Ruchir Sharma, head of emerging markets and global macro at Morgan Stanley Investment Management and the author of the forthcoming book The Rise and Fall of Nations: Forces of Change in the Post-Crisis World, sits down with Foreign Affairs Editor Gideon Rose to discuss his latest article in Foreign Affairs.

A rush transcript is below.

Gideon Rose: Hi there. I'm Gideon Rose, Editor of Foreign Affairs. And welcome to another edition of Foreign Affairs Focus. We're here today with Ruchir Sharma from Morgan Stanley, who has a wonderful piece in our new issue on Slow Growth: The Demographics of Stagnation, Why People Matter for Economic Growth. Ruchir is the Head of Emerging Markets and Global Macro at Morgan Stanley Investment Management. He's also made some incredibly accurate calls in recent years on it was bearish on Brazil before it became popular and bearish on China in it's debt before that became conventional wisdom. And now, you're bearish on global population growth and talking about the importance of demography to the coming stagnation. What is your thesis?

Ruchir Sharma: Luckily with that one, it's one of the forecast and also that population growth is one of those things which is easy to forecast. Which is that whatever projections are made by the UN typically come true. If the IMF or other institutions make projections about economic growth or even on measures like productivity, you don't know if it's gonna come true or if it's for real. So with population growth, here's what we are finding. That there's so much discussion today in the world, that "Why is the global economy so weak?" And one factor that I feel is under appreciated on a global basis is that we've seen a very significant decline in population growth rates over the last couple of decades, and in particular in the working age population growth rate over the last decade. And that to me is one of the major reasons why economic growth is so low today.

Gideon Rose: So could you say that human productivity in terms of the production of other humans is falling?


Ruchir Sharma: That's one way of putting it. But, it's a very simple economic concept. That economic growth or the potential for any country is driven by two factors. One is the increase in productivity and the second is the increase in the labor force or the number of people working in that country. And what we've found historically is that the contribution to growth is roughly half. Half comes from productivity and half comes from the increase in the labor force growth rate.

Ruchir Sharma: Now, as we know, there's a big discussion regarding the growth rates of productivity. There's a lot of discussion that productivity rates are very low today. But there's some debate there, that, "Are we measuring it properly? Are we capturing the new internet revolution and all the other technological advances properly?" But on the second half, I think there can be no debate because that number is very straight forward and easy to calculate, and what we've seen there is that the world's working age population used to average the growth rate of just under 2% from 1960 till 2005. After 2005, it's been falling off a cliff, and currently the working age population of the world is increasing at a pace of just around 1%. So, this is a major change which is taking place on this factor.

Gideon Rose: So is what's really important not just overall numbers of people but the relationship of the working age population to the total population?

Ruchir Sharma: Yeah. That's important, but roughly it tells you. There's a time lag that from the time that the population growth of a country peaks, it takes about 15 years for that to make its way into the working age population because people are working between the age of 15 to 64 typically. So that's what's really happening in the world today, that the number of... That we were worrying a lot about a population bomb, instead what we really now need to be concerned about is a population de-bomb because this is really changing.

Gideon Rose: But if you have fewer people, don't you need less production and less growth because why would per capita growth matter if you just have fewer people producing fewer things?

Ruchir Sharma: Yeah, that's partly true but there are two factors out here which is what we're taking into account. One is that the decline in working age population growth of late has been even faster than the decline in the population growth rate. So that's causing a bit of an issue because per capita incomes aren't increasing as rapidly as they used to. And secondly, when you compare different countries the game becomes very interesting because what was going on is that some of the countries which we're seeing a decline in their working age population growth were getting much more aggressive. Believe it or not, on policies such as immigration, of getting more people to come to their countries. But that's something which is now taking a back seat following the crisis of last year. But otherwise, countries from Australia to Canada were much more aggressive at least in trying to attract more high skilled talent, partly to offset what was going on on the population front.

Gideon Rose: So if you take the refugees going into Germany that's why some people say this'll actually be good for Germany to get more young people? Is that...

Ruchir Sharma: Yeah. No, I think that was very much part of the calculus, but it shows you how difficult it is because these things have an impact on the social fabric of a country, that to achieve these things is so difficult, that brings you back to the original point, which is that the global economy is likely to see much slower growth than we did in the past because of a host of other factors, but the main factor to me is because we are seeing a decline in the working age population like we have never seen in post-war history.

Gideon Rose: Now, does this play out, presumably, differently in different countries? A country like Japan which has a rapidly aging population and no real immigration and no real new numbers coming in. Is that gonna be hurt even more than others?

Ruchir Sharma: Yeah, I think... But they will know a lot, and I think, they're always trying at the margin to change things, but the country with the biggest changes taking place to me is China. That for the first time in China's post-war history, its working age population shrank last year. Actually shrank. And why is this significant? Here's why. Because we looked at all the countries which have seen a shrinkage in their working age population growth rate. And what was their growth rate? Economic growth rate for the decade after which their working age population started shrinking. And the growth rate was as low as just 1.5% a year. So it just tells you how difficult it is to generate economic growth when working age population of a country is shrinking or not growing very well.

Gideon Rose: So you're already bearish on China 'cause of the debt stuff and other problems. Are you now saying that the demography will be yet another head win that the Chinese economy faces, and China will almost certainly grow old before it grows rich?

Ruchir Sharma: Yeah, I think that's absolutely true, and it's something which I think even they realize. So they're trying to reverse it now by abandoning their one child policy and promoting two children. But by the time that really has an effect, it takes 10 to 15 years on the working-age population growth rate. So in China's case, yes, I think they face major demographic headwinds, and so therefore for anyone to expect China to grow at 6% when you have negative working-age population is really something which I think is implausible.

Gideon Rose: What are the factors that correlate with increased productivity of population production, of increased population growth rates?

Ruchir Sharma: Governments have tried across the world, in terms of how to increase fertility rates, and the success has been very mixed. But what can be done is this, you can have more immigration in terms of getting more people in to substitute for the declining working-age population, as some countries have tried in the past, from Australia to Canada to Singapore. And the US used to be good at this at one point in time. Or you can do something to increase the female labor-force participation in the labor force, because that has flat-lined for the last couple of decades. So to get more women to work in the labor force can really help. And the other concept which I think needs to be abandoned is the retirement age.

Ruchir Sharma: Now, this is a very 20th Century concept. Before the 20th century, there was no concept of a retirement age. So I think the fact that now people are living longer, they're living healthier because of advances in medicine, and this entire thing that you should stop working at the age of 64 or some age like that, I think that is going to change, and we're seeing it. Some countries like Germany and all, now we're seeing that the working age population is shrinking, so they are extending the retirement ages. I think these are the three factors or three ways of countering what is the natural decline in the population growth rate.

Gideon Rose: Pressing you on the sort of women in the workforce, one of the things that I've always found counterintuitive, but if you think about it, it makes some sense, is that social welfare policies like increased child-care actually help because if women face a choice between working and staying home, they may well not necessarily have more kids. And so, the countries with very weak child-care, public child-care systems, and very little tradition of helping working mothers have kids and work, tend to have actually low birth rates, whether it be Japan, and Italy, and places like that.

Ruchir Sharma: Very true.

Gideon Rose: Whereas places like Scandinavia actually have somewhat higher rates than you might expect.

Ruchir Sharma: Yeah, very true, like I've been to emerging markets like South Korea, where this is a major problem in terms of not enough being done there. So in many parts of the world, the big problem is too much welfare and we have too much government spending going on, but they got parts in East Asia, like in South Korea, where the problem is the opposite. Not enough going on, for exactly the reasons that you cite.

Gideon Rose: So this is an unexplored or unappreciated, let's say, aspect of growth. You have a new book coming out of which this piece is based on a chapter. What are some of the other topics in the book?

Ruchir Sharma: Well the book really, The Rise and Fall of Nations, speaks about the 10 most important things we should look at to figure out if a country is gonna rise or fall within the next five years. And I say the practical time-horizon is five years because anything beyond that or much beyond that, especially over a decade, is just irrelevant. Who is gonna be around to know whether I was right or wrong about those?

Ruchir Sharma: So, we focus on 10 important factors, and apart from demographics I look at politics. And what we come up there is that the first couple of years is really when reforms get done for any government, and the longer a leader stays in power, the worse it is for a country. The classic example being Putin and Erdogan. These leaders, when they came to power in 2000/2001, in the early part of the last decade, they were very different in the way they governed. We like to sort of paint them in one brush, as tyrants who've been around for a long period of time. But really, the way that they have governed has changed very significantly over time. So, the politics chapter really looks at that and says that back leaders in their initial term, and the longer they stay in power, the worse it is for that country.

Gideon Rose: Two other chapters you can talk about briefly...

Ruchir Sharma: Yes, and two other chapters I speak about, one is on inequality, which is that good billionaires/bad billionaires. That is a country producing good billionaires which are billionaires coming from industries which seem to be friendly for the consumers, like technology or even manufacturing. Or they're coming from industries like they do in places like Russia to Malaysia which are producing natural wealth, which is all about government contracts, to try and make wealth rather than doing something which is genuinely innovative.

Ruchir Sharma: Then the other very important factor, at this point in time to me, has to do with debt. And this is what we find, that there is no holy grail. It is very difficult to come up with one rule to suggest that this rule really determines the fate of a nation. But there's one little thing that I've found here, which is if a country increases its debt very rapidly over a five-year time horizon, the next five years almost always tend to be bad. So, this is one of the few 100% rules we have, everywhere else you're handicapping probabilities. So this is the kind of stuff, so I call that the 'kiss of debt' that if you have too much debt over a short span of time, the next five years are gonna be bad, and that was a main reason why we turned negative on China a few years ago.

Gideon Rose: Ruchir Sharma, trying to become one of the good billionaires while writing articles for Foreign Affairs, thank you very much.

Ruchir Sharma: Enjoyed it, thanks.

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