which are the countries that rank relatively well and which are most vulnerable you can see Russia Chile South Africa even India lots of billionaires are the share of the economy and many of these billionaires have inherited their wealth rather than created it on their own which is generally not a good sign which are least vulnerable you can see here that including UAE Hungary Poland where a lot of the billionaire wealth is relatively low and also a lot of it is uh in terms of in the right kind of Industries my last IND indicator this is much to do with sentiment and this is a contrarian indicator and I and we actually did a proper study of this using Time Magazine over the last uh few decades that whenever Time Magazine would put a country on its cover the next 5 years would typically tend to be bad for that country it marked the peak of the hype on the other hand whenever Time Magazine wrote about uh you know like a country in a negative way that often marked the bottom for that country's uh prospects so so it just tells you it's not just picking on one magazine but when something becomes part of the popular culture that's when things uh you know you have to watch out for on the other hand which countries don't people aren't talking too much about not too much hype those are countries that do relatively well so in the interest of time what I'd like to do is to summarize this is how the score sheet looks what I do with my team is that every quarter we sit down and rank all the countries in the world on a scale of 1 to 10 uh one being the lowest 10 being the highest on all the 10 metrics and come up with a weighted score of how the countries are looking uh so we have a internal proprietary score sheet on this these are the summary results which countries are ranking good today which rank as average and which rank as sorry to say outright ugly and again it's important to keep updating this so that you know if things change but normally have uh the system has been devised to be a good predictor for the next 5 10 years about which countries are likely to see growth accelerate and be high and which countries are likely to see growth decelerate and be relatively low so that really is the summary of my presentation on the 10 rules of successful Nations thank you