Mega Economic Cycle – Do we know about it

Something they don’t teach you at Stephen’s

Mega Economics Cycle is not something they teach you in London School of Economics. It goes beyond the scope of temporal economics ie micro and microeconomics. But some economists do discuss it in private circles.

Economics is traditionally an action-based science meaning that any economic policy change gets reflected, sooner later, in a country’s economy. The changes that we look for are in the GDP, inflation, availability of money in the system etc. Economics, however, does not give us indication of things to come in distant future, because it uses only current data and current algorithms for prediction.

Mega economics on the other hand, is an approach where the growth and reduction of world economies is studied over extended large periods such as centuries or generations. It brings in parameters from other non-exact sciences, for example from attitudes and belief systems,  for their effect on the rise or fall of a country. It deals with the study of the cycle of rise and fall that is not perceived by the present or near future generations, but will be experienced after say five generations ahead in the future. If we study such cycles of the past 5 or 6 centuries of economic history of countries in the Europe, China, Russia and America, we can derive some interesting axioms and postulates.

What do we know about economic history

In 1820, China and India were biggest economic powers, until they gave in to decadence, a term that reflects change in priorities from work, fighting and competing to enjoying the fruits of production lazily. In second half of 19th and early 20th centuries, UK and Europe dominated the world due to the two waves of industrialization before UK giving in to the USA. The loss was not only because of the damages due to war in the Europe but also because of the high productivity in the USA.

In a strange balance of economies, today (2014), 53 percent of the world GDP is contributed by the developed countries and 47 by the emerging economies. Experts say that in another 15-20 years, the contribution by the emerging economies would swell to 70 percent, and this is not an extrapolation of trends but the estimates are based on the basic principles of economics. If a developing country, such as India or China, falls out of this equation, it will only have to blame itself for wrong economic policies, cumbersome political bureaucracies or arrogant international trade relations.

In ancient times the cyclic rise and fall of economy, took effect in substantially large periods that spanned hundreds of years, but now this cycle is reduced to a span of about a hundred years or two. What this implies is that the ascent of economies may continue for about a century and reach its peak, before the descent would commence.

India’s 65 years of independence was therefore a good enough period to have completed the major part of the ascent. The fact that we are nowhere near that peak is primarily a blotch on our governments of the past, irrespective of whatever justification that they may give for this failure.

And future ?

Politicians restrict and confine their answers about progress to the present times. And any questions on what happened in the past and what may happen in the future are brushed aside as not being their responsibility. Though not all countries have gone through this dismal performance.

If we understand that our impediments to progress are not shocks or temporary disturbances like war damages or natural calamities but more permanent ones like, culture, religion, remoteness (in location and in technology), diversity and above all multiple segmentation of the polarized society, we might be encouraged to make policy alterations. But if not, our leaders might lead us back to the subservience status prior to independence. If they bring us to this starting line of 1947 quickly, nothing much is lost in the context of mega-economics, since we could recover. But if they continue on the mixed path of decline and rise, we have no hope.

The political commitments

Immediate and near future decisions are important only to a certain extent, and decision makers feel personally committed to those. But for the long-lasting stability of the country leaders have to give up the lure of temporary achievements and rise above their self-centered approach. The impact of decisions taken now would probably be reflected in decades to follow, when the present day decision makers would not be on the scene to say sorry. Mega economics provides a simple framework of stages to enable understanding of where we stand now and where would we be heading.

  • Stage 1 – Countries are poor and they think they are poor, with low incomes and poor life styles. Culture and belief systems hamper them from emerging out of this stage. Countries in this stage offer very low cost labor and therefore are attractions for FDI.
  • Stage 2 – Countries are getting rich but they think they are poor. Essentially, it is the next stage after poverty where some disposable income becomes available but the citizens save it for a rainy day. They invest in gold, apartments and government bonds, preferably in a country outside their own. They continue to work hard. Initially the rise of income and productivity are matched but when country’s debts grow faster than income and income rises faster than productivity, the increased buying power brings in inflation. From pegged exchange rate, they move to independent currency.
  • Stage 3 – Countries are rich and they think of themselves as rich. The per capita income rises, because the investments in infrastructure and capitals start delivering fruit. Here the psychology of saving is changed to that of spending and style of living from work to leisure. 5-day week is a clear sign of this stage. Countries at this stage become importers from other countries, since they can afford it.  Today, USA imports from China and India.They also try to become military powers by necessity and by ego.
  • Stage 4 – Countries have become poorer and they still think they are rich. When debts rise in comparative to incomes they are bankrupts, but outwardly, they appear rich because of their extravagance. Parents and grandparents, who saved and prepared the grounds for luxurious life style, are already dead and the current generation does not really care for the future. This is the last stage of the 3-generation affluence syndrome. A few developed countries are showing signs of this stage.
  • Stage 5 – Complete recline and they are shocked

What about the individuals

The stages above are described at the country level but one can extend it to individuals in a reduced time span. Our youth, which has not seen the days of poverty or austerity, has a mindset of the rich and they like to spend and even buy imported brands. They are at the stage three but the parents are at the stage two. India being a vast country is subjected to these stages in parts, in segments of the societies, and this is why it is important for the leaders to understand that prosperity does not mean equality.

So think of the mega-economic cycle at the back of your mind while making any major decisions.

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