Breakout Nations - In Pursuit of the Next Economic Miracles

Ruchir Sharma, the author of “Breakout Nations”, is the head of Morgan Stanley Investment Management based in New York. His main job is to constantly juggle a total corpus of over $20 billion of global investors’ funds which Morgan Stanley has deployed in the emerging market stocks of Asia, Africa and Latin America.

He travels to these countries for a week every month to understand the deeper political and economic dynamics of these nations. The book “Breakout Nations” is born out of his experience of watching closely these economies for over a decade and a half.

Aided by a strong team of researchers who have helped him crunch a huge volume of historical data, Ruchir tries to speculate as to what makes nations grow their GDP consistently for four to five decades and emerge as reasonably high income economies.  Very few economies, less than 15%, have historically graduated to being high income economies. High income is defined as over $20,000 average income of the population.

The book is interesting because it speculates on the basis of historical and present experience as to which nations from among the emerging economies will actually breakout  and move to the high income category. The currently high income economies, OECD nations, seem to be in a long-term low growth trap and have slipping into an unprecedented sovereign debt crisis.  As Ruchir says, “Starting in the late 1990s the formerly irresponsible debtor nations cleaned up the red ink and became creditors, even as former creditor nations, led by the United States, began sinking into debt. Thus the emerging nations are poised as never before to take advantage of the global flows of people, money and goods ….”

But Ruchir cautions the big emerging economies like China, Brazil, Russia and India that they should not take the decline of the West for granted and must keep innovating with new, productivity-oriented reforms in the economy to be able to sustain reasonably high growth rates for four to five decades. Or else most of these nations will fail to graduate to the high income category. According to Ruchir, history suggests that so far only five to six emerging nations have shown a GDP growth of 5% or more annually for  four decades—Malaysia, Singapore, South Korea, Thailand, Hong Kong and Taiwan. Of this Taiwan and South Korea have shown high GDP growth for five decades. However, most of these are export-led economies and clearly depended on the western export markets to register consistent growth. China too has tried to use exports as a major GDP growth driver over the past three decades.

However, India has been relatively less export driven, though it is far more integrated with the global economy today than it was in 1980. Today India’s two-way trade is over $800 billion compared to less than $25 billion in 1980.

Ruchir emphasises that most emerging nations get stuck in the middle income trap, which is upward of $5,000 per capita and can go up to $15,000. China is at roughly $5,000 and India is about $1,600.

In my view the middle income trap is the most critical factor which needs much more in-depth study. The author is right when he says India has only 50% chance of emerging as a breakout nation which beats the middle income trap. He says India is saddled with the key problem of too many people locked up in low wage farm employment. It is an unending puzzle and a paradox that India, though one of the seven most industrialized economies, still has over 60% of its people engaged in farm related activities. Something has not worked in India to help move people from farm to factories.

Ruchir likens Brazil to India in the way politics and policies interplay in these two societies. For instance, both Brazil and India have not been able to build adequate infrastructure like roads, power etc and it remains a big drag on their economies affecting productivity. He describes them as “high context” economies where cultural factors explain why things are the way they are.

In a way it is true that the growth trajectory in older societies like India, Latin America and even China may take their own peculiar courses, different from what the West had experienced over the first half of the 20th century.

Ruchir speculates the likely breakout economies over the next few decades to be smaller nations like Czech Republic, Poland, Nigeria, Indonesia etc. It is much more difficult to predict what will happen in the two most populous societies – China and India. These two nations will eventually decide which way the world moves, economically, socially and, not least, environmentally.