Breakout Nations: In Pursuit of the Next Economic Miracles
Breakout Nations: In Pursuit of the Next Economic Miracles

Breakout Nations: In Pursuit of the Next Economic Miracles

Apr 15, 2013

TV Show


Which countries will be the next big thing? Most follow a four-point cycle, says Sharma: "You have economic crisis. They carry out economic reforms. After they carry out economic reforms, some sort of boom takes place. Then complacency sets in, and then you get back to having a crisis." So beware! Economic development is extremely hard to sustain.


JOANNE MYERS: Good morning. I'm Joanne Myers, director of Public Affairs Programs, and on behalf of the Carnegie Council, I would like to thank you all for joining us.

Our speaker is Ruchir Sharma, whose book Breakout Nations has been its own breakout bestseller for some time now. It has been noted as one of Publishers Weekly Top 10 Business Books for 2012, and Foreign Policy magazine recognized it as one of the primary business books to read.

Mr. Sharma is head of emerging market equities and global macro at Morgan Stanley, where he manages around $25 billion in emerging market assets. Previously he spent many years as a contributing editor for Newsweek and as a regular contributor to The Wall Street Journal and The Economic Times. We are delighted to welcome him to this Public Affairs Program.

In 2001, a Goldman Sachs managing director named Jim O'Neill coined the acronym "BRICs" to define the big four emerging markets of Brazil, Russia, India, and China. It wasn't long before American and European investors began pouring money into these markets, hoping to receive big economic gains. But that was then.

According to our guest, the golden age for these up-and-comers is fast coming to a close, as a host of other new markets going beyond these big four have emerged and are bringing with them the promise of economic success. Ruchir calls them breakout nations, and it is these countries where he says the new economic miracles will take place. Who are these countries? When and how do you determine that they are ready to take off?

Ruchir writes that he normally spends about a week each month in a different developing nation. His book is the fruit of those weekly fact-finding excursions, where travel affords him the perfect opportunity to meld his skills both as an economic analyst and as a journalist. His tools: First, he learns the macroeconomic numbers of a country. Then he travels to that distant spot, and while there, he talks to a wide variety of people from all walks of life, from the taxi driver to hotel operators, to restaurant owners. They all help to uncover the true economic picture.

His method may seem simple, but his proven success is a result of hard work, astute insightsand besides, he is very smart. For Ruchir, these grassroots experiences provide the information he needs to determine what makes economies break out or break down. The stories he tells to support his conclusions are not only entertaining, but instructive. Looking far into the future is never easy. Instead, Mr. Sharma has chosen to concentrate on the economic here and now. His premise is that economic success is hard to come by, economic growth is very hard to sustain, and that very few countries are able to make this journey to become an emerging-market star.

Please join me in welcoming a person who knows which frontier markets are on the right path and may just be the next big thing, our guest today, Ruchir Sharma. Thank you so much for joining us.


RUCHIR SHARMA: Thank you very much for having me here. It's very kind of you.

As the introduction will have revealed, I have been a writer for as long as I have been an investor. I started writing back in India in 1991, when I was just out of school. I didn't have any other options back then. I was always very interested as a young person in what was happening in the global economy, but at that sort of age and inexperience I couldn't find too many people to relieve them of their weath. So I had to stick to writing about what my thoughts were on the global economy.

I got that break in India in very interesting circumstances. Back in 1991 in India, no one was really that interested in what was happening in the rest of the world. It was a fairly insulated country. It was just about opening up to what was happening in the rest of the world. The largest economic newspaper was looking for somebody to sort of check the box, to write about what was happening in the world, since none of their mainstream writers or columnists wanted to bother doing that. That provided me with a window into that newspaper. I started writing when I was in college back then.

In the mid-1990s, I joined Morgan Stanley, under interesting circumstances. I was keen to go abroad and pursue a Ph.D. in economics. I was all set to do that. I was just about to do that when some of the senior Morgan Stanley people from New York were visiting India, and one of them spotted my writing, was intrigued"Who is this kid sitting in India writing about the rest of the world?" After a few conversations that I had with him, his question to me was, "Do you want to make money or do you want to study?"

I said, "Listen, I want to make money."

With that, I started my career at Morgan Stanley, looking at emerging markets. Then, of course, I moved to the center of the universe, New York, just over a decade ago. Since then, I've been running the emerging markets team at Morgan Stanley.

But one thing I have always been passionate about is writing. I find that it brings an extraordinary amount of discipline. Every time I go to a countryand I typically, on average, go to one country a month and spend a week there or sowhat I find is that when you end up writing about it at the end of that visit, it gives you an extraordinary amount of discipline. You are forced to put pen to paper, and when you put it out there in the public domain, you had better make sure that you have all your facts right. It helps crystallize your thoughts about that country.

I wrote such a column for Newsweek for much of the last decade, where I would end up writing about any country that I would visit, apart from writing op‑eds here, there, and the other. Like most writers, I thought that I had a book in me. In late 2010, the idea struck in terms of what the book should be about. One thing that I always thought was that no matter how much I want to write about the world and about the countries I'm visiting, there needs to be a big theme to it. Otherwise, it doesn't have a purpose.

In late 2010, a couple of things happened that gave me the big theme for this book. It had been an extraordinary decade for all developing countries. Never before in the history of economic development had so many countries done as well as they did over the last decade. Just to put that number in context, the average growth rate of developing countries in the 1950s and 1960s was about 5 percent per year. In the 1970s, it was a bit lower, but somewhat similar. In 1980s and 1990s, that growth rate dropped to 3.5 percent. There were so many crises in various emerging markets. Then, from 2003 onwards, that growth rate jumped to 7.5 percent per year. From 2003 to 2008, we sustained that boom, growing at an average pace of about 7.5 percent per year.

Never before in the history of economic development had so many countries grown so quickly together. The peak year of that boom was 2007, when only about three countries in the entire emerging market universe reported a negative GDP growth rate. Typically, if you go back in history, about 15 to 20 percent of countries in any year report a negative GDP growth rate. But in the peak year of 2007, only three countries did. These three countries were Fiji, Zimbabwe, Congobasically, who cares? You had the entire emerging market world doing well. Some random small stragglers weren't doing that well. But they were doing extremely well out here.

We all came to celebrate this era as being this era where this mass rise of emerging markets was taking place. The power was shifting away from the developed world, with the U.S. in decline, the Western world in decline. These powers were rising in the emerging world.

This narrative got even stronger after the financial crisis of 2008-2009. It was seen to be a Western financial crisis. These countries were very badly affected. It was seen that these emerging markets would continue to do that well.

That confidence was quite apparent to me in some of my visits to emerging markets in late 2010, when the capital flows were really gushing in. One of the things with which I begin my book in terms of what gave me some cause for concernas an investor, we are always looking for the flaw in the conventional wisdom, because too often have we seen that when something becomes conventional wisdom, that comes to an end. In every decade there has been some hot trend that has captured the imagination of the entire world. Often what we find is that that hot trend in one decade is rarely the hot trend in a subsequent decade.

In the 1980s, it was all about the rise of Japan. Of course, that went caput in the 1990s. In the 1990s, it was all about the rise of the tech bubble, the TMT thing [technology, media, telecommunications], as they called it. That sort of faded after that. In the 1970s, it was all about the rise of natural resources, commodities. People were in awe of the Soviet Union back then. The CIA was making projections about when the Soviet Union would end up overtaking the U.S. as the largest country in the world, partly because the commodity boom was helping the Soviet Union a lot in the 1970s.

So there has always been some trend that has captured the imagination of people every decade. The big trend of the last decade, as I said, was the rise of all these emerging markets. The acronym "BRIC" accurately captured this, because these were the four largest emerging markets. The rise of the BRICs was what had everyone fascinated.

In late 2010, I was touring some of the BRIC countries. It struck me, the levels that this overconfidence had reached. I was in India. India has its own equivalent of Christmas, around November there, early November. I went to my home city of Delhi. In Delhi, I was invited for one of these Diwali parties. This was at one of those very fancy farmhouses in India.

By farmhousesthese are the so-called Hamptons kind of thing on the outskirts of Delhi, where these palatial bungalows exist with fancy water features and fountains. This one I went to had a railroad also running through it. They call them farmhouses because they used to be farmlands, given at concessional rates. But now the rich of Delhi use them as their weekend playgrounds to basically go an hour or so away from Delhi.

I was invited to one of these parties. I ended up there at night. There were all sorts of fancy cars. The valets were out there juggling the Jaguars and the Bentleys and other things. Of course, you entered in there and you had food from all over the world, chefs flown in from Italy, Azerbaijan to lay it out for you.

I got to chatting with this young, 25-year-old person there. This guy seemed to me like this typical rich, spoiled brat, wearing this very tight black T-shirt, his hair spiked with gel. The techno beat was beating in the background. This was late 2010. India's growth rate was at 9 percent when the rest of the world seemed to be unfolding, or at least the West seemed to be unfolding back then. He got talking with me and very quickly figured out who I was and thought that I was some large investor from Wall Street looking to make some investments in India.

He looks at me and then goes, "Where else will the money go?" Here's this cocksure guy at the age of 25 who hasn't seen that much of the world, hasn't seen too many cycles. But he is seeing me in this thing"Where else will the money go?"

That makes me really concerned. I have seen emerging markets for 20 years. Exactly like a decade ago, my mind went back. Nobody wanted to hear about emerging markets in the late 1990s. The growth market in the world was the NASDAQ and it was the tech bubble, and emerging markets were seen to be these mosquito-laden, rat-infested kinds of places where you didn't need to take all this risk, because they had one crisis after another. There was the Russian crisis. There was the East Asian financial crisis. What's the point of going to all these countries when you are getting such great growth and returns back here in the U.S.? That was the sentiment in the late 1990s.

Fast-forward a decade, and there was this guy basically telling me, "Where else will the money go? It's got to come here." It sort of intrigued me when somebody was saying that.

Shortly after, I went to Russia. I was invited to speak at a conference. At this conference, then-Prime Minister Putin was also going to be there. His office asked for somebody to make a presentation at this conference, a large investor, along with Putin, in terms of telling about what their thoughts were about Russia. They called me to do this. I said, "Fine. I'll make the presentation."

I was not quite aware of what the setup was going to be like. But I strolled in there and, much to my surprise, I saw that it was going to be telecast live, and all the bells and whistles attached to that.

But I made a presentation. Like investors, I'm used to speaking my mind. I made a frank presentation there about how much we used to like Russia at the beginning of the decade and what Putin did was good for Russia. He brought in stability. He cut taxes. He had a sort of informal deal with all the oligarchs: You keep out of politics and you stick to your own fields, and all will be fine. And then Russia saw a big boom.

But my point now was that that model has run its course, that the price of oil has gone up a lot over the past decade, a lot more than you would have expected, and that nothing else was happening in Russia, beyond oil and a consumption boom related to it. There was no real manufacturing going on. There was not one company listed on the Russian stock exchange which is a serious manufacturing company. There was very little going on in terms of the small- and medium-size enterprises, which are typically the lifeline of an economy.

So I made a very frank presentation that what worked for Russia a decade ago will not work for Russia anymore in terms of its growth terms, and the best of the growth seems to be behind Russia, unless it reinvents itself and initiates a fresh dose of reforms. It was a fairly frank presentation that I made.

I thought all was going well. The prime minister was sitting there on the dais and he was taking notes down. I thought, "Hey, this is great. I can make a presentation, and it seems to be well received."

Of course, next morning I woke up and I read the press out there. It was a rather sharp reaction. It was like, "Who is this guy who has come here to spoil our party?" The reaction was, "We don't need your money"again, stereotyped as an investor, with the money bags, et cetera. But with so much money flowing in, this sort of advice was gratuitous. "We don't really need this advice. Russia has been just fine. Thanks, but no thanks, as far as your advice is concerned."

Now the dots are all beginning to connect up that this was what was going on.

Then there was Brazil, which I went to after that. It just struck me how frightfully expensive Brazil had become. To stay in Rio at one of those fancy hotels on the waterfront, you were being charged up to $1,000 a night. As I write in the book, buying a Bellini was costing me $25. That's a bit outlandishmuch above prices in New York or anywhere else. A whole list of services, from renting a bike to going up for a hikeit was getting really, really expensive. A colleague of mine bought a T-shirt. She said that after one wash it turned into a handkerchief. She paid $100 for it.

So quality-adjusted, this was really, really expensive in terms of what Brazil had become. That's because a huge amount of money had flowed into Brazil. The currency had doubled in value over the past decade or so. It was something that really ended up beingyou could see that it was really expensive. And it was showing up in the numbers, too. Brazilian exports outside of commodities were kind of down. They were importing a lot. They were not able to make much at home because the currency had made manufacturing quite uncompetitive.

Now you are connecting these dots. You're going to India. You're going to Brazil. You're going to Russia. You're seeing the level of overconfidence that has come in here. You are seeing the way the prices have gone up.

Then, of course, there was the case of China, where the entire belief was that whatever growth rate China says it's going to do or has done in the past, it will just keep doing that. As I would say, if there was a price-to-earnings multiple, if you could attach a P/E to the Chinese leadership, it would be like 50, which is that, no matter what they say, that's what they are going to achieve.

So all these dots I connected up, and I said, "This is not going to work out the way people think it will." The fact of the matter is that economic success is very, very hard to sustain. That's the lesson from the history of economic development. I have also seen enough cycles in emerging markets to know that this is not going to happen.

There are about 180 economies in the world that are tracked by the International Monetary Fund [IMF]. Only 35 are developed. The other 145 have been emerging, many of them forever. So you have Brazils, Mexicos, et cetera, which have one good decade and then they do nothing for another couple of decades. Then they have another good decade. But in terms of their per capita income as a ratio to the United States, they have been stuck for 50, 60, 70 years at the same level.

You have so many other examplesthe Venezuelas and the Argentinas, which used to be First World countries, that have regressed over the years.

Economic success is extremely hard to sustain. The data that I quote in the book as well is that in any particular decade, about one-third of economies are able to grow at 5 percent or more, in emerging markets. About one-third are able to grow at an annual pace of 5 percent or more in any particular decade. The odds that those countries can keep growing for a second decade go down to 25 percent, for a third decade, go down to 10 percent. Only six countries in the world have been able to grow at 5 percent or more, on average, every year for four decades in a row, and only two have been able to grow for five decades in a row at 5 percent or more, those two being South Korea and Taiwan, what are called the gold medalists of growth.

If you look at the growth league tables, you will see that in the 1950s, the stars used to be some countries that you would never believe. They used to be the Middle East. In the 1960s, Iran and Iraq used to show up as the stars, growing above 5 percent that decade. Pakistan used to show up, sometimes Saudi Arabia, sometimes Yemen. So all these countries, which tended to do very well for a decade or two, but were not able to sustain economic successthat's really the history of economic development.

That's because most countries follow this four-point cycle, as I call it. You have economic crisis. They carry out economic reforms. After they carry out economic reforms, some sort of boom takes place. Then complacency sets in, and then you get back to having a crisis. This is the four-point cycle that I find that most countries tend to follow. Very, very few countries are able to reform in a proactive manner and keep growth going.

I think that's what has been the difference, let's say, between even a China and the likes of an India. If you look at China in the last 30 years, it has proactively reformed. Every five years, there has been some big bang reform which has kept the Chinese growth engine humming. I'm waiting to see whether the Chinese leadership are going to take the next steps of economic reforms. But there are some signs that a fault line is emerging even in China. Like I said, in China, until about five years ago, the Chinese economic miracle looked really good to me. We used to be optimistic on China. It took about a dollar of debt to create a dollar of GDP growth in China, until about 2007.

In the last five years, it has taken more than three dollars of debt to create a dollar of GDP growth in China. You can make out that now. To be able to sustain high growth rates as they get richer, as the per capita income level gets higher, it's getting more and more difficult to do so.

That really is the history of economic development. It's very hard to sustain economic success.

My idea for the book was coming through, which is that these hyped-up stars are going to face difficulties and challenges, because complacency is setting in in these countries, and it's time to look for the new stars. Often the new stars are the ones that have been laggards over the past decade or so, and where some new leader is coming in to try to change things. That's typically the rhythm.

My entire point also in this book was that you keep the forecast horizon in terms of what stars you are looking for to a reasonable timeframe. You keep it to about five years maybe, maximum up to a decade. But to talk about anything longer than that is complete nonsense.

As I say, the old rule of forecasting used to be that you make as many forecasts as possible and you remind people when you are right. The new rule of forecasting is that you forecast so long out in the future that neither you nor I will be here to know whether you were right or wrong. So all these fancy projections are made that these BRIC economies will be X share of the global economy by the year 2040, 2050. Yeah, right. Who will be here to check these forecasts out?

I wish that I could find clients to whom I could say, "Hey, give me your money, and come and check my performance in 2040." It doesn't work that way. For politicians, businesspeople, it doesn't work that way. Politicians are answerable over four- to five-year cycles in most parts of the world. Businesspeople have a strategic plan for about three years for their shareholders, et cetera. But nobody can believe in these plans, and often we know these long-term forecasts come very wrong.

In the 1960s, the multilateral institutions, like the IMF and the World Bank, thought that the next East Asian tigers would be Sri Lanka, the Philippines, and Burmaexactly the three that didn't make it. In fact, the ADB, the Asian Development Bank, set up their headquarters in Manila in the 1970s, thinking how the Philippines is the second-richest economy in Asia, and with a large English-speaking population and having inherited a lot of practices from America, this was going to become the next breakout nation. It never did. It never lived up to that promise.

So that's really the history of economic development, whether it's people predicting how Japan would overtake the U.S. or how the Soviet Union would overtake the U.S. or how Sri Lanka or Burma would become the next East Asian tigers. These very long-term forecasts don't end up being true. Very rarely do they come true, because the forecast horizon is too long and so many things change. There are new technologies, new leadership that comes in.

As I said, the most important thing, though, is that complacency sets in. That's what means that these countries stop reforming and they slip backwards or stagnate because of that. In some places, ethnic war breaks out. Conflicts break out. The countries don't remain as a whole. So there are all sorts of problems which come true.

The other rule is that the richer you get, the higher you go up the per capita income curve, the more difficult it is to grow at a very fast pace. I think that's one of the things that is not understood that well. For example, India, as you know, is in the midst of a major economic downturn just now, but the growth rate is about 4.5 to 5 percent. Some people tell me, "Hey, that's not bad. In this low-growth world, 4.5 percent to 5 percent is good."

No. That's wrong on two counts. One, India's per capita income level is only $1,500. The U.S.'s is $45,000. At $1,500 when you are growing at 4 to 5 percent, that feels like a recession. There are just too many poor people who are not being able to come out of poverty at that sort of growth rate. I think that is not well understood enough.

The second thing is expectations. When you are expecting a country to grow at 8 to 9 percent and it delivers 4 to 5 percent, that truly feels like a shock.

So to me this concept of breakout nationsthe two most important metrics I want to use here in identifying breakout nations were, one, that the countries need to grow faster than people expect them to, and two, when you compare growth rates, you do it with countries in the same per capita income group. Don't do it with countries in different per capita income groups, because that is not the right benchmark to do it.

The United States, no matter how well it does, cannot grow today much faster, on a trend basis, than about 3 percent or so. It's already a rich nation. It doesn't have as young a workforce as it used to have. So there's no way that the United States can grow, on a trend basis, at faster than 3 percent. But if the United States does 3 percent, that is a very good outcome for a country of this size and of this per-capita income.

On the other hand, a country like India, to feel as if it's really making economic progress, needs to grow at least 6 to 7 percent. Anything short of that is really disappointing back home, and you know it. It feels like an economic bust when you are growing at only 4 percent or so.

In Brazil and Russia, the benchmark needs to be 4 to 5 percent. Their per capita income level is much higher than India, but much lower than the United States.

Which are the countries, to summarize, that I think could be the breakout nations over the next three to five years, which meet the criteria of growing faster than people expect them to and also in terms of which will end up doing better than other countries in the same per capita income group?

Among emerging markets, the countries that I identify herein the lowest per capita income group, I speak about the Philippines, I speak about Indonesia, I speak about Nigeria possibly doing better than people expect them to. In the slightly higher income category, I speak about Turkey, I speak about Colombia, I speak about Peru.

In fact, Latin America is very interesting. You can basically cut it by the Andes, which run in the middle. All the countries on the left are doing well; all the countries on the right aren't doing that well. The left countries are what we call the new gold coast. That includes Chile, Peru, Colombia. On the right you have Venezuela, Brazil, Argentina. To me, those are the economic disappointments. It's sort of interesting.

Similarly, I think there will be countries that will do well in Eastern Europe. I feel relatively okay about Poland, which I think is being dragged down a lot now by what's happening in Western Europe. But I think it has decent structures in place and good institutions in place, and it checks the box on many of our fronts and will do well.

Then we keep getting new surprises. One country that, when I wrote the book, I was a bit mixed about, but all of a sudden things are beginning to really stir out there, is Mexico. Mexico had its back to the wall. In the last decade, as emerging markets grew at this breakneck pace of 7 percent or so, Mexico was growing at 2 percent. But finally, the people get fed up. They put into power a new leader, who promises reforms. As he begins to deliver on reforms, the prospects begin to change. There's a sense also in Mexico that they are being left behind by Brazil, because Brazil did so much better than them over the past decade.

So all of a sudden things in Mexico are beginning to stir. There's a reform agenda out there. This is the opposite of Brazil. In Brazil, after a great decade, complacency sets in. In Mexico, after a decade of really doing poorly and lagging, you put into place a new leader, and all of a sudden reforms begin to take place and the growth rates begin to pick up. That's why we find Mexico to be increasingly interesting in the Latin American continent.

What I do in the latest edition of the book is to apply this concept of breakout nations to the developed world as well and see which countries in the developed world might end up emerging as breakout nations. The country that Isurprisingly, I guess, for somecome out being really optimistic on is America. I think that, on many counts and many of the rules of the road that I look for, America ends up looking quite good.

If you look at the basics in terms of cost of labor, cost of land, the relative exchange rate, and the other input costs, like energy, on all those fronts, America looks very competitive. Wages have been flat, which has gotten a lot of political heat, obviously, but that's also a reason why manufacturing is now finding it increasingly competitive to come back here, because wages in many parts of the emerging world, like China, have risen a lot. The cost of land here compared to, let's say, Shanghai or Shenzhensetting up an industrial plant in Oklahoma or Alabama is a fraction of that cost in terms of the land cost.

Then the U.S. dollarin inflation-adjusted terms, this is the cheapest that the U.S. dollar has been ever in its floating rate history. So this is a super-competitive currency also just now.

Then you also have the sort of thing about technology. About one-third of total spend in the world on research and development is done in America. As a share of its economy also, America spends amongst the highest in the world on research and development. Therefore, all the cutting-edge technologies and the cutting-edge products, from Apple to Google or the cloud computing concepts, social networking concepts, still tend to come out of here, even though the jobs often are created abroadthe classic case, of course, being Apple, which employs only 50,000 people here. It's about the largest market cap company in the world, with a million people in Taiwan who are making Apple products. This is super-efficient and productive. But the fact of the matter is that the real value-added stuff is still happening here.

So these are some of the reasons I end up being optimistic here. I know there are a lot of problems. The debt is a real issue here, the federal debt. But here's the interesting statistic. The only major country in the world that has seen its debt as a share of GDP decline post the global financial crisis is America. That's because the private sector debt has come off. The private sector is doing a really good job here of paring down debt, whether it's corporations, households, the financial sector, even as the government debt has been exploding. But on a net-net basis, it's still a picture which is not as worrisome as what's happening in Europe or so. Therefore, I end up being optimistic out here.

In Europe, too, we see some signs that some countries are biting the bulletnot all, but some. For example, in Spain, the labor costs have come down a lot. In Portugal, the labor costs have also come down a lot as they try to reform and try to bring down some of the labor costs. Even in Greece, we have seen labor costs come off a lotvery painful adjustments going on, but it's happening.

Lastly, the country, once again, where something seems to be stirring is Japan. This country is a huge laggard for the last 20 years. But again, they have a new leader in place. He's trying to stir the pot. He's doing it first by this monetary big bang in terms of getting the yen to fall and getting inflation to come back from a state of deflation. But if he also carries out and delivers on his agenda of structural reform, which is deregulating the economy a bit, doing more trade pacts with the world, even Japan has a shot of reviving.

So this is the classic sort of thing, which is that leaders become laggards, laggards become leadersthis constant churn which is going on, which is what makes this game, for me, so fascinating and so interesting.

But the key here is that economic success is really hard to sustain. Always be on the lookout for how the dynamics are shifting and which new countries can emerge. Keep your time horizon on that flexible. I think three to five years, maximum up to a decade, is a reasonable timeframe. Anything longer than that, and you are dealing with all sorts of issues and problems.

That, to me, is really the key thing here, and that's what this book is about. It's like an economic travelogue of all these emerging markets, along with a new chapter about the developed markets as well, and which of these countries are likely to do well over the next three to five years or so.

The good news is that I put my money where my mouth is. As an investor, I'm forced to put my money where my mouth is. Since I have sort of stuck my neck out, three to five years from now at least, you can hold me accountable, unlike the other people who are forecasting 50 years from now.

With that, I think I would like to end my talk and open it up to questions. Thank you.


QUESTION: James Starkman. I'm a retired vice president of Merrill Lynch who is doing on a much smaller scale what you have done.

You used the word "complacency." How do you equate that with, let's say, government heavy-handedness or corruption as forces that create this cycle? Brazil, for example, is a very interesting example of that over the last three or four years. Were they complacent or did the governmentlet's say, Mrs. Rousseff, relative to Luladid she put her heavy hand in there, much to the detriment of progress there?

RUCHIR SHARMA: Brazil is a chicken-and-egg thing: Which came first? My sense is that the heavy hand came afterward, as panic. As growth is slowing down, you want to do something to try and revive stuff. You got in a hard place. The issue in Brazil really is that government spending as a share of GDP in Brazil is 40 percentamong the highest for any developing country. It's far too high. That's what has businesses paying very high taxes, as well.

I think what happened in Brazil was that the commodity boom over the last decade made the fundamentals look a lot better than they actually were. The fundamentals have improved. Inflation is much better-behaved. But they looked at lot better.

The complacency really came in because of the commodity boom. The commodity boom made them feel that, "We are on a different path here, and we can continue to get away with very high spending and very high taxes, because we have this commodity windfall that is coming out." As the commodity windfall has sort of died down, that's what really has caused Brazil to slow down, as far as growth is concerned. The meddlesome stuff has happened as a reaction, I think, to the slowdown.

QUESTIONER: What's the role of corruption?

RUCHIR SHARMA: One of the interesting things is that corruption is a universal concept in emerging markets. Now the issue is, when does it matter, and when do you take that into account?

Here's what we find very interesting. Transparency International, as just an objective example, comes out with its rankings on corruption every year. Here's what we find. Typically, the richer a country gets, the better its ranking should be as far as corruption is concerned. The better it should be. When you find that a country is getting richer and yet corruption is also increasing, you know that is a red flag. That's not sustainable.

That, to me, has been the case in countries such as India. Growth increased over the last decade, but corruption also increased a lot. That is going to lead to a public backlash at some point in time and lead to the reform process being stymied.

I think the corruption is a cliché. All emerging markets have to deal with corruption. The issue is, is it getting better? Is it getting worse? Relative to the per-capita income, where are you? To me, that's the way of looking at corruption.

QUESTION: Don Simmons.

To what extent, and in which direction, is economic growth correlated with political liberalism or degree of democracy?

Secondly, to what extent does that reflect causation?

RUCHIR SHARMA: Great question. I looked at this. What we did here was to look at the all the high-growth examples in the world over the last 30 years. By high growth, I mean countries that were able to grow at 5 percent or more for a decade. We found 120 such examples over the last three. Then I looked at what percentage of these countries were democratic and how many of these countries were authoritarian.

Here's the answer: 50/50. Basically, what it tells you is that the political system as suchI hate to say itdoes not matter for economic growth. What matters is the quality of political leadership and what they are doing for giving the country more economic freedom. Economic freedom is much more highly correlated with economic success than the political regimes, whether it's democratic or authoritarian. It's a 50/50 case.

QUESTION: Sergey Yakushev of Russia.

First of all, I want to thank you for the advice you gave the Russians in Moscow. I assure you that your advice was heard by those you addressed it to. At least it is repeated each and every time they canmany, many times for the last year. Next time when you go to Russia, you can ask them for compensation.

RUCHIR SHARMA: I'll be safe, right?

QUESTIONER: Sure. But please do not read the Russian newspapers or press the next morning, because probably they are not so serious as the press in this country.

The question is, can we add something to what you said from the experience of the last meeting of the BRICS countries in South Africa. Are there new trends?

RUCHIR SHARMA: As I wrote, I think the BRICS are so last-decade. This is typical, which is that the summit was created at the height of the emerging market boom, but these countries have nothing in common. I think that's the fundamental point. If you want to grow rapidly, you're much better off having better trade relationships with your neighbors first. Basically, this summit was China and the rest. China's size is bigger than all the other countries put together. Eighty-five percent of all trade within BRICS involves China. So this really is about China.

I'm really surprised as to what happened. A Wall Street marketing acronym becomes the tool for a political meeting. That really tells you the power of marketing at times.

But I really feel this concept is dated. These countries, as you know, were not able to reach any agreement. They wanted to create a development bank. They couldn't agree as to how much should bewho should put in terms of the corpus. Everyone thought that if China puts too much in the corpus, it will have too much of a say as well.

Therefore, I find that this gathering really meant very little. If I were to hazard a guess, I don't think this is going to go further. I don't think this summit is going to bring you anything in the next few years either.

QUESTION: Good evening. Thank you so much for the wonderful, vivid presentation.

I'm a young global leader with the World Economic Forum, and I'm also a global culture adviser based here in New York. I'm originally from Romania, so what you said was very interesting for me.

How important are a country's neighbors when you evaluate it as a potential breakout nation? I'm referring to all the countries that are neighboring China right now, especially in the context of China's rise as a military power.

RUCHIR SHARMA: I think neighbors are very important. One of the rules we have is that very often economic miracles tend to take place in clusters. When you trade a lot with a region, the entire region benefits. So it's very important to have very good trade relations with the neighbors.

One of the big handicaps India, for example, has is that its trade with its neighbors is very limited. The same problem has existed in Africa. Intraregional trade within Africa is very, very limited.

So having very good trading relationships with your neighbors is, to me, really important. As you know, the more trading relationships you have, the less is the chance of going to war with each other. So I think it's very important to have relationships.

I remain optimistic for parts of Eastern Europe for that. It's a very good trading union. I think they can leverage that to do much better, and some countries have done that over the last 10 to 20 years.

So I think that relationships with neighbors are very important. In China's case, too, I find that their trade with other countries has increased quite a bit over the years, and that's a positive sign. But China is such a big country that it's very hard to make that case.

But I would say that for most small to medium-size countries, it is very important to be part of a trading union with your neighbors. That really helps growth decisively.

In Africa, the brightest spot I find is the Eastern African region, because they have formed something called the East African Community. Intraregional trade could be very helpful for that region.

QUESTION: Susan Gitelson.

Would you comment on some of the major issues that you haven't had a chance to touch on? Number one, about China, it's still said that China is going to take over the world and so forth. How do you feel about this? The new leadership coming in has talked about the complacency and lack of reform of the past decade, and there's certainly a lot of corruption and so forth.

Another one which we have heard so much about in this country is the great discrepancy between the richest and the poorest. Who is under examination? Mexico, with the richest man in the world, Slim, perhaps is a good example.

Since you are dealing with the developed world, there's a whole debate now about which is the better way to progress, growth or austerity.

RUCHIR SHARMA: As I said, I don't believe in forecasting beyond three to five years, a maximum of up to a decade. Our growth projections suggest that China will not be overtaking the United States in that period. We think that China's growth rate slows down to 5 or 6 percent for the next three to five years, which is still decent, but it's a big step down from what they have done. I think that's there.

The good thing about China in terms of their new leadership that I find is that they are very wide-eyed about their problems, and they openly talk about them. In fact, what I find about China that is remarkablewhen I go to China, the debate tends to be a lot more robust, on economic issues at least, whereas outside, people tend to have a much more Panglossian view of China. Inside China, you find the debate is much more there. The speeches talk about how corruption can ruin the country. They speak openly about it and about the challenges to economic growth.

I think China has its own issues. It has gotten richer. The richer you get, the harder it is to grow very quickly, and China will face a slowdown. It's in the process of doing so. So I don't think that these projections that China will grow by 7 to 8 percent for a decade and overtake the United States are going to come true. I think that's not happening. That's my best guess. And beyond that, who cares; who knows?

The second point that you made was about

QUESTIONER: The growing gap between the rich and the poor.

RUCHIR SHARMA: This is a global phenomenon. Inequality is an issue today everywhere I go, even in countries like Korea, where it was never an issueI won't say "never," but less of a issue. People are talking about it. In Chile it's an issue.

Let's be clear. There are bigger forces at work, whether it's globalization, technology, that are causing this problemand the skills gap. This is not restricted to any particular country. It's a universal problem which exists because of some of these factors out there. Each country needs to figure out how to tackle it, because these forces will remain.

The third point you raised?

QUESTIONER: Developed countries and growth versus austerity.

RUCHIR SHARMA: Here's the entire point. I think that there is no straitjacket formula in terms of what works, but here's what our experience has taught us. It's only when countries have a hard landing that they end up reforming. Very few countries, when you give them the palliative or, like Japan, you hold them through the pain and you keep doing stimulus after stimulus after stimulusyou often don't end up getting reforms. You end up just stretching the pain, amortizing the pain, rather than doing it.

I think it's very difficult to take pain, but if you look at the experience of emerging markets, often they have no solution, because they don't have the resources to do anything about it in a downturn, and they are forced to take a lot of adjustment.

On that side, I think it's hard to say as to which is better. But our experience basically teaches us that when countries have a hard landing, that's when the reforms take place, not when countries are trying to amortize the pain.

QUESTION: Allen Young.

Your responses to some of the questions and your presentation seem to focus on reform. Implicit in that reform I sense the idea that we get less government and more reliance on the private sector. That's consistent with your answer about the political democracy. It all depends on economic freedom.

Certainly since the Second World War, most economic booms reflect a loosening of government controls. But before the Second World War, that was not necessarily the case. For example, during the 1930s, the highest growth rates were in the Soviet Union and in Nazi Germany.

Given your basic theme that you just can't assume that what has existed for the past several decades will necessarily continue in the future, isn't it possible that in the future greater growth rates will be experienced only by countries who get the states more involved in the economy?

RUCHIR SHARMA: I think that's a great point. But here's the thing. The globalized world today, where global capital flows play such an important role in funding your growth, I think it would make that very difficult to happen.

I'm not saying that the government can't play a role here. You need good government to make things happen, because they still have to deliver on things like governance. I have seen cases, like India, where the governance is so bad and they break down so much. Having less government doesn't work. You need the government still to do your basic stuff in terms of delivering on infrastructure. Typically, in most countries the infrastructure is built by the government, not by the private sector. China has shown that.

So there is a role for government. But I would say if you get too much state-meddling, like you mentioned with Brazil, you typically, at least for now, are getting counterproductive results. Global capital flowsand in a globalized world of trade, it's very difficult to survive that. That ends up hindering growth.

The latest examples of high-handed government behavior have been Venezuela and Argentina. Those have been two economic disaster cases over the last decade or so.

So at least until now, there is no evidence that this paradigm is shifting.

QUESTION: Sondra Stein.

When you measure a country's GDP, you don't measure unemployment. But you can have increases, as we see, in GDP and increases even in unemployment. With technology advancing, that may even increase.

When you look at the prognosis of a country or where it's going, do you think the ratio of unemployment is something that should be considered? Do you consider it?

Just one other point of information. When they give you GDPyou were talking about Appledoes that include that part of the product that's made overseas? Is that separated out in GDP?

RUCHIR SHARMA: Yes. That's separated out. In terms of economic value added, it's wherever it's done, from a GDP. Market capitalization is a different concept, yes. GDP is measured by where the goods and services are actually produced.

Regarding your other point in terms of GDP growth rate and unemployment, I agree with you that the employment intensity, as we call it, of GDP growth rate has come down because of technology and globalization. But the basic relationship still holds. Europe has a much higher unemployment rate than the United States does, because its growth rate has been much lower. China, for example, has been able to create millions of jobs. In China, the whole thing has always been that you need at least 8 percent GDP growth rate a year to try to keep bringing the unemployment rate down.

So I don't think the relationship has broken down. I agree with you that the employment intensity of GDP growth has gone down in places such as the United States. A 2.5 GDP growth rate does not create the same kinds of jobs, possibly, as it would have done in the past. But I don't think the relationship has broken down. Faster GDP growth is still associated with better employment levels everywhere.

QUESTION: Sherin Gobran. I'm a consultant in the social impact space.

One of the continents that has gotten a lot of attention recently is Africa, the rise of Africa. A lot of funds are going in there, whether it's private equitybut the only mention you made was Nigeria for your short list and then, of course, you said the East African Community. Do you have any observations?

RUCHIR SHARMA: I sort of have a mixed-to-positive view on Africa. A lot of good things have happened in Africa, which have been spoken about, from better institutions, more economic reform which has taken place out there.

But let me tell you about one maybe slightly flippant, but also slightly serious rule which has me worried about Africa. In the first quarter of 2000, The Economist had a cover story on Africa saying this is a hopeless continent. That was right at the worst point for Africa, when commodity prices were on their back and nothing seemed to be going right in that continent. In December 2011, the cover story in The Economist was "The Rising Continent: Africa."

I get concerned by those cover stories, because it becomes conventional wisdom. All of a sudden commodity prices have gone up many-fold over the past decade, and many people in Africa are looking much smarter. So I'm concerned.

But having said that, I think the key thing is that there are 54 countries in Africa, and it is important to take country views in Africa as well, rather than thinking that Africa is one homogeneous entity, and also to take into account what's going to happen with lower commodity prices. So far what we're seeing is that, despite the very high commodity prices in Africa over the last decade, there has been no manufacturing or industrialization taking place in Africa. It has all been about commodities and about the African consumer, as they have got some increased wealth, largely through the commodity boom, doing relatively okay.

But the fault line still remains. There has been zero manufacturing or industrialization growth in Africa. That is a fault line.

I would say that the key, therefore, isI speak about these two regions, whether it's Nigeria or East Africa, because they at least meet some of the criteria. In Nigeria they have a new political leader who is trying to do something a bit better, still controversial. But at least he's not pillaging the country's wealth, as every single Nigerian leader has done in the last 40 years or so. So it's a positive.

In East Africa, I spoke about the union. At least it's a positive.

So look for something different happening in these places on a regional or country basis. But with 54 countries, it's very hard for me to make a generalization, even though it's very tempting to when The Economist has something on the cover.

JOANNE MYERS: I can make a generalization that it was just a wonderful discussion. You said three to five years. You must come back. We're going to hold you to your predictions.

Thank you very much.

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