National economic development cycle, a short introduction

Ray Dalio has divided national economies into four different stages of development. I will use his assessment, but I will add more to the phase of the country that dominates the world economy. This position encounters few countries and even less often the same country reaches it more than once. Every economy has started from the first or lowest level of development which means that the country is poor and its citizens feel poor. Few countries reach the top level, the dominant economy in the world.

Most third-stage nations do not reach this stage. They jump straight to the fifth. The paths contain similarities and the same cause-and-effect relationships, but no country follows exactly the same path as the others. The levels will remain for decades and their changes will not happen fast. Each phase includes both ups and downs and booms and busts. Psychology contributes to the rise and destruction of nations or to their own level of development. It has five levels:

1. A poor nation that feels poor
2. A rich nation that feels poor
3. A rich nation that feels rich
4. A country that dominates the world economy
5. An impoverished country that feels rich

Stages are estimates of how the government and citizens, on average, see things. In many countries, individual provinces, geographies, cities, and residents do not feel that their state is at the same stage as the majority. Often the capitals of countries are richer than others which can be due to many things like corruption in poorer countries. The definitions are not clear. They are based on the opinions of the person making the assessment, with the exception of the country that dominates the world economy, which is self-evident to almost everyone.

The foreign investor needs to look at the transitions between stages. They last for years or decades. The functioning of a market economy increases as nations develop. The opposite trend is likely on the downside. The cause-and-effect relationships of transitions are not simple. Their effects often last for decades. Moving from a lower level to a higher one can mean a long period of favorable economic development. It is reflected in increased returns for investors. Dropping to a lower level weakens the expected returns. Changes are difficult to detect without visiting the country. This is especially true for lower tier countries. Reality and the outward image are not always close.