In December 2013 the investment manager Ruchir Sharma was on the road in the Indian states of Madhya Pradesh and Rajasthan, interviewing locals in connection with upcoming elections. Everywhere he went, people “would angrily reel off to the exact rupee” the price increases for potatoes, ghee and onions over the past five years, Sharma writes in The Rise and Fall of Nations. “Talk of inflation trumped other pressing issues, such as corruption and unemployment.”
Inflation is one of 10 criteria used by Sharma, head of emerging markets and chief global strategist at Morgan Stanley Investment Management in New York, to assess the prospects of nations big and small. It is a problem, he writes, because it kills growth by discouraging saving, raising the cost of capital and contributing to political instability.
As Sharma’s insights into Indian onion prices suggest, there is nothing theoretical or abstract about his work. His new book adopts the approach that served him well in his 2012 survey of emerging markets, Breakout Nations, considering the views of village barbers alongside those of presidents as he works out whether the fundamentals of the countries he considers suggest a more bearish or bullish stance. For the most part, it is the former that prevails. Sharma notes that when the global financial crisis struck in 2007, more than 60 nations were growing at rates of at least 7 per cent a year; today, a mere nine countries can make that claim.
Sharma is particularly bearish about the prospects for China, which performs poorly on the metric of debt. For him this is the most critical factor determining economic performance in the short to medium term: if it grows faster than gross domestic product over a sustained period of time, expect an economic slowdown. Sharma was sounding this warning at least two years ago, well before such fears became fashionable.
Perhaps the most compelling chapter is the one on “good billionaires” and “bad billionaires”. Good billionaires are those who create jobs and products, thus supporting future economic growth — examples include the founders of Alibaba, Baidu and Tencent in China and the Silicon Valley moguls in the US. By contrast, bad billionaires are those who have made their fortunes through political connections and corruption, obtaining licences to natural resources or real estate.
Russia is the face of the bad billionaire model — among its 104 billionaires (the third-largest number after China, with 596, and the US, with 537), 70 per cent of wealth comes from politically connected activities such as oil and gas. Russia is therefore a prime candidate for a backlash against growing inequality. “It is the rise of an entrenched class of bad billionaires in traditionally corruption-prone and unproductive industries that is most likely to choke off growth,” Sharma writes.
Less predictably, Japan comes in for criticism here precisely because of its lack of billionaires. Indeed, the share of GDP held by this class is a mere 2 per cent. “One cannot help but suspect this is a symptom of the economy’s chronic incapacity to create significant wealth,” Sharma notes, suggesting that the failure is a mark of “a corporate and political culture that rewards seniority more than merit and risk taking.” Growth can slow when inequality is very low as well as very high.
India also doesn’t fare particularly well, primarily because of its low rating on Sharma’s fourth metric, which looks at how heavy a hand the government places on the economy. (France, unsurprisingly, turns out to be “the rotund king of this class”.) In India’s case, the pessimism lies in the fact that the government owns about 70 per cent of the banking system.
There are nations whose prospects are less bleak. Sharma is relatively optimistic about the US, because of its deep trade links, strong manufacturing and technology, and good billionaires such as Bill Gates. (On the debit side, the US also has an expensive currency, a high level of debt and the threat of angry populism.) He is also positive about Germany and some of the countries in its economic orbit, such as the Czech Republic and Romania.
All these views are not meant to be written in stone: Sharma believes that long-term forecasting is a fool’s game. But for insights into the forces operating in our world today, The Rise and Fall of Nations is a stimulating and useful guide.
Henny Sender is the FT’s chief correspondent for international finance
The Rise and Fall of Nations: Ten Rules of Change in the Post-Crisis World, by Ruchir Sharma, Allen Lane, RRP£25/W.W. Norton, RRP$27.95, 480 pages
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