'Capitalism is suffering death by a thousand cuts': Ruchir Sharma talks to MoneyWeek

Ruchir Sharma, author of What Went Wrong with Capitalism, explains how free enterprise in developed economies has been undermined by continual state interference

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Andrew Van Sickle: The developed world has a growth and productivity crisis. Taxes are high, there is growing concern over income and wealth inequality, and the statist populist right and populist left are in the ascendant. Many people think capitalism has failed. You have a different take.

Ruchir Sharma: One of the reasons I wrote this book is that in 2019, there was a survey saying that young Americans thought socialism was preferable to capitalism. That struck me as a hugely significant: I grew up in India, which used to be a socialist country, and I experienced the adversity caused by socialism.

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The essence of capitalism is to give people as much economic freedom as possible. The government’s role is really just that of a traffic cop. It is not supposed to keep interfering. But over time, it has expanded its role more and more. In the two centuries before the 1920s, there was no welfare state in most countries, and government spending was minuscule, around 3% of GDP. Since the 1930s, there has been a steady expansion in the role of the state.

Ruchir Sharma: Zombies, according to the Bank for International Settlements, are those that have not even made enough profit to service their debt for three years in a row; they’re forced to go back to the market to keep raising more debt. They are a bigger problem in Europe than in the US.

The phrase was coined in the 1990s when Japan had many zombie firms, and at that stage, the Western media were saying: “This doesn’t happen in Europe and the US.” But even then, the share of zombies in the US and UK was about 2% or 3% of listed companies. Now, the figure in developed stock markets is 10%. In the US and UK, respectively, it’s 20% and 22%.

Andrew Van Sickle: What’s the solution?

Ruchir Sharma: A key move would be to stop these companies from buying smaller ones. They have access to cheap capital and huge war chests. If they see companies becoming a threat, they can just pre-emptively buy them. Stopping that would certainly help.

Then we must get the cost of regulation down so that it is not prohibitive for small companies to set up. These measures should temper the impact of big companies’ lobbying, too.

Andrew Van Sickle: Zooming out a bit, the consequence of all this regulation and interference is a very top-down development model. In this country, it is illustrated by a very heavy-handed green policy. Is this a universal problem?

Ruchir Sharma: I wouldn’t single out specific sectors in this regard; to me, it seems that the overriding imperative is to spend as much as possible on everything: on defence, industrial policy, you name it. What we need is an efficient state that prioritises sensible things.

Andrew Van Sickle: We may have to pin our hopes on a productivity miracle through AI?

Ruchir Sharma: It seems to me that all this government interference in the economy is negating all the advances in technology we have seen – the improvement in PCs, the advent of the internet, and so on. That is the reason we are not seeing a large productivity boost.

We are soaked in debt, 20% of all listed companies are zombies, big companies (hardly known for productivity) dominate, and you have declining social and economic mobility. All these explain why productivity growth is low and stagnant, virtually, in the UK and Europe.

Andrew Van Sickle: This might explain why we haven’t seen much of a kick from AI yet? It sounds as though governments could throttle it before it gets going. Is there anything more specific you think governments should do now to get things going?

Ruchir Sharma: No; as I say in the book, it’s about looking at other countries where the state is efficient, with good outcomes. In the book, I highlight examples like Taiwan, Singapore, or Korea, where governments are tech-savvy and highly efficient, building a state for the 21st century. Taiwan is an impressive example I explore in the book. Switzerland is also worth studying. It’s very rich, state spending is relatively low, and its economic model is heavily decentralised. There are 26 cantons, each with a great deal of autonomy.

Andrew Van Sickle: One headwind governments have, as you note in the book, is demographics. This is part of the growth problem, too.

Ruchir Sharma: There are two drivers of economic growth: population growth and productivity growth. Global growth never really got going until populations started growing in the 1800s, a result of advances in medicine. Then, productivity growth took off with the first industrial revolution. Then, after 1945, we had the baby boom. So we had a post-war golden era of growth.

But growth began to slow down in the 2000s, while population growth peaked a few years earlier. Now both productivity and population growth, especially working-age population growth, has slowed. There are now 50 countries in the world where the working-age population is shrinking.

Yet politicians keep insisting we can return to a golden era of growth; in the US, they talk about a 3% or 4% rise in annual output per year, and 5% in China. The latter is especially unrealistic. No country can grow by 5% if its overall population (not just its working-age population) is shrinking.

It’s a case of recency bias and anchoring bias. Most people’s, certainly politicians’, perspective is skewed by the fact that they grew up in a 50-year golden age for economic growth – a time when population growth worldwide was expanding by 2% a year or so.


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Andrew Van Sickle
Editor, MoneyWeek

Andrew is the editor of MoneyWeek magazine. He grew up in Vienna and studied at the University of St Andrews, where he gained a first-class MA in geography & international relations.

After graduating he began to contribute to the foreign page of The Week and soon afterwards joined MoneyWeek at its inception in October 2000. He helped Merryn Somerset Webb establish it as Britain’s best-selling financial magazine, contributing to every section of the publication and specialising in macroeconomics and stockmarkets, before going part-time.

His freelance projects have included a 2009 relaunch of The Pharma Letter, where he covered corporate news and political developments in the German pharmaceuticals market for two years, and a multiyear stint as deputy editor of the Barclays account at Redwood, a marketing agency.

Andrew has been editing MoneyWeek since 2018, and continues to specialise in investment and news in German-speaking countries owing to his fluent command of the language.