Book reviews

on global economy
and geopolitical
readings
ESADEgeo, under the supervision of Professor Javier Solana
and Professor Javier Santiso.

Breakout Nations: In Pursuit of the

Next Economic Miracle
Sharma, Ruchir. (2012) W. W. Norton & Company, New York, London.
If the local prices in an emerging market country feel expensive
even for a visitor from a rich nation, that country is probably not a
breakout nation.
The EU is also a stabilizing model and still an inspiration for some
new members, particularly Poland and the Czech Republic, which are
in that rare class of nations poised to break through and join the
ranks of the rich elite. Not every Little EU member is a Greece.
The next two nations in line to join that elite group, probably within
the next five years, are Muslim democracies with increasingly
market-oriented economies: Indonesia and Turkey.

Summary
What countries should we keep our eyes on in the coming years? What will the next
emerging countries be? Where will the money go? These and other questions are
answered in this book which serves as a guide to discerning which countries are most
likely to become economically buoyant nations in the decades ahead. While
newspaper headlines and government agendas are still paying attention to nations like
the China, Russia and Brazil, which investors watch unrelentingly as a source of
inexhaustible wealth, it is in fact other nations that are likely thanks to a new
direction in their economic policies due to cultural or demographic factors to take
over as the new players in the economic arena.
We will witness a decline in China's growth, which will remain high but somewhat
more discreet after the recent boom. The country is already taking measures such as
cutting investment in infrastructure, which had soared in recent years. Other
countries, however, will pay for their mismanagement, lack of control and poor
investment of incoming capital and enter into a period of recession as was the case
of the Asian countries in the 90s. This will take them down several rungs in the ranking
of the juiciest countries for investors. On the other hand, the new players, the
countries that will experience steady growth, may well arise from among the smaller
nations that are already on the right track, such as South Korea, Poland, the Czech
Republic and especially Muslim democracies like Turkey. The next two trillion dollar
economy will spring from this group.

The author
Ruchir Sharma is the director of Emerging Markets and Global Macro at Morgan
Stanley, from where he directs assets of $25 billion in emerging countries. In this line
of occupation, which he has been carrying for the last two decades, Sharma spends at
least one week a month in an emerging market, analysing its situation and status. In
parallel, he has written extensively, with articles published in Newsweek, The Wall
Street Journal, Financial Times, New York Times, Foreign Affairs, and Economic Times.

Basic idea and opinion

Ruchir Sharmas book is a highly interesting, essential guide to the current status of
emerging countries. But above all, it is a roadmap to understanding and identifying the
countries that will play in the premier league of the world economy over the coming
decade. Perfectly structured and in some of the most intelligent and readable prose
in the economic genre, the book examines two dozen countries one by one of all
sizes and continents and with diverse histories and cultures, to draw up a map
containing many surprises. The fact that Sharma has spent two decades traveling all
these countries, analysing not only their macroeconomic data but also their policies,
the nature of their leaders, history and customs, lends a unique vision which, beyond
the figures and statistics which it also includes solidly and realistically puts
forward reasons for his predictions.
To speak of emerging countries today is to speak about China which, while continuing
on the path of growth, will reduce the pace at which it progresses. According to the
author, Brazil and Russia, meanwhile, will be examples of missed opportunities due
to political and commercial mismanagement of their incoming cash flow. The 2008
economic crisis has redrawn the map of the world and while the West is still trying to
recover from the blow, other countries are prepared to seize their opportunity as new
investment hotspots. Meanwhile, countries like Turkey, Poland, the Czech Republic
and South Korea, and some of the so-called frontier markets (ranging from the African
nations with the best horizons to the Persian Gulf countries) are on the right path to
becoming the new stars.
With each location examined, the author provides a useful rule of thumb to be taken
into consideration when identifying emerging markets with particular potential. He
also reminds us that these countries should be analysed individually, not as a whole
that acts and reacts synchronously. Moreover, we should bear in mind that economic
growth is a transitory phenomenon which is far from everlasting. This past decade of
growth has been exceptional and we cannot expect the miracle to be repeated in the
next.

Despite being a book full of forecasts, the author aims to distance himself from
widespread long-term theories because, in the changing world in which we live, we
cannot foresee what will happen in 2050. However, we can forecast what will happen
in the next decade, which provides a clearer, more certain pattern in the global
economic cycle. At the beginning of each decade, we see a new global obsession, a
new idea that creates and reshapes the global economy and provides great profits. In
the 70s it was large US companies, in the 80s natural resources, in the 90s Japan and
in 2000 Silicon Valley in 2010, the new fetish is emerging markets, led by China,
whose growth went from 4% to 12% in two decades.
In 2003, all countries considered emerging (those with per capita incomes under
$25,000) doubled their GDP growth and, in addition, the total European and US inflow
into their stock markets increased by 92% between 2000 and 2005. Certain countries
managed to invest this flow wisely in education, transport and communications while
others did not. But the most important factor driving this boom has been overlooked:
an enormous global flow of easy money that laid the foundations for the great
recession of 2008. Since then, the West has been experiencing a new reality, but so
too have emerging countries, which have seen a drop in their exports to the part of the
world that has been damaged most by the crisis.
The basic law of economics that states that the richer a country becomes, the more
difficult it is to increase its national wealth at a rapid pace, is beginning to show, and
China will be one of the biggest victims. When a country reaches a per capita income
of $4,000, its growth goes from 9% or 10% to 5% or 6%. These rates, for China, will
imply some degree of recession. And while some adapt to these new times, others will
emerge as the new stars. A basic rule for identifying these types of countries will
always apply however: economic regimes, the factors that drive growth in a country at
a particular time, are constantly changing. Different rules apply in different countries
depending on changing circumstances. The countries that were emerging in 2011 are
now too large to be treated as one and can only be understood individually.

China
After more than a decade of double-digit growth, the situation is set to change.
Chinese leaders are already rethinking their strategy. The countrys huge investment in
infrastructure, education, etc., has amounted to unsustainable spending and other
factors, such as the slowdown of migration to cities and wages increases are changing
Chinas future. In addition, it is becoming clear that the much-discussed figure of the
repressed Chinese consumer is a myth and that the country is now at the head of
those nations consuming luxury goods. The slowdown of China's growth to 6% will
mean a slight recession but not a cataclysm for the global economy: the country will
remain the biggest contributor to global growth.

India
India, meanwhile, risks falling victim to its own optimism, namely the widespread
assumption that it will follow Chinas course and become the fastest growing economy
in the coming years. It now embraces the once-dreaded issue of overpopulation,
which, in the countrys eyes, has worked so well in China. This overconfidence is very
dangerous. Culturally and politically India looks less like controlled China and more
like chaotic, confusing Brazil. Both Brazil and India are societies geared towards family
and community, with a tendency towards the group, and which are more susceptible
to corruption. Indeed, corruption has become a serious problem. To avert a crisis,
India will have to create a society governed by rules, not by personal connections that
place potential assets in the wrong hands. Crony capitalism is a cancer that
undermines competitiveness and reduces economic growth. India has more
advantages than any other major economy, but politicians cannot take for granted the
success that the countrys demography could offer. Rather, they should tackle the real
challenges such as crony capitalism or increasing social benefits.

Brazil
What has happened in Brazil is that the flow of foreign exchange into the country has
made its currency one of the most expensive in the world. Here the author mentions
one of the rules to be kept in mind: If local prices in a developing country are
expensive even for a visitor from a rich country, that country will probably not top the
list of successful economies. Despite its role as a major exporter, Brazil is still one of
the most protectionist economies in the world, with hostile trade barriers that scare
away foreign investors. It must carry out the much-needed reforms; otherwise it will
see its growth decline.

Mexico
In the case of Mexico, oligarchs control virtually every industry. This culture is creating
a perpetual form of inequality that also leads to violence. Another rule comes into
play here: strong companies and a strong stock market do not instantly make for a
strong economy, and as such, these concepts should not be confused. If
competitiveness increases and large companies are weakened, then prices will fall,
productivity will increase and the country will grow.

Russia
In Russia, the author detects the excesses and ostentation of the countrys millionaires
as a sign of economic weakness. While some flaunt their wealth, the country suffers,
amongst others, from lacking transport connections caused by poor government
investment. Russia is an oil state that has lost its way. The combination of slow

growth after the 2008 coup and high prices suggest that the growth rate is
plummeting. The countrys lack of investment means that its workers are becoming
less productive and leaders, namely Putin, have adopted an authoritarian attitude
through their control over industry. Here, Sharma warns that alarm bells should start
to sound when rulers outlive their usefulness. Russia does not have a single
noteworthy multinational company and the iron-fisted surveillance of the Kremlin
leaves little room for manoeuvre, which has left the country absolutely dependent on
its largest source of income, natural energy resources. Of all the emerging countries,
Russia has taken the longest to recover from the 2008 recession. Russia needs a new
economy that is not based on oil and a new non-Tsarist mind-set that does not
project that level of popularity to leaders such as Putin.

Eastern Europe
Here, the author emphasises the position of Poland and the Czech Republic, which are
stronger than Russia because of the European Union model. Although the current
situation of countries like Greece, Spain or Portugal poses questions as to its success,
the EU is still a growth engine for those new members who take its rules seriously.
According to the author, these two countries are certainly future emerging nations.
Another of the guidelines to detect such nations is an inspection of the precise
moment when political and economic reforms are carried out. Countries tend to
implement reforms when things go wrong; however, when countries go against this
current, as in these two cases, there is room for optimism. These two countries have
benefitted from the advantages of the EU but have not yet become involved in the
swampy terrain of the euro despite the renewed insistence of Germany that they
should adopt the currency.

Turkey
Recep Tayyip Erdogan is turning Turkey into a powerful Muslim country by virtue of its
brand of religious freedom that is stimulating the economy through its traditional
channels which include the Middle East, Africa and Asia, but Europe no longer.
Currently, Turkey is carrying out an ambitious investment programme in
infrastructure and the power of the countrys leader is balanced thanks to a wellestablished democracy that keeps corruption at bay. Today Turkey no longer sees
entry to the EU as a priority, denied on numerous occasions by countries such as
Germany. It has become another rising economic star, an example of development for
countries like Egypt.

Asia
With countries such as Indonesia, Sharma uses another rule of thumb: checking the
size of the second largest city in the country. In a large country, the second city usually

has a population equivalent to one third of the country's largest city. This figure
reflects regional balance in the countrys economy. Indonesia fulfils this rule of thumb,
and has also created a new business culture in the countrys provinces. Thailand, for
example, does not obey this rule, but the author suggests it could be among the
emerging nations if it achieves political stability; something that it has not enjoyed in
decades. It does, however, apply in the case of the Philippines, another possible
candidate, and especially in the case of South Korea. The countrys multinational
companies, sector leaders, and openness make it the one to watch in order to measure
the pulse of the global economy. It ties for gold with Taiwan in this race, as the only
two nations in economic history to achieve five consecutive decades of growth above
5%. Moreover, South Korea is projected to grow even faster than expected.

The Fourth World

The author considers as fourth-world nations or frontier markets all those countries
whose economic rise neither responds to typical patterns nor is affected by
globalisation. These are countries that are open to foreign investment but which do
not follow the rules of the market, rendering them volatile and unpredictable. They
include lower middle-income countries such as Ghana, Vietnam, Sri Lanka and the
strongest African nations, along with the world's richest nation, Qatar. In this sense,
the most isolated area in terms of global market standards is the Middle East: the key
economies in this market are oil-rich Gulf countries. They have broken dozens of basic
economic development rules and provide unequivocal proof not all emerging countries
can be treated alike. One-size-fits-all approaches cannot be applied in assessing these
economies: each emerging nation, especially in the fourth world, is unique.

The trends of the new global balance

We currently live in the illusion of raw materials, which have replaced technology as
trading stars and now constitute 30% of the global market. At least in the tech boom,
the new millionaires were talented people, whose activities contributed to
development through new technologies that would be beneficial for everyone. The
new wave, however, lies completely aside from human progress. Moreover, the
increase in oil, cotton and wheat prices caused by these operations and the
speculation involved endangers the overall growth of the economy. Meanwhile, new
paradigms are invented to justify high prices. Furthermore, this situation is based on
the dangerous assumption that demand from emerging countries will rebound in
another fresh wave; but that wave has already passed us by. We may, therefore, be
about to witness yet another bubble about to bust.
However, what has already arrived is the Third Coming: a new era defined by
moderate growth, the return to the classic cycle of boom followed by decline and the
end of group behaviour. Emerging markets will also be more cautious. Therefore, the

definition of the emerging markets of the next decade will depend on the range of
wealth we are examining. In the $20,000 to $25,000 income range, the countries most
likely to surpass 3% growth are the Czech Republic and South Korea. In the $10,000 to
$15,000 group, Turkey or Poland will be the ones exceeding 4% or 5%.
The rise of the next decades emerging powers will restructure the global balance of
power: the West will regain confidence while the Brazilian and Russian stars begin to
fade. New players may emerge from the darkness, but at the top, where 15 economies
are worth over one trillion dollars a year, two states are next on the list: two Muslim
democracies with market-oriented economies, Turkey and Indonesia. And, despite
the rules and expectations, many other nations still have a good chance of becoming
the new stars on the European scene if they manage to change course and improve on
some of their weaknesses.