The era of both easy money and easy growth is over,thats the central message that Ruchir Sharma,the head of emerging market equities for Morgan Stanley,seeks to convey in his first book Breakout Nations. The book has been welcomed as realistic and panned as pessimistic in Brazil by Brazilians,in India by Indians but its central theme is actually optimistic. Growth can,and does,emerge from anywhere but when countries stop sweating it,this stops. The tide of easy money lifted all emerging economies together,a phenomenon never seen before,but thats over now. Its time to separate the men from the boys. Excerpts
from a conversation between Ruchir Sharma and Sunil Jain.
Swaminathan Aiyar has said youre too pessimistic about India,that many things you obsess about crony capitalism,unskilled population,premature welfarism are exaggerated. Youve read the column.
Yes! Everyone in India is interested in just what I have to say about India. Foreign Affairs published my chapter on Brazil and labeled it Bearish on Brazil and it caused quite a stir there. Brazil,like India,is what anthropologist Edward Hall would describe as a high context nation colourful,noisy,quick to make promises that cant always be relied on,and a bit casual about deadlines.
Youre quite down on Brics: is From Brics to Cribs an accurate summary of the book?
Im not down on China Im just saying its growth will slow. On India,Im 50:50. All Im saying is the last decade was really freaky because all emerging markets did so well,part of it was catch-up,part was liquidity driven by,not just Greenspan,but he led it. Brics was a great marketing term because it captured the largest emerging market economies.
But dont we still have so much liquidity sloshing around?
We do,but its a lot more muted,nuanced… we have periods of risk-on,risk-off… its not like between 2003 and 2007. I have this line in the book about how in the middle of the last decade,it seemed every man and his dog could raise money for emerging markets; by the end,it appeared that just the dog would do.
With liquidity no longer abundant,growth is reverting to pre-2003 levels in many emerging economies,the ones that stopped reforming since they thought they had a god-given right. You know my beginning with this spoilt,gelled kid in a Delhi farmhouse party where he shrugs after getting to know Im a New York-based investor and says,Well,of course. Where else will the money go? Of the Brics,China reformed the most. Russia was reforming,then the oil boom made it feel it didnt need to any more.
Why is Turkey a breakout nation? It hasnt been growing as fast for so long as to meet your criterion. You yourself say its savings are low.
Breakout is a function of several things,expectation levels are one of them. If expectations are low,its easier to be a breakout nation. Indias growth fell from 8-9 per cent to 6-7 per cent and its market fell 35 per cent in dollar terms so,expectations are key.
To talk of another breakout nation,Poland when the number geeks come and start talking about its potential,will its hype be over?
The lesson is we have too many shooting stars,and too few winners. And the winners can,and do change. We need to look at each emerging market individually and at each point in time. Dont take large trends and extrapolate. I was bullish on Russia five years ago,Im not today.
Crony capitalism plays a big role in your classification. But East Asia was terribly crony capitalistic,so is China.
Im aware that crony capitalism is seen as a rite of passage,but I think perception is the new reality. If the view is you got where you did because of patronage,there will be a backlash. Look at the list of billionaires (page 45!). China has more billionaires than India,which is to be expected,but the net worth of Chinas billionaires is 4 per cent of its GDP it is 17.2 per cent for India. When I wrote about this in September 2010,people said whats the big deal,but you get a backlash and that stops everything.
How do you get to stop crony capitalism and reduce wealth concentration? How did the US do it,how did South Korea,how did China?
The US got anti-trust laws,in Korea the 1997 crisis led to many chaebols just getting bankrupt. Basically,you need a lot of churn among wealth generators,you need these billionaires to come up in non-government-related sectors (tech,for instance) and therell be no backlash.
But Indias got a lot of churn. The older families are all but gone,the new infra-chaps like GMR and GVK didnt exist a decade ago.
I dont want to get into names,but India had a lot of churn and that seems to have stopped now. In the book,I talk of how 9 of the top 10 Indian billionaires in the 2010 Forbes list were holdovers from the 2006 list. The top 10 Sensex stocks account for two-thirds of its total value; in the case of the Dow this is half.
What do you want the government to do? Say,youre doing well,so nothing more for you?
Maybe the political system should have the maturity to diversify to new chaps!
You talk of commodity.com to explain the frenzy that drove countries like Russia. Are you saying commodity futures are a bad idea,that governments must restrict investments here?
I dont think bans are a good idea because you cant ever control markets,theres so much liquidity. But the correlation between where the money is going and commodity prices rising is there for all to see.
Dont trust commodity-driven economies,Chinas going to slow,India has stopped getting its act together. Youre a fund manager,a successful one,where do you invest with all these caveats?
In all these places! But at the right time. I invested in Russia in the last decade,we were invested in commodities in the last decade. Im invested in India which still has good picks.
Whats your tipping point,your index of unsustainability? The Hilton Index?
Four Seasons actually! If at the Four Seasons,a room costs double the emerging markets average,as it does in Russia,or 60 per cent more,as it does in Brazil,it is time to move on. Mumbai,which is the most expensive in India,is still 14 per cent below the average! But Poland is 39 per cent below the average,and Malaysia 64 per cent below the average; the Czech Republic is 17 per cent below the developed markets average.
So the problem in India is that of the perfect storm,too many bad things happening together?
My point about India,and thats why Im 50:50,is that many states are breaking out I was with Montek Singh Ahluwalia on TV and he said my next book should be about breakout states! while the Centre isnt. So dont stay in Delhi and youll feel less pessimistic. FDI in retail,when it happens,will be in the states.
Isnt it difficult to divorce Delhi from states? Sure,Gujarat made big port investments in minor ports,but you dont have many such windows.
Well,you can divorce tech or consumer businesses from government in a sense. But the general point is while you see a sense of urgency in several states,you dont see that at the Centre. The poverty fight was so unreal surely you should begin by growing what there is to distribute.
Youre down on big debt,but the US where you see a revival is a big debt nation.
You have growth in the US,but because debt levels are high,this will shave off growth by 1 percentage point or so.
Chinas issue is not about lower reforms speed,its about it becoming middle-aged and not being able to sprint. It will grow but at a slower speed. Its also clear the old investment-led model doesnt work. Korea,Taiwan,Japan all slowed when they reached Chinas income level,but they continued to grow,albeit at a slower pace. In the case of India,you have to take risks. In the 1990s,India did things that paid off. Keep doing them,not doing anything is wrong. Dont do MGNREGA that keeps people on the farm.