Tuesday, 17 September 2013 00:18
Recently the world famous author and investment advisor Ruchir Sharma was in Colombo to deliver the 63rd anniversary lecture of the Central Bank of Sri Lanka. Sharma is the Head of the Emerging Markets Equity Team at Morgan Stanley Investment Management USA, based in New York, and acclaimed author of the best seller ‘Breakout Nations: In Pursuit of the Next Economic Miracle’. He has over US$ 25 billion assets under management.
Educated at Mumbai, Delhi and Singapore, Sharma completed his undergraduate studies at Shri Ram College of Commerce in Delhi and first joined a securities trading company. He was a columnist for the Observer and the Economic Times in India, the column entitled ‘For Ex’. His lucid writings on the Indian economy drew the attention of top executives of Morgan Stanley who hired him for their Mumbai office in 1996. In 2002 he was moved to New York and in 2003 was appointed co-head of the emerging markets team at Morgan Stanley Investment Management. In 2006 he was appointed to head the team.
In his bestselling book ‘Breakout Nations,’ Sharma writes that he travels in emerging markets for roughly one week out of every month, in order to understand what is happening in the economy up close. He uses these travels as the basis for his monthly columns to the Economic Times. Later Sharma became a regular columnist for Newsweek International, as well as a contributor to the Wall Street Journal. Sharma’s articles have also appeared in Foreign Affairs, The New York Times, The Washington Post, the Wall Street Journal, the Financial Times, Time magazine, Foreign Policy, Forbes and The Bloomberg View among others.
Rise of emerging nations a ‘myth’
In his book ‘Breakout Nations’ and articles and columns, Sharma has argued that the rise of emerging nations as a group, much hailed by certain analysts, is in fact a ‘myth’ that seized the collective global imagination following the unprecedented boom of the 2000s, when emerging nations actual did grow fast for a decade, maybe two, then backslide when its leaders got soft and complacent.
The net result is that many of those so-called ‘emerging nations’ are still in the ‘emerging’ age, and only a few have grown fast enough for a sufficient length of time (like Japan, Korea, Taiwan and Singapore) to emerge into the ranks of the developed nations. One of Sharma’s fundamental messages is that analysts need to study nations as individual cases , and not as a part of a faceless group, in order to determine which ones actually have to really break out form the underdevelopment trap.
Sharma refers to those with the biggest prospects as ‘Breakout Nations,’ which he defines as ‘an economy that can sustain faster growth than its peers in the same per capita income category for the foreseeable future,’ which he sees as ‘a term of not more than five to 10 years’.
In ‘Breakout Nations,’ Sharma reveals his rules for spotting success stories and lays out a compelling argument to determine which nations will thrive and which will falter, in the global economy reshaped by the 2008 economic crisis. The hard cover edition of the book was published in early 2012.
Since that time, factually, the economic development story has evolved in terms of Sharma’s prescient predictions. There has been a real slowdown across all emerging markets, particularly among the ones that were most hyped up – the BRICS: Brazil, Russia, India and China. A Goldman Sachs executive coined the acronym, later South Africa was added.
The BRICs, some analysts say, are now faring among the worst in the world economy. Sharma talks of new emerging success stories, unsung nations like the Philippines, Turkey and Nigeria. In fact the IMF in a note on world economic prospects to the G20 Summit at St. Petersburg also dropped its view that emerging economies are the dynamic engines of the world economy. Instead noting that ‘momentum is expected to come mainly from advanced economies where output is expected to accelerate’.
India’s economic travails
We in Sri Lanka have a ringside seat to view India’s current economic travails. The new Governor of the Reserve Bank of India Raguram Rajan has proposed some bold new financial sector reforms. These include banks being allowed to open branches without specific RBI permission, easing priority sector lending requirements imposed by the RBI due to the perceived reluctance of banks to lend to rural farmer and small businesses; a reduction of the requirement for banks to invest in government bonds so as to free credit for productive parts of the economy; a new round of banking licenses will be issued early next year, foreign banks would be encouraged to operate in India as wholly owned subsidiaries that would enjoy ‘near national’ treatment on a reciprocal basis; easing restriction on overseas borrowing by banks and on position taking in financial markets; and the introduction of new interest rate futures contracts and the establishment of new mobile payment systems and ‘mini ATMs’ run by non-bank financial companies.
From November Indians will be able to buy government savings certificates linked to a consumer price index to wean them away from their traditional nest egg – gold. Analysts described Rajan’s initiatives as ‘definitely a big bang entry’. Rajan’s statement has helped restore confidence in the Indian currency, which rose more than 2% against the US$, after the Governor spoke. It will be interesting to watch the longer term impact of these reforms when implemented.
In an epilogue written for the paperback edition of ‘Breakout Nations,’ Sharma extends his rules for spotting success to the developed world and offers a captivating picture of global economic power. The slowdown in the emerging markets is setting up the USA and some parts of Europe to regain competitive ground. The so-called catching up of the poor nations may be pushed away by a rise of Western economies.
The US revival, Sharma says is built on its traditional strengths, its adaptability, its technological prowess, the revolution in shale oil and gas which is helping to address the USA’s the worst problem, the debt burden. US companies are reducing debt much faster than foreign companies, Sharma says, due to their capacity to adapt new technology and raise productivity. The American brand of capitalism is on a winning streak, Sharma surmises.
Vulnerabilities of the fading BRICs
Sharma further analyses the perceived vulnerabilities of the fading BRICs. He says that China has grown too comfortably middle class and is far too dependent on huge infrastructure investment, building new roads and factories, to be able to continue to grow at a double digit rate.
Russia’s extreme reliance on oil and gas has resulted in an emerging class of petro oligarchs who seemed to have turned Moscow into a city reminiscent of the debauched days of the last days of the Ancient Rome, described in Gibbon’s ‘Rise and Fall of the Roman Empire’. Brazil seems so terrified of reverting to the economic volatility of the ’80s and ’90s that it is focusing almost exclusively on protecting the poor from economic pain. India, once hyped up as the next China, has given way to gloom and doom as growth slows, elections loom and India is federalising and fragmenting into a collection of State economies, making it very difficult to assess the real prospects. New RBI Governor Rajan’s reforms may hopefully be a catalyst to swing India back into a growth mode.
‘Rules for the Road’
For the 63rd CBSL anniversary lecture, Sharma formulated a series of ‘Rules for the Road’ for the basis of his forecast of a country’s economic prospects. The fundamental rule, which concerns us here in Sri Lanka of the 15 Sharma has formulated and some of which he clarifies very lucidly, is this one, in his own words: ‘If a country does well for one decade, the odds are that it will start faulting in the second or third decade’.
He went on to declare that ‘very few countries reform when they are in good times and that is a key take. What normally happens is that going through this cycle many countries lose out on time and are unable to make progress. That is what many emerging markets tend to follow’.
Sharma explained that ‘the best time for economic reforms for any country is in the first term of a new government’. The reason for this is that it is a time when the government has fresh ideas and energy, resulting in maximum output especially at a time when the country is coming out of an economic crisis.
‘Having a new leader and looking forward to change, the people of the nation are prepared to support the measures that are needed to get the economy back on track. But this is usually for the first decade,’ he said. Sharma decisively declared that ‘political leaders also have a lifecycle and it is best in the first term. Up to a decade is fine, but after that it is difficult to evaluate the country… However if a leader wants to protect his legacy, he should not be in power for more than a decade, since after that there will be diminishing returns of power.’
Term limits for political leaders
What Ruchir Sharma is talking about here is term limits for political leaders. The Constitution of the USA is one which has a number of provisions regarding term limits for politicians. This issue of term limits has been extensively discussed by Prof. Larry J. Sabato in his book ‘A More Perfect Constitution’ published by Walker & Co. of New York.
Prof. Sabato is the founder and Director of the renowned Centre for Politics at the University of Virginia. In this book Sabato has proposed 23 changes to reform the US Constitution, in order to ‘revitalise our Constitution and make America a fairer country’. The proposals leave the core of the US constitution untouched, concepts such as individual liberty, the separation of powers and federalism.
He places on record that readers should remember that the framers of the US Constitution, meeting at Philadelphia in 1789, were working in a pressure-packed vacuum environment to build a constitutional system for which there was no known model. The only guide was for that which should be avoided, concentration of power in one arm of government, lack of a mechanism to protect fundamental human rights, the tyranny of the nation state’s central government, as against local governments, etc.
Sabato quotes a letter from one of the constitutional framers, Thomas Jefferson, written to James Madison, written at the time the Constitutional Convention first met, saying that ‘no society can make a perpetual constitution, or even a perpetual law. Every constitution, every law, naturally expires at the end of 19 years.’ (This was a generation’s timespan, at that time, before longevity set in.) Sabato quotes term limits advocate Richard Davies to the effect that “Politicians in government should be changed regularly, like diapers, and for the same reason!”
Rotation of politicians in office through a term limits mechanism rests on the sound principle that, one individual holding on to any single office for an extended period of time is an anathema to the mechanism of representative democracy. New ideas and fresh blood, perhaps even greater representation for historically under-represented women, youth and minorities, are guaranteed with term limits.
In the absence of term limits, voting is based on a desire to get re-elected, at any cost, rather than on conscience or on policy issues. With term limits , the prevention of the emergence career politicians, whose very existence depends on being close to the seat of power and the concentration of power in the hands of an unaccountable few , can be avoided.
Sabato convincingly argues that the authors of the US Constitution fully expected that there would be frequent rotation in office. He says that they could not have foreseen or even imagined the professionalisation of the political class which is seen in the US and many other ‘Ballot O’cracies’ of today. Sabato argues that increasingly, in American national, state and local, legislatures voting and other related decisions by members are made out of a pressing desire to ensure re-election, rather than of a national or state interest.
Readers are aware that the only elected office for which there was a term limit in Sri Lanka was the Executive Presidency, which was removed by a Constitutional Amendment. For the Presidency in the US, there is a two term limit. Over a dozen US States have imposed term limits on their elected representatives. Post-revolution law makers in the US drafted new state constitutions in the entire former British colony to ensure that the ousted foreign colonial tyranny would not be replaced with new home-grown, tyrannical demagogues.
For example, the 1776 Constitution of Pennsylvania State barred lawmakers from serving as state representatives for more than four years within a seven-year period. The Constitution of the State of Virginia of the same year provided that legislators should ‘be restrained from oppression, by feeling and participating in the burdens of the people. They should at fixed periods, be reduced to a private station, return into that body from which they were originally taken, and the vacancies supplied by frequent, certain and regular elections.’
Here then was the democratic ideal of Ancient Rome, the citizen legislator, serving his country and then happily returning to private life. US Founding Father Benjamin Franklin, put it succinctly, ‘in free governments, the rulers are the servants, and the people their superiors and sovereigns. For the former, therefore to return to the latter is not to degrade them, but to promote them.’
Today’s reality of a cadre of career professional politicians, found in most ‘Ballot O’cracies’ would have made little sense to the Founding Fathers of the USA. US President George Washington solidified the principle of voluntary rotation of office as a central facet of American politics with his decision not to seek a third term as President, long before presidential term limits were legislatively mandated by an amendment to the US Constitution.
A valid point
The point that Ruchir Sharma makes, that term limits for the political class ensures that the political process remains dynamic and responsive to reform, voters aspirations and change, is indeed valid. One has to only look at the systems in existing ‘Ballot O’cracies’ to see politician being repeatedly re-elected, who have entrenched themselves in office, completely out of touch with the needs of their voters, crossing over from side to side of the political fence, buzzing around the corridors of ‘supposed’ power, as if their lives depend upon it, in a shameful and derogatory display of sycophancy, like bluebottle flies around a pile of dung.
They are never put to pasture , but further entrenched in sinecures for life, living like parasites off the taxpaying public , in terms of the old rugby song – ‘No bloody use to any one, No bloody use at all!’ Except to themselves and the immediate coterie of relatives, hangers-on, ‘catchers’ and other sycophants and ‘ass liquors’ around them, until death, finally ensures their departure. But some even then live on in a sarcophagus, in morbid mausoleum!
Sharma is correct, term limits are an essential ingredient of a truly development-oriented democracy, differentiating it from just any other ‘Ballot O’cracy,’ where the mere holding of elections of questionable validity ensures the continuity of the same persons and their families in power in the nations legislative assemblies. Any nation which aspires to be a ‘Breakout Nation’ as defined by Ruchir Sharma has to heed his advice on the matter of term limits for the elected political class.
(The writer is a lawyer, who has over 30 years experience as a CEO in both government and private sectors. He retired from the office of Secretary, Ministry of Finance and currently is the Managing Director of the Sri Lanka Business Development Centre.)