Ruchir Sharma and the Fallacies of American Decline

Yes, a few emerging nations have shown impressive growth, notably China and a handful of Asian Tigers. But remember when Japan, now beset by chronic deflation, an aging population and perhaps another recession, was poised to become the world's most powerful economy?
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In the new Foreign Affairs, Morgan Stanley emerging market equity guru Ruchir Sharma,takes a wrecking ball to the BRICS. You could see this coming (particularly if you read Sharma's recent book, Breakout Nations), but Sharma does an efficient demolition job on a concept that, since Goldman Sachs & Co.'s Jim O'Neill invented it in 2001, has always been more about marketing than long-term reality, and that had been swaying in the chill winds of late. As Sharma points out -- this has been obvious for awhile too -- the BRIC countries (Brazil, Russia, India, China, and added in 2010, South Africa, producing the BRICS) have little in common besides the fact that they're not part of the great bulk of impoverished nations and not yet members of the developed world. They are, in the current nomenclature, emerging. Or at least they were emerging; their growth has slowed dramatically in the last year.

Sharma notes:

Other than being the largest economies in their respective regions, the big four emerging markets never had much in common. They generate growth in different and often competing ways-Brazil and Russia, for example, are major energy producers that benefit from high energy prices, whereas India, as a major energy consumer, suffers from them. Except in highly unusual circumstances, such as those of the last decade, they are unlikely to grow in unison. China apart, they have limited trade ties with one another, and they have few political or foreign policy interests in common.

So there. Sharma's essay is more than simply an attack on an artificial distinction that now seems to be coming apart. It's reminiscent of a series of essays written several decades ago -- a number published in Foreign Affairs -- that rampaged through the conventional economic wisdom of that Clintonian era, most effectively on the American hysteria (Sharma calls it paranoia) over global competitiveness. That earlier writer, new to many, was a rising MIT economist named Paul Krugman. Both Sharma and Krugman arrived on the scene bristling with economic and financial credentials, but their essential approaches do not require graduate degrees to follow. In Sharma's case, he argues several truths we should have learned by now, if only by reading Krugman or remaining semi-alert. You can't extrapolate from current growth rates, particularly unusually high ones, into the indeterminate future. (The same applies in spades to financial firms: High growth rates are a red light flashing disaster.) It is difficult to sustain high growth for over a decade (or, as Sharma points out, two economic cycles), even harder for two decades or three. Fast-growing nations stumble for all kinds of reasons; many fail to make the move to middle-income status, with incomes averaging about $5,000 a year. "Failure to sustain growth has been a general rule, and that rule is likely to reassert itself in the coming decade," he says.

In short, convergence, like the BRICS, is, over the long run, a mirage, sustained by an unusually conducive decade that, alas, ended in 2008. A digression: Is there any popular touchstone with a crappier track record than convergence? Has convergence ever really worked, whether it's in M&A (AOL and Time-Warner merged because of convergence), political economy (the end of history, the American consensus, democratic convergence, it's a small world after all) or emerging markets? Convergence is a classic good-times, new-age phrase that suggests rules have changed and we have moved to a higher stage of development -- a new normal, usually without down cycles and nutty social or religious unrest. It's word designed for glib punditry. The New York Times' Thomas Friedman may well have been the greatest apostle of convergence, but he is hardly alone. We are all alike; we all respond to the same, usually economic, determinants. In fact, the empirical reality around us suggests we live far more in an age of divergence than convergence. Sharma sums it up bluntly: "The notion of wide-ranging convergence between the developing and the developed world is a myth."

Sharma's diagnosis is relevant for its own sake. But it takes on a greater significance by its timing. The election is over, but a noxious cloud of half-baked ideas linger. When it comes to describing America's place in the world, a set of notions -- to call them ideas is to overstate their rigor -- came to define the debate in both parties and from both presidential candidates, fueled by a chorus of punditry. The United States had lost its way, particularly economically, fiscally and politically. It was in decline. It was no longer competitive. It was heading in the direction of Europe, or better yet, Greece, or for old-fashioned declinists among us, Britain. America had fallen behind China and the West had succumbed to the rising economic powers of Asia; it was, everyone knew, the Asian century. Steps needed to be taken to arrest that precipitous decline, embodied in the financial crisis of 2008. And on that score, the paths diverged. Republicans urge lower taxes, austerity, smaller government. The victorious Democrats sought to tax the wealthy, help the middle class and invest in infrastructure, education and R&D.

Sharma offers a different view, without denying American problems. Yes, a few emerging nations have shown impressive growth, notably China and a handful of Asian Tigers. But remember when Japan, now beset by chronic deflation, an aging population and perhaps another recession, was poised to become the world's most powerful economy? The BRICS are now slowing, in part because of the decline of investment from the developed world. They are also beset by two burdens: the problems of size and what might be called demographic fate. Simply put, as nations grow per capita income, growth gets more difficult -- it's the problem of large numbers companies confront as they bulk up -- which often feeds back into political and social woes. Then there are the demographics. China, argues Sharma, rode a demographic wave "driven by a large number of young people entering the work force." But on top of a general global slowdown, China is maturing. "China's population is simply too big and aging too quickly for its economy to continue growing as rapidly as it has.

With over 50 percent of its people now living in cities, China is nearing what economists call 'the Lewis turning point:' the point at which a country's surplus labor from rural areas has been largely exhausted. This is the result of both heavy migration to cities over the past two decades and a shrinking work force that the one-child policy has produced." Notice, Sharma does not even mention other hurdles emerging nations face: shifting from export and savings-driven to consumer economies, or moving up the value-added chain from low-cost manufacturing to design and innovation, not to say the political demands of a population that has grown accustomed to stability and relative wealth.

One of his conclusions then is that China is not about to overtake the United States any time soon and that, in fact, the "uneven rise of emerging markets" will "revive the self-confidence of the West and dim the economic glow of recent stars such as Brazil and Russia (not to mention the petro-dictatorships in Africa, Latin America and the Middle East)." Sharma ends up in much the same place as demographer Joel Kotkin in his 2010 book The Next Hundred Million: America in 2050 predicting better times in a still-dominant America driven by a younger, more diverse, faster-growing population than, in competitiveness-speak, the competition.

Demography is not destiny. But it certainly helps. The demography that swept President Obama back into office is, in fact, the same demography that Kotkin and Sharma recognize as a powerful economic force: a flood tide of younger, child-producing men and women, many from overseas. Other factors play a role as well, of course: infrastructure, education, security and stability, a cohesive politics anchored in sensible regulation and the rule of law. But the historical tendencies still rule and demography is a powerful determinant of economic success or failure. A few good years, or bad, doesn't change that.

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