Ray Dalio

According to people familiar with the matter, Ray Dalio, CEO of Bridgewater Associates, has spoken at length about what makes countries competitive.  The current issue under discussion is the ‘magic formula’ for economic success.

Ray Dalio notes that the most self-sufficient economies of the world are, surprisingly, the Asian emerging markets, whereas the most dependent are members of the Eurozone, Italy, and Spain. Economies like, India, Philippines  and South Korea beat the USA by far on the self sufficiency scale. Bridgewater also concludes in their thesis that the self sufficient countries outperform in economic growth. Additionally, both developed and emerging economies have more or less equal correlation between their self sufficiency rating and the level of growth they achieve over long periods of time. The measure of being independent is based on indicators like the amount of hard work, government supports, and the number of hours worked.

Interestingly, countries with governments that provide a minimal welfare system and transfer very little to their people, find higher standing on the independence scale. Consequently, individuals keep their spending in range of their earnings (since support from government is absent), evolve into more independent economies, and thus achieve greater real economic growth per capita.

The governments of countries like France, Italy, and Sweden spend more than 50 percent of their GDP, while China and India spend very little (close to 20 percent). The ratio is small when compared with the size of the economy and governing bodies. As a result, the inference drawn from Bridgewater’s analysis is that people in these emerging economies kind of just live on their own and hence, are more self sufficient.

As support and redistribution of resources is limited in self sufficient countries, their people end up doing more hard work, so another point goes to their benefit. The correlation of hard work with future growth is 26 percent, individuals in developing countries spend  more weekly hours working. China, Mexico, and India take the top position followed by Latin America, while US has good rating in the developed countries, while the most leisure-loving countries are in Europe. The relationship between weekly hours and economic growth has been 49 percent in the past decade according to Bridgewater’s calculations. Similarly, emerging nations take top honors in how much their people want to participate in the labor force. Therefore, we again see European countries taking the lower spots in labor participation. It is also fair to mention here that countries like, Greece, Italy, and Spain have a large portion of their labor force based on immigrants rather than locals.

Bridgewater’s thesis does find some noteworthy relationships and draws fair conclusions. But the indicators of self sufficiency, or the factors controlling it, are deeply inter-related, the presence of one (for example, reduced government spending) allows the other factor to thrive (higher participation in labor force and more weekly working hours). So the factors in themselves are not independent of one another. Moreover, the analysis does not include geographical elements, like natural resources. Therefore the scale defines only one kind of self-sufficiency and it does that very well. Bridgewater’s analysts think that their explanation of self sufficiency can help in devising policies for future, but it is of course, not the only factor that controls growth, as will be discussed in future posts.