You know the script by now: the world’s economy is being built by the BRICs. It has been the standard analysis for more than a decade, but flailing western countries have come to place evermore trust in the enterprise of Brazil, Russia, India and China. But have expectations become excessive? Ruchir Sharma, author of a new book called Breakout Nations, believes so. He argues that the last decade was exceptional and that we need to recalibrate our approach to emerging markets. He identifies a number of nations which are ripe to breakout in the next few years, including Indonesia and Nigeria.
His economic case is compelling, but its political underpinnings are shaky at times. For example, the Nigerian government embezzles billions of dollars every year, which concentrates the country’s
vast wealth in the hands of self-anointed elites. The collapse of the political system in the localities has allowed religious extremists of both major faiths to rise in its place, controlling
education, public health and the administration of justice. This has inspired sectarian violence: more than 50,000 people have been slaughtered in the last decade. I asked Sharma if these facts
meant that there was a glass ceiling on Nigeria’s economic development, but he declined to answer. Here is what he did have to say about the economic miracles of the future:
1) Is it time to lose faith in the BRICs?
We need to stop thinking in BRIC terms. The whole idea of lumping emerging markets into catch-all categories, under increasingly silly acronyms, has run out of control. My favourite is CIVETS
— a reference to an exotic cat. The BRIC nations are the largest emerging markets, but other than that they have very little in common. They have to be analysed individually — but yes,
an individual analysis of Brazil, Russia, and China suggests all are likely to undershoot expectations in the next five to ten years, and that India is a borderline case.
2) Was the last decade a blip in the history of developing economies?
Absolutely. It was the first decade, and probably the last in our lifetimes, when all emerging economies grew, and a highly unusual majority grew very rapidly — faster than five per cent. My
belief is that this synchronized surge was due in part to the usual suspect — globalization — but more specifically to the tide of easy money pouring out of the West. Without that easy
money, growth rates are likely to revert to the historic norm — with some winners, and many nations struggling.
3) Where should we look for opportunities if not the BRICs?
To Breakout Nations — the stars in my book.
4) What is a Breakout Nation?
It’s a simple framework to replace BRIC thinking, a way to identify the winners. You can’t just pick the fastest or the biggest — because it’s relatively easy to grow from a
poor base, so while 4 per cent growth is strong for an emerging market like the Czech Republic, with a per capita income over $20,000, it’s a disaster for a much poorer nation like India,
which has come to expect growth over 8 per cent. So first you look at per capita income, then you look at expectations. With per capita income of $5,000, China should be happy with a growth rate of
6 to 7 per cent, but because everyone expects much faster growth, that rate is going to feel like a mild recession. Finally you have to correct for population growth — there is no sense of
winning unless per capita income is rising — and rapid population growth will lower income growth.
5) What will the emerging market asset class look like over the next decade?
Normal, which is to say uneven. The anomaly of the last decade peaked in 2007, when only three of the 183 economies failed to grow — Fiji and the chronic basket cases of Zimbabwe and Republic
of Congo, exceptions that prove the rule. Easy money made recessions much less severe, and less frequent, but they will return.
6) Are we in the middle of an oil bubble? And if so, when will it burst?
The mania for China created a mania for oil and commodities in general. The widespread assumption that China will continue to grow faster than 8 per cent inspired a search for “China
plays,” since it can be difficult to invest directly in China stocks. Billions went into speculative investment in oil, but also copper and other raw materials. As China slows — and it
has hit a stage in its development at which a slowdown is inevitable — many of these bets will unravel.
Ruchir Sharma is author of Breakout Nations: In Pursuit of the Next Economic Miracles and the
head of emerging markets at Morgan Stanley Investment Management.
Comments