An Interview with Ruchir Sharma
I have two definitions. One is countries that beat expectations, and two is nations that are able to grow faster than other countries in the same per capita income bracket. The reason I use these two criteria is because, over the last decade, a lot of misconceptions have been built. People ask me, “If China slows down from growing at nine percent to four or even five percent, what’s the big deal? It’s still going to be growing much faster than many countries in the West.” And my counter to that is twofold — one, expectations are really key, because if China really grows at five or six percent, that’s going to feel like a real recession in China and for the rest of the world, because people have gotten so used to growth rates of eight to nine percent.
The same was the case in India. India’s growth rate has slowed to 5 or 6 percent from rates of 8 to 9 percent over the last decade. It is feeling in India like a real, real slow down. Secondly, growth rates matter a lot, and so does where you start. If a country, like Nigeria or India, with a per capita income of only $1,500 is able to grow at five percent, that’s an underachievement. But if a country with a per capita income level of $20,000, like Korea, grows at four or five percent, that’s a huge achievement.
The Politic: Why don’t you think that China can keep growing at the 10 percent rate? Is it just because it’s too big at this point?
Yes, China is a victim of its own success. It has done really, really well over the last few decades, but the problem with China is that it is now hitting the law of large numbers. Its per capita income is getting close to $7,000 in current dollar terms – it’s about $6,000 now. At those levels, it’s more difficult to grow very rapidly. If you look at the other huge economic miracles such as Korea, Taiwan, Japan — all countries at similar stages of development — their growth rates also slowed down. I’m not talking about a crash in China, but growth rates typically slow when you become a middle-income country. It’s not a middle-income crash; it is what I call a middle-income deceleration.
The Politic: A point you make in your book is that you can’t just treat these countries the same — China has a $7,000 per capita income and India has a $1,500 per capita income. But why has the idea of a BRIC, for instance, where these countries are treated uniformly, been so popular?
It’s because every single emerging market boomed last decade. The average growth of emerging markets nearly doubled from what it was in the 1980s and 1990s, and I argue that this happened due to special circumstances. You had a huge amount of global liquidity floating around the system, and these emerging markets (apart from China) were catching up after the really poor performance in the 1990s. Many of the emerging markets, from Thailand to Mexico to Russia, were going from one crisis to another. The BRIC concept packaged countries together. But now you need to look at countries on an individual basis. Acronyms worked when every single emerging market was booming, because you could package countries that have nothing to do with each other. That is no longer true. It’s a big change that the exceptional period is behind us, and we’re beginning a more normalized period.
The Politic: You seem pretty confident in most of your growth predictions, but with India, you say the chances it becomes a “breakout nation” are about fifty-fifty. What about India makes you so on-the-fence about its prospects for the future?
When I wrote the book, expectations were really high for India. People were expecting India to be the next China, and even Indian policy-makers took that line seriously.
They all thought 8 to 9 percent growth was the new normal. But I think that is changing; those expectations have come off very sharply. The problem in India really remains that, at the central level, the government is quite weak. It’s been in power for a long period of time and doesn’t seem to have that much credibility. But the good news in India is the fact that a lot of the individual states are doing much better. You have a weakening center but the states are getting stronger. and that’s what makes things difficult about India. You’ve got this sort of to and fro and back and forth about India.
The Politic: You seem to be generally more pessimistic about commodity-based economies. Why is this? And why do you think Indonesia’s commodity economy will fare better in the future than the commodity economies of countries like Brazil and Russia?
Twofold. One, I feel that if you look at the long history of commodity prices, they follow this really loose pattern of two decades down and one decade up. We just had that one up decade last decade. Now that supply is coming on stream, in many commodities from oil to iron ore, I think that the expense of commodities in terms of commodity prices is going to generally go down rather than up. What is now happening is China’s growth rates are slowing down as I mentioned, and China is the 800-pound gorilla of the marketplace, so I think that’s the big thing which is going on for commodity prices. In general, that doesn’t bode well for commodity-based economies.
However, I think that some economies such as Indonesia may still be able to fare okay because there you have the following: One, per capita income is still much lower compared to Russia or Brazil, so it has more room to catch up. Two, they made use of the commodity windfall. The problem I find in the cases of Brazil and Russia is that there is nothing else — the other economic activity outside of commodities isn’t doing that well. In Russia and Brazil’s case, investment as a share of GDP has been stagnating at about 19 or 20 percent of GDP. In Indonesia, it is increasing steadily and is now over 20 percent of GDP, so it is a much more friendly environment for other investments to take place in this economy, rather than just one which is dependent on commodities.
The Politic: Do you think it also has to with the way the governments spent the revenue that was generated during the boom? Did Brazil, for instance, under-invest in infrastructure?
Yes. I think that the fundamental problem in Brazil has been that even before the boom of the last decade, they really did not spend that much on infrastructure at all. Their infrastructure spending as a share of GDP is among the lowest for emerging markets. Another real problem with Brazil is that the amount of welfare spending as a share of its economy is very high.
The Politic: You said that Brazil, among many other breakout nations, needed crisis. How important is crisis in promoting growth?
The one thing that I always see is that most governments only tend to reform when they have their back to the wall. When things are good, they tend to sort of lose the initiative to reform. In Brazil, all the initiatives and all the other good things happened when they really had a big crisis in the late 1990s. Similarly in India, the reforms were always carried out once every ten years when you had some sort of a macroeconomic crisis in India or some sort of a growth crisis in India — that’s the lesson. I think in China, what is very impressive is that they kept reforming all the time.
The Politic: Do you think this lesson can be brought to the Middle East? Do you see any possibilities for breakout nations to come out of the upheaval and crisis created by the Arab Spring?
In Saudi Arabia we are seeing signs that they are reforming now. In Egypt, too, despite all the negative headlines, I remain a bit optimistic because they seem to be following economic orthodoxy. Turkey has also carried out a lot of reforms over the last decade after the cold phase that it had in the 1990s. The fact that many of these nations have their backs to the wall means that these are the nations which may well be reforming.
The Politic: Is growth independent of the system of governance?
Yes, I think so. As I argue in the book, whether you’re a communist country or a democratic country, the results are fifty-fifty in terms of which regime achieves higher growth.
The Politic: What about culture? What role do cultural values play in promoting growth? You seem to be hopeful about the Muslim democracy in Turkey, and you also touch upon the cultural differences between countries like Brazil and China.
The big problem I have with many of these theories on economic development is that, whether it’s got to do with culture, or some people say it’s got to do with institutions, or some people say it’s got to do with geography, some say it’s got to do with environment — all sorts of factors like that — is that these factors matter in the very, very long term maybe, but not in the sort of time frame that I’m looking at, which is the next decade or so. Within a decade, to talk about culture really misses the point.
A decade ago it seemed as if the Anglo-Saxon model was the only thing which worked, and then you had a whole bunch of successes in emerging markets. Then we all talked about how the Muslim world would never be able to achieve high growth. But you’re seeing now that countries in the Muslim world, such as Indonesia and Turkey, have been able to achieve high growth. These sorts of factors are outside of growth — ebbs and flows take place. If you use the time frame I’m looking at, which is the next five or ten years, culture is not a very important factor.
The Politic: With all these emerging markets striving to become developed economies — there are only 35 developed markets listed by the IMF and the rest are emerging — what global competitive advantages or disadvantages do you see specifically for the United States moving forward?
I see three to four advantages for the U.S. One, the currency is very cheap — it’s a very competitive currency — and so therefore there’s ample scope for manufacturing to move back to the U.S. because the wages have been very restrained. This is a source of a lot of political heat out here, but I think the fact that wages have been so restrained at a time when wages have been rising sharply in many countries such as China means that some of the balance is again beginning to shift in favor of U.S. labor. Another competitive advantage is what’s happening in the energy sector, with the shale gas boom and the discovery of more and more oil, which is going to make the US, at some point in the next few years, an energy exporter. This is a major, major advantage. Furthermore, the private sector has done a good job of deleveraging in terms of paying down the debt. Even though the government has been increasing its debt load, in the private sector, particularly in the financial sector, the debt has come down very significantly.
The Politic: Before I let you go, I want to ask you a question that’s more Yale-oriented. There are a lot of kids here who want to do things like work at Morgan Stanley, but in recent years there’s been a pushback against finance-related jobs. What advice would you give a Yale student who’s on the fence about working somewhere like a Morgan Stanley after college?
I didn’t join this industry because of the glamour or the money. When I joined it nearly two decades ago, it was very glamorous and high-paying, but my passion has always been about investing. That’s what I wanted to do from a very young age, and so I just pursued my passion. I’ve been in emerging markets now for nearly two decades, and we went through our own lean phases. In the late 1990s, nobody wanted to do emerging markets, but the idea of abandoning emerging markets never occurred to me because that’s the area I really like to enroll myself in. The only advice I can give is that the cycles come and go, and if you stick to your passion, then it’ll all be fine.
Ezra Ritchin is a sophomore in Ezra Stiles College