Why are manufacturers closing up shop in China and moving back to the United States? Because “we are the world’s new ‘low-income,’ high-productivity nation,” says Ruchir Sharma. Sharma heads emerging markets at Morgan Stanley in New York. His new book Breakout Nations (W.W. Norton) debuted at number one on Indian best-seller lists and has been praised by the Wall Street Journal and The Economist.
Breakout Nations argues that the emerging markets boom in the 2000s was a golden moment, not likely to be repeated. Regional or political blocs mattered then. Now, as Greece shows, a nation’s friends won’t protect it from its own economic weakness. Sharma thinks last decade’s darlings, the BRICS nations (Brazil, Russia, India, China and South Africa) are overhyped. He says the emerging economic stars in the next five years will be Indonesia, Nigeria and Poland, along with his ‘Comeback Club’ – the post-conflict nations of Iraq, Sri Lanka, Uganda and Mozambique. He spoke with Latitude News by phone from his office in New York. This interview was edited and condensed.
Latitude News: Why are some U.S. companies with factories in China moving back?
Ruchir Sharma: In China, wages have been increasing at a very fast pace over the last few years, about 15 percent a year. Chinese costs are increasing, but in the United States wages have essentially stagnated – and productivity is among the highest in the world. Also the exchange rate in China is increasing against the U.S. dollar.
LN: You warn that developing economies need to start innovating and inventing on their own, and many will fail. Two issues come to mind: the first is that innovation in developed nations has slowed dramatically in all but technology.
RS: In the United States research and development remains a cause for optimism. The United States accounts for almost a third of total global R&D spent. The global commodity boom [commodity stocks rose 400 percent in the last decade] is driven by a lack of faith in human progress to find alternatives to oil or ways to make agricultural land more productive. But the coming slowdown in China and the end of “commodity.com” will bring transformation, not disaster. A sharp decline in commodity prices will see more capital flow to the productive parts of the global economy, and I would not be surprised if U.S. technology again becomes the mania of the coming decade.
LN: Secondly, I cannot think of any innovation coming from what you call the breakout nations: Nigeria, Poland or Indonesia.
RS: It is too early. Poland, Indonesia and Nigeria are at very different per capita income and innovation levels [compared both to each other and developed nations]; at their per capita income levels you can’t expect much innovation. It is not something I would hold against them. Failures in innovation are a high-class [rich country] problem, not a low-class [poor country] problem.
In Poland’s case there is some legitimate criticism; per capita income is relatively high and innovation is low. Hopefully with the shale gas exploration [Poland is leading Europe on this] they will innovate more.
RS: Countries with very high expectations will have problems: if India’s growth rate slows to six or seven percent, even though this seems high, it will feel like a downturn. And if China grows at only six percent, that is considered a real disappointment. I am not arguing that the BRICS nations will not be important. But to talk about the BRICS countries as one economic block sharing the same future is misleading. Some BRICS countries are likely to succeed as individual nations, but there is a point where the hype about the strength of this economic group does not meet expectations.
LN: In Nigeria, corruption makes it difficult for many companies to do business. Why do you believe it is going to succeed apart from your regard for President Goodluck Jonathan?
RS: Nigerian per capita income is at a very low level [$1,224 in 2010], so there is not much they have to do to be able to gallop ahead. Breakout nations will, in the next few years, beat expectations. They will not necessarily achieve the coveted status of developed markets – I have seen some reports that say one of the 10 biggest economies in 2050 will be Nigeria; such predictions are so far out they are useless. But the performance of some countries that are at the margins now will be very good over the next few years.
LN: What are the top three factors a nation needs to succeed?
RS: The key thing is not to rely on global liquidity or global factors for success; investors will become increasingly discerning and will treat emerging markets as individual stories, not a homogenous class. No nation can hope to grow as a free rider on the tailwinds of fortuitous global circumstance, as so many have in the last decade.
The second is the quality of leadership. It does not matter whether there is a democratic or authoritarian regime; what matters is leadership focused on economic growth.
The third is to have rising investment as a share of the economy. The reason I am negative on the Brazils and Russias of the world is that investment as a share of GDP is less than 20 percent. High growth economies typically have investment of 30 percent to 40 percent. China has investment in its economy approaching 50 percent.
LN: You mention the “Comeback Club” of post-conflict nations – Iraq, Uganda, Mozambique and Sri Lanka. The latter two have made remarkable progress, but surely it is too soon for Iraq?
RS: Iraq was the most successful economy in the Middle East from the 1950s through the 1970s, growing at around nine percent annually. A 2009 study of post-conflict economic development by the U.S. Agency for International Development found growth took off in years four to seven after the end of a war.