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Can India play by Ruchir Sharma’s rules of success?

Economist Ruchir Sharma's new book, 'The 10 Rules Of Successful Nations', distils some hard-hitting truths about India’s place in the fabled Asian century

Ruchir Sharma has worked on Wall Street for decades and backs up his premises with a scrupulous mining of data.
Ruchir Sharma has worked on Wall Street for decades and backs up his premises with a scrupulous mining of data.

Early on in The 10 Rules Of Successful Nations, Ruchir Sharma quotes what should be sanctified and magnified as Tetlock’s Theorem. The psychologist Philip Tetlock has examined thousands of economic forecasts and found that “the further they reach into the future”, the “less reliable” they become, equivalent to random guesses. Speaking to me from New York, Sharma says “the right balance is three to five years…which politician can say ‘come back in 15 years and see what sort of job I have done’?”

In this shortened and updated version of his 2016 book, The Rise And Fall Of Nations, Sharma quotes a 2013 study by the renowned economists Larry Summers and Lant Pritchett. They sought to show that projections for China and India’s GDP in 2033 based on India and China’s prevailing growth rates at the time lead to a massive overestimate. Arguing that economies eventually regress to growing at the average growth rate of all countries and seeking to debunk the“Asiaphoria” so prevalent in the West, Summers and Pritchett calculated an alternative regression to averages scenario. The difference between the two estimates of the two countries’ combined growth over two decades was a staggering $42 trillion ( 3,066 trillion now). (Indeed, both countries’ growth rates have slowed markedly since then.)

2020 has turned the world upside down, but really made nonsense of Chindia predictions. Those who said the Chinese renminbi would displace the dollar as the world’s reserve currency by 2020 looked fanciful almost a decade ago and still do, but who could have predicted that Chinese soldiers would kill 20 Indian soldiers using weapons such as spiked clubs and rocks this summer and that the two standard-bearers of the Asian century would be involved in a terrifying face-off of 30,000 troops or more on each side at 14,000ft?

Sharma has long been a thinking person’s Thomas Friedman, one who avoids the superficial mumbo-jumbo of the American columnist and backs up his premises with a scrupulous mining of data. Unusually for someone who has worked on Wall Street for decades, Sharma often displays the deft touch of a Pico Iyer in interspersing emerging market analysis with a travel writer’s flourishes.

Shortening the 2016 tome to make it a handbook advocating open economies at a time when socialism and protectionism are making a comeback has strong logic but I occasionally missed the delightful digressions of the original. In one strikingly paradoxical observation in The Rise And Fall, Sharma, chief global strategist for Morgan Stanley Asset Management, showed that the widespread belief that autocracies manage economies better stems in part from liberal foreign media, who have written many more articles asserting this as a fact (Korea made more progress cutting its oligopolistic conglomerates down to size as a full-fledged democracy). In another revealing anecdote in the original book, Sharma recounted a 2011 difference of opinion on NDTV with Kaushik Basu, then chief economic adviser for the Congress-led coalition. Sharma had argued that long, enduring economic booms in developing economies were built on a foundation of low inflation. Basu countered this by saying that in the 1970s, China had managed to grow fast in spite of a high inflation rate. India’s inflation rate then was twice the emerging market average.

'The 10 Rules Of Successful Nations', By Ruchir Sharma, Penguin Random House India, 256 pages,  <span class='webrupee'>₹</span>299.
'The 10 Rules Of Successful Nations', By Ruchir Sharma, Penguin Random House India, 256 pages, 299.

Reading that exchange reminded me of the economist Jagdish Bhagwati’s observation that India has too many clever economists; one can always find someone to argue a contrary point of view. From demonetization to import substitution, the Narendra Modi government has taken such flights of fancy to altogether new levels. Its chief economic adviser, Krishnamurthy Subramanian, said in late July that a stimulus would be better timed once a vaccine became available. This flies in the face of what other governments in the G20 are doing.

By contrast, The 10 Rules For Successful Nations argues uncontroversially that successful developing countries need to have open economies and low inflation, but also avoid racking up debt in boom times. The main building block is having a strong manufacturing sector that is geared to export markets. With a magpie’s eye for a telling statistic, Sharma quotes a study of “150 emerging nations looking back fifty years…that found that the single most powerful driver of economic booms was sustained growth in exports, especially manufactured products”. This was the basis for the East Asian miracle: Japan rebuilt itself from the ashes of World War II thus and Korea, Taiwan, Hong Kong and Singapore followed.

A combination of developed world multinationals and overseas Chinese businessmen then powered the expansion in China and South-East Asia. Manufacturing growth is more helpful than service sector expansion because it spreads technology, skills and wealth more efficiently.

Despite the handsome increase in exports following the delicensing of the 1991 reforms, India’s export growth has turned anaemic for most of the past decade. Last month, the Export-Import Bank calculated that manufacturing had dropped to just 15% as a share of Gross Value Added (GVA) for India last year, compared with 18% in 2010-11. This is suggestive of the deindustrialization of developed economies, not an Asian miracle in the making.

The government’s recent reforms of labour codes might help. Economists and strategists for Morgan Stanley in India are breathlessly predicting an increase in Indian manufacturing by three times by 2030, but our prospects are handicapped by our protectionism, a slowdown in global trade and an overvalued rupee. The global merchandise exports to GDP ratio has “been declining for the first time since World War II, falling about five percentage points since 2008”, Arvind Subramanian and Josh Felman wrote for Project Syndicate recently.

Sharma’s elegant arguments, in favour of what might be called sensible, worldly economics, move along as smoothly as a ride in a Tesla. A former minister in Indonesia makes the point (especially true of India) that good times make for bad economics while tough times usually spark reforms, and a meeting with Taiwan’s thoughtful woman president, Tsai Ing-wen, reveals her pragmatism.

Yet, Deng Xiaoping gets too much credit for China’s reforms, overlooking former premiers Zhao Ziyang and Zhu Rongji—the latter used China’s impending accession to the World Trade Organization as a battering ram for change. To applaud Deng’s “earnestness” jars, given that Deng presided over the Tiananmen massacre in 1989. Sharma’s assertion that China’s Belt & Road initiative, a massive infrastructure building effort that aims to connect China with Eastern Europe and Asia, is an example of Beijing “spreading the wealth” is questionable, given that many participating countries have seen sovereign debt levels climb to uncomfortably high levels.

Still, 10 Rules ought to be required reading in curriculum everywhere, especially as the world turns inward, notably in China and India. I asked Sharma if this makes him a lonely prophet on his visits home from New York. He recently spent months in India after the severe lockdown in March, which he warned early on was the wrong strategy. The experience has left him even more convinced that “statism and socialism runs deep in India’s DNA” and that reforms happen only when the country’s “back is against the wall”.

Sharma, who has been invited to audiences with the leaders of Russia, Indonesia and elsewhere, says he is often asked what he would advise the Indian government to do. Ever clear-eyed, he laughs: “No one has ever asked me and no one cares.” And there’s the rub: For ministers and bureaucrats in successive Indian governments to turn their back on a repository of sound analysis of how developing economies prosper sounds like the very opposite of what the leadership of a successful nation should do.

Rahul Jacob is a former South China correspondent for the Financial Times.

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