Breakout Nations: In Pursuit of the Next Economic Miracle, by Ruchir Sharma, Allen Lane, RRP £14.99, 288 pages
Almost by definition, investors interested in emerging markets tend to be bullish. Why else would they look beyond the established economies of the US, western Europe and Japan if they weren’t searching for better returns? Emerging market bears tend to stay at home.
So it’s refreshing to read Breakout Nations, Ruchir Sharma’s book on the Bric countries – Brazil, Russia, India, China – and the rest of the developing world. In his day job, Sharma is head of emerging market equities and global macro at Morgan Stanley Investment Management. But he’s no emerging markets cheerleader – his book offers a careful view that has little truck with forecasts of the relentless Bric-led rise of the emerging world.
Breakout Nations is mercifully light on blue-sky predictions. Unlike many other investment experts working on emerging markets, he does not focus on forecasts of China, for example, overtaking the US as the world’s largest economy by around 2030 and India climbing to second place by 2050, with Brazil, Russia and Indonesia not far behind. Instead, Sharma rightly eschews the spurious nature of such forecasting and concentrates on the economic here and now, taking each country individually.
In his opening chapter, “The Myth of the Long Run”, Sharma nails his colours to the mast: “As much as we all love the speculative titillation of futurology, no one can forecast the next century with any credibility and, more importantly, be held accountable for it.” He warns that today’s “mania” for emerging markets is driven largely by the supply of cheap money that developed world central banks are pumping out to keep their economies afloat. Sooner or later, the bubble has to burst.
Only six countries – Malaysia, Singapore, South Korea, Taiwan, Thailand and Hong Kong – have maintained annual gross domestic product growth rates of 5 per cent or more for four decades. The rapid growth of the past decade has been unusual and will decelerate. Indeed, it is already decelerating, as shown in the latest data from China.
In its place, the new normal in emerging markets will be much like the old normal, dating back to the 1950s and 1960s, when growth averaged 5 per cent and gains by some countries were offset by crises in others. “Failure to sustain growth is the general rule,” Sharma writes, “and that rule is likely to reassert itself in the coming decade.”
But, he says, investors should not give up on emerging markets. On the contrary, they should work harder at spotting economies that are going to be “breakout nations”.
Top of his list is South Korea, “gold medallist” of the emerging world, which has built on its earlier success in manufacturing exports to create world-class brand-led companies such as Samsung in electronics. With North Korea close to collapse, there is another huge growth impetus on the horizon.
Further behind on the development curve is Indonesia. But, for Sharma, it is the best-run large commodity exporter, with solid finances, a strong investment record, and plenty of undeveloped economic potential.
He is also bullish about the Czech Republic and Poland, saying that the European Union’s successes have been overlooked in the despair over Greece. Turkey looks promising too: prime minister Recep Tayyip Erdogan is showing the world that a Muslim country can be a political and economic powerhouse.
In China, the great challenge is managing expectations as its economy gets bigger and GDP growth inevitably slows – from 10 per cent annually to, say, 6 per cent. Those who feared China’s rise will experience “tremendous relief” while those who “bet everything” on China growing at 8 per cent or more “will face a much nastier surprise”.
India’s chances of achieving breakout Sharma puts at 50-50. Its young population and entrepreneurial drive give grounds for hope, as does the fact that per capita incomes are only a quarter of China’s, giving lots of scope for growth. But all this is set against India’s many weaknesses, not least the recent “national overconfidence”.
Sharma has little time, though, for the other two Bric economies, Brazil and Russia. Both have grown on the back of the past decade’s commodities boom, which Sharma forecasts cannot last because technological advances will reduce reliance on raw materials, as they have in the past. The “this time it’s different” argument is just wrong.
Sharma’s book is not perfect. It’s wrong to state that Czechoslovakia “endured the strictest Communist government outside that of East Germany”; Romania and Bulgaria fared far worse.
More seriously, Sharma skates over the political challenges facing the Gulf’s autocratic rulers and fails to address the welldocumented links between economic development and the advance of democracy, saying only that competent policy making matters more than the system in which policies are made.
That may be true in the short term but in the long run authoritarian regimes have generally given way to democracy in countries as diverse as South Korea, South Africa and Brazil. It is surely revealing that democracies abound among Sharma’s top candidates for breakout nations.
Stefan Wagstyl is the FT’s emerging markets editor and former eastern Europe editor