Ruchir Sharma is the head of equity emerging markets at Morgan Stanley. He served as a contributing editor for Newsweek and is a regular columnist for the Wall Street Journal and the Economic Times of India. He is author of the bestselling book Breakout Nations.
Harvard Political Review: What is the premise of your book and what exactly defines a breakout nation?
Ruchir Sharma: Well, the premise of the book is that economic growth is very hard to sustain, that economic success is hard to come by, and that very few countries are able to climb the ladder all the way and become developed countries. The premise of my book is to sort of look at countries that in the next three to five years are likely to do well in the emerging world and those countries that are likely to disappoint. It’s a survey of all the main emerging markets based on both data and anecdotal evidence as to which countries I think are on the right path and which I think are not likely to do that well.
The concept of breakout nations is that two criteria matter the most. One, that you need countries which do much better than expectations, and two, that countries that grow faster than other countries at the same per capita income ballpark.
HPR: Since publishing your book, have you found any new countries that have stood out to you that you didn’t mention in the book that could potentially be breakout nations?
RS: Yeah, in fact I’d say that in Latin America a couple of countries that do sort of stand out as being potential breakout nations could be Colombia and Peru. I think that these countries are doing relatively well. In fact if you look at Latin America you can split it virtually down the Andes. On the left side, there are countries like Chile, Peru, and Colombia that are doing well. On the right side, Brazil, Argentina, Venezuela are not doing that well. So I’d say that that’s been one of the added insights after writing the book.
HPR: You give the gold medals to South Korea and Taiwan. What are the lessons for other emerging markets from those two countries and what did they do exceptionally well?
RS: The key thing is to realize that there’s not one thing that they did well. They’ve continuously been on the path of reform and liberalizing and opening up for year after year after year. The political leadership understood that imperative, and they kept on doing that. They were able to move up the value chain at the right time, and spent a lot on research and development. So, the key thing is that in economic development, there is no one rule. Different things work for different countries, but it’s about the quality of political leadership; if it’s really good, it’s able to sort of transition you through those various steps.
HPR: One of the lessons from the Asian crisis of 1997 was that there were two approaches. There was the Hayekian approach where you do largely austerity programs. Then there was the Keynesian approach largely taken by Japan where you try to stimulate the economy with artificial interest rates, things like easy credit. So far, clearly it hasn’t worked out for Japan, and the austerity measures worked out really well for countries like South Korea. So what do you think are the lessons from that crisis in terms of improving structural conditions for growth?
RS: I think that the best reforms tend to take place in a country where they have their back to the wall. When you try to amortize the pain, it almost is counter productive. The instinct is to amortize the pain, but the best reforms take place when you have your back to the wall, because that’s when you get the political will. That’s when you get the ability to galvanize the people to conduct change. That’s what we saw in countries such as Korea and Indonesia. After the East Asian crisis, those two countries who suffered the most had the strongest bounce back and the most sustainable run up. That’s the big lesson—that you don’t get economic reform unless countries have their back to the wall.
HPR: What do you think the biggest impediment to growth this decade will be? Do you think it’s going to be this recurring narrative of debt crises, or is it something else?
RS: Debt is a major issue; it’s a major overhang. Even if countries run a lot of crises, the fact that you’ve got so much government debt is known to slow economic growth down. The fact of the debt overhang will be an issue. The other sort of problem that I said is the fact that China’s growth seems to be maturing. So if China was such a powerful engine for growth, it will still be a major engine, but to be as powerful as it was, as its growth matures and it deals with its own domestic issues, I think that could be an impediment to taking global growth higher.
This interview has been edited and condensed.