Why are some economies more successful than others, and why do a few remain so for much longer? Why do some countries trip after a few years of beating expectations? After all, the basic economic tools and prescriptions are often similar and available to all. Most importantly, how does one spot the winners early on?
These are the issues discussed in Breakout Nations by Ruchir Sharma, the head of emerging markets at Morgan Stanley Investment Management. The book is easy reading, with its intimate and breezy style. It is peppered with facts, opinions and anecdotes amassed by Sharma on his extensive travels.
A “breakout nation”, according to Sharma, is one that is likely to sustain rapid economic growth, beating both expectations and the average growth rates of its peer group based on per-capita GDP. Sharma is correctly being practical by limiting his time horizon to one or two economic cycles (roughly, five to 10 years). But it is often difficult to find countries that repeat the positives of one cycle in the subsequent one. Far too often, emerging economies fall for the growth race, creating macro imbalances that in turn create a bust after a few years of superior growth. They could, potentially, be breakout countries temporarily, only to break down, something that is often their own doing.
Turkey, one of the possible breakout nations identified in this book, is a good example. It clocked GDP growth of 9 per cent and 8.5 per cent in 2010 and 2011, respectively, after contracting almost 5 per cent in 2008. It is struggling with inflation. It has a current account deficit of around 10 per cent of GDP and, like India, is heavily dependent on volatile capital inflows. Turkey has highly volatile economic cycles, and shows several signs that it could get into trouble again, especially in the global landscape painted in the book, where the days of easy liquidity are over. The Philippines is another country that over the years has gone through several “it is different this time” expectation cycles only to disappoint eventually.
Last decade’s winners are not expected to remain leaders. Thus, Breakout Nations does not list any of the four BRIC economies as a winner. China is expected to slow down, while Brazil and Russia, being commodity exporters, will suffer because of the expected correction in global commodity prices. Strangely, there is no discussion on why India will not benefit hugely from lower commodity prices, or to what extent that positive will be compromised by weaker global liquidity. The book is understandably negative on China, Brazil and Russia but unexpectedly hedges its bet on India, giving it a 50/50 chance of becoming a breakout nation.
I thoroughly enjoyed the book but found myself searching for a more insightful analysis of the situation in India — beyond the well-known bugbears of politics, corruption and political patronage and how some states are doing better than others — but remained hungry. The book seems more worried about corruption in India than in Indonesia or China. The key difference, in my view, is that in India the dirty linen of corruption is now on public display — nothing similar is there in Indonesia or China, where the approach is still “don’t rock the boat”.
Also, possibly because of a weak state and its poor and inadequate delivery, civil society activists play a much more important role in India than in other countries. India has done better economically under weaker governments than stronger governments. Change is glacial and uneven in India but perhaps the most striking irony is that populism is not really working for the government. The ongoing push and pull and political flux will, more likely than not, result in an improved situation.
Political patronage is never good news, but the book gives the impression that it is not an issue for South Korea (another breakout nation), where the rise of chaebols, or family-run conglomerates, was nurtured on political favouritism. To be fair, South Korea has made huge strides in several areas and is the best example of an emerging Asian economy with greater evidence of endogenous growth than just generating higher growth by using more inputs. But that itself raises the question of whether South Korea should still be treated as an emerging economy.
Indonesia, the book notes, is the “best-run large commodity economy”. Why it deserves special treatment and to be judged relative to other large commodity-economies is unclear. Indonesia has a lot of promise but it shares several problems that afflict India, too: poor infrastructure, an overbearing bureaucracy and corruption. Unlike India, it has a government that works, but the country suffered a gut-wrenching multi-year political flux to arrive where it is today. However, the quality of human capital is a liability. Also, Indonesia’s reliance on commodities should be a negative, given the book’s outlook for commodity prices. It is true that it shows fewer excesses than some other commodity-driven economies but, like India, it is stuck in political battles over subsidies and poor government execution.
South-east Asia’s main challenge is that it is sandwiched between high-skilled newly industrialised economies (NIEs), such as South Korea, Taiwan and Singapore, and lower-cost economies, such as China, Vietnam and possibly Myanmar. Limited human talent and inadequate availability of skills blunt the ability to compete with NIEs, while the advantage of lower cost is facing greater competition.
This book is a good read for anyone interested in emerging markets. Still, I felt intrigued by the hedge on India: a 50/50 chance of becoming a breakout nation. India generally triggers strong reactions. But the sum total of the author’s expertise and experience assigned a probability similar to what could have been achieved by tossing a coin.
Rajeev Malik is senior economist at CLSA, Singapore. These views are personal
In Search of the Next Economic Miracles
Editors: Ruchir Sharma
Price: Rs 599