Sun 22 Apr, 2012 10:35 am
Breakout Nations: In Pursuit of the Next Economic Miracles
by Ruchir Sharma
Publication Date: April 9, 2012
One of Foreign Policy's "21 Books to Read in 2012"
A Publisher's Weekly Top 10 Business Book
After a decade of rapid growth, the world’s most celebrated emerging markets are poised to slow down. Which countries will rise to challenge them?
To identify the economic stars of the future we should abandon the habit of extrapolating from the recent past and lumping wildly diverse countries together. We need to remember that sustained economic success is a rare phenomenon.
As an era of easy money and easy growth comes to a close, China in particular will cool down. Other major players including Brazil, Russia, and India face their own daunting challenges and inflated expectations. The new "breakout nations" will probably spring from the margins, even from the shadows. Ruchir Sharma, one of the world’s largest investors in emerging markets for Morgan Stanley, here identifies which are most likely to leap ahead and why.
After two decades spent traveling the globe tracking the progress of developing countries, Sharma has produced a book full of surprises: why the overpriced cocktails in Rio are a sign of revival in Detroit; how the threat of the "population bomb" came to be seen as a competitive advantage; how an industrial revolution in Asia is redefining what manufacturing can do for a modern economy; and how the coming shakeout in the big emerging markets could shift the spotlight back to the West, especially American technology and German manufacturing.
What emerges is a clear picture of the shifting balance of global economic power and how it plays out for emerging nations and for the West. In a captivating exploration studded with vignettes, Sharma reveals his rules on how to spot economic success stories. Breakout Nations is a rollicking education for anyone looking to understand where the future will happen.
“The head of Morgan Stanley’s emerging markets division conducts a brisk worldwide tour in search of new markets ready for takeoff. No first-book jitters for Sharma, longtime columnist for the likes of Newsweek and the Wall Street Journal. His smooth, almost chummy style suits him ideally for guiding civilians through the sometimes-arcane thicket of the dismal science, looking for those emerging markets likely to disappoint or exceed expectations in the coming years... Confining his predictions to the near future, Sharma refreshingly comes across as that rare thing Harry Truman once sought: a 'one-handed economist' willing to stake his reputation without resort to “on the other hand” equivocation. For investors looking to place their bets and for general readers looking to understand the global economic landscape in the wake of the Great Recession.” (Kirkus Reviews )
“Breakout Nations works best as a compilation of highly illuminating country vignettes—similar, say, to Michael Lewis' Boomerang... As with Mr. Lewis' work on the European crisis, for sheer readability and insight on the various parts of the ongoing developing world drama, I dare say you won't find a better choice.” (Jonathan Anderson - Wall Street Journal )
“Breakout Nations is basically an investors lonely planet guide to the world for the new century.” (Bloomberg "On the Economy" )
About the Author
Ruchir Sharma is the head of emerging markets at Morgan Stanley and a longtime columnist for Newsweek, the Wall Street Journal, and the Economic Times of India. He lives in New York City.
By Loyd E. Eskildson HALL OF FAME
The average length of time investors hold stocks has been falling from a peak of 16 years in the mid-1960s to under 4 months today. In the 1970s it took $1 of debt to generate $1 of U.S. GDP growth; by the last decade it took $5. Real GDP growth in developed nations is expected to fall this decade to about 2-2.5%. Author Sharma is head of emerging markets at Morgan Stanley and as such spends one week each month visiting other nations looking for the best places to invest. He believes it's no longer possible as in 2003- 2007 to simply bet on rapid growth in any emerging market - those years average 7.2% returns. The amount of funds flowing into those stocks grew 92% between 2000 and 2005, and another 478% between 2005 and 2010. His 'Breakout Nations' provides quick overviews of more than two dozen of the currently most interesting economies for the next decade.
His first major conclusion is that China's growth will slow sharply. Total debt as a share of GDP is rising, its cheap labor advantage is rapidly disappearing, its consumers are already strongly participating in its new economy - spending has increased nearly 9%/year for 30 years, and some estimate China already has a 25% share of the world's luxury market, its 'one-child' policy is now bringing an aging population (average age 37 in 2020, vs. 29 in India and 49 in Europe), its highway network is already second only to the U.S., slightly more than half its population is now city-dwelling (691 million), developers have built 'ghost cities' and malls, and its economy is already quite large - the world's second largest.
Sharma is even more negative on India. Major problems include its bloated government, crony capitalism, a general reluctance of farmers to leave their land, a state much less able than China to provide world-class infrastructure (it's struggling to arrange sufficient grain storage capacity while people are starving, cannot provide reliable power to existing businesses), investment by Indian businesses have decline from 17% GDP in 2008 to 13% and their overseas operations now account for over 10% of overall corporate profitability, public debt/GDP has reached the 70% level, and there are high demands for social welfare.
Brazil, like India, also has high expectations for state-provided social welfare, its currency has risen sharply, growth has fallen to 4% GDP/year during the 2003-07 period, and to combat inflation, Brazil has one of the highest interest rates in the world - leading to an influx of even more currency. Government spending has risen from 20% of GDP in the 1980s to 40% in 2010, while productivity grew at only 0.2% between 1980='08, vs. 4%/year in China. Trucks carrying sugar to Sao Paulo's port wait 2-3 days for lack of space and unloading equipment. Investment levels are only 19%, vs. China's 50%, the average student leaves school after 7 years, vs. 8 in China. New infrastructure spending averages 2% GDP in Brazil vs. 10% in China. The 'good news' is that it now produces 2 mbd of oil and this is expected to reach 6 mbd by 2020.
Mexico's top ten business families control almost every industry in Mexico, with market shares ranging between 60 - 80%. U.S. corporate profits average about 12% GDP, in Mexico they're 25%. Economic expansion there in the last decade averaged 3%/year, students there rank near the bottom in international comparisons, and drug violence has been endemic since 2007. China's average wage was about one-third Mexico's in 2002, now is about 13% less. A new antitrust law was passed in 2011, and resulted in a $1 billion fine levied on Carlos Slim's America Movil over termination fees - it remains to be seen whether he'll pay.
Russia's government closely controls what is said on TV, but not in the papers. Despite a relatively high per capita income, citizens incur frequent power outages. Moscow and St. Petersburg are connected by a modern rail system from Germany, but the average age of the rest of its rail system is 20 years old, and runs quite slowly. Roads and airports are old. Oil comprises about half of the government's income. Personal income tax rates have been lowered to 13%, and average income is up from $1,500 in the late 1990s to $13,000 currently - double that in China. Between 2003 and 2007 growth averaged 8%/year, with Russian companies doing the best. Pensions were raised from 25% of income to 40% after oil hit $140/barrel; state-owned companies account for 56% of the stock market. (Russia owns 51 - 60%.)
Sharma believes it is common for authoritarians in developing countries to extend their power, citing as examples Cameroon, Nigeria, Bolivia, Venezuela, Argentina, and now Russia. (But not China.) Despite Russia having been first into space and has produced 27 Nobel winners in science, mathematics, and economics, it has no global manufacturing companies on its stock exchange. One of its disadvantages is that it is one of the 20 least populated nations in the world, creating logistics challenges, especially for retailing. Nearly 80% of its 100 billionaires (115 in China) reached that status in commodities. Most Russians pay cash to buy a house, small business interest rates run 15 - 20%, its currency was devalued in 1991 and 1998. Bribery is rampant, and direct foreign investment in 2010 was negative. It has one of the world's worst aging problems, and about 40,000 inflow of immigrants/year (mostly Russian-speaking from former satellites).
Where are the best places to invest? Sharma's analysis and reporting continues, and he eventually concludes that the Czech Republic, South Korea, Turkey, then possibly Poland, Indonesia, and Turkey are the best candidates. As for the U.S. - he sees a good possibility of a manufacturing revival in lower wage states after 2015, and believes Germany is also well positioned because it has invested in facilities in low-wage European nations.
Bottom-Line: 'Breakout Nations' provides interesting introductory material. However, readers should recognize that even if China slows down 3 - 4 percentage points as Sharma predicts, it has become so large that even that will represent sizable aggregate progress. Further, China has been making major strides to move up the value chain - buying Western firms (eg. Volvo), locating facilities in the U.S. (Haier America) and Europe, encouraging/forcing American technology firms to locate R&D and manufacturing in China as a condition for selling in China (G.E., Caterpillar, Intel, etc.), is moving into more complex manufacturing (now the world-leading ship builder, producing heavy construction equipment, wind-power generation, developing CPUs; is a leader in biotechnology research), and dominates the solar power industry. It's not going to fade away, even if its growth rate declines.