Ruchir Sharma is the chief global strategist and head of emerging markets for Morgan Stanley Investment Management, and author of a New York Times bestseller, The Rise and Fall of Nations. Based in New York, Sharma has been a global investor for more than 20 years, and a writer for even longer. He discusses why global growth rates are lower than expected — and tries to find some semblance of optimism amid the global volatility.
FinanceAsia: We’ve seen a lot of talk about slowing global growth. How do you feel the world stands?
Ruchir Sharma: It’s clear there is no region where global economic growth will return to the average rate in the decade before the global financial crisis. It will be lower everywhere in world. That realisation has not been fully appreciated.
The reasons for this have been debated a lot. The key reason for me is that this drag is down to productivity and demographic issues in the world. The basic point is that a lot of the declining growth rates you see are down to the fact that population growth rates have fallen a lot, particularly working-age population rates. The working age population of the world was increasing at nearly 2% a year between 1980 and 2007 —that’s now dropped to around 1% a year.
There are two drivers of global growth; productivity and labour force growth, and labour force growth is driven in a large way by working-age population growth. Labour force growth has come off a lot because global population growth has been falling, and that is taking a major chunk out of the potential growth rate.
A big example of that is China. Last year was the first time in China’s history that the working-age population shrank. That’s a very big deal, as typically the working-age population contributes one third of GDP growth, and its population has just gone into retreat. That makes its ability to reach 6.5% growth harder, because now it’s relying on productivity.
FA: There has been a talk in China about improving efficiencies and productivity.
Sharma: Yes, but I think that’s just talk. These are just clichés. Everybody likes to talk about improving productivity, in any country. The bottom line is that when your working-age population is contracting, growing the economy at 6% to 6.5% is almost impossible.
It’s even harder in China because urbanisation is slowing down. Last year, I was told there was no increase in urbanisation. In fact, last year five million people moved the other way, either because of land prices or other factors. So you have a declining working-age population growth and urbanisation that seems to have stalled in the last year.
There are many drags to the economy, such as the fact that it has taken on so much leverage. There’s been some excitement recently that the economy has stabilised and property and infrastructure investment have all looked up, but it’s been almost entirely done with an increase in leverage. China’s leverage in the first quarter was at a new high and it grew at 18%. It is getting less bang for each buck.
I like to say that China’s growth has been like a ping-pong ball bouncing down the stairs. The trend is clearly down and although the government will put in stimulus measures that temporarily lift it up, each time it drops again it’s lower and lower.
FA: That’s a bleak picture of the world’s second-biggest economy.
Sharma: Well it’s large enough that there are still investment opportunities in sectors such as healthcare, education, the internet and e-commerce. But generally it’s an economy we are wary of investing into because the trend is [for economic growth to go] down.
FA: In that case, what are the bright spots? Where should your clients be looking instead?
Sharma: I’d say we look at global demand. It’s clear that Europe is on some path to recovery but Europe has an amazing ability to come up with a new crisis every few months, with Brexit being the most recent example. Indeed even before the vote, the conversation was already turning to the next crisis, perhaps emerging from Italian banks.
Having said that, Eastern Europe looks relatively okay. In Asia, the Philippines and Indonesia look relatively interesting too. Countries in South Asia such as India, Pakistan, Bangladesh, Sri Lanka also look quite appealing, despite the level of promise not delivered in years past.
Corruption is terrible in all of these countries, but you have to focus on the changes in the margin. Context is also very important. If you look at India and wonder if it will be the next China, it disappoints. But there are enough opportunities in India to make money, because there is enough going on under the surface.
India is a country that has consistently disappointed the optimists and the pessimists. Every time the optimists think it’s the next China it disappoints. On the other hand, every time you think it will be torn apart by a crisis or foreign currency problems it proves more resilient than expected.
It’s coming from a low base with a per capita income of $2,000. You can make minor tweaks to productivity and get much more bang for the buck.
FA: There’s been criticism about a lack of widespread reform under prime minister Narendra Modi.
Sharma: That’s true. If you think you’re going to get massive reform in India like we saw in China in the 1990s, when they shut down masses of SOEs, laid off millions of workers, and we saw the privatisation and mass movement of workers west to east — well, it’s not going to happen in India.
On the other hand, there’s always enough going on. I always think of India being a collection of states, and some are doing the right thing with reform-minded senior ministers.
In part two: Sharma finds cause for optimism in more emerging markets and discusses how China can get back on track