for the republican national convention in tampa, florida. watch every minute, every speech. in "breakout nations," richir sharma tax that is listed companies attack about the economic success story. issac dumais at the cato institute here in washington. >> welcome to the cato institute. my name is ian vasquez. i'm the director for the next economic success story.

in the 1960s and 70s, that was supposed to be persaud and other times it's been the ivory coast, mexico, kenya, venezuela and a number of other countries that have turned out to have less than stellar performances. instead, he sometimes surprising list of countries in the past couple of decades pulled ahead, including georgia, india, peru and estonia for example. professional economists and investors, political scientists and also as a pundit are not particularly good at predicting success. for that matter, they're really not even good at looking back and explain why some countries have succeeded in why some have failed. the inability to predict the future is understandable. that depends on all sorts of complex factors and also the very frequent arbitrary decisions of politicians.

there is however such a thing as detecting patterns of development and causes for growth. with the cato institute have done quite a bit of work with friends and colleagues at the fraser institute in canada on the importance of economic freedom in establishing prosperity. and what we publish an index of economic freedom around the world, that does establish strong empirical relationships with human progress. that index by itself cannot tell you why some countries are more likely to reform or why some will stick to building the types of sound institutions that lead to growth. to do that requires a lot more detailed about a particular country, circumstances and an eye for relevant information. i am pleased today we have some time, the author of "breakout

nations" him in pursuit of the next economic miracle that was developed precisely those skills that combine a good sense of what is proper policy environment with the keen observation about what's going on inside of the country in terms of politics, social attitude and economic trends and other factors that can determine where a country is heading. he spoke as a useful guide to understanding the growth potential of countries around the world and contains much insight in demand spectate conclusions. worse as business culture, for example, is fundamentally different than that. vietnam is not in fact following in the footsteps of china as many people believe. business cartels explained by mexico's markets are hot, stock record is hot, but its economy is not in the future may look brighter than many people think in the united states and

germany. "breakout nations" is a reminder that understanding the development process requires a lot of judgment about what intelligent people can disagree and the development cannot be understood by taking a technocratic approach, all the more reason why we should be skeptical of grand schemes coming out of the agency's brother sources claiming to have the answers to the world's very diverse set of nations. fortunately, richir sharma doesn't suffer from a messianic approach. aegis offers rules of the road, which are very useful in the book. so let me introduce you to him and a you to judge for yourself how sound his evaluations are. richir sharma is the head of global emerging markets in the global macro and morgan stanley investment management. he's a columnist at "newsweek" and writes for publications like "the wall street journal" and other leading newspapers around the world.

and he is a regular contributor to the economic times of india and has been writing financial columns since the early 1990s. please help me welcome, richir sharma. [applause] >> thank you very much. it's a real pleasure to be here at the institute. i'm heard it's the first time at this auditorium as well. it's a real delight to be here. as you mentioned that i'd been an investor for nearly two decades now and the developing world. i try and spend about one week each month in some country from assorted obsessing about it because i find that for me there is no substitute than to be on the ground in some country and to meet with all the people that

are the various players from the government offices to corporate ceos to local investors. and that is what i have done for the last two decades now and tried to form a view on the country on a continuous basis. but i have been a writer for longer than i've been an investor. i started writing back in 1991, but i started back in india. in those days when i first started out to right, there's very little little interest in india about what's happening in the global economy and i have this idea that went about writing a column exactly based on that. it's pretty young when i started out, but precisely because thomas was interested in the global economy, i managed to squeeze my column in, in large part due to swaminathan's negligence because he was a

editor back then transfer that is how i started out writing bad. and then finally after two decades of writing i said i'm going to write a book and that is what the separately too. is that much of last year putting together all night talks about various emerging markets and try to write something in the form of an economic travelogue, which is impressionist views of each emerging market, but also based on some economic observations as a gunner in two countries. what got me to write this book is this big idea that when you rent to read about a resealing commute a big big idea behind it. this idea that sort of struck me was in late 2010 in terms of what's going on. i've been investing in emerging markets for nearly two decades and save a lot of cycles. when we started out in investing

in emerging markets, in the mid-1990s we had a series of crises after that, but emerging markets between 1894 and 2002 are considered the problem child of the world economy. those crises included the east asian financial crisis, the russian, the c. 2001 and then it all started with mexico in late 1994. so that was sort of the history we were through. and then there was this magical. from 2003 on board, where every single developing country did well. from 03 to 2008. and this is captured in a couple statistics. between 2003 in 2008, the average growth rate of the developing world with 7.5%. and the global economy in

recorded history have never gone through such a period for so many emerging markets in such asnous manner. so in the growth rate of emerging markets in the 1980s and 1990s used to be about 3.5% or so of the long-term growth and postwar history was about 5%. we went through this. from 0320 wait that the average growth rate was 7.5% and the rising tide of countries doing well left no country in its wake. in 2007, the 180 economies tracked by the imf, only three economies contract to this refugee, congo and zimbabwe. who cares, right? and the history otherwise is that in any particular year if you look back but typically about 20% records gdp growth in any year on average, around 20%.

and only one third of a common means are able to grow at about 5%. that's the spread in terms of what was god. 2007, the peak year of the boom we had only three economies out of 183 from which reported a negative gdp growth rate in more than 50% of the world economy growing at about 5%. this is really a very exceptional period, but the question was, what causes exception. admin that led to obviously a lot and it's about the history of economic development. what caused this exceptional. according to me was three factors. one was the fact these economies are catching up after a very poor performance in the 1980s and 1990s. and because of the poor performance, a lot of balance sheets have been cleaned up in these economies in terms of macroeconomic finances had he been put in order from indonesia, russia, pay down

their debt and a lot of improvements to the macroeconomic fun because they had their backs to the world. so after the crisis, these economies preformed considerably and so they were catching up. the second most important point, which is underestimated, was as we know what the western world, there is a huge increase in financial leverage and an overall indebtedness. and a lot of that liquidity flows to emerging markets as well. swift analyzed how long the liquidity has created the housing bubble in the u.s., all of their problems in europe in terms of the housing boom and so many southern and european countries, but it also led to a big site of capital to emerging markets and lowered their risk returns in terms of what it takes the cost of capital rather than the very strong demand in

the u.s. has triggered debate export boom. so this combination is that as of catching up from a very bad. the 1980s and 1990s, abundant global liquidity which lower the cost of capital and also the fact that the u.s. consumer was reasonably strong and a big stories of emerging markets helped lift the growth rates of emerging markets to these exceptionally high levels from 03 to away. now after the craze says happened in 2,002,009, some emerging markets were able to use some of the unspent bullets to try and keep demand. so india, china, by those pipeline to keep demand going. but what is happening now is many of these countries experienced and there are difficulties in growth rates

across emerging markets are slowing down quite a bit. i think this is what is setting the stage for a very different kind of outcome now in this decade. they think we are reverting to the old emerging market experience, which is there will be some stars, but some flops as well. this is not going to be the exceptional. we had last decade where every single emerging market recorded high growth rates on the back of easy liquidity. the rising tide of global liquidity is no longer there to lift every single emerging market now. and i think what we need to do here is to start distinguishing again the long history of economic development is that there are more flops and stars. failure rather than success is the rule and economic development. look at the global economy. only 35 are developed. everyone else is emerging

because they're sort of in this. as you mentioned at the outset when you have one good type it for any particular economy or weekend and that sort of economy falters because of the gain that comes from the boom were to start reforming in the business societies often than they have their backs to the wall. so development and set the what i referred to as a game of snakes and ladders, where you go up some, get bitten by a snake, come back down and start all over again. some get lucky and are able to leap to make it to the top. but the game of extrapolation doesn't happen. you go from the bottom to the top, but that's exactly the kind of leaves over the past decade because so many emerging markets did well. that is captured. the most popular of course was brick. why deibert recants a popular? because it captured the

imagination as it was a full logistic economy in the world, in the developing world. and because every single emerging market was doing well, it seems to brick at the maximum spotlight on them because they were the largest economies and they were all growing above the historical averages, so it seemed something special was going on. but the acronyms went on and on after something in the most ridiculous when i heard at the end of the decade was sent and called civics, which is the only reason is because it sounds good for the country's in the mix included colombia, indonesia, vietnam and the egypt. i mean, all the countries had nothing to do with each other. we do a good marketing term of these things work because every single emerging market was doing well. i matter what acronym you created, it sounded very because

everything was fine. so that's what was going on by the end of the last decade. i am an emerging market investor. my interest is to sort of go up there and tell emerging markets, right? and a lot of people are willing to buy the argument because you're an emerging market, you're bound to grow faster. that's where the opportunity lies, so bookmark l. baird, diversify it t way and that is sort oad to becoming rich. but i find that as someone who has invested for many years with a contrarian friend of mine that you don't go over the hurt, you basically distinguish and see what is the flawed in the conventional argument all the time. a couple of anecdotes took place in late 2010, which told me this trend has gone too far and this trend also post on the way many of the transcend time, which is they become very popular for one decade and rarely continue to be popular in the subsequent

decades. 1980s, they were going to route the world. and 1970s, as with all the resource and inflation, they were concerned about. amenities 60s, it was all about the 50/50 as to call it here. they captured the imagination and politicians of investors by the time everyone buys into it, it intends to run out. there's a couple of anecdotes which happened in late 2010. what were they? one goes back to india as they frequently do for one of my business. i was invited to a fancy party, these farmhouse parties. the farmhouse is because they've got these confessions, they still exist out there for many of the rich to have their fancy sort of homes out there, the sprawling mansions which have ulcers of the new features.

i'm the one i went to through this party at a range rover running around it. and you've got chefs all over the world preparing the food. so here i was at this party in late 2010 and got into a conversation with this young 25-year-old. use the typical stereotype, wearing a tight black t-shirt and he was an exporter, like a guy is making some money on the click. so like this guy had only was 25. he very quickly figures out that i'm a global investor backing india looking for opportunities and that's what he wants to believe in. he goes, where else does the money go? yes such overconfident that the

west is in decline, the money is going to come here. where else is it going to go? she not only worked with disbelief, to a lot of it seems to be at the west is in decline and the money is bound to flow through these places. and that's where it's got to go. this along with another anecdote that happened in moscow's short thereafter as this book in this idea about the coming decades. another anecdote is that i went to moscow organized out there and the prime minister wanted somebody to present to him at the conference about the state of affairs in russia. and then the conference organizers at prudence office after they make the presentation. i said fine, i do it. i did not know is going to be such a big deal because although i've mentioned before, but this

is televised. and i gave a really blunt assessment on russia about how i was optimistic a decade ago when things had taken values cheap in russia and people he did it in a decade beta the per capita ratio is $10,000 in russia basically was regressing rather than progressing, just being reliant on oil and gas is not enough. which country makes rich kids. they better get some sort of a manufacturing sector going in new businesses going. so is a pretty blunt assessment of how russia was doing. and pretend was very good. she was there listening and stuff, but the next day i found out what this is all about because the entire russian media went after me. and they're sort of take was who needs your money?

the peak of the boom in 2010 was who really needs your money? and this assuredly have the the attitude had changed. i had visited quite frequently over the years. and right there after they had organized for a conference and in that conference recalled george bush to be the guest speaker and i was having a fireside chat with him, like an interview for the audience. i asked him, what is it that she saw and pretend when you commented famously like a decade ago that she looked him in the eye inside friend. what is it that she saw in him to instill all that believe? he saw something that would have mirrored my own sort of change in russia. he said had the attitude of

putin had changed. putin had first come to the white house back in the early two thousands. putin would talk about his dad and what all he is doing. he says one of those visits, bush introduced him to his dog, barney or whatever. putin looked and didn't react much to it. at the peak of the boom he went to moscow and took it into his -- and by then, putin's confidence was huge. he was really believing that russia had truly reemerged because of the massive room russia had enjoyed. and so he said that putin's question was much more about the mortgage-backed securities, which the u.s. had. and out of the blue, putin goes

to bush and since you want to meet my dog? he says okay, let's make your dog. so out produced outcome style, this big dog. putin says to bush, c., bigger, better, stronger. this is a massive change in attitude which had taken place despite his concern. he was telling me how the attitudes had changed in emerging market. a decade ago when we felt emerging markets, no one was willing to listen to us and valuations for really cheap and the whole absurd as place appeared to be a real mess. and now all of a sudden a decade later, any sort of country within the emerging market had a lot of hype around it. that's when i decided i was going to write this book. the idea of the book really was if elected economic history, you've got to sort of distinguished emerging markets are now nearly 40% of the global economy.

you cannot treat them as a homogeneous entity. the differences are incredible. there's an income of a less than $1000. large economies and then you've got the life of korea with a per capita income. and the middle east that a whole bunch of countries like brazil, mexico, turkey, russia with a per capita at 10,000 to $12,000. and even in china, china's per capita income is $6000. if elected economic history, typically countries due to the per capita income level and the obvious exchange-rate evaluation. growth tends to slow down. in china it is exactly where japan was in the 1970s in the stage of economic development. in the 1980s and 1990s. that these are the gold medalists of growth. these are countries that have

gone on to successfully industrialize themselves. but even these gold medalists ended up slowing down at the per capita income level. and i think that has to be something happening in china as we speak. and yet the ankle last such that the more we speak that can lessen a percent% there's a lot of nervousness. the next five years, china's growth rate of the more than 8%. and the sociological game in town which is very worrying is the thing about wendell china will overtake the u.s. ulcers of arguments going on around there. would be 2018, 2021? all based on a gdp growth in the future, so a dollar terms, it's only a matter of time that china overtakes the u.s. economy and

this is completely ignoring the fact that he's gone through this entire. in economic history, but often at this stage, things get much tougher. i'll talk about the income track of a much debated concept. i think the world is not prepared for some of the commodity exporting countries. they now have again come to believe that there's some sort of massive commodity super cycle. like in these arguments about how they running out of everything from wheat to corn because demand is growing a lot, supplies are keeping pace. yet if you look at the 200 year commodities, it's a consistent pattern. one decade up, two decades down. and the reason for this is even though the demand has increased over time committee human ingenuity in terms of innovation and other factors come in terms

of lower the cost of extraction and another subsidy has brought down the cost of production and commodity prices over time. in fact, even allocation mixes commodities historically is the worst performing asset compared to stocks or bonds and it should be. because why should people sort of make too much money digging dirt out of the ground. that's exactly what the commodity businesses. was looking at this thing that a decade ago the number of billionaires who came from the factor representing one third in the world, today the number coming from the commodity sector or one third of the total billionaires in the world. this is a massive price and market capitalization of a lot of billionaires out there. so as i sort of go around the of

economic travelogue, i try to come up with rules of the road but i i think the imf, world bak have been a pretty good job of coming up with like all the academic staff, in terms of the quality of institutions, education matters in the ruler of law matters, but sometimes as investors we feel a lot of attention to touchy-feely stuff. one thing i come up with this faith four seasons index. we get to stay in the four seasons hotels or in similar luxury hotels and often the prices at these hotels tell you a country is competitive for doing business or not. i find it shocking that russia u.k. for high-end room rates pay a thousand dollars a night. and places in east asia, was in a much better with china, all of southeast asia and indonesia,

thailand, philippines he paid two or $300 a night. enduring menace is the currency has appreciated massively because of the commodity boom in the fact that interest rates are relatively high, leading to a huge amount of capital, but the rest of the company is getting hollowed out. known as producing much in brazil, even though they have a commodity boom to that amount. i shudder to think what is going to happen if commodity prices as i anticipate there will the coming few years. that could be seized problem for the life of her cell, even for russia. in russia, a decade ago the price of one was $25 a bottle. what is this $15, what will happen again because it has suffered from this experience in the late 1990s. today, russia cannot balance its budget on an oil price of $110 a

barrel. so these don't just get embedded. and that is where the problems arise. and yet, but countries are still a bit more optimistic. i still feel countries which are coming back are countries that are reforming he tries the need to attract the need to do with those countries. one sort of example, which i find i get a lot of pushback from his philippines. ..

>> more focused on economic reform with the investment cycle again. but if the destination is more important, the journey is more important. they need to be flexible. and not be locked in for two long. i say you used to make as

many forecast as possible then remind people you were right. [laughter] but now you forecast into the future and wait and see if you are right. [laughter] who cares? who will be around to figure out? we would been a practical world but to say if you elect me i will deliver them. the entire business it is staggering because something happened in the year 1400 therefore that is a good

guide? with no practical value. but to keep the horizon and to a practical one. that is a problem with acronyms. because russia, it is hard to do have one that does not sound cool. but you have to say which country will exceed expectations and what will fail and be flexible. have rules of the road but

some that are willing to reform one thing that i come up with the suite try to be objective what is the economic system. looking at all the cases what was backing the regime? i found it was a 50/50. talking about said chinese model but i said fy in the system works, but another does not. and then looking at the next tide of the region and

vietnam tried to copy everything which was disappointing. and now it is falling very rapidly. for flexibility, what can work and what it cannot? paid attention to expectation. that is key. even as a breakout nation as 6% is still faster than the western world. so they grow that much faster. so now china dips below 8%. so like india it was about

to it was a question mark. so expectations are key. because the politicians come investors and business community come to expect. for the per-capita income income, the same thing with china. it has been a remarkable success. that at 120 million chinese over the past decade, that

is when things begin to slow down. so with those urban areas and the faction, they actually slowed down. but the economy slows down naturally. the question is will china have a hard landing? 7%. expectations are inflated. it feels like a real problem. i tried to talk about it. one decade ago with emerging-market in the middle of the real-estate boom in the u.s. they had to

get to started from the west. then everyman and his dog could raise money. and then at the end just the dog would do. [laughter] so capital and emerging markets we have to pull back to distinguish. what should we do? for me, when there is no wind it cannot expect converging toward development over the past decade catching up after the poor performance. to come up with their own agenda with the developed

world that is the main argument of the book. i will take your questions. thank you. [applause] >> this my pleasure to introduce a colleague of mine and also a regular columnist and is a correspondent and a very prominent commentator of the major media and indonesia please help me to welcome mr. aiyar. [applause] >>

>> i am sure you are convinced by listening to ruchir sharma the book has insights make you laugh and why he did not think of it earlier. whenever there is an election rego into the areas and then who will win with which party? over the last 14 years the guy who got it right was ruchir sharma. there is much to agree with in the book. we had the enormous boom over the last decade.

we have a situation with the imf and there were no bad economy is left. to say we have nobody to lend to. it was obvious this cannot last. in the it is 90% unsustainable 6% is no great deal. when the whole thing came down remember who wrote to the book -- when we wrote

the book one year-ago in these countries have slowed down as many predicted it is clear. and it's a certain number of countries in the presentation is worth mentioning some of those. to will be the breakout nation. specifically indonesia is likely to become day "breakout nations" over the next few years not just from an investment banker.

i said it just focuses in the middle east. indonesia and the middle east so if you just concentrate on the middle east but because the money was there bangladesh with 150 million people that economic success less than into a leadership quote that the holy places are saudi arabia. even with bangladesh and

indonesia. sell military is on begins to have any effect. if you see fallen commodity prices rushes it is in budgetary trouble. so if richard is right the oil producers within the islamic world order read talking? indonesia if there is a redistribution of power is extreme they possible from

afghanistan or the cities. >> also what he expects in europe. not those that you immediately think of. different from others. i do think it is possible. and guess they made it through the great recession it is the european banking system. the imf said after all that

this happened by $3 trillion, a lot of that is not alone by the european banks. which is one more reason. but this is a bit mckinley effective. -- significantly effective. i think they are in danger. if the banking system collapses then the whole world. says some of that does not

actually benefit. the marketplace in general i think is right. but he things one could decade followed by two bad ones. , think he is wrong. because we have an attention to the environment which just never been done before. her we have the united states from the east coast and in the west coast.

texas, louisiana, alabama and everywhere else. then the gas goes up. willis polluting and drilling adds to the pollution. yes. how you know, you will not strike will? every other kind of mining mining, it put a new line in many countries with the environmental impact. india has the third largest coal reserves in the world. i tried to write a column

saying we don't need to import whale. because of the difficulties. but to for this reason they will be more resilient. except shale oil and shale gas which is a separate technology china has the biggest with an expert of hydrocarbons so that outlook is not particularly good at all. for the large commodity importers especially with

the commodity price this is especially about india he says maybe only 5% were 6%. he is quite right to put them on the political scene many things have gone wrong at the same time. but there is a great recession. but now you have flipped. when those fundamentals are created i don't think they

can. with at demographic period the problem of population explosion. you say you have the expanding work force but the population growth it will rise slowly than decline and then looking at those 300 million. there actually members of the work force the guardians of the west coast people not

to in the work force. the chinese did doing better. would get 60 or 70 with the collapse why does this happen? of the working-class people send the women out. and education? fortunately the demographic

show women get to more educated then that is the end of the work force macy major benefit coming in the form of democracy at -- tomography where is the subject of responsibility. india it is not the only a poor country so we have the ketchup possibility if many below the national average with 200 million people with one of the largest countries

of the world. now it has began to grow to go beyond all redemption comment day officers that they cannot go there. it was really bad word. so those possibilities is immense so with much of india i do be the four these reasons india is perfect the

fed is of a "wall street journal" thinks. [inaudible] [applause] >> we now have time for questions. please raise your hand. but. >> you have been all over the place with a good crystal ball. what about egypt? and back to those from the party in india, where do people go now? [laughter] >> with all humility it is a country we were warming up to.

part baby guess i remember in 2009 by would go to a conference and they would be there and met mubarak in 2009. so much about the end of the free-market and capitalism because of the financial crisis. i said will the world turned its back? that was the fear. he said it added great time that struck me. he said, the problem is not

more regulation but better regulation. and we still remember socialism and the bad experience. there is no turning back. last few years of mubarak they started to open the economy again. they did shut themselves down thinking they would get better. obviously because of the political change but egypt has a chance. spending time with the turkish leadership in this impressive the muslim brotherhood would ask for a vice. -- advice.

because then they focus on economic reform and the hardline agenda. and i am getting burned in the year 2010 but now we think there is the optimistic road map for egypt to take the advice of the party. those of the same fears about turkey as well. turkey, an indian issue of -- indonesia breaks out and joined which is my

forecast, very powerful effect in the next three and five years including egypt. i hate to say the bargaining is still going on in. i have not seen any dampening. even though the business quell. >> another question? >> good afternoon. my question is based on the concept of human rights. as the u.s. loses its economy in emerging -- emerging markets , how does the relationship hard or soft

power but these historical a had issues with human-rights come up repression, and personal liberty as well. what is our relationship to the former dictator ships and repressive democracies in the future? how will that change? . .