I have talked about Ray Dalio and Bridgewater’s take on an economy’s self-sufficiency and the factors that control it, in a previous post. Ray Dalio and fellow analysts at Bridgewater concluded that countries that stand higher on an independence scale achieve greater real economic growth.
Based on the most influential of the above mentioned factors, i.e. competitiveness and indebtedness, their conclusion states that India, China, Mexico, and Russia have the highest potential for growth, while the least growth can be expected from Japan, France, Italy, and Spain. The US lies somewhere in the middle and is expected to grow 2 percent in the upcoming years.
Bridgewater’s unusual, but perceptive approach on how countries achieve growth circles psychology of people and luck as prime elements that control competitiveness and indebtedness. Based on them, countries achieve varying levels of wealth and power. Here is how the evolution of an economy takes place:
- In the early stages, people know they are poor and thus have limited resources and savings. The economy has reduced debt because they have no insurance.
- In the subsequent stage, the wealth is increasing, but psychology is still the same. They save, work hard, and maneuver cautiously. But investment and exports increase and their assets, like gold and real estate, expand.
- Now comes the part where they realize that they are actually rich. Their per capita income breaks records. The psychology shifts as the generation is replaced by new people who like to spend and enjoy more. Working hours go down, while expenditures on luxuries goes up.
- In the next phase, the economy gets poorer, but the psychology of people and governments does not budge. Debt to earning ratio increases, incomes are high but spending is even higher, payment and government deficit expands. Infrastructure weakens and productive investments lose steam.
- The bubble of being wealthy bursts and deleveraging and austerity measures come in play. They print more money and lower interest rates to help GDP growth. The previously powerful economies now start competing with developing and emerging economies.
Logically, countries that lie low on the debt curve and high on competitiveness achieve faster growth. One of the things that influences a competitive environment is how ‘productive’ the education system is. The countries that have a higher payback on what they spend on their population’s education, achieve greater growth over time. Less trade and communication barriers and reduced cost on raw materials also help in building up the competition.
On indebtedness, Bridgewater Associates observes how spending from debt can paint a picture of economic prosperity which is not substantial. Debts eventually stop raising relative to incomes and these countries then experience stringent debt regulations and thus achieve slower growth. While those that are less indebted have far brighter prospects of achieving further growth. The analysis uses metrics, like weekly hours , investing, corruption and education, all weighted against relative income to assess competitiveness while debt service levels, debt flow, and monetary policy are used to judge the level of indebtedness. Together, competitiveness and indebtedness are 73 percent correlated to GDP growth for the next ten years. India tops as being the most competitive, with China coming at second place. The US has a weak position on the basis of competitiveness. In measure of indebtedness, India beats all others again, while Russia and Mexico take the next places. The USA falls in the middle, while Japan, Greece, Hungary, and Spain come at the lowest end.