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Government 101

What does it take for a developing nation to move ahead and join the ranks of the developed world?  For all the tremendous advances for at least some developing nations in the last decade or more, there is still a gap.  Brazil is not quite developed nation yet on the eve of their 2 year long coming out party due to start with the World Cup next year.  It’s not that the people aren’t trying, it’s not that the nation doesn’t want to be there.  It’s that it’s hard, dedicated work.  It’s that … the problem is almost too simple to understand.

The fundamentals of running a government always seem to slip between the cracks of the politics that define any nation.  The US is no different from any other in that regard – look no further than the calls to first push us over a “fiscal cliff” and now perhaps shut down the government for the lack of a budget (or continuing resolution).  But that’s what it’s all about, regardless.  And in developing nations we can see what the global leadership crisis really looks like – a lack of Government 101.

Ruchir Sharam even looks like a no BS kinda guy

Ruchir Sharam even looks like a no BS kinda guy

Ruchir Sharma is an Indian born investment analyst who is the head of the Developing Nations team at Morgan Stanley and a respected columnist.  His argument for the last decade is that it is the exception, and based far more on two important phenomena – the developed world slipping into recession and the brief commodities bubble that formed at the tail end of the internet/finance/real estate bubble that defined the late 1990s through the early 2000s.  The last part was driven in large part by the rise of China and what seemed like an insatiable demand for raw materials.  That is at least slowing, and the party is over.

But if the great rise of the BRICs is over, what should we be looking for as the future?  Sharma is very specific in his picks.  Sharma likes Mexico for one simple reason – President Neito is a trust-buster determined to open up his nation’s closed economy.  He’s down on Brazil because despite the protests of the middle class the corruption and “Brazil Tax” doesn’t seem to go away.

The same principles seem to apply rather universally, despite bubbles and blips along the way.  The question is what kind of cycle a nation is in rather than a global trend one way or the other.  Hunger for resources or cheap labor may move markets one way or the other, but will it last?  That’s the problem with developing nations, after all – they go in and out of fashion with investors based on what’s hot, but the growth never lasts.  At some point the people hit the streets and demand more and soon it all seems to collapse in what Brazil has come to call a “chicken flight economy”.

Chickens don't really fly, at least not for long

Chickens don’t really fly, at least not for long

The problem is best illustrated in China, a nation that Sharma appears to think can continue its rise for quite a while.  As a middle class develops, workers start to demand more.  The main competitive edge erodes and growth slows down.  Can this continue to happen while approaching equilibrium?  Perhaps, but it’s still largely a centrally planned economy.  No matter.  By this analysis it’s not even about market based openness or any of the other things economists usually talk about.  It’s about navigating the changes as the transition happens – which seems to have a place for a strong (but highly competent) government.

Is Sharma right, that it’s really just about fundamentals?  While Adam Smith’s “Wealth of Nations” is regarded as a right-wing book in US politics, it should not be.  There’s plenty of meat in there for liberals and conservatives alike if you read it properly.  And so far, this analysis seems to be able to tease out the difference between a fashion trend and solid economic growth.

More to the point, if that’s what it’s really all about the US is horribly screwed for its utter lack of attention to detail.  Sharma is not down on the US at all, and sees us as a safe haven as the world transitions.  But it would not be hard to conclude from how he writes about his assigned turf, developing nations, that we could be doing a lot better.

What are the most important political choices and considerations facing the US today?  The short answer is too simple for any of the supposedly sophisticated “professionals” in the punditocracy to understand, it seems.  That’s too bad.  Because if you look at other nations it becomes crystal clear that what matters most are the really simple things.  If we could only turn down the noize perhaps we could hear that pretty clearly here, too.

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7 thoughts on “Government 101

    • Thanks. I’m starting to think all this stuff is really pretty simple. Traders and investors with some experience do have something to teach economists, IMHO.

  1. Say more about what you mean by Government 101. I’ll bet it does get political no matter what you think. That’s not to say you don’t have a point but it is probably a lot harder than you think & that’s why no one does it.

    • It does get political, such as the choice between full employment and maximizing short-term GDP growth, as an example. But many choices are very straighforward. Perhaps this is worthy of a post itself.

  2. The developing world or whatever you want to call it still has a long way to go in most places. I say that democracy is a prerequisite for a developed economy so I think China has to be maxed out somewhere. Their life looks miserable with the pollution, tiny little apartments and horrible working conditions for like no money. They can have it. Maybe someday they will revolt and have a democracy. I hope so. But until then I can’t see them becoming anything like us.

  3. Pingback: Chinese Meltdown, Latin America Next? | Barataria - The work of Erik Hare

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