On a recent trip to China, I was shocked by how large and modern Shanghai was. From shiny new shopping malls to gigantic skyscrapers, everything looked as though it had been built yesterday. China was certainly an emerging economy.
It then occurred to me that I had no idea what an “emerging economy” was. I’d heard the term used to describe a country experiencing rapid growth, but now I had questions. What factors cause rapid growth? Is it always sustainable? Why does China prosper and not India, Brazil, or Thailand?
Armed with ignorance and a credit card, I bought Breakout Nations: In Pursuit of the Next Economic Miracles by Ruchir Sharma. Ruchir studies emerging countries as Head of Emerging Markets at Morgan Stanley.
What attracted me to the book was its format. Each chapter profiles a different emerging market like China, India, and Russia, along with less “popular” countries like South Korea, the Czech Republic, and Nigeria. The author paints a vivid picture of each country by mixing macroeconomic data with observations from his travels.
Early in the book, Sharma presents his thesis about what leads countries to “break out”:
“There is no magic formula to break out, only a long list of known ingredients:
Allow the free-market flow of goods, money, and people;
Encourage savings, and make sure banks are funnelling the money into the productive investments;
Impose the rule of law and protect property rights;
Stabilize the economy with low budget and trade deficit;
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.”
It quickly becomes clear that not all growth is created equal. For example, growth in Russia is likely a temporary result of price inflation in oil and gas. South Korea, on the other hand, may continue its steady growth from a well diversified economy.
Let’s return to China. To my untrained eye looking at the Shanghai skyline, China appeared to be a juggernaut. To a sophisticated investor like Sharma, it’s obvious that China’s growth must slow. Fewer opportunities for infrastructure investment, a debt to GPD ratio of 200%, and the disappearance of cheap labour to a growing middle class means China will have to find new ways to grow in the future.
Pick up Breakout Nations and learn how a country’s prosperity might be sustainable, temporary, or just around the corner.
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