In his latest book, The Rise and Fall of Nations, Ruchir Sharma, chief global strategist and emerging markets head at Morgan Stanley, crystallises 10 telltale signs for predicting the future of nations in the post-2008 financial crisis-era using insights gained from 25 years of travelling around the world. He spoke to Puja Mehra about these practical rules (in contrast to academic analyses) for predicting booms and busts over a five-to-seven-year time horizon. Excerpts from the interview:
Even so many years after 2008 the world economy isn’t out of the slowdown. How is this slowdown different from the previous slowdowns?
There are some reasons that are structural and underappreciated. As I begin my book, my first tool is about population, which is not well-understood. There are two drivers of economic growth. One is productivity and the second is increase in labour force. Historically, they have contributed in equal measure to economic growth. What I find is that there is enough discussion about productivity but not enough on [the fact] that the world’s population growth rate has slowed down dramatically. Even in India, the fertility rate has dropped from six and a half in the 1960s to two and a half now. That’s a dramatic drop. People aren’t realising that you can’t get the economic growth rates of the 2000s. Demographics is just a very major factor behind this big slowdown.
There are other reasons. Some people think they are not being measured properly. New technological innovations aren’t getting captured. Some people think this is because there are too many zombie companies around, too much government support.
You are taking a contrarian view on automation in the book. You say that the fear of a robotic future is built on lack of imagination.
If you look where robots are really growing, it is in countries which need them badly because the population is shrinking. Take the case of Japan: the growth rate of the country in the last few years is 0.5 to 1 per cent. Yet it is facing acute labour shortages. That tells you how severe the demographic headwinds in Japan are. They [The Japanese] are also very insular, not very welcoming towards immigrants, so robots are a natural solution for them.
Germany, Japan and South Korea show the maximum increase in robots. All these countries have the maximum demographic problems. Even last year one of the reasons Germany was welcoming immigrants is that it was facing a demographic shortage. I think the demographic problem is underappreciated. Robots are coming just in time to supplement. They are not coming to take jobs away.
What is Brexit, a failure of the European experiment or a downside of globalisation?
It could be both. We track the popularity levels of the leaders in the 20 largest countries, a composite approval rating. These are at all-time lows. Dissatisfaction with the establishment is everywhere. It is not just a problem with Britain. I have sympathy with the narrative that nations are turning inward but there is a chink in it. Look at Latin America where the opposite is happening. All the incumbents there are of the Left. All those coming to power are the market-friendly, pro-business people.
My point is that there is anti-incumbency. It is not ideological. Donald Trump is not a classic Right candidate. It’s not like his economic policies are more Left than Right. They are all over the map. Europe too. Brexit was more about insecurities of people than ideology.
Extrapolate this to 2019, what do you project for Prime Minister Narendra Modi?
Too early to say. There is a global anti-incumbency. There’s a contagion effect. Usually the contagion effect is regional in nature. The Arab Spring. We’ve seen it in Latin America. Typically the best time for a country is in the first two years of a new leader.
Are you impressed with his first two years?
I am disappointed as an Indian that the entire political capital was not well spent. Relative to the mandate he had, there’s a lot more that could have been done. Very specifically [when it comes to] the banking sector. It is unpardonable that you should own 70 per cent of India’s banking sector when the global emerging market average is 33 per cent. They haven’t begun on reducing ownership and now it’s almost too late.
The Opposition is too well-organised compared to where it was six to 12 months back. Their narrative is in place: suit boot ki sarkar (a government of the elite, for the elite). But at a time when populism is rising across countries, particularly in Europe, incremental reform is not a bad thing.
You say in the latter part of their tenure, leaders aren’t as driven to reform...
That’s the general rule. No rule is 100 per cent true. There are always exceptions. Every time I talk about how democracies are better than authoritarian regimes, people say, oh, but Lee Kuan Yew did so well in Singapore. Every leader likes to believe he is the exception but the probability is against you.
What’s your view about outgoing Reserve Bank of India (RBI) Governor Raghuram Rajan?
I think he did the best he could. By 2013 [when Rajan joined the RBI] India’s inflation performance was horrendous; of the 150 countries we tracked, India was ranking at 140. That’s never happened in India’s history before. Now it is back to the average. From a pure performance point of view most of us will say we were happy with him. But there is always a political argument that he should never have been speaking about issues that were outside his remit.
Do you agree with the argument that he spoke on issues outside of his remit such as tolerance?
I don’t agree with that. But that’s how it is perceived. Most of us think that he should have been given a second term. I am all for seeing fresh faces but there’s a long list of incompetent people you first want to get rid of. Let’s get that long list of incompetent people first rather than saying, let’s start with Rajan.
In the book, I have a quote a former RBI Governor gave me in 1997 who said Central bank Governors are like teabags — you know how good they are when they are in hot water.
You have written that the next recession will probably be made in China. Why? And also, applying your rules, what is going to be the next engine for global growth?
I’ve argued that if a country takes on far too much debt over a short span of time, that’s a real problem. Why I am worried about China is the amount of debt they have taken, over a short span of time.
Till about 2008-2009, China’s debt ratios were quite stable. After that, because they tried to grow very rapidly at a time when the rest of the global economy was slowing down, and they launched a massive stimulus and had to keep doing that to keep growing at their pace, they took on so much debt. One statistic that scares me today is that it takes about six dollars of debt to create a dollar of GDP in China today — it’s out of control. At the peak of the U.S. housing bubble, it took three dollars of debt to create a dollar of GDP.
What about India?
India is quite stable now. Debt and GDP are growing together. India’s debt is not going up much, even public debt has stabilised. In the last 10-15 years, private sector companies took a lot of debt, but in the last five years or so the debt profile seems to have stabilised. On the next engine, first there has to be realisation that the baseline has moved lower everywhere. That’s a universal truth. Then if you apply the set of rules, South Asia looks good to me, even India on a relative basis looks okay on the rules. Bangladesh, Sri Lanka and Pakistan, the whole region is quietly recovering. Five years ago, Pakistan was the most dangerous place, today some investment and consumption is picking up. Malls are buzzing even though it remains a very bad place from a security standpoint.
I like Eastern Europe on a relative basis. The middle income countries are on top, if you ask me which countries have the best chance of becoming rich. They are in a sweet spot. In the East Asian region, I like Philippines, even Indonesia. They have had a much better land acquisition bill than India has had, and tax amnesty, which is now making progress. In the developed world, the U.S. and Germany still look relatively okay because of their inherent strengths. Debt levels have stabilised and their investment landscape is much better. There’s no way the U.S. can grow at 4 per cent any more. The working age population is shrinking so with the new maths U.S. can grow 2 per cent, and Germany too. Japan is trying reforms but it is so difficult when your population is shrinking.
