In the last 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 of his incisive op-ed articles in The Economic Times.
A Journey Through Emerging Markets
“Breakout Nations” is his travelogue interspersed with the cold realities of emerging markets. 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. Along the way, Sharma 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.
The Snake and Ladder Game of Emerging Market Growth
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. It is 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.
How the West’s Slowdown Affects the East
The author also makes a foreboding assertion that the next decade won’t be like the golden era that lasted 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). Wages are rising in tandem with a declining workforce there. It’s a significant pointer to a debilitating scenario of the middle-income trap.
While the ripple effects of the Euro crisis and a stalling West could be more devastating for smaller export-led economies, China’s tremendous growth over the last two decades, according to Sharma, could act as a strong underpinning even if its growth rate slows down to 6% a year.
India’s Demographic Advantage – But Is It Enough?
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, the average Indian will be 29 years old, whereas the average Chinese will be 37 and the 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 matters. Add to that situation, the creation of perverse social incentives in the garb of vote-bank politics and ever-rising Government spending only lends 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.
Ruchir Sharma’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 failed to raise enthusiasm about the country’s future.
The Bright Spots: Czech Republic, Poland, Indonesia, South Korea, and Turkey
The author is even more disapproving of the likely success of Russia. His 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 Ruchir Sharma is putting his monies on (literally, perhaps). The Czech Republic and Poland are a part of the European Union but have 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.
Sharma envisions Turkey to be a breakout success, too. Turkey epitomizes both the flamboyance of Europe and the conservatism of an Islamic state. His 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 the author’s anticipation, is the only Southeastern 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.
South Africa: The Struggle of a Resource-Rich Nation
Sharma wraps it up with a curious account of the South African economy. An economy afflicted with the Dutch disease – a situation where a resource-rich nation suffers from its 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.
Conclusion: A Must-Read for Investors and Enthusiasts
All in all, Breakout Nations is a delightful read. A book both seasoned investors and newbies would savor. 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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