Ruchir Sharma, head of emerging markets and chief global strategist at Morgan Stanley, is the author of the international bestseller Breakout Nations, which accurately predicted the rise of BRICs. He is a leading global analyst on economic trends and one of the world's largest investors, managing US$ 20 billion in assets in emerging markets. In an exclusive interview to the Huffington Post, Sharma talks frankly about the economic winners and losers over the next few years.
Sharma's best-selling new book The Rise and Fall of Nations: Ten Rules of Change in the Post-Crisis World published by the Allen Lane imprint of Penguin Books, presents 10 interesting criteria for predicting which nations will rise. He sees the next generation of tigers rising in South Asia, the sun setting on Britain and China struggling with a huge debt crisis. He is not very alarmed at the prospect of a Trump presidency because "US institutions are strong enough to resist his whims" and some of his success thus far is based on "investor assessment that he can't win". Excerpts:
Do you see the EU collapsing in the long term given that right-wing parties across Europe are also asking for referendums like Brexit?
I am no expert on the EU, and leave its future to those who are, but I do watch closely for signs of political revolt and new leadership, which can be pivotal for national economic prospects. Before Brexit, right-wing movements were on the rise in Europe but had won a national vote only in Poland. The centre had held in the core European countries: Britain, France, Germany. Brexit was thus a major breakthrough for the nationalist right and gives them more momentum going into the next leadership elections.
Modi has been an incremental reformer, but in a world where politics is turning reactionary in many countries, incremental reform looks good.
How will Britain fare on its own -- potentially without Scotland and Northern Ireland?
Judged on my 10 rules, Britain's prospects decline after Brexit: the politics are shifting to the reactionary right; the challenge posed by slow population growth will be compounded by a turn against accepting economic migrants; and Britain's trade and financial ties to the world are likely to be disrupted by protracted negotiations on the terms of its leaving the EU. That said, its scores do improve on at least two rules: the decline in the British pound is a plus on the currency rule, which is that "cheap is good". And leaving Europe should lower the degree of state meddling in the economy, by removing the supranational state from the picture. Overall though, Brexit lowers Britain's scores and diminishes its economic prospects.
Your new book The Rise and Fall of Nations suggests guidelines for predicting the short-term future of nations. Will India rise or fall if business continues as usual for the rest of Mr. Modi's present term?
India will rise, but not as fast as the optimists expected when Modi took power in 2014, and was feted by some as the Deng Xiaoping of India. The surprise is that he has been an incremental reformer, but in a world where politics is turning reactionary in many countries, incremental reform looks good.
You say, "India's growth rate is probably overstated, the result of dodgy new accounting methods used by the national statistics bureau." What, according to you, is India's current growth rate? And what should it be for sustainable growth?
I think India is growing at a pace between 5 and 6%, or about two points lower than the government claims. That is a huge difference -- but these days a pace better than 5% is actually quite good, even for a relatively lower income country. At a time when slower population growth, high debts, falling growth in global trade and capital flows, and other forces are slowing the global economy, every class of nations needs to lower its expectations. It may be a long time before we see another emerging nation post growth in excess of 7-8% in this new era. The risk for India is that the state will try to push growth faster than is possible or practical, in this slow growth era.
I think India is growing at a pace between 5-6%, or about two points lower than the govt claims... but these days a pace better than 5% is quite good...
You talk about "good" and "bad" billionaires -- India now has the third largest number of billionaires in the world. How would you (a) rate them and (b) how worried should we be about growing inequality as India has the largest number of poor people in the world?
I first started tracking billionaires around 2010 because I saw so many "bad" ones rising in India on political connections in traditionally corrupt industries like mining and real estate. There are still reasons for concern -- billionaire wealth equals around 15% of GDP, well above the emerging world average of 10%. But the trend in terms of quality is improving: over the last five years India has seen a sharp rise in "good billionaires," meaning tycoons rising in industries like tech and pharmaceuticals, which traditionally make a strong contribution to productivity, and are relatively free of political corruption. This matters, because it is the rise of bad billionaires that is most likely to stir social unrest, and demands that the government focus on redistributing rather than creating wealth.
You are optimistic that South Asia will produce the next generation of tigers. Yet Pakistan's polity remains dominated by a self-serving military and the rising intolerance in Bangladesh is literally killing dissenters. This goes against your thesis that democracies are best for sustainable growth.
That is true, in part. South Asia has been dogged by political instability since the independence movements of the 1940s, and the economic risks of authoritarian rule still loom over this coup-prone region. On average, authoritarian governments are no more or less likely than democracies to produce long runs of strong growth, but they produce much less steady growth and tend to experience volatile swings from very strong to very weak growth. So the signs you cite are genuine cause for worry, and I see politics as perhaps the most important threat to the prospects of South Asia.
Sri Lanka, Pakistan and Bangladesh all have bright prospects going forward, with credit growth under control, strong working-age population growth, inflation in check...
That said, one basic principle underlying my system of ten rules is that it forces me to maintain a broad perspective, not to get too wrapped up in one threat or storyline. Despite the politics, the place to look for the next winners is always among the recent laggards, and South Asia is emerging economically after a long period in the shadows. In 2015 it had the highest concentration of accelerating economies in the world. Sri Lanka, Pakistan and Bangladesh all have bright prospects going forward, with credit growth under control, strong working-age population growth, inflation in check despite GDP growth averaging around 6 percent. Bad leadership could derail South Asia quickly and countries such as Pakistan are especially vulnerable to sudden regime shifts, which is one reason I limit my outlook to the next five years. The only real constant in the economic world is change.
Are Asia's entrenched political dynasties good or bad for growth? Scions of political families are increasing their representation in both regional and national parliaments. Do new parties like AAP represent the future?
In general I see growing nepotism and widening family ties as a step backward for any economy. Back in 2012, I was still very concerned about princelings rising across the commanding heights of the Indian economy, from business to Bollywood and parliament. That problem is still visible, for example, in the fact that more than 60% of total billionaire wealth in India is inherited, well above the emerging world average of about 40%. Right now, however, I think the larger trend is the rise of regional parties and chief state ministers who increasingly focus on economic development, and not just on caste or family politics.
According to the eight-year cycle of economic boom and bust in your book, we are on the brink of another global recession. This one caused in part by China's imploding debt crisis and overall global decline in productivity. How deep will this recession be and who will it hurt most?
The point I make is that between 1970 and 2010, the world suffered five global recessions, or one roughly every eight years. Since the last one hit in 2008-2009, or about eight years ago, it is time to start watching for the next one, which may be near.
Between 1970 and 2010, the world suffered five global recessions, or one roughly every eight years... it is time to start watching for the next one...
National economies often suffer recessions, but because there are always fast-growing nations somewhere in the world, the global economy rarely shrinks as a whole. If you look at the global recessions identified by the International Monetary Fund, they started when global GDP growth fell below 2%, and lately global growth has teetered close to that mark. Though all previous global recessions since 1970 originated in the United States, the next one is likely to flow from the slowdown in China, which in this decade replaced the US as the largest contributor to global growth. In fact the hardest hit countries are already visible, including those like Brazil and Russia, which had prospered in the last decade by selling raw materials to China, and are now deep in recession.
You are quite optimistic about the US although many are worried about a possible Trump presidency. How do you account for his improbable popularity and will you remain optimistic about America's future in his hands?
It's been amazing to watch a race that has featured both a billionaire and an anti-billionaire. On one side Bernie Sanders, campaigning against "the billionaire class," and on the other Trump, who would be the first billionaire president. Trump is hard for anyone to explain, but I think the fact that he is still in the race reflects in part America's generally positive view of billionaires and how they make their wealth. Despite Sanders's charge that the system is rigged, many Americans associate billionaires with highly competitive, productive industries. They think of Gates, Buffett, Zuckerberg, Elon Musk. That generally positive view opens the door for a billionaire to be President, a first that would be impossible in many emerging countries, where the anger over inequality runs much deeper.
Indeed if a character similar to Trump were rising in an emerging country, you would likely see investors fleeing and the currency tanking. That's not happening in the United States, because investors assume either that Trump can't win, or that US institutions are strong enough to resist his whims if he does.
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