What are the fundamentals of an economy?

Politicians, Bankers and Economists have been saying, “The fundamentals of our economy are strong”. We have heard this line so many times that I started to investigate the meaning of the ‘Economic Fundamentals’. Nobody seems to have a clear-cut answer to that question. What exactly are the fundamentals of an economy? The answer is very complicated and with all due respect, neither President Bush nor Senator McCain seem to have the brains to understand the ‘Fundamentals of an Economy’. I do not pretend to be an economist but I would try to take a crack at it!

Infrastructure should be on top of the list when you talk about the fundamentals of any economy. It is not just the depth and the breath of the infrastructure that we should talk about but also the quality of the infrastructure that the country depends upon so much. Age of the infrastructure is very important when you talk about the physical infrastructure. The investments in the infrastructure not only create jobs and opportunities but are also a big factor in the fundamentals of a modern economy. When we talk about the infrastructure, we must talk about not just the physical infrastructure but also the soft infrastructure like knowledge, research and development, banking and finance and much more. I would go one step further and add political diplomacy as part of the intellectual infrastructure. Are you still with us Senator McCain?

Energy security is the next item on my list of fundamentals of a sound economy. We are not talking about the price of gas at the station, we are talking about the comprehensive energy policy! What is the size of domestic production of oil and gas compared to the risky and expensive imports? How many refineries have been built in the last 10 to 15 years? What is the share of nuclear power in the total energy mix? What has been the level of investment in alternative fuel technologies? What is the impact of current energy policy on the environment?

My friends, the next item on my list of fundamentals is the ‘Food Security’. It is not just the availability of the food but the prices that are important to an average consumer. No country should ever be dependent on imports for its food requirements. But imports must be used to supplement the shortages and also encourage competition. Mechanization has greatly increased farm production but still farm labor is critical for the harvesting of crops and the total food supply chain. The cost of labor has a direct impact on food prices. Immigration of farm labor has always been a key component of any rural and agricultural economy. Sorry folks, the senator is sleeping!

BRIC theory is profoundly flawed…

BRICs theory was first introduced by Jim O’Neill, managing director of Goldman Sachs (investment bank) in 2003. The four BRIC countries are, Brazil, Russia, India and China. The Goldman Sachs’ thesis contemplated that the economies of the BRICs are rapidly developing and by 2050 will eclipse most of the current richest countries of the world. This theory appears to be more of a wishful thinking rather than a hard-headed economic analysis. I do not see the fundamentals existing in any of the four mentioned economies, for a sustained economic expansion. These are certainly a group of exciting possibilities, besides Mexico, South Africa, South Korea, Vietnam and others. It is important to measure all these countries against some basic conditions and parameters. There are a lot of essential elements that made the Western World rich and powerful.

The first condition is a stable political environment. There can not be any long-term political stability without the consent of the governed. This consent must be reaffirmed periodically, not later than 4-6 years. When a government looses the confidence of the governed, there must be a peaceful transfer of power as and when necessary. A single party in power breeds corruption, cronyism and stalemate, no matter how well intentioned. No country in the world has sustained growth and prosperity over long periods of time, without a political consensus. How many of the BRIC countries would qualify in this test?

The second and probably the most important condition is the ‘Rule of Law’. Every country must have a written ‘Constitution’, giving equal protection to all it’s citizens under all circumstances. There must be an independent Judiciary, capable of interpreting the laws and providing justice to all including the foreigners and international agreements. The government must be accountable to the Courts and Justices. The Executive and the Legislator must stand by the law of the land. Without the rule of law and the transparency of justice, long term trade and agreements can not be sustained. Where do BRIC countries stand on this?

Another important condition for the ‘Emerging Economies’, is the development of Intellectual Infrastructure. We are not just talking about basic educational institutions, we are talking about the world-class universities and research laboratories. How many countries around the world have centers of excellence like Stanford, Harvard, MIT (Massachusetts Institute of Technology), Cambridge and Oxford? How many countries produce innovators like Bill Gates, Steve Jobs, Jerry Yang, Larry Page and Sergey Brin? Would Brazil, Russia, India and China, encourage students from around the world to come to their Universities and do research, find jobs, raise families and then become full citizens of their countries?

Immigration has been the foundation of an idea called “America”. The United States of America was founded by immigrants. Few would know that even their ‘Revolutionary War’ for independence was fought by Irish immigrants who were not even born in America. Hundreds of thousands of people come to The United States every year and over time become permanent residents and finally citizens of this country. It is the genius of these immigrants, that has fired the imagination of this country. Immigrants have rejuvenated the creative instincts of this ‘Economic Power House’. If BRIC countries and others around the world aspire to be the great powers of the 21st Century, they would have to learn to live with others, in peace and harmony.