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Friday, December 21, 2012

Breakout Nations

Rucher Sharma is a big time money runner at Morgan Stanley. He has written a fascinating new book entitled, BREAKOUT NATIONS, In Pursuit of the Next Economic Miracles (W.W. Norton & Co, 2012).

He raises some great issues and explodes some time-honored myths. One point that he makes excellently is that “the factors driving growth in any given country at any given time are in constant flux. Economic regimes are like markets. When they are on a good run they tend to overshoot and create the conditions for their own demise.” You rarely see this kind of candor in financial writing. Markets go to extremes and people who should know better get caught up in the enthusiasm. Most “experts” on the international economy tend to have a few rules for growth, and, if a country follows those, their future is bright. Sharma explains quite cogently that you need to take each on a case-by-case basis.

What I enjoyed about the book was that unlike most foreign investment and development experts, he does not always go with the conventional wisdom. This comes in to focus the best when he dissects the BRIC countries (Brazil, Russia, India and China) that have led the globalization trends in recent years. His opinions are as follows:

Brazil—government has gone from 20% to 40% of the economy in recent years. This is not a positive (et tu, Washington?). The average adult only has a seventh grade education and their supply chain management is a mess. The ongoing oil boom will cover a multitude of sins in the years to come but things are not as bright as they appear on the surface.

Russia—Oil is virtually one half of GDP. What happens if we get our natural gas and domestic oil business humming in the US? Retail has not caught on, as there are only a few big cities so the big box retailers have not bothered with Russia. Also, there are few good rail links and infrastructure in general is weak with major cities often suffering from rolling blackouts.

India—suffers from a bloated bureaucracy and a heavy dose of crony capitalism. Has potential but will be weighed down.

China—the one child rule is speeding up the aging of their population (see Media Realism, “Malthus, Demographics and China’s Future, 3/27/11)

There were other surprises. A few years ago, Vietnam was on everyone’s list of a sure bet as an emerging economic success story. It was a mini-China in people’s eyes. What seems to be happening is that their command capitalistic system is ill equipped to handle the influx of foreign investment and local politicians are very corrupt. Docks are ancient and can only handle a fraction of the shipping containers per berth as compared to major international ports in other growing economies. So the big ships can’t get in and a major manufacturing plant could not get goods out of the country efficiently.  Most of the ports are owned by a state company and are under the influence of local politicians.

Mexico remains the poster child for an oligopoly where 8-10 families control 60-80% of economic activity. Turnover in billionaires according to Sharma is an interesting metric to look at for whether or not an economy is vibrant.

Sharma makes an excellent point that sustained economic success is a relatively rare phenomenon in economic history. But he ignores that developing nations are growing twice as fast as the US and are now cutting trade deals among themselves and, with every passing year are less dependent on the United States and other Western countries.

He is optimistic about the US reigniting its industrial base but does not mention at what wage level this will take place (I would assume lower). Germany is nicely positioned among other Western powers.

Where are the next breakout nations? In Europe he likes the Czech Republic and Poland.  Both have low levels of debt that put them in a strong position relative to their European neighbors. Poland’s economy actually grew 4% during the 2008-2009 economic debacle. Turkey, a European/Asian hybrid has promise and he really likes South Korea in Asia along with Indonesia. In Africa, he says Nigeria has a chance and touches on Nollywood, the nation film industry that is slightly bigger than Hollywood but remains far behind India’s Bollywood. We have all been aware of Bollywood for some time but did you know about Nollywood? Sri Lanka, in the Indian Ocean has improving prospects as a long civil war is over and the ensuing peace dividend should foster growth.

Marketers should always be on the lookout for where an emerging middle class is going to develop and then begin to do serious branding in those countries.  Purveyors of luxury goods have also taken note.  Roughly a third of Swiss watches are now sold in China!

This is a very thoughtful book. Whether you are an investor, a marketer, a political observer or an armchair dreamer, this book is a terrific read.

Merry Christmas to all!

If you would like to contact Don Cole directly, you may reach him at doncolemedia@gmail.com

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