China is exception in bleak picture
Updated: 2013-07-26 11:03
By Andrew Moody (China Daily)
Ruchir Sharma says the biggest challenge for China now is adjusting to a slower economic growth. Cui Meng / China Daily
Country will be the only one in emerging-markets bloc to break out of middle-income trap: Economist
China is the only one of the emerging BRICS nations that is likely to break out of the middle-income trap, Ruchir Sharma believes.
The head of emerging markets and global macro at Morgan Stanley, however, says it will still be a difficult journey for the world's second-largest economy.
"China has just got into the middle-income status so now is the big test as to whether it gets stuck or not.
"I think it is a fair assumption that it will get to the next level and if its economy grows at 5 to 6 percent over the next 15 years, its per capita income is likely to more than double to around $20,000, making it firmly high income," he says.
Sharma was speaking in the lobby of the Ritz Carlton Hotel in Beijing, where he was promoting his highly acclaimed book, Breakout Nations: In Pursuit of the Next Economic Miracles, which has just been published in Chinese as well as in paperback.
He insists the biggest challenge now facing China is adjusting to a slower pace of growth, which he sees as something of a "psychological hurdle".
He believes the new norm for GDP growth should be 5 or 6 percent and that chasing higher rates by artificial stimulus could be destabilizing and halt the country's climb up the global income ladder.
"It is a step function down that needs to be made and it is an adjustment that everyone will have to make and not just in China.
"China is in a similar stage of development as to where Japan was in the 1970s, South Korea in the 1980s and (the economy of) Taiwan in the 1990s. They moved on to the next level but with a slower pace of growth from that point," he says.
His book is not necessarily about China doing well but more to do with the other BRICS countries - Brazil, Russia, India and South Africa - doing badly.
The BRICS, he argues, are "so last decade" and were largely lifted by a rising tide of global prosperity and a huge demand (apart from India), largely from China, for their natural resources.
"I have been very lucky because the main thesis of the book was that this era of BRICS is over. It was the hot theme of the last decade. Every decade there is some theme that captures the imagination of everyone."
Sharma says that the recent slowing growth of China - by far the largest of the BRICS countries, accounting for about 56 percent of the bloc's GDP - partly explains why these nations are now experiencing problems.
"It just so happens that with China's slowdown and commodity prices coming off, this whole BRICS concept is getting badly hit."
Sharma, 39, who lives in New York, is a well-known figure, particularly in his native India, where his book was a No 1 best-seller.
A regular on TV channels such as CNN, Bloomberg and CNBC, he is also a columnist for Newsweek and writes for The New York Times, Financial Times and Foreign Policy magazine.
His day job, however, is to manage more than $25 billion (19 billion euros) as head of Morgan Stanley's emerging markets equity team.
He says this means that unlike some theoretical economists, his feet are firmly planted in the real world.
"The problem in the academic world is that you have perma bulls and perma bears. They have these rigid views whereas I think for me my views evolve."
He also says he has a problem with making long-term forecasts, such as the often turbo-charged ones about China's future, and prefers to restrict his horizon to three to five years.
"It is very difficult to make predictions beyond that sort of horizon. Nobody knew 30 years ago that China could grow at 10 percent a year for 30 years so that is why I have evolving views."
Sharma, courteous and considered, says slowing growth for China should no longer be the frightening prospect it once seemed and may no longer result in higher unemployment and consequent social problems.
"I have been in China for the past few days and my reading of the situation is that growth has already slowed and it has not led to any employment pressure.
"I think China can achieve its economic dream with 5 to 6 percent growth and I think that would be more sustainable than the 7 to 8 percent which they (policymakers) want to officially achieve."
Making wrong policy changes has in Sharma's view fatally undermined other BRICS countries, particularly Brazil, which although achieving middle-income status a long time ago remains on a yo yo course and not on an "upward trajectory" like China.
"In Brazil, government spending is 40 percent of GDP which is way higher than even China. The government is very meddlesome and is very interventionist and this has consistently held down the economy," he says.
"One of the mistakes Brazil made was to institute a welfare state prematurely and the price it is paying for that is very high taxes on business."
Sharma says showcasing the country by holding the World Cup next year and the Olympics in 2016 might backfire.
"I don't think hosting the Olympics or the World Cup for a large economy like Brazil can be a gamechanger. I think it has never been for any country.
"Beijing hosted the games in 2008 but today you barely remember it, despite it being seen as a success. It is done and dusted. In China what has mattered is the big reforms in, say, agriculture and state-owned enterprises, which have been carried out systematically."
Sharma is also negative about the prospects for India, where after graduating from Shri Ram College of Commerce in Delhi, he began his career at a securities trading company.
It was, in fact, a sideline writing columns for leading Indian newspapers that led to Morgan Stanley recruiting him for its Mumbai office in 1996.
He argues that India with a 2012 per capita income of $1,489, making it a low middle income country, according to the World Bank, will find it difficult to build on the growth it has seen over the past decade.
"I think a lot of people have prospered in India over the past decade but I don't believe a country with an economic model where manufacturing does so poorly can do well. I think that is a major drag on its development."
Sharma says many people make the mistake of comparing India and China as rivals when there are vast differences.
"It is not just about size, although China's economy is three to four times bigger. The differences are much deeper. The Chinese model of strong central leadership would just not work in India since it is so diverse, almost like a continent. Sixty percent of Indians don't speak Hindi or English, which means they have no common language," he says.
"The only thing they (the two countries) have in common is geographical proximity and large populations, nothing else."
The rising stars, according to Sharma, are countries like Indonesia, the Philippines (he is impressed by the reforms made by President Benigno Aquino since he came to power in 2010) and African countries like Kenya and Nigeria.
"I think within a decade Nigeria will become the largest economy in sub-Saharan Africa, overtaking South Africa.
"South Africa usurped this title of being the leader of Africa but I don't think other African countries will stand for this for too long because it is not doing well economically."
Sharma argues that a false notion was allowed to develop in the last decade on the back of the BRICS' success that all countries were heading toward becoming high-income developed nations.
"It is not an inevitability that everywhere will develop. High growth is, in fact, very difficult. I make the point in the book that only about a third of the economies in the world are able to grow at 5 percent at any one time. The odds of them repeating it for a second decade is one in four and for a third decade one in 10."
Sharma says development is actually more like a game of snakes and ladders with only 35 of the 180 economies tracked by the IMF classed as developed.
"We have seen India and China which used to be great powers in the 18th century decline. You get bitten by a snake and fall down. Very few countries make it to the top," he says.
(China Daily European Weekly 07/26/2013 page8)