Post 2008, the world must redefine the maths of economic success as we adapt to tough new realities
Ruchir Sharma says while we are unlikely to see a repeat of China’s long run of double-digit growth in the near future, every era has its winners
In the years BC – Before the Crisis of 2008 – the world enjoyed an unprecedented economic boom that extended from Chicago to Chongqing. Though the boom ran for only four years and its foundations were thin, many observers saw it as the beginning of a golden age of globalisation. Flows of money, goods and people would continue to expand at a record pace, increasing wealth and spreading it as well. More poor nations would enter the ranks of the rich nations. More of their citizens would escape poverty and earn a comfortable living, narrowing the gap between the 1 per cent and the rest. With their newfound clout, the rising global middle class would put pressure on dictatorships to loosen censorship, hold genuine elections and open up new opportunities. Rising wealth would beget political freedom and democracy, which would beget greater prosperity.
Then came 2008. The years BC gave way to the years AC. After the Crisis, the expectation of a golden age gave way to a new reality. Hype for globalisation yielded to mutterings about “deglobalisation”. Countries turned inward. The battle to attract migrant talent turned into a campaign to keep out immigrants. The G20 nations have imposed hundreds of new barriers to trade, helping to slow the growth rate of international trade from 8 per cent before the global financial crisis to near zero. Big international banks have pulled back to within their home borders, afraid to loan overseas, and global capital flows have fallen eightfold to just 2 per cent of global GDP, a level last seen in the early 1980s.
When flows of trade and money dry up, so does economic growth. The global economy grew at a rate of about 3.5 per cent for most of the postwar era, but that pace has since fallen sharply and is teetering perilously close to 2 per cent, the level that feels like a global recession. Excluding China, emerging nations are now growing at an average pace which is slower than the United States. The average income of emerging countries from Russia to Brazil is no longer catching up to that of the world’s leading economy.
The AC era has seen the weakest global recovery of the postwar period, but it has been accompanied by a market boom. To fight the global slowdown, central banks have been pumping out easy money, which has pushed the prices of stocks, bonds and other financial assets to record highs. Because the rich own most of these assets, inequality is widening and spreading. In a study of 46 major countries, Credit Suisse found that, before 2007, wealth inequality was on the rise in 12 nations; after 2007, that number more than doubled to 35, from China and India to Italy and Britain. In that short time, the global population of billionaires has doubled to nearly 2,000.
The dream that prosperity would spread freedom and democracy has faded too. Poor and middle-class voters are angry, tossing out seated leaders, whether they are on the left or the right. Among 20 top emerging and developed nations, the median approval rating of the incumbent leader has fallen from 54 per cent in 2006 to 37 per cent.
Populists are on the rise, their nationalist tirades finding a receptive audience in nations battered by slower growth and rising inequality, further fuelling the self-destructive turn against global trade and migration. The most recent eruption came in Britain, where a map of the regions that voted to leave the European Union mirrors a map of the poor and middle-class regions. In England proper, it was all against London, one of the billionaire capitals of the world.
The AC era is marked by slower growth in every region. In 2007, the number of economies growing faster than 7 per cent reached a postwar peak at more than 60, including China, India and Russia. Currently, there are only nine economies growing that fast, according to official numbers, and only one of them is reasonably large: India.
This broad slowdown has fed an almost universal pessimism, which tends to be the default mood of the intellectual classes anyway. As economist Joseph Schumpeter noted, “Pessimistic visions about anything usually strike the public as more erudite than optimistic ones.” Ask a journalist to name a country with bright prospects today, and you’re likely to get a blank response. I suspect they are judging economic potential by the standards of the BC era.
Even at a time when growth is slowing everywhere, some nations will still be flourishing relative to their peers. My ten rules for anticipating the rise and fall of nations aim to identify which nations are poised to thrive or stumble over the next five to 10 years. In this new era, every country needs to lower its expectations and adopt a standard of success that fits the tough global conditions. The fastest-growing economies are almost always the poorest ones, so the standards vary depending on income.
For developed nations with average incomes higher than US$25,000, any rate above 1.5 per cent represents relatively strong growth in the AC era. For middle-income nations with per capita GDP between US$5,000 and US$15,000, a growth rate between 3 and 4 per cent can now be classified as a reasonable achievement. For emerging countries with average incomes of less than US$5,000 a year, the definition of good, solid growth should be revised downward by at least 2 percentage points, to any rate above 5 per cent.
Based on this new maths of economic success, prospects are actually quite good for many countries. In the developed world, the United States and Germany are among the leaders. In the middle-income group, countries from Mexico to Poland look pretty good. Among poor countries, those with prospects of growing faster than 5 per cent include India, Vietnam, the Philippines and Kenya. It may be many years before we see another country sustain a long run of double-digit growth in the way China did before 2010. But every era has its winners, and the AC era will be no different.
Ruchir Sharma is chief global strategist and head of emerging markets at Morgan Stanley Investment Management. This piece is adapted from his new book, “The Rise and Fall of Nations: Forces of Change in the Post-Crisis World”