Breakout Nations

In the last one decade, many authors have highlighted the predicaments of emerging economies, but none so successfully as Ruchir Sharma has. Head of Investments in Emerging Markets for Morgan Stanley, Ruchir Sharma is an established name, courtesy his incisive op-Ed articles in The Economic Times.

“Breakout Nations” is his travelogue interspersed with the cold realities of emerging markets. As a book, Breakout Nations enlightens and occasionally entertains, too, but it never bamboozles the readers with numbers, charts and stereotyped arguments.

This book is a beautiful journey across the world of emerging nations and along the way, introduces us to an ensemble cast: the opulent Russian oligarchs, the filthy-rich-yet-unassuming Mexican tycoons, the staid Polish businessmen, the charismatic Turkish and Singaporean heads, the authoritarian-yet-successful CPC and last but not least, the crony capitalists of India.

Breakout Nations lays down a country-by-country account of various emerging markets. Sharma, in the prologue, aptly analogizes the growth pursuit of developing nations to the game of snakes and ladders – a topsy-turvy scenario wherein a host of emerging nations will make a scramble to the breakout point, a few will make it and several – even those that have witnessed growth for decades – will fall by the wayside.

Author also makes a foreboding assertion that the next decade won’t be like the golden era that was last 10 years. The 2008 meltdown and the unfolding Eurozone debt crisis could result in a new normal for the Emerging nations.

The sputtering growth in the West would hamper the export-led nations of the East such as China, Indonesia, Malaysia and Taiwan, thus throwing a proverbial spanner in the wheels of these economies. A once-booming economy like China is already facing structural inflation (inflation built into the system due to a Government’s monetary policy) as wages are rising in tandem with a declining workforce – a significant pointer to a debilitating scenario of middle income trap.

While the ripple effects of Euro crisis and a stalling West could be more devastating for smaller export-led economies, China’s tremendous growth over last two decades, according to Sharma, could act as a strong underpinning even if its growth rate slows down to 6% a year.

Author’s touch-and-go stance on India’s chances of breaking out of its current average income class of $1400 would certainly raise eyebrows. However, Sharma has his reasons and quite potent ones, too. His is not a withering statement, but a rather honest depiction of malaises debilitating India. He unflinchingly squares the blame for a potential debacle on the usual suspects: crony capitalism and policy paralysis as he remains optimistic about the demographic edge that India holds over her counterparts. In 2020, average Indian will be 29 years old, whereas an average Chinese will be 37 and average European will be 49. However, this advantage might not be potent enough unless the Indian Government moves swiftly against the gnawing issues of corruption and partisanship.

An utter lack of political propensity to change things around is only worsening the matters. Add to that situation, creation of perverse social incentives in the garb of vote-bank politics and ever-rising Government spending only lend to chaos and confusion.

A once-booming economy like China is already facing structural inflation as wages are rising in tandem with a declining workforce – a significant pointer to a debilitating scenario of middle income trap.

Author’s analyses of Brazilian, Russian and Mexican economies falsify the exaggerated and often wax lyrical spiel about the emerging economies. Sharma brands Brazil as the Un-China – a stark contrast to the booming East Asian economy. Oddly, Brazil’s leading exporter status does not quite complement its economic status. Moreover, its protectionist stance compounded with  high inflation, high interest rates, low investment in GDP and lackadaisical infrastructure fail to raise enthusiasm about the country’s future. Author is even more disapproving of the likely success of Russia. Author’s prediction about Russia could be summed up by the following excerpt from chapter 6:”A rich country needs to make rich things to keep growing and Russia doesn’t have even one globally competitive manufacturing plant. Poland and the Czech Republic by contrast have many…”.

Russia is a relic of the communist era, with plenty of wealth now concentrated in the hands of a few. A strict oligarchy besotted with virtually no political opposition, poor banking infrastructure, stagflation and a conspicuous absence of SMBs (small and medium businesses).

The Czech Republic, Poland, Indonesia, South Korea and Turkey are the breakout economies that author is putting his monies on (literally, perhaps). The Czech Republic and Poland are a part of European union but are yet to adopt the Euro. With the prevailing crisis in the Eurozone, there would still be a long time before these two nations change their mind about the Euro. Author envisions Turkey to be a breakout success, too. Turkey epitomizes both the flamboyance of Europe and conservatism of an Islamic state. Author’s acclaim of Turkey, however, lacks certain key points such as Turkey’s over-reliance on hot money that is pouring into the economy on account of high interest rates and inadequacy of major greenfield investments. Indonesia, in author’s anticipation, is the only South-eastern economy that has the potential to scrum ahead of its peers. While Indonesia could be the best run commodity economy, South Korea already holds the pole position in the words of Ruchir Sharma. An out and out manufacturing behemoth, South Korea is steaming ahead on its auto exports, still taking a dim view of the services sector.

Author wraps it up with a curious account of the South African economy. An economy afflicted with the Dutch disease – a situation where in a resource-rich nation suffers from its own riches – and a huge income disparity. South Africa’s abundance of natural resources, pool of high domestic savings and a sophisticated financial market notwithstanding, its status remains that of an economic laggard. A nation suffering from high wage inflation, income disparity and poor performance of state-controlled institutions.

All in all, Breakout Nations is a delightful read. A book both the seasoned investors and newbies would savour. However, readers must keep in mind that the subject matter of the book is highly dynamic and they must keep constant tabs on fast-changing emerging nations’ landscape to keep up with it.

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