Coming from a medical background and working as a financial strategist for the past two years, I have always been astounded by how similar both subjects are on a grand scale. The world, it seems, are a perfect analog of our fragile human body. But instead of analyzing what is right and wrong with human patients, and prescribe a treatment to bring it back to normal state, now I have the job of analyzing the characteristics and problems of Emerging Market countries, and look for ways to profit from its recovery or further deterioration. Although I understand that it sounds evil on the surface, in economics and finance, the same deterioration of country’s health often allow it to adjust to the new reality and build a stronger foundation for the future, such is often the case for a country in crisis.
Similar to a doctor in training, a financial strategist also needs practical experience in order to improve his/her diagnosis on a country and sharpen their instinct. My first big case came in 2018, when I had just joined the firm I’m currently working at. President Trump had just announced tariffs on steel and aluminum, and my first task is to research the implications of such policy to emerging market countries, especially those with large share of metal exports to the U.S. Not long after, Turkey and Argentina fell into crisis, triggering a sharp and sudden fall in their asset prices, which to me, seems like a patient’s symptoms during anaphylactic shock (a severe allergic reaction). Two years after, Turkey’s condition has greatly improved while Argentina is still on a critical state that needs close monitoring. “What’s the factor behind the divergence of both countries’ health?”, I ask myself, hence the birth of this article, written from the perspective of both my medical and economic background.
Each country, just like human body, has its own characteristics: traits, health predisposition and response mechanism to shocks. Today, we have a better understanding of the genetics role in determining our health and traits. But it would be wrong to blame all our problems solely to genetics or the nature. More often, I suspect, our daily bad habits are the one that cause the worse side of our gene to surface. A better understanding of our nature, on the other side, allow us to leverage strengths and better accommodate weaknesses. The same case could be applied to countries around the world, each with its own history, fight for progress and survival. I will come back to this topic later.
Thinking Framework: Acute vs Chronic Disease
The maladies we experienced as a human and society could be categorised into acute and chronic, with chronic disease sometimes causing acute symptoms and acute disease becoming a chronic one if left untreated.
· Acute disease usually gains lots of attention. A burst of pain, headache, fever and other noticeable symptoms are things we paid attention to daily but are easily forgotten once the problem is resolved. On a grander scale, this includes natural disasters, traffic accident and violent crimes, among other events that are likely well-covered on the newspaper.
- Among acute disease, we could break it down further to natural and man-made disasters. On a country level, natural disasters include earthquake, pandemic and volcano eruption, all of which are often unpredictable and have major impact for the local economy. In the same way, a road accident, falling from stairs and acute illnesses could struck human body without warning. On the other hand, man-made disasters include flooding caused by congestion of river flow, terrorism outburst and riot. One could categorize this later classification as a man-made disaster, or a culmination of a chronic disease. However, these manifestations are often just a blip on our life-long timescale.
- The problem, however, is when these acute and seemingly minor events turned into something larger. A small, untreated pain could be a signal to bigger underlying problem. Such is the case of recent wildfires in Amazon and Australia, a symptom of long-standing problem of climate change. The same case could be said for a small pain in any part of our body, which often signals our organs inability to work normally.
- The good news is that the acute symptoms and pain are part of our system’s defense mechanism to protect itself. For example, when we are ingesting a rotten or bacteria-infested food, our stomach would trigger vomit reflex and prevent it to cause further damages. On a country level, protests against various economic and social policies are part of a country system in protecting its current system.
· The second category is chronic diseases, which often creep slowly without much of our awareness but could potentially cause severe damages down the line. These are usually a manifestation of long-term habit and lifestyle choice of a country or human.
- First thing that come to my mind regarding this subject is the similarity between a type I diabetes patient and a commodity producing country suffering from Dutch disease. We know that in the former, the body is unable to produce insulin for the cell to absorb the surge in blood sugar level, leading to hypoglycemia and shut down of the body. Analogous to that, a country dependent on commodity production and export (the insulin) often collapse during periods of low commodity price and risk creating another crisis in the country banking system.
- Second example relates to hypertension and hyperinflation, both of which are caused by increasing pressure in the system. Rapid increase in money growth and excess fat in the artery play major part in each chronic disease. Country that are printing money irresponsibly, with aggregate demand exceeding supply would experience upward pressure on prices of its goods. Similarly, a person with high consumption of fatty foods could potentially have an atherosclerosis or the thickening of arterial wall, which will cause the heart to pump blood more forcefully and increasing the pressure inside the system. In order to prevent further deterioration, an intervention is needed. On a body level, beta blockers drug could be used to slow the heartbeat and reduce the blood pressure. On a country level, a deceleration in money circulation is needed.
- The third example is perhaps the most dangerous and deathly for a human body and society at large, concerning cancer and corruption. Both diseases are creeping inside the system, taking a long time for the host to feel its existence. Once detectable, it usually is often too late to cure completely and already metastasizes on the other part of the system. In this case, prevention through good body/system governance is needed, with check-up of the whole system from time to time in order to detect the early presence of disease.
- Finally, the last chronic sample relates to the side-effect of a treatment itself. Drugs dependency among insomnia patient could potentially disrupt the natural circadian rhythm of the body. Analogous to that, an unemployment benefit could discourage marginal worker to find work. Excessive or irresponsible treatment to a disease could cause dependency and weigh the system it is trying to fix in the first place.
Primum Non Nocere (First, Do No Harm)
Economics and finance, like few other fields in social science, have got its own bad reputation since the Global Financial Crisis. The public has blamed economist for not foreseeing the crisis and financiers for making it happen in the first place with their creative financial engineering practice. But this does not mean that the job of an economist or financier is doomed. In fact, in a world plagued by weak growth and inequal opportunity for advancement, we need honest and evidenced-based policymakers more than ever. Just like a patient would only trust and see a competent doctor, the world should also rely only on a non-partisan policymaker at all time, whose goal is to benefit the whole world, not only parts of it. Most of us would question the judgement of a doctor who are receiving kickbacks from drug prescription, and it should be the case too for policymakers who benefit directly from the decisions they made.
In medicine, when a doctor makes a mistake, the consequence could be very direct and easily seen, such as death. By contrast, in economics, when a policymaker chooses the wrong turn, the effects often take a long time to materialize, but the impacts could be even more severe and on a grander scale. A research in England1 shows that 1% increase in child poverty is significantly associated with an additional 5.8 infant deaths for every 100.000 live births. This made the job of a policymakers extremely crucial, especially in developing countries. Policy mistakes could easily result in millions of families falling into poverty and reduce the living standard of the whole population.
This is why the recent partisan fight in policy development in the U.S. is concerning. Instead of pursuing policies that have been proven to work and would directly benefit the society at large (expanding health care insurance coverage and other social safety net), the U.S. government choose policy that would benefit the top 1% directly (tax cut) on the promise that the benefit would trickle down to the bottom 50% of the population. The resulting increase in prices of financial assets, which was already concentrated in the hands of the top 1%, further amplify the trend in wealth inequality across the world.
Maintenance of The System
For a system to work properly, each organ in it have to do its function properly. A chain is only as strong as its weakest link and the same case could be applied to our body and country. When one of our heart, kidney, brain or lungs stop working, the rest of the organ will be negatively affected, leading to the death of the system sooner or later. On a country level, smooth interaction between a country’s legislative, executive, judicative body is paramount in sustaining growth and maintaining stability of the system. There are three points I would like to emphasize in this section:
· Having a method to restore the broken part, like our immune and justice system, is crucial for the survival of the country or body. Without the ability to fight against bacteria/virus or injustice/crime/corruption we are defenseless in preventing the system from going on a downward spiral. Our small and daily decisions do have the power to change how the system works, just like gene mutation from long-term habit could impair the body’s ability to fix itself.
· There are sets of routine that need to be maintained for the system to run smoothly. Just like a person need to consume healthy food, do a routine exercise and maintain a good habit, a country needs to have a stable source of tax revenue, control of public expenditure and an independent body to oversee and penalize excesses in government.
· At the end of the day, our overall health and progress depends on the strength of the weakest organ in the body. Hence, in a well-connected system the weakest organ will weight the whole from advancing further.
The Seven Sins
There are hundreds, if not thousands, way to ruin a body or a country. However, I found most of it could be condensed into seven major categories outlined below. There is no promise that a person or country with prudent governance is shielded from diseases discussed above, but I believe avoiding it could significantly improve the odds of surviving from both internal and external shocks.
· Running a fiscal deficit to sustain unproductive spending. When revenue (salary) is below expenditure (spending), individual or a country must borrow to maintain its lifestyle, which will eventually have to be paid out in the future. If a country is borrowing to invest in productive assets, and cost of debt < return on investment, then running a fiscal deficit might be justified. However, imprudent or wasteful expenditure that result in minimal economic or social benefit should be avoided at all cost. Keep in mind that a country, just like individual, also need to save in order to pay for pensions in the future. This should be budgeted on the country annual budget proposal.
· Raking up debt to unsustainable level, especially those denominated in other currency. When cost of debt > income growth, the ratio-of-debt to income will increase with time, creating an unsustainable pathway for a country or individual. For an entity already in such condition, it needs to cut spending and run a fiscal surplus to pay back its debt until interest cost is growing slower than income. Greece is a prime example of a country running unsustainable deficit and raking up debt, until investors demand higher cost of debt and the country is forced to cut down spending and run massive surplus to bring its debt-to-income ratio down.
· Subsidies…on everything. When an individual is just starting out to live independently, sometimes it make sense to provide subsidy to prevent him/her from falling into a low living standard. Parent’s subsidy, the most common type, could often become a dependence when not being tapered out during good time. Ugly consequences and revolt could ensue when the subsidy is eventually eliminated, such as in 2016 when truck drivers protested the government due gasoline subsidy being lowered in Brazil.
· Using unrealistic assumptions for budgeting purpose. Reliance on high commodity prices (subsidy, trading income), excess optimism on future income (tax collection) and “productivity enhancing” spending are all common trap for both country and individual in doing budget planning, if they are doing one at all.
· Extreme ideology and bad policymaking. Extremism, both to the left and to the right, is an obstacle to healthy debate and is a precursor to bad decision making. This prevents individuals and countries from making rational policies that prioritize common goods.
· Bad habits, corruption and nepotism. These are ways of circumventing the system and preventing each organ to work as intended. Often, a person or country doing it try to justify itself by pointing to others who are also doing the same thing.
· Not investing for the future. Infrastructure, education and healthcare spending are all the backbone of a prosperous society. In the long-term, investment in these sectors result in increasing productivity and higher value added in the economy, which has the potential to lift the welfare of individuals and society.
The message is clear. First, excess of anything is seldom good for the system. Second, maintaining integrity of the system, which allow it to fix itself, is important for the survival of the country or body. Third, our daily decision matters, as it shapes the system in the long run. Fourth, similar to a doctor recommending a treatment, policymakers should use evidence-based therapy to treat the cause of a country’s maladies, not just its symptoms. For students of both fields (me included), learning the anatomy of the system, how it interacts with each other, diagnosing a current or potential problem, and recommending a treatment are all important steps that need to be sharpen with experience.
1. Taylor-Robinson, et.al. Assessing the impact of rising child poverty on the unprecedented rise in infant mortality in England, 2000–2017: time trend analysis.
About the Author
Kevin Yulianto is medical graduate from Atma Jaya Catholic University of Indonesia and Master of Management graduate from Binus University, Jakarta, and McGill University, Montreal. Currently, Kevin is working for an independent global macro research firm in Montreal, Canada. He had passed all levels of CFA, FRM and CAIA exams and has been managing his family equity portfolio since 2012. In his spare time, he writes on his blog, journeyman.live, or travels to far-flung countries and becomes a freelance photographer for Getty Images.