The long road
Making sense of euphoria and despair about emerging markets
Jun 2nd 2016
The Rise and Fall of Nations: Forces of Change in the Post-Crisis World. By Ruchir Sharma. W.W. Norton; 466 pages; $27.95. Allen Lane; £25.
GLOBALISATION has gone into reverse gear. Trade volumes have stagnated and the value of the capital flows sloshing around the world has dropped by over half since 2007. The West is angry and inward-looking. Disappointment festers in the emerging world. In the boom years between 2003 and 2010 it appeared that a new era of openness and global supply chains would help emerging countries to grow at turbocharged rates for decades, closing the gap with the rich world. Today that idea is out of fashion. Brazil’s economy is shrinking, China’s debts are terrifying and Russia is a rusting autocracy. Emerging countries are growing at 4%, half as fast as in 2006.
Into the wreckage steps Ruchir Sharma, a fund manager and author of the bestselling “Breakout Nations”, which came out in 2012. His new book, “The Rise and Fall of Nations”, has three aims: to assess the crash; to dismantle the analysis that led investors and economists to get overexcited; and to offer a new framework for thinking about emerging countries. The result is ambitious. It covers four-fifths of the world’s population and 40% of its GDP, and though it is sometimes rambling, it is also entertaining, acute and disarmingly honest. Instead of pious statements about poverty, or portentous mutterings on the importance of American leadership, Mr Sharma sees the world from the ruthless and restless perspective of an investor.
The emerging-market slump, he argues, is not over yet. Commodity-exporting economies, such as Russia, Brazil and South Africa, have yet to adjust fully. Some multinational firms cannot admit that their investments abroad will not return a decent profit. To counteract the global slowdown after the crisis of 2008-09, most emerging economies went on borrowing binges. China, in Mr Sharma’s view, is almost certain to face a crunch of some kind. No country, he says, has “ever survived a debt binge of such a scale without suffering a severe economic slowdown”.
Plenty of executives and forecasters mistook a commodity-driven boom for a step-change in long-term prospects. On paper there are some reasons why GDP per person might increase much faster in emerging economies than in rich ones: for example, they might be able to leapfrog generations of technology, learning from rich countries’ experience. But history suggests that sustaining fast growth is terribly hard in practice. Since 1945 most countries’ spurts of success have been followed by periods of mediocre growth or worse.
Some forecasters then compounded this error by making projections over a dizzyingly long time. At the height of the emerging-market boom, it became routine for bosses and bankers to discuss the relative size of the GDPs of America and India and China in 2050. Mr Sharma thinks that looking beyond a horizon of between five and ten years is useless, and even then things are murky.
What organising idea should replace the belief that the emerging world will one day converge with the rich world? Mr Sharma’s proposal is cycles. Countries’ prospects rise and fall over cycles of up to ten years. Spurts of fast growth contain the seeds of their own destruction: exuberant investors sponsor frothy projects and politicians become complacent. After a slump banks and firms eventually purge their balance sheets and reformers are emboldened, allowing growth to pick up again.
It is hardly a novel way of thinking about the world, but Mr Sharma has ten tests for working out where countries are on this rollercoaster ride. For example, a country at the beginning of a rising cycle will often have an expanding manufacturing base, stable debts, low inflation, a cheap currency that boosts exports, a state that builds bridges but does not meddle, few crony billionaires, and hungry leaders who have not been in office long enough to become lazy or corrupt.
For investors, the trick is to bet on a country before the next cycle of hype begins (and then sell before it peaks). Fittingly, Mr Sharma is keen on countries that few investors think about much: Pakistan and Romania, for example.
He has a knack for sharp comparisons between countries. Australia’s history of high immigration is contrasted with Japan’s insularity. The puny trade links between India, Pakistan, Bangladesh and Sri Lanka are compared with the umbilical cords that bind South-East Asia and which have made it richer. He is pithy, too. In countries with rotten financial systems, “a shake-up of banking is a shake-up of society”. China’s periodic attempts to perk up its economy are like watching “a ping-pong ball bouncing down stairs”.
The book has two limitations. First, it is an unashamedly business-class view of the world. Mr Sharma name-drops and networks like mad, often to entertaining effect. Visiting China less than a year after the collapse of Lehman Brothers, he finds an air of “triumphant self-satisfaction”. In 2015 Najib Razak, Malaysia’s prime minister, gets confused while addressing a room full of investors in New York, despite an aide’s attempts to keep him on-message. Yet there is little first-hand reporting on the slower currents of change in the emerging world—such as the shift from the countryside to cities—that continue regardless of where currencies and shares trade.
The second flaw is that Mr Sharma doesn’t tackle whether it makes sense for most people to compare countries as he does. His point is that although no grand theory explains the world, an experienced observer can make informed guesses about which places are on the up or in decline. This is a useful skill for a portfolio manager, shifting money around the world. But it is of less use to people in government, or to companies, whose time horizons are longer. If Mr Sharma is right that global capital flows will remain depressed, and that developing economies face a pedestrian future, then the hot money chasing them will recede—as, perhaps, will the influence of famous fund managers. Until then, Mr Sharma’s book is a fine guide to the great emerging market boom and bust.
This article appeared in the Books & arts section of the print edition under the headline "The long road"