BY: Frank Kane
Conventional wisdom is all about emerging economies, but it seems most of the pundits have become engrossed in the big-name economies and haven’t dug deep enough into what’s really happening out there, observes Frank Kane of The National.
It is a brave, or perhaps foolhardy, man who goes against the accepted economic orthodoxy of the day. But Ruchir Sharma, an investment manager with Morgan Stanley, has done just that in a study of the global economy.
Since the turn of the century, economists have fallen in love with the concept of the BRIC economies—Brazil, Russia, China, and India—as the leaders of global economic growth. Originally promulgated by Jim O’Neill of Goldman Sachs, the BRIC thesis has been amended and expanded over the past decade, but the core remains the same: those four economies will dominate world economic activity at some fast-approaching date.
Sharma’s book Breakout Nations: In Pursuit of the Next Economic Miracles challenges the BRIC orthodoxy—although he mentions it specifically only once, in passing, in nearly 300 pages.
The attractions of the BRICS—the group includes South Africa now—are overdone, he believes. Their best days of rapid economic growth are behind them, and they each have specific economic, political, or social problems that will circumscribe their future potential. Also, other economies, mainly in Asia but also in other parts of the global economic “frontier,” offer better investment prospects.
“I’m an investor, not a marketeer. I have to put my money where my mouth is,” he says, echoing critics of the BRIC concept who say it was just a marketing campaign, albeit an effective one, drummed up by Goldman Sachs.
So why are the BRICs passé, and which countries are the “next economic miracles”? On the biggest BRIC in the wall, Sharma offers words that will comfort those—mainly in the United States—who fear China’s seemingly inexorable rise.
“China is on the verge of a natural slowdown that will change the global balance of power, from finance to politics, and take the wind from the sails of many economies that are riding in its draught,” he says.
The signs are already there for China, with GDP growth forecasts falling to 6 or 7%, instead of the heady double-digit days of the past two decades. Meanwhile, Sharma accuses his home country of perpetrating the “great Indian hope trick” of offering high levels of growth and development, but without delivering.
In India, too, growth rates are falling, but the hugely diversified country is at risk of socio-demographic, cultural, and political weaknesses, he says: “The Indian elite seems more focused on how to spend the windfall than on working to make sure the rapid growth actually happens.”
Brazil and Russia, Sharma argues, are both vulnerable because they are overdependent on commodity production that could turn against them if the global markets for oil and other raw materials prove to be a “bubble.” Both countries have their own specific problems, too, that could hamper future economic growth.
Sharma is critical of Russian political and economic policymakers, and says government spending is still too big in Brazil, leading to high interest rates and an overvalued currency. Russia and Brazil are the most expensive countries on his “Four Seasons index,” which compares the cost of staying in the global hotel chain in different countries.
“The unthinking faith in the hot growth stories of the last decade ignores the high odds against success. Very few nations achieve long-term rapid growth,” Sharma argues.
And his long term is really long term. Since 1950, only six countries—Malaysia, Singapore, South Korea, Taiwan, Thailand, and Hong Kong—have maintained an average of 5% growth over four decades, and only two—South Korea and Taiwan—have managed it for five decades.
This is the key to future growth, he says. Both South Korea and Taiwan share similar histories as first colonies of Japan that rebuilt their economies according to the lessons of the Japanese postwar miracle, but which also learnt from Japanese mistakes.
Both are entrepreneurial, organized, hard-working and efficient, focused on manufacturing and exports as hard-currency earners. But he prefers South Korea, the “gold medalist” of global economic development for several reasons, not least because it has a trick up its sleeve.
He believes the country can become the “Germany of Asia” by leading a successful and peaceful reunification with North Korea, avoiding the financial and currency mistakes of the Germans in the 1990s, and benefiting from a quantum leap in domestic population and consumer markets.
Other “frontier” markets also catch Sharma’s eye. Turkey has the potential to become a stable Muslim democracy and an economic role model for the rest of the Muslim world. Anatolia could be the manufacturing heartland for vast areas of the Middle East and central Asia.
Indonesia, with a large population and a wealth of untapped natural resources, “is by far the best-run large commodity economy” in the world, and has even learnt the art of “efficient corruption,” where a payoff to a government official actually ensures the job gets done.
Even in crisis-ridden Europe, Sharma finds a “sweet spot” somewhere between Warsaw and Prague, where governments have avoided the pitfalls of the single currency but exploited the benefits of the single market.
How does the Middle East fit into this global tour d’horizon? Sharma’s answer is, largely, that it does not.
Iran, beloved by some post-BRIC theorists as a potential powerhouse, is “shut to the world,” he says. “Intriguing” Egypt could become another Turkey, but there is a long way to go. The Gulf is a “world unto itself,” he concludes, “a world built entirely on revenues from oil and gas.
“Black gold has flowed so easily for so long that the typical Gulf state has become an oil-fueled jobs machine with subsidies on offer for every essential item, ranging from food and power to schooling.” The subsidy culture has only grown since the Arab Spring, he says.
There are a couple of glimmers of hope in the Gulf, however. One is the prospect of reform in Saudi Arabia. The other is the policy of many Gulf states to direct future economic development via sovereign wealth funds along the Norwegian model.
Sharma may not have proved the BRICs are dead, but his book shows there is life elsewhere in the global economy, and where it is.