Breakout Nations by Ruchir Sharma
RUCHIR Sharma takes us on a tour of 24 of the world's most
interesting economies, any of whom could "break out" and become the
next economic superstar capable of sustaining rapid growth.
As head of one of the world's leading emerging market funds,
Shamra has spent two decades travelling to these countries to understand them
first hand. With rapid growth in emerging market stocks (478% from 2005 to
2010) clearly investors are taking this cohort seriously.
We all should take this cohort seriously because we trade
with them, and in some quarters even try to emulate them.
Many believed at the start of this decade that the economies
of Brazil, Russia India and China would continue to grow at the astonishingly
rapid pace of the previous decade.
However, the basic laws of economic gravity are already
pulling these countries back to earth – the richer a country is, the harder it
is to grow national wealth fast.
Superficial understanding of emerging markets has led to
many hastily-drawn conclusions. For example, India is widely thought to be the
next China, but according to Sharma it is as likely to recede and become the
next Brazil.
The South American economy, heralded as the regional superstar,
is turning out to be more troubled than suspected. This is indicated by
Brazil's premature construction of a welfare state rather than the construction
of the roads and wireless networks that are fundamental to a modern industrial
economy.
In this respect it is the antithesis of China.
China splurged in the heady days on extravagant
infrastructure such as the Maglev (magnetic levitation) train that travels at
270 miles an hour between Shanghai and the airport - unnecessarily and
expensively.
But China also built a highway network of 46 000 miles,
making it the second-largest in the world. Its roads enable the efficient
movement of people and goods, which cannot be said for Brazil.
But much more is changing in China. The advantage of cheap
labour, the key to its economic boom, is rapidly disappearing as labour
shortages give workers the upper hand. Now there is wage-driven inflation,
which has proven to be an important warning sign that economic growth is about
to slacken.
This is compounded by the slowing of demand from the West
and the inability of China's domestic market to replace the lost Western
consumption. To this must be added the impact of the government's
infrastructure spending spree being reigned in.
As Brazil is the anti-China, Poland is probably the
anti-Russia. The Polish new rich are boringly understated in contrast to the
garish extravagance of their Russian counterparts.
Poles are investing in income-generating assets in their
country, whereas the Russians are not. This explains why it is the only country
where people have an average income of around $13 000, but still live in fear
of power outages.
India is a country of rich diversity in almost every
respect. Unlike other emerging economies that are founded on a single industry
- oil in Russia, technology in Taiwan - India has everything from cars to drug
companies.
The diversity is also evident in the medieval backwardness
of Bihar and the sophistication of the Infosys campus in Bangalore.
Businessmen in Delhi and Mumbai complain bitterly about the
cost of starting up a new business in India, largely because of the demands for
government payoffs.
As a result they are investing more abroad, as indicated by
the percentage of overall corporate profits that comes from overseas
subsidiaries. Five years ago foreign-generated profits contributed only 2%; now
they contribute 10%.
"Going global" is often trumpeted as a national
badge of honour in India and elsewhere, when it all too often masks a lack of
faith in the home economy.
Very few Russians for example invest at home, for this very
reason making Russia another emerging market suffering a large and accelerating
outflow of private capital.
Sharma suggests watching the changes in the list of top
billionaires to learn both how they made their billions, and how many billions
they made. A country generating too many billionaires relative to its economy
is off balance.
Russia has 100 - almost as many as China, but China has an
economy four times the size. Most Russian billionaires have their roots in
Yeltsin's fire sale of the country's natural assets, and all have a very cosy
relationship with the Kremlin.
India's new billionaires have built their fortunes by
cornering the markets for location-based industries like mining and real estate
that are, similarly, based on special relationships with state governments.
Sharma's is a truly rounded view of the economies he
surveys. He has monitored everything from per capital income levels to the
speeches of politicians, from the prices of black market money to the travel
habits of local business people, and much more.
His accurate and incisive chapter on South Africa gave me
confidence in the accuracy and incisiveness of his understanding of the other
countries. (That chapter alone, titled "The Endless Honeymoon", is
worth the price of the book.)
Caring about what the emerging economies were doing was not
a major concern when they represented less than 20% of the global economy.
Now that they represent about 40%, what they are doing
certainly does matter. These economies have become too big and too important to
be captured under one label - they now need to be studied, as Sharma has, in a
nuanced manner as individual nations.
This is a book that must be read.
Readability: Light ----+ Serious
Insights: High
+---- Low
Practical: High
--+-- Low
*Ian Mann of Gateways consults internationally on
leadership and strategy.