Searching for the ladders and dodging the snakes of the world

Breakout Nations: In Pursuit of the Next Economic Miracles

Ruchir Sharma

Allen Lane, €33;

ebook, €16.99

Review: Terry Prone

Less than two years ago, Rusher Sharma from Morgan Stanley Investment Management found himself at a party in India, beside a young man who was wearing a fashionably tight black shirt and hair spiked with gel. The man was the son of one of the 30,000 millionaires Delhi has produced in recent times, many of them new to a millionaire status consequent upon massive inflows of private capital. Sharma indicated he was a New York investor in town on the hunt for investment opportunities.

“Well, of course,” the other man said. “Where else will the money go?”

When Sharma left the party, the smug comment stayed in his head. The cocky youngster undoubtedly had recent trends on his side. Many commentators at the time, looking at recession edging towards depression in the developed world, were enthusiastically pushing the inevitability of the flow of money going east and south.

“By the middle of the last decade it seemed that every man and his dog could raise money for emerging markets,” Sharma observes. “By the end, it appeared that just the dog would do.”

The problem, as he sees it, is that economic development is a game of snakes and ladders, lacking a clear path to the top, with fewer ladders than snakes. The view that growth was derived, he felt, from the last decade. Uniquely from the last decade, when, he reminds the reader, “virtually all markets did grow together. But that was both the first and, in all probability, the last time we will ever see such a golden age; the next decade will almost certainly not bring more of the same.”

Because Sharma typically spends one week out of every month in emerging markets, driving through those countries, seeking to understand which economic and political forces are in play at a given moment and what the prospects for growth are in each individual nation, he is well placed to provide an answer to the question the Delhi rich man’s son asked about where else the money might go, other than India.

In approaching the task of identifying the best prospects for future investors, he deploys a number of approaches, prime among which is to abandon the habit of extrapolating from general global trends and examine each emerging market individually. Global trends he portrays as always behind the magic eight ball. Indeed, he pokes fun at The Economist as the most high-profile example of an analyst vehicle overly driven, in his view, by what constitutes fashionable thought at any given time, and, as a consequence, making predictions in recent years which have turned out to be spectacularly wrong.

Sharma’s predictions on which will be tomorrow’s breakout nations are based on a scotching of current consensus, such as the conviction that manufacturing has shifted irrevocably to the east. Not so, he maintains. China’s wage costs are rising so quickly that the “stick it in China, they’ll make it for half nothing” rationale has now sprung a leak or two, while the US is making something of a comeback as a manufacturing hub.

The next trillionnaire economies, he predicts, will be big Muslim democracies, one of which is Turkey, where the charismatic prime minister, Recep Tayyip Erdogan has, over the past two decades turned his country into a Muslim nation of aggressive commerciality.

Erdogan’s transformation of Turkey reversed the pressure on Turks to be more European, less Muslim, despite the fact 99% of them identify themselves as Muslim.

“Erdogan brought Turkey the chance to be comfortable in its own skin,” says Sharma. “A system that reserved the most desirable positions for people who subscribed to secular European ideals is giving way to a system that allows upward mobility to practicing Muslims as well. The government, the courts, the military, the police, the schools, the commanding heights of the private sector — all the power centres once cornered by the secular elite have been opening up to Muslims.”

The axis of Turkey’s economy has turned away from Europe, with increasing emphasis on the Muslim and non-Muslim nations of the Middle East, Central Asia, and Africa. The prime minister seems to have a knack for abandoning rules that don’t make economic sense with a view to regaining the commercial position it held from 1299 to 1923. During those Ottoman Empire centuries, Turkey served as a bridge between Europe and Asia, and Sharma sees it as poised for a revival.

He also believes Indonesia is poised to assume an equally pivotal position, with its population to provide a large domestic market. Indonesia, in addition, has a wealth of natural resources, giving it a competitive advantage.

Indonesia seems to have been particularly good at managing the money that flowed to it in the last decade in payment for the commodities in which Indonesia is so rich. It didn’t blow those monies as did Brazil and Russia, nor did it have a property bubble similar to what happened in Ireland. Instead, it invested heavily in infrastructure, thus boosting its own economy, and also got into the debt reduction business, paying down public debt from 97% of GDP in 1998 to 27% now.

Breakout Nations is one of those books which require the reader to have a card of page markers handy, because, in one chapter after another, the author provides data-rich surprises — the kind of surprises that force the reader to re-orient their mental economic maps. It helps that Sharma combines breadth of experience and expertise with an instinct for the telling anecdote and a lightness of touch which makes his book such a page-turner that reaching its conclusion is something of a disappointment for the reader. Breakout Nations is a clever and interesting answer to India’s question: “Where else will the money go?”