The first time I saw Ruchir Sharma on TV was in April 2012. He was discussing his first book Breakout Nations with Prannoy Roy on NDTV. Montek Singh Ahluwalia, the then Deputy Chairman of the Planning Commission, was also part of the panel.
The core point of Sharma’s Breakout Nations was that economic growth cannot be taken for granted. In the long run, very few nations had grown at a pace of greater than five per cent per year on a consistent basis. In fact, only six countries—Malaysia, Singapore, South Korea, Taiwan, Thailand, and Hong Kong—had managed this pace of growth for four decades. And only two—Taiwan and South Korea—had done so for five decades.
In the discussion, Sharma was trying to suggest that India should not take economic growth for granted. In fact, 2012 was when things had just started looking bad for India’s economy, after many years of strong growth.
Ahluwalia, given that he was in government, kept insisting that India would continue to grow at a fast pace and that a GDP growth of seven per cent was a given. Things did not turn out to be that way, and pretty soon India was growing at less than five per cent per year. As Sharma had explained, economic growth cannot be taken for granted. And that’s how things turned out to be.
In his second book The Rise and Fall of Nations, he takes his ideas forward. One of the most important points that Sharma makes in Rise and Fall is that economic growth is basically a function of two things—labour force growth and gains in productivity. Both these factors have contributed equally to global growth of 3.5 per cent a year, since 1960. In the recent past, global economic growth has slowed down to around 2.5 per cent per year.
Most economists and policymakers think this is an impact of the financial crisis that broke out in 2008. But more than that, what they don’t realise is that during the last decade, global labour force growth (i.e. people between 15 to 64 years of age) has slowed down to 1.1 per cent per year, against the 1.8 per cent per year growth for the previous five decades.
As Sharma writes: “The impact of population is very straightforward: a 1 percentage point decline in growth in the labour force will shave about 1 percentage point off economic growth.”
This is a point that central bank governors, policymakers and politicians of the Western world need to realise.
In the aftermath of the financial crisis, they have flooded the financial system with printed money, in their effort to get economic growth going to the levels that prevailed before the financial crisis. Given that the working age population is stagnating, the Bismarckian retirement plans need to be relooked at.
Another important point that Sharma makes is regarding the demographic dividend. This is especially valid for India.
Over the last 10 years, one story that has consistently been sold to us is that India’s demographic dividend will ensure that the country will keep growing at a fast pace.
The demographic dividend of a country essentially is a period of two to three decades when the birth rates go down and this leads to a situation where the workforce of the country is growing at a faster rate in comparison to its population. As these individuals enter the workforce, find work, earn money and spend it, the economy is expected to do well. Several estimates suggest that around one million individuals are expected to enter the Indian workforce every month, up until 2030.
The trouble is that while this sounds good in theory, this is not how things have always worked out. The Arab world is a good example. As Sharma writes: “In India, where hopes for the demographic dividend have also been sky high, 10 million young people will enter the workforce each year over the next decade, but lately the economy has been creating less than five million jobs annually.” The point being that India already has a jobs crisis that no one seems to be talking about.
Almost every country that has come out of poverty has had a manufacturing revolution or what Sharma calls “Factories First”. In India’s case, we thought that information technology could do the trick. But it ended up creating around two million high-skilled jobs which are clearly nowhere near enough.
The trouble is that India has missed the manufacturing revolution.
The Narendra Modi government is trying to kickstart it through programmes like Make in India and Skill India. But even there, they seemed to be initially talking about high-end manufacturing in areas like solar-powered appliances and military weapons.
What India needs is low-end manufacturing in areas like toys and textiles. In the recent past, some attention is being paid to these areas as well and that is a good thing. But it has become more and more difficult to get the manufacturing game going. Global trade has shrunk in the aftermath of the financial crisis. Further, more and more robots can do the low-skill jobs that India needs to create to move its people from farms to factories. What does not help is the fact that the government is trying to do everything—like running 27 public sector banks. As Sharma puts it: “Spend a lot of time in the field, and it is all too easy to find evidence that the State is not a competent banker.”
The Indian government continues to throw money at public sector banks. Between 2009 and March 2017, the government will have ended up infusing close to Rs 1.5 lakh crore as capital in these banks. And that is no small amount by any stretch of the imagination. In the process, the government takes away money as well as attention from more important things than running a bank.
To conclude, Sharma makes some extremely important points, making it a must read for politicians and policymakers all over the world, including India.
The one issue I have with the book is that could have easily been 50 pages shorter. At some places, there is just way too much detailing—especially the South East Asian financial crisis of the late 1990s. And that leads to a situation where the broader points get lost.
That apart, Rise and Fall is a very good book, and a must read for the Modi government.
Vivek Kaul is the author of the Easy Money trilogy. He can be reached at email@example.com
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