'The average lifespan of good govts is just 7-8 years'

Ruchir Sharma says the India growth story is really in the states. Leaders of states who manage growth well tend to get re-elected, but the average lifespan of good government is still not more than 7-8 years

Vivek Kaul December 11, 2012 15:04:21 IST
'The average lifespan of good govts is just 7-8 years'

When it comes to the growth sweepstakes, it's like a game of snakes and ladders. It's not easy for any country to avoid all the snakes, says Ruchir Sharma, head of Emerging Market Equities and Global Macro at Morgan Stanley Investment Management.

Most recently he has authored the bestselling Breakout Nations - In Pursuit of the Next Economic Miracles. He generally spends one week a month in a developing country somewhere in the world. Based on those experiences he even refers to his book as an 'economic travelogue'. Sharma was speaking a literary festival in Mumbai on Sunday. Here are a few excerpts from what he said.

The past has no prologue

One of the first rules of the road that I would like to set at the outset is that the past has no prologue. Because what we do is extrapolation and we take what happened in the past and draw straight lines out into the future and say this is what is going to happen in the future. That is just one of the basic rules that does not work.

If you look at it, there are very few countries in the world that can sustain economic success. Only about one-third of all economies are able to grow 5 percent or more on an average in any decade. Only about one-third of the 180 economies in the world. Of the 180 economies in the world, only about 35 are developed economies, everyone else is emerging.

What this basically means is that there are these countries which grow for a short span of time and then come back down. It is like the game of snakes and ladders. You sort of go up and get bitten by a snake and come down. Some countries find a lucky ladder and leap-frog and get to the top. Very few countries are able to get to the top and very few countries are able to sustain economic success.

Given this, one of the biggest negatives against India at this point is that they have had such an extraordinary decade. And after this extraordinary decade complacency had set in where we thought of demographics and other factors. We (thought) we would be able to cruise control and nothing else matters as far as growth is concerned. That (idea) really has been thrown out of the window.

The average life of a good government is seven to eight years

The other rule is that the average life of a good government is about seven or eight years. Typically governments tend to do well for seven to eight years, maximum upto a decade, and after that the performance typically tends to decline. This is true even for Russia, where the first two terms of Putin were relatively fine. In the UK, Margaret Thatcher did very well for about eight to nine years and was booted out after that. Franois Mitterrand faced something similar in France.

The average lifespan of good govts is just 78 years

UPA has been in power for way too long. AFP

There are some exceptions like Lee Kuan Yew of Singapore - who are outliers. Usually the average life of good government is seven to eight years and which is why we are concerned about governments that remain in power for too long and get very concerned about countries which try and change the constitution to hold onto power for too long. Then their interest is only in ensuring that the power and vested interests are taken care of and they run out of fresh ideas.

So that is the thing with the current government - that it has been in power for a long period of time. But typically, after seven to eight years, governments don't do well. That is the lifecycle. There are very few who do well for a decade or more.

Markets reform when in crisis

The other sort of rule that I have figured about markets is that they only tend to reform when they have their backs to the wall. Crisis is what focuses your mind. Otherwise you have a boom, you fritter the gains away and then you sort of slide away and then try and stop it.

The average lifespan of good govts is just 78 years

According to Sharma, past has no prologue. Because what we do is extrapolation and we take what happened in the past and draw straight lines out into the future and say this is what is going to happen in the future.

That is why I said that of the 180 economies in the world today, only 35 are developed because very few are able to grow for a sustained period of time. So you get these sort of growth spurts because they don't reform.

India's case is very interesting to look at. Every 10 years, at the start of the decade, India seems to consistently have some sort of a macroeconomic crisis. This was there in the early 1970s, early 1980s, 1991, the early 2000s period when we had the tech boom-bust cycle and the growth rate slipped. You can argue that this year has turned out to be similar. The good news for India is that every time we have this macroeconomic crisis or a threat or a currency weakness, that is when we take to reform. In 1981 we did that under the IMF, in 1991 we did that (again), 2001-02 the same thing happened and we seem to be doing that now.

Very few emerging markets have taken to reform in a proactive manner. They tend to reform with their backs to the wall and that is what China did with such an exception. China proactively reformed every four to five years and came up with some big bang reforms. They were proactive about it and not complacent. You can argue that complacence is setting in now. But the last 30 years has been a stream of proactiveness.

Premature populism is a bad sign

The other sort of rule is to look for is populism. This is one of the things which is very hard to say because it is politically incorrect, but building a welfare state prematurely creates the wrong incentives. Schemes like NREGA keep too many farmers at the farm - a mass form of populism which has taken place in India over the last 10 years. On the other hand, if you look at the successful economies like Korea, Taiwan or even China, they did very little in terms of the welfare state at this stage of their economic development. Their focus was: let's get to grow, and make the pie big enough. And then we will share the pie later.

The average lifespan of good govts is just 78 years

Schemes like NREGA keep too many farmers at the farm - a mass form of populism which has taken place in India over the last 10 years. Reuters

Today you can argue that countries like Korea and Taiwan don't do enough of a welfare state. The Korea story is very fascinating. It is one of the most equal societies. And it is a very well educated society and Korean women are very well educated. Yet their participation in the labour force is very low. And that is because many of them are not able to leave their children at home and go to work because they don't have a good enough child-care support system. They don't spend enough on those kids. In Korea's case I can argue they need more welfare and in India's case I can argue that there is too much welfare.

Social spending as a share of GDP for Korea and India is equal even though Korea's per capita income is more than 10 times higher than India's per capita income. So to have too much populism prematurely is a bad sign.

The billionaire's index

One of the popular parts of the book (Breakout Nations) that resonated with many people was the billionaires index. Forbes publishes a billionaire's list in March. It sort of looks across the world to see who are the good billionaires, who are the bad billionaires and stuff like that. I think the key dimension will be to look at the billionaire's index to figure out in how many cases has the wealth been created because they are genuinely productive billionaires. They are creating wealth in sectors such as technology, pharmaceuticals, manufacturing, etc. When you have wealth created in those sectors, you are respected but when you have wealth created in so-called sectors where the benefit has happened because you had a good government connection, that is just not good. In India's case, we saw many such billionaires rise over the past decade - which is what made me somewhat concerned. It is a bad sign for democracy as well .

Another thing to see in the billionaire's index is that you need churn, you need new people to come up the list. You don't need holders of the past always there. The third thing is that you need the concentration of billionaires as a share of the economy to not be that high. That leads to resentment. Having said that India respects its billionaires a lot.

The James Bond moment

When I go and meet billionaires in countries such as Mexico, Brazil, or even Russia, in all those countries you have all these billionaires with a whole bunch of armed bodyguards. There are scared to go out on the streets on their own because they fear that they are going to be attacked. In places like Brazil, you will find the sale of luxury cars is quite low for a country of that size, because people are scared to display that kind of wealth. And if there are luxury cars they are all bullet-proofed because they are scared about what is going to happen.

On the other hand, Brazil tops the list of maximum number of helicopters sold. The only time I feel like James Bond is when I go to Sao Paulo in Brazil. In Sao Paulo the traffic is really bad but the permission to fly helicopters is quite easy to get unlike what happens in Mumbai.

My sort of James Bond moment is after you finish your meeting they will take you to the roof of the building where there is a helipad waiting for you; you run to the helipad, you take the helicopter and go to the next destination. And you see the aerial view of Sao Paulo and there is a whole bunch of helipads up there on top.

That is a sign. It is a sign of poor infrastructure and you are using these helicopters to short-circuit roads and to sort of not care about what is happening on the street and take a helicopter across it. And then you get gated communities, where they keep you behind these fortresses. And I think that is just a bad sign. Brazil is the most extreme and my James Bond moment will remain and, therefore I relish my trips to Brazil.

The Four Seasons Index

What I do not relish while going to Brazil are the costs. And this is one my other rules - the Four Seasons index. I am fortunate that I get to stay in the Four Seasons hotel in all these countries. And I think it's a good benchmark to look at a country to figure out whether its cheap or expensive?

In Brazil, I find the rates are exorbitantly expensive. To get a top hotel on a trip to Rio de Janeiro, you pay $800-1,000 a night. And that is really exorbitant. You go to East Asia, places like Jakarta and Bangkok, you pay about $200-300 a night, and that is pretty competitive. In places like Brazil and Russia you pay $800-1,000 a night. And the currency seems very expensive. My colleagues went to Brazil last year and one of them bought a T-shirt. The T-shirt cost more than $100 and it did not last even a single wash. So its terrible quality and you are paying a huge price for that.

Hence, Brazil has been one of the big laggards because of expensive currency. This year Brazil's growth rate will be only 1 percent. When you have expensive currency it is bad news. India, on the other hand, is positive - the currency is extremely competitive at this point of time.

But isn't a weak rupee a sign of weakness?

People are concerned that this is a sign of real weakness in India and whether India is about to face a balance of payment crisis? Is money going to leave the country in a huge way because the currency is quite weak?

The average lifespan of good govts is just 78 years

e currency is adjusting for overvaluation because of our inflation. Andrew Middleton/Flickr

One of the rules of the road I watch out for is who are the first people who take money out of the country when they think the country is going to face a crisis. Are they locals? And this is counter-intuitive because most people like to believe that it's the foreigners who flee when they sight trouble.

So I am always watching what are the locals doing? Are they taking money out of the country? Or are they bringing money in? This happened in India in 1991. Similarly in East Asia in the late 1990s.

The good thing for India on the balance of payments front is that we don't have too much outflow on that front. We don't have mysterious outflows which show up on the RBI's balance-sheet. You know that is going on when hawala rates are way, way more expensive than what your official rates are. You don't see such signs in India. So it seems that the currency weakness is happening in an orderly manner. The currency is adjusting for overvaluation because of our inflation.

Efficient Corruption

Businesses are complaining about investing in India. They are saying that we are better off investing abroad rather than India because the cost of doing business here has become very high. So they are even going to places like Indonesia. So I asked one businessman in India, isn't Indonesia also very corrupt? So why are you investing in Indonesia? His answer was very interesting. Indonesia has something that you call efficient corruption compared to India. In Indonesia, if you pay money to somebody the work is done.

And I have got first hand evidence of efficient corruption. I went to Indonesia and I was stuck in Jakarta in a traffic jam. The person who was taking me around Jakarta called a number and without me knowing police escorts arrived. What you do here is you pay $100-200, and call up a number, and police escorts arrive. They clear the traffic for you and take you to the airport. That is efficient corruption for you as far as that country is concerned.

The second city rule

One of the other rules that I looked for is the second city rule. If you look at all the successful economies across the world, whenever there is a growth spurt you get the rise of second cities in that country.

As far as India is concerned we don't have one prominent city and everything else below that. We have four to five mega cities. And here is the difference with China. You look at India's mega cities with populations of 10 million, and 16 percent of India's population lives in these mega cities. And that is why these mega cities are bleeding because that is way too high a number. You take the case of China and only 5 percent of the population lives in the mega cities of China .

The question is why? Because there has been a huge rise in second -tier cities in China. If you look at the last 15 years or so, more than 20 second tier cities have come up in China. And second tier I define as cities which had a population of a less than 100,000 but now have a population of a more than a million. In India's case, only six such cities have come up over the last 40-50 years. And that is the real difference and so there is big pressure on the big cities in India.

A 5 percent growth rate is a big disappointment

So is India going to be a breakout nation or not? And here is what I find quite fascinating as far as India is concerned. When the book came out this year, the general response was that by giving India a 50 percent chance of becoming a breakout nation, you are being too pessimistic.

And how I define breakout nations? I define breakout nations as those countries which are going to do better than other countries in the same per capita income class and countries which will grow faster than expectations.

The average lifespan of good govts is just 78 years

India's case of 5 percent growth is a big disappointment and especially when you take into account that at the beginning of the year there was an expectation that we will do 9 percent this year. Reuters

So those are two my major definitions of breakout nations. And why those two? People tell me that if India grows at 5 percent what is the big deal because that is still faster than the US or many of the European countries. And my response is that it is the wrong way of looking at it because if India grows at 5 percent per year, it is far too low to satisfy India's potential and for India to get people out of poverty.

And which is why India's case of 5 percent growth is a big disappointment and especially when you take into account that at the beginning of the year there was an expectation that we will do 9 percent this year.

A bit conflicted on India

On most countries in the book I was quite categorical. Like I was quite negative on Brazil as you have guessed by now. Even on Russia. I had a fixed view on China. On India I was a bit conflicted. I came out with the book and the most common response here was that are you being a bit too pessimistic by giving it a 50 percent chance. Fine. Six months later, by August, the response of most people was that you are being too optimistic on India by giving it a 50 percent chance of being a breakout nation. So that is how dramatically sentiment has swung on India this year. We went from euphoria on a straight line extrapolation. And how great we are. And how are going to concur the world.

And then there was complete disappointment by August. The last couple of months sentiment has shifted back again. The needle has shifted again. The good news is that expectations are much lower now for India to be a breakout nation.

Indian democracy versus authoritarian China

Gone is the story on how we are going to be the next China. One thing I do find disturbing is that a lot of people respond to this by saying you know the reason. India cannot be the next China because we are a democracy. And that is the price we pay for being a democracy. China is an authoritarian state. It can implement reforms any way it wants. It can displace people and acquire land. It can set projects up.

India is a democracy and, therefore, we have to pay a price by accepting a lower growth rate. And this argument irritates me. If you look at the high growth instances of the last 30 years, a high growth instance is a situation when a country is able to grow at 5 percent per year or more in any particular decade. And there are hardly 120 such cases over the last 30 years. How many of them were democracies and how many of them were authoritarian? It's a 50: 50.

For every successful China following an authoritarian regime, there are failures like Vietnam, which was built as the next China, and which has turned out to be a real disappointment, following the authoritarian system. A whole bunch of countries in Africa, including the dictatorship of Zimbabwe, have failed.

So what matters is the quality of economic leadership you have and not whether you are democratic or authoritarian. A lot of democracies have done well over the last 20-30 years. Democracy, let's remember, is a relatively new concept in much of the emerging world and that is something that we should celebrate.

India is 28 countries with almost distinct identities

There are some state leaders in India who are able to do quite well because they are focused much more on economic growth. And that to me is a real positive about India as to how India is emerging as a land of 28 independent states, almost 28 countries with distinct identities. We have many good state leaders and the relationship between economic growth and getting re-elected is increasing.

If you manage to grow above the national average and at a pace faster than the preceding five years, the chances that you as a state leader will get re-elected are extremely high. I think that's the big message. So, therefore, you get states like Gujarat where you keep getting victories and then you get a state like West Bengal, where you finally get defeated after a very poor performance. This is being backed by data over the last five years.

The picture of India for me is still one that is mixed. But it is improving and improving principally because our expectations have been balanced compared to where we were at the start of this decade. Gone is the era of straight line extrapolations. India still has a reasonable shot at being a breakout nation. But if we have got to do it, we have to do it state by state. This really is a land of 28 countries like no other emerging market I know. For example, China is a very homogeneous society whereas India is a lot more heterogeneous. And this bottom up model of economic growth state by state gives us the best hope.

Vivek Kaul is a writer. He can be reached at vivek.kaul@gmail.com

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