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Home Publications Blogs Beat the Press Ruchir Sharma's Entry in the "Most Things Wrong in a Short Column" Contest

Ruchir Sharma's Entry in the "Most Things Wrong in a Short Column" Contest

Wednesday, 25 April 2012 23:36

I'm shorting Morgan Stanley after reading the NYT column on China by Ruchir Sharma, the head of emerging market equities at Morgan Stanley Investment Management. The piece begins by telling readers:

"more than half of Americans think China is already the world’s leading economy — an astonishing misperception, given that China’s gross domestic product is still less than half of America’s."

That is not what our friends at the IMF say. On a purchasing power parity basis, which assigns the same set of prices to goods and services produced in both countries, China is already almost 80 percent of the size of the U.S. economy. There is also some serious research suggesting that because of mis-measurement of prices in rural areas, China's economy is already larger than the U.S. economy.

The piece then goes on to tell us:

"It is well known that developing nations hit a “middle-income trap,” and stop catching up to rich nations, when per-capita income reaches about $5,000 to $15,000 (in current dollars). The examples (Brazil, Mexico, Malaysia) are numerous."

Huh? This is well-known to whom? This is a huge range (imagine per capita GDP in the U.S. tripled to $150,000 per person) that includes almost 70 countries. It makes a huge difference whether a country's growth slows near the bottom of this range, where they are still relatively poor, as opposed to the top, where they are decidedly middle class.

Furthermore, countries enter this range with radically different growth paths. The speedy growers like China are the exception. More typically countries edge up into this range with modest growth rates. In the more typical case, there is not much room for a slowdown. Of course in some of the fast growers, like Malaysia, one of Sharma's examples of a slowdown country, there is little evidence of a slowdown as they maintain rapid growth right through this range.

Then Sharma tells us that China passed his $5,000 mark last year. Actually the IMF says it was 2007, and if the understatement view is right, China hit this mark as early as 2005.

Next we get my favorite:

"In recent years China has accounted for nearly half of global growth in oil demand, and every 1 percent of G.D.P. growth in China added 10 to 30 percent to the price of oil."

I'm still trying to figure this one out. China consumes a bit more than half as much oil as the U.S., but somehow if its GDP increases by 1 percent, the price of oil rises by 10-30 percent. How exactly does that work? If U.S. GDP rises by 1 percent, does the price of oil rise 20-60 percent.

Finally, we are told that:

"China’s slowdown is also opening the door to a revival in American manufacturing. China is suffering many symptoms typical of a maturing miracle economy, from a strengthening currency to rising wages, land prices and transport costs, while the United States has a weak currency, stagnant wages and a moribund property market. The dollar is near record lows (in inflation-adjusted terms) against many of its trading partners, including China."

I understand the point about relative prices, but don't we have a better export market if China is growing rapidly? What did I learn in my econ 101 class that was wrong, don't fast-growing countries have more rapid import growth than slow-growing countries?

Perhaps there is something that made sense in this piece, but it's not easy to find. It's hard to understand how a piece so chock full of errors finds its way into the NYT oped page.

Comments (10)Add Comment
Just wondering...
written by diesel, April 26, 2012 5:53
When economists reckon GDP and per capita income and include oil consumption as one of the leading indicators of wealth and development, do they also assign a monetary value to the amount of solar energy per square meter that blankets countries? Why would someone from Ecuador (or Brazil, Mexico and Malaysia) need as much oil as some one in Vermont?
written by JSeydl, April 26, 2012 6:46
The sad thing is that Sharma probably makes 10x what Dean makes in a year.
written by skeptonomist, April 26, 2012 8:48
A better parallel for China might be Japan in the 80's, rather than Latin American countries or Japan in the 70's. Japan's phenomenal growth in the 80's was ended by a financial crash including puncture of a huge real-estate bubble. The factors considered by Sharma are important, but he ignores the possibility of financial overexpansion and collapse. It is strange how many prognosticators ignore the liklihood of financial bubbles, considering how important they have been in economic history.
"We Are Not Stupid!"
written by James, April 26, 2012 10:30
It's amazing that Sharma's piece went through his own firm review as well as the NYT. I guess when you are high-price PHd on WS, you are solid and your analysis is beyond criticism or scrutiny.

Of course, his compensation is much higher than Dean's.

Doing social justice work does NOT paid, being the hatchet men for the powerful and influential does get paid rather well.
written by PeonInChief, April 26, 2012 10:42
NYT regularly publishes opinion pieces with errors--think Brooks, Friedman etc.
Free advertising for fund managers?
written by David, April 26, 2012 11:35
I find it interesting that Sharma's funds have been performing relatively poorly compared to the S&P 500. In general, this just confirms my suspicion that many fund managers don't know as much as they think they do, and the empirical evidences shows managers definitely don't deserve (Sharma's) 1.5% net (5.5% gross) management fees. It is so touching to hear someone like John Cochrane (UChicago finance prof) or Greg Minkiw (Harvard economist) discuss public sector inefficiencies; they must consider management fees negligible, how else explain their support for this persistent costly feature of the private sector (are there any credible cost-benefit analyses of this feature of mutual funds?) ? In a market where risk-free means 0% interest, these high fees become an issue (and, yes, I'm considering dividends as part of this complaint).
earnings = intelligence, er, duh, no
written by mel in oregon, April 26, 2012 12:26
a lot of people on wallstreet are totally goal oriented. so are most executives in american corporations. but when you are able to have a discussion with these types, you realize how shallow they are & really how unhappy they are. that's why so many of them spend a small fortune on pscho analysis (parden the pun), booze or drugs. my guess is baker is much happier & has a much more fulfilling life than does ruchir sharma.
written by liberal, April 27, 2012 7:14

Of course, that's the basic principle behind the Vanguard Funds.

The interesting thing, frequently pointed out by Vanguard's creator (Bogle) is that "the market" (ie buyers of funds) appears to have faith in managers, because the typical fee hasn't come down despite strong empirical evidence managers usually don't add much (if any) value, that costs are the one aspect of mutual funds that aren't mean reverting, etc etc.
written by Jose Marquez, April 27, 2012 10:05
Once Asians, not only China, have gotten such a good taste of sweet times it is going to be very hard to let go...India'a TV is boasting about India being # 1 by 2020 !! China is sending a man to space, the women, lean/tall and attractive are shopping at the best stores in Paris/NYC !! THEY must be doing something right...The Yuan will soon be a world currency and may replace the dollar as a reserve currency...
Mr. Sharma, what a disappointment !!
Are these glaring errors or information seeking more clarification for the case?
written by Vandana, April 29, 2012 11:24
Instead of bringing this as a battle of haves and have nots , the comments can be productively used to understand the points raised , seeking more inputs from ruchir. For eg if slowdown in china is correlated to recovery of manufacturing in us , is it because of good quality / cheaper us goods having a better chance to complete with not so cheap Chinese goods in event of high wages that ruchir mentioned ?

Is the correlation of oil price rise with rise in chiinese GDP more to do with proportion of Chinese oil imports from the world market compared to US reliance on its own domestic oil consumption rather than the imports from the world market ?

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About Beat the Press

Dean Baker is co-director of the Center for Economic and Policy Research in Washington, D.C. He is the author of several books, his latest being The End of Loser Liberalism: Making Markets Progressive. Read more about Dean.