From Hydra to Phoenix. The Transformation of Developing Nations

Indeed, occasionally it is both amazing and truly ironic how the global socio-economic cycle evolves.

Not so many years ago, during the late 80s and early 90s, most of the underdeveloped world was in shambles, overburdened with debt, high levels of inflation, and frequent recessions and currency crises. Developing nations were, at that time, a basket-case.

globalization and economic development

The typical –understandable– reaction of most of the developed countries to those frequent and severe crisis was to admonish the troubled and disorganized countries to put their affairs in order, learn to behave prudently and to live within their means.

What a difference a few years can make!

Around two decades later, both the EU and the US are now the ones experiencing the aftershocks of highly uncontrolled public finances which have resulted in incredibly high levels of debt. As a group, most western economies are still struggling to overcome unusually sluggish growth combined with persistent high levels of unemployment.

The irony resides in the fact that fortunes have made a 180 degree turn and the two largest economic blocks on earth, the EU and the US, are in a situation (in many respects) very similar to the one the developing nations were in during the late 80s and early 90s.

globalization and economic developmentConversely, most of the developing nations currently hold an enviable fiscal and debt position. Nowadays, most of the developing world has a relatively low (and very low in some cases) debt level, manageable fiscal deficits and are growing at rates normal for their nature, consistently outperforming the developed nations’ growth rate in a significant way. In the past two decades, most of the developing nations have managed to behead the mythical multi-headed hydra that held them captive, and have been transforming themselves into a phoenix that is rising from the ashes.

How can such a dramatic turn of events have occurred in such a relatively short time?

globalization and economic development

There are several reasons for it.

First, contrary to a common belief, the level of political development of the developed nations, in many respects, is an unfinished business. To the contrary, it is safe to state that contemporary political systems are highly dysfunctional, trapped within their worn-out way of doing business. Hence, in many respects, the current dire situation of the two largest economic blocks on Earth is a patent manifestation of the insufficiencies and limitations of contemporary political systems. That is the major reason behind the “new normal” of unusually sluggish growth and persistently high unemployment in most Western, developed economies.

Second, parallel to the previous point, on a relative basis, during the last couple of decades most of the developing world has made a substantial catching-up effort. Developing nations have been rapidly closing the political gap versus the developed world. Granted, without disregarding the merit this progress implies, it has to be acknowledged that what has been done to date, in many ways, is the easy part. So, the misalignment in political systems between both groups of nations has been substantially diminished. It is fair to state that the day-to-day functioning of most developing nations’ political systems are highly comparable, in essence, to their developed brethren.

A superficial reasoning would lead us to conclude that the developing world now seems to be a role model for developed nations. Not so! Most of the progress achieved during the last decade of the XX century and the first decade of the present one, as substantial as it is, is not necessarily irreversible. Not at all.

To a great degree the substantial progress accomplished to date is a hard-earned dividend for the great pain and suffering the late 80s and early 90s crises inflicted upon them. A great deal of fiscal adjustments were made, their central banks became independent, their currencies were finally left to float like major currencies do, a good deal of markets liberalization and deregulations flooded these countries. In short, the ongoing stability and prosperity of most of the developing world seems to be a one-in-a-lifetime phenomena.

Once the temporary part of those virtuous changes runs its course, developing nations will have to face the harsh realities of the many limitations and insufficiencies of contemporary political systems.

The breadth and depth of the challenges ahead require a profound transformation of contemporary political systems. The incentives structure has to experience deep changes. Statesmanship and the common good should be rewarded. Winning elections should not stand on the way of the two major objectives just pinpointed, as it currently does. The current status quo of political dysfunctionality should not be tolerated any longer.

The world has been increasingly moving further away from its long/term potential economic growth rate. The opportunity cost of the current state of stagnation and mediocre growth is immeasurable –in the trillions of dollars a year. Imaginative solutions have to be implemented ASAP to rectify this monumental misalignment. Click here to read more.

Profound, lasting transformations in contemporary political systems are required, to avoid falling into the otherwise inevitable case of beheading the hydra, only to realize than shortly thereafter a new one, as pernicious as the one cut, has grown.

 

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About Martin Marmolejo

Global Investment Manager | Founder & Managing Director at MMA Global Investment Management | Proud husband and father | Follow me @globalmarmolejo.

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