RUCHIR SHARMA'S BOOK,
Breakout Nations, is a kind of cultural anthropologist’s guide to economics. He takes us on a tour of emerging nations from the bottom up, describing the Philippines’ economy from the point of view of a Filipino maid working overseas, and explaining the varying and widely disparate costs of a Four Seasons hotel room in different cities around the globe. His detailed and colourful research is based on travelling to the countries he writes about and ‘kicking the tires’; the best way, he says, to take the pulse of a nation.
Sharma works full time as Head of Emerging Markets Equity and Global Macro for Morgan Stanley; his avocation is writing, for Newsweek, the Economic Times and the Wall Street Journal. We met him at the Kee Club in Hong Kong recently to discuss his first book.
ALR – To begin, we’d like to ask about China, the giant that casts its shadow across all of Asia. Everyone knows about the boom in China’s coastal cities, but you write about the rise of second-tier cities as indicators of a country’s, or indeed a region’s, growth, or potential for growth. Are China’s second-tier cities the next big thing?
RS – There’s a lot of argument today in China that they need to go west because coastal areas are already very well developed. There’s no doubt that China is a very big country, but the key thing to remember is that not all areas are equally productive. So the bang for the buck you get in some of these areas can be a lot less than you get in some of the coastal areas.
ALR – The head of Samsung, Kim Young-ha, is now going into fourth, fifth and sixth-tier cities in China in order to expand and look for growth. Is this an act of desperation? Or is it is really clever and forward thinking? Do you think they’ll make money? How can people in these still-impoverished cities afford things like mobile phones?
RS – I’m sure they will (make money). It’s not desperation. But those places may not be able to achieve the same level of economic success or development as the coastal areas did because they are not as well placed, and may not have as much talent.
ALR – But it’s still an opportunity.
RS – Yes, that’s right.
ALR – Speaking of South Korea – they are, to a large extent, dependent on exporting their manufactured goods to China, just as Mexico is dependent on its exports to the US, as you’ve said in Breakout Nations. Won’t China’s slowdown make South Korea vulnerable?
RS – Yes, that is a risk. But the key thing about South Korea is that it’s got this amazing chameleon-like character of being able to reinvent itself. A decade ago, a lot of people thought Korea was very vulnerable to slowdown in the US and the Western world because its exports were all destined there. The remarkable thing about South Korea is that it is able to adapt to the economic environment. South Korea was not seen as vulnerable to China’s slowdown a decade ago, but because China rose South Korea was able to capture that. That’s what I find remarkable about South Korea: its adaptability.
Regarding the slowdown in China: it will affect the countries that are commodity exporters more than it will affect countries like Korea that are selling consumer goods into China.
ALR – I was fascinated by your comment in Breakout Nations that South Korea would not have difficulty embracing North Korea should the two reunite. I have not heard that kind of optimism. Most people think it would be more difficult for the two Koreas to unite than it was for West and East Germany to merge.
RS – The good thing about South Korea is its ability to learn from mistakes. A lot of people speak about the German reunification and how much it cost the West, but I’m hoping the Koreans will be able to learn from the mistakes the Germans made in terms of the currency union, et cetera.
ALR – Do you think national pride, culture, character and the propensity for entrepreneurship affect the chances of a country in breaking out?
RS – I’m not sure whether cultural characteristics matter so much. But one thing is instructive about Korea. I was (in Asia) in 1998 during the big financial crisis and Korea took it on the chin. There is great debate right now about whether or not to take austerity measures in Europe, but what I admired was South Korea’s ability to embrace austerity and to be able to come out of the crisis as well as they did. They had a very hard landing in 1997, 1998.
ALR – Do you think China could do that?
RS – Well, China has not been tested. These kinds of comparisons at times are a bit difficult to do because China’s per capita income is so much lower compared to Korea’s. Korea was tested and its comeback was truly remarkable because it could have fallen into the middle-income track at those income levels. But the people of Korea embraced austerity and the country was able to reinvent itself.
ALR – It’s amazing how quickly South Korea paid off the IMF loan in just three years and, in a small but significant way, through people handing in their jewellery to help pay off the debt.
RS – Yes, exactly.
ALR – You know the Chinese proverb about eating bitterness? It’s considered a virtue in Confucian societies like the Chinese and Korean; and not being able to ‘eat bitterness’ could be considered a weakness. With this cultural stoicism in facing hardship, perhaps China might take the same approach as Korea were it to face a similar downturn. And then there’s the other proverb about difficulty bringing opportunity.
RS – That’s right. There’s a saying in our business too, that you never let a crisis go to waste.
ALR – What do you think about the stimulus package that the Chinese are proposing?
RS – Well, I hope they don’t do it. That would be a big mistake. China needs to accept the fact that it’s now at a stage of economic development when things need to cool down. I hope they accept that they can’t keep going at the frantic pace they’ve been going at for years. It could backfire – I make a point in Breakout Nations that a lot of the stimulus in 2008/09 was misdirected – to keep the economy going at a very fast pace.
ALR – And to keep things cushy, as you say in the book. The South Koreans let companies go to the wall if they couldn’t sustain themselves. This allowed the remaining businesses to become stronger, sometimes even by absorbing the smaller companies that failed to keep up.
RS – Yes.
AALR – Turning to China again, there is a lot of concern that the workforce is outpricing itself. Where will manufacturers go if China becomes too expensive?
RS – China will remain an opportunity, but what I talk about in the book is that this phenomenon allows Southeast Asian countries a chance to benefit. The likes of the Philippines, Indonesia and Thailand – these economies have the numbers and the economics that make them attractive to companies looking to go outside of China for labour.
ALR – You identify the Philippines as a possible breakout nation, and others are also optimistic about its expected growth. What about the issue of inequality right now in places like the Philippines? There are huge modern shopping malls in one section of town; you turn a corner to find yourself in the midst of shanties without running water or proper sanitation; and turn another corner to see so much prostitution ...
RS – I’m not that concerned about inequality – it can be a problem but it’s too early to worry about that in places like the Philippines and Indonesia. The fact that more people are coming out of poverty is the more important point.
ALR – Do you think pegging to the US dollar is a good idea – as Ecuador did, for example?
RS – I find that pegged exchange rates are often not the way to go. You need exchange-rate flexibility; you need a voluntary anchor to discipline yourself.
ALR – Do you think social media affects markets? If so, is this a more prominent phenomenon in Asia, or is it the same all over the world?
RS – I think it’s the same all over the world but I also think it’s too early to say. This is just normal evolution. Technological change is nothing new, but we tend to overestimate the impact of the current technological change, thinking ‘this is path-breaking’. But all technological change is path-breaking – that’s what defines progress. That’s what we call a ‘recency bias’, when we think whatever is current has a much bigger impact than anything else.
ALR – Do you think social media affects herd behaviour, which you bring up in the book?
RS – There’s no evidence to back that up. Herd behaviour is more affected by liquidity than social media.
ALR – Is there an optimum number of years for political stability in a nation before it is ready to emerge?
RS – You need political stability all the time. A lot of people ask me whether a democracy or an authoritarian regime is better for growth; my answer to that is it does not matter. Among all the high-growth cases it’s basically 50/50.
It’s about the quality of economic leadership more than anything else. This point of view gets me into some trouble; people ask, ‘How can you say democracy doesn’t matter?’ But I’m just looking at results.
ALR – You really stress the importance of good leadership, though. What do you consider the qualities of good leadership?
RS – It’s when people get the connection between good economics and good politics. Because often we think that good economics does not lead to good politics. But I think it does.
ALR – That and sensible reform, which you write about as well.
RS – Yes, that’s right.
ALR – Are you optimistic about the coming change of leadership in China?
RS – I do track the situation there, but it’s so opaque that none of us can really know what’s going on. I’d feel almost like a charlatan if I were to tell you what I think about the political change in China because I don’t think we really have a fix on what’s going on there.
ALR – You write about the value of an educated workforce. You mention Vietnam for example, saying its workforce is not well educated enough to cope with investors’ expectations. Is improving education one of the aspects of good political reform?
RS – Absolutely. So much is made of the ‘demographic dividend’, whereby large and young populations in places like India and Vietnam are a benefit to growth. But what do you do with a large population? If you don’t educate the population properly and provide opportunities then it could be a demographic time bomb.
ALR – South Korea has a problem with ‘over-education’. They have too many university graduates and not enough jobs, so many people under thirty are underemployed. It doesn’t show up in the unemployment figures, since university graduates may be waiting tables in restaurants or working as sales clerks. China too has more university graduates than it can suitably employ. Do you think this is a time bomb?
RS – It’s a much better problem than the one I talk about, which is when you have a large and young population, like in Yemen for example, that isn’t properly educated.
ALR – You also talk about welfare as something that inhibits growth.
RS – Yes, if it’s premature. As countries get richer the welfare schemes come into place, which is fine. The problem is when you start to redistribute the pie without having much of a pie.
ALR – China keeps coming to mind; in the book you praise Deng Xiaoping for not introducing welfare too early. But what about now? Is it about time for China to start sharing the pie more broadly?
RS – Yes, I think China is doing that. This has been recommended in order to sustain consumption. There is a natural progression for this, but the key lesson, for places like India for example, is not to do it prematurely, because it chokes growth. You need the growth first.
ALR – Are you optimistic about your own country, India?
RS – I have mixed feelings about it. In the book, the tone is a bit pessimistic because I think they’ve blown away a lot of their chances. They could easily have been the fastest growing economy of this decade. But there’s been too much government spending, not enough impulse to reform.
ALR – Are you optimistic overall about the economic state of the world? Are you hopeful for the future?
RS – Well, I’m an eternal optimist. So I always think something will come up.
ALR – The tone of your book seems very measured though.
RS – When it comes to investing you have to be. I’ve seen so many cycles. I started investing in Asia when things got hot in the mid-1990s and then we had the financial crisis … I’ve seen too many cycles.
ALR – One thing that’s missing from the book is the ‘moral high-ground’ perspective.
RS – My personal values can’t be conflated with my economic outlook. They are two separate things. Personally I am for civil liberties, democracy and all that. I grew up in the chaotic democracy of India and I live in New York, which is about as free-spirited as it gets. I have my personal views, but I’m dealing here with hard-core observations and research.
ALR – Thanks for sharing your time and your views with us. We did struggle a bit to come up with questions because everything is so well set out and explained in the book.
RS – Thank you very much. So many people in my profession write books that are so … dense … that the outside world can’t understand them. My whole idea for this book was to write it as a sort of travelogue to make it more accessible.
