Growth superstars?

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.