Growth isn't a God-given right PDF Print E-mail
Sunday, 29 April 2012 14:53
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The era of both easy money and easy growth is over, that’s the central message the head of emerging market equities for Morgan Stanley, Ruchir Sharma, seeks to convey in his maiden 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 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 that’s over now. It’s time to separate the men from the boys. Excerpts of a conversation with Sunil Jain:
Swaminathan Aiyar has said you’re too pessimistic about India, that many of the things you obsess about—crony capitalism, unskilled population, premature welfarism, not enough creative destruction—are exaggerated. You’ve 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 labelled 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 can’t always be relied on, and a bit casual about meeting times and deadlines.
You’re quite down on Brics: is ‘From Brics to Cribs’ an accurate summary of the book?
I’m not down on China. I’m just saying its growth will slow. On India, I’m 50:50... All I’m 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 don’t we still have so much liquidity sloshing around?
We do, but it’s a lot more muted... nuanced. We have periods of risk-on, risk-off... it’s 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 I begin the book with this spoilt, gelled kid in a Delhi farmhouse party where he shrugs after getting to know I’m 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 didn’t need to any more.
Why is Turkey a breakout nation? It hasn’t been growing as fast or for as long as to meet your criterion—you yourself say its savings are quite low.
Breakout is a function of several things; expectation levels are one of them. If expectations are low, it’s easier to be a breakout nation. India’s growth fell from 8-9% to 6-7% and its market fell 35% 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, it’s hype will be over?
The lesson is we have too many shooting stars, and too few winners. The winners can, and do change. We need to look at each emerging market individually and at each point in time, don’t take large trends and extrapolate. I was bullish on Russia five years ago; I’m not today.
Crony capitalism plays a big role in your classification. But east Asia—you have breakout nations like South Korea—was terribly crony capitalistic, so is China...
I’m 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 I have (page 45). China has more billionaires than India, which is to be expected, but Chinese billionaires’ net worth is 4% of its GDP—it is 17.2% for India. The average net worth of the top 10 billionaires in China is less than half that in India. When I wrote about this in Newsweek in September 2010, people said what’s the big deal, but you get a backlash and that stops everything.
How do you stop crony capitalism, reduce wealth concentration? How did the US do it, how did South Korea, 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 the wealth generators, you need these billionaires to come up in non-government-related sectors (tech, for instance) and you won’t get a backlash.
But India’s got a lot of churn. Older families are all but gone, new infra-chaps like GMR and GVK didn’t exist a decade ago...
I don’t want to get into individual names but India had a lot of churn, and that seems to have stopped now. In the book I talk of how nine 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, you’re 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? All studies, from regulators, show futures don’t cause spot prices to rise.
I don’t think bans are a good idea because you can’t ever control markets; there’s so much liquidity. But the correlation between where the money is going and commodity prices rising is there for everyone to see.
Don’t trust commodity-driven economies, China’s going to slow, India has stopped getting its act together… You’re a fund manager, a successful one; where do you invest if you have 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. I am invested in India, which still has good picks.
So what’s your tipping point, your index of unsustainability? The Hilton Index?
Four Seasons actually! It’s one of them, but it works. If a Four Seasons costs double the emerging markets average as it does in Russia, or 60% more as it does in Brazil, it is time to move on. Mumbai, which is the most expensive in India, by the way, is still 14% below the average! But Poland is 39% below the average, Malaysia is 64% below the average, the Czech Republic is 17% 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 that’s why I’m 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 isn’t. So don’t stay in Delhi and you’ll feel less pessimistic. FDI in retail, when it happens, will be in the states.
Isn’t it difficult to divorce Delhi from the states? Sure, Gujarat made big port investments in ‘minor’ ports, but you don’t have too 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 don’t see that at the Centre. The poverty fight was so unreal—surely you should begin by growing what there is to distribute.
You’re 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 a percentage point or so.
Closing summary?
China’s issue is not about lower reforms’ speed; it’s about becoming middle-aged and unable to sprint. So it will grow but at a slower speed. It’s also clear the old investment-led model doesn’t work. Korea, Taiwan, Japan... all slowed when they reached China’s 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. Don’t do MGNREGA which keeps people on the farm.

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