Breakout Nations: In Pursuit of the Next Economic Miracles

377 Pages·2013·4.89 MB·English

by  Ruchir Sharma

BREAKOUT
NATIONS
In Pursuit of the
Next Economic Miracles
RUCHIR SHARMA
W. W. NORTON & COMPANY
New York London
CONTENTS
PROLOGUE
1. The Myth of the Long Run
2. China’s After-Party
3. The Great Indian Hope Trick
4. Is God Brazilian?
5. Mexico’s Tycoon Economy
6. In Russia, There’s Room Only at the Top
7. The Sweet Spot of Europe
8. The Monophonic Voice of Turkey
9. On the Tiger Road
10. The Gold Medalist
11. The Endless Honeymoon
12. The Fourth World
13. After the Ecstasy, the Laundry
14. The Third Coming
EPILOGUE
ACKNOWLEDGMENTS
APPENDIX A: THE EMERGING-MARKETS UNIVERSE
APPENDIX B: THE FRONTIER-MARKETS UNIVERSE
BIBLIOGRAPHY
INDEX
PROLOGUE
It’s been a long time since the farmers left the “farmhouses” of Delhi, and
though the name lives on, it now describes the weekend retreats of the upper
class, playgrounds on the fringes of the city where unmapped dirt lanes wind
through poor villages and suddenly open onto lavish mansions with sprawling
gardens and water features; in one case I even came upon a garden with a mini-
railroad running through it. This is the “Hamptons” of Delhi, the city’s party
central, where event planners will re-create Oscar night, Broadway, Las Vegas,
even a Punjabi village for the homesick, complete with waiters in ethnic garb.
On a foggy night in late 2010 I made my way to one of these famously
decadent bashes, where the valets were juggling black Bentleys and red
Porsches, and the hosts invited me to try the Kobe beef they had flown in from
Japan, the white truffles from Italy, the beluga caviar from Azerbaijan. It was
hard to talk over the pulsating techno-beat, but I managed to engage in a chat
with a twenty-something son of the farmhouse demimonde—he was a classic of
the type, working for his dad’s export business (it always seems to be “exports”),
wearing a tight black shirt, hair spiky with grooming gel. After determining that
I was a New York–based investor back in town to search for investment
opportunities, he shrugged and remarked, “Well, of course. Where else will the
money go?”
“Where else will the money go?” I left the party around midnight, well before
the main course was served, but the comment stayed with me. It should have
stroked my sense of self-importance as an emerging-market investor. After all,
the size of my team’s fund had surged more than threefold over the past decade,
and if the trend continued—something the partying youth seemed to take for
granted—then emerging-market investors would be the masters of the universe.
Instead an Urdu couplet came back to haunt me: “I am so stunned by my
prosperity that my happiness has begun to make me anxious.” I began my
investing career in the mid-1990s, when one developing country after another
was hit by economic crisis and emerging markets were seen as the problem
children of the financial world. By the end of that decade some of my colleagues
were rechristening these orphaned assets the “emerging markets” in an attempt
to pick up some of the stardust from the tech boom in the United States.
Emerging markets were spoofed in investment circles as an inversion of the
80/20 rule, which states that 80 percent of your profit comes from the top 20
percent of your clients. For much of post–World War II history, emerging
markets accounted for 80 percent of the world’s population but only 20 percent
of its economic output. When Latin America was on the rise in the 1960s and
1970s, Africa and large parts of Asia were on the decline, and when broad
swaths of Asia were growing at a rapid clip, in the 1980s and 1990s, Latin
American nations could not seem to get their growth act together, while Africa
was dismissed as the “Hopeless Continent.” Even as late as 2002 the big-money
investors—pension funds, college endowments—saw emerging markets as too
small to move the needle on multibillion dollar funds, or just too dangerous,
because vast countries like India were seen as the “Wild East” of investing.
So here I was only a few years later, standing with some spoiled kid in the fog
and the pounding din, and he is feeling on top of the world because his dad is
one of some thirty thousand dollar-millionaires in Delhi, most of them newly
minted. He has seen little of the world beyond the isolated farmhouses, and yet
he knows enough to parrot the sentiment of emerging markets everywhere:
“Where else will the money go?”
Well, he had recent trends on his side. Private capital flows into developing
countries had surged from an annual pace of $200 billion in 2000 to nearly a
trillion dollars a year in 2010. Even on Wall Street, all the experts were saying
the West was in terminal decline, so the money was bound to flow east and
south.
It also occurred to me how the dramatic change in sentiment was affecting the
attitudes of politicians and businesspeople in the emerging world. When I visited
Egypt nearly a decade ago, I was made to feel like an honored state guest of
Prime Minister Ahmed Nazif, who invited dozens of media photographers for a
ten-minute photo-op, and used my face on the financial pages to demonstrate
that foreign investors were beginning to pay attention to his country. Flash
forward to October 2010, when I made a televised presentation to Russian prime
minister Vladimir Putin in Moscow, in which I was not exactly exuberant about
his country’s future. Some local media responded with taunts, saying that Russia
could do without my fund’s money.
By the middle of the last decade it seemed that every man and his dog could
raise money for emerging markets. By the end, it appeared that just the dog
would do. Yet history suggests economic development is like a game of snakes
and ladders. There is no straight path to the top, and there are fewer ladders than
snakes, which means that it’s much easier to fall than to climb. A nation can
climb the ladders for a decade, two decades, three decades, only to hit a snake
and fall back to the bottom, where it must start over again, and maybe again and
again, while rivals pass it by. That kind of failure happens a lot more often than
making it to the top. There is a huge pool of competitors, and only a few nations
defy the long odds against success. Those are the rare breakout nations, and they
beat the game by growing faster than rivals in their own income class, so that a
nation whose per capita income is under $5,000 competes with rivals in that
class. The growth game is all about beating expectations, and your peers.
The perception that the growth game had suddenly become easy—that
everyone could be a winner—is built on the unique results of the last decade,
when virtually all emerging 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.
For the last fifteen years I have typically spent one week every month in a
particular emerging market, obsessing about it, meeting all sorts of local
characters, and traveling the breadth of the country, mostly by road. As the
writer Aldous Huxley put it, “To travel is to discover that everyone is wrong
about other countries.” Reading Excel spreadsheets in the office can’t tell you,
for example, whether a political regime gets the connection between good
economics and good politics.
No one can pinpoint the precise mix of reasons why nations grow, or fail to
grow. There is no magic formula, only a long list of known ingredients: allow
the free-market flow of goods, money, and people; encourage savings, and make
sure banks are funneling the money into productive investments; impose the rule
of law and protect property rights; stabilize the economy with low budget and
trade deficits; keep inflation in check; open doors to foreign capital, particularly
when the capital comes with technology as part of the bargain; build better roads
and schools; feed the children; and so on. This is armchair academics, clichés
that are true but that offer only a long list of dos with no real insight into how
these factors will or will not combine to produce growth in any given country at
any given time.
To identify breakout nations it is key to travel with an eye toward
understanding which economic and political forces are in play at the moment,
and whether they point to growth, and at what speed. In a world reshaped by
slower global growth, we need to start looking at the emerging markets as
individual cases. This book tours the world to examine which nations are likely
to flourish—or disappoint—in the new era of diverging economic prospects.
Along the way I will offer a few plain-English rules of the road for identifying
emerging markets with star potential. My point is to take you with me on my
travels in search of the next breakout nations, and to answer that simple but
difficult question, “Where else will the money go?”
Not all trees grow to the sky.
1
The Myth of the Long Run
T
was to make as many forecasts as possible and
HE OLD RULE OF FORECASTING
publicize the ones you got right. The new rule is to forecast so far into the future
that no one will know you got it wrong.
The super-long view inspires some of the most influential forecasts of our
time, which look back to the overwhelming economic might of China and India
in the seventeenth century as evidence that they will reemerge as dominant
global powers in 2030 or 2050. In 1600 China accounted for more than one-
fourth of global GDP, and India accounted for just under a fourth. Though their
shares have fallen dramatically since then, the super-long view skips past the
messy recent centuries. The reasoning seems to be that seventeenth-century
performance offers some guarantee of future results. Sweeping extrapolation has
become a staple argument for the many companies, politicians, and high-profile
public intellectuals who believe we are entering a Pacific Century or even an
African Century. I recently received a report from a major consulting firm
forecasting that Nigeria could be one of the top-ten economies in the world by
2050. Well, yes, but almost anything could happen by 2050.
The irony is that the extra-long views have a growing impact even on Wall
Street, where in general the way people think about time has become
increasingly narrow, even breathless. For example, the average length of time
that American investors, both large and small, hold stocks has been falling for
decades, from a peak of sixteen years in the mid-1960s to under four months
today.* At the same time, Americans and Europeans have been pouring money