Breakout Nations Book Summary - Breakout Nations Book explained in key points

Breakout Nations summary

Name: Breakout Nations
Author: Ruchir Sharma

Ruchir Sharma

In Pursuit of the Next Economic Miracles

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Breakout Nations
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To identify the next breakout nations, look at the current, local conditions in emerging markets.

International investors are always trying to identify emerging countries that will deliver high growth on their investments. But finding countries that do this consistently is difficult. Consider, for example, that since the 1950s, only two emerging economies – Taiwan and South Korea – have managed to maintain an annual growth rate above 5% for five consecutive decades.

This is why investors are attracted to economies with the potential to beat growth expectations, the so-called breakout nations. A breakout nation is an economy that grows faster than its economic rivals so that it competes with nations richer than itself. Economies are measured using per capita income and this figure is used to place nations into different income brackets. For example, a nation in the $5,000–$10,000 bracket that is able to compete with economies in the $10,000–$15,000 bracket is a breakout nation: it punches above its weight.

So how can you identify such breakout nations?

First, forget long-term forecasts. Economic circumstances change radically every decade or so, so any forecast beyond that is automatically obsolete.

Second, don’t follow the crowd. When everyone else is already investing in a country, opportunities there will already be overpriced due to increased demand.

The key to discovering the next breakout nation is to look for developing or emerging economies that are healthy and adaptable enough to take advantage of future economic circumstances.

Take a closer look at each emerging market to identify the local strengths and weaknesses. For example: What are the political conditions like? Is the leadership making the right economic reforms? Is the economy balanced and robust, or too reliant in one particular area? Is the domestic market strong enough to maintain high growth rates?

To identify the next breakout nations, look at the current, local conditions in emerging markets.

China’s high rates of growth are unsustainable as natural economic barriers slow its economy.

Over the last decade, China’s economy has grown at an unprecedented pace, enjoying growth rates in double figures. The speed of this growth combined with China’s massive population has turned the nation into an economic powerhouse, which consumes huge amounts of commodities and exports all manner of manufactured goods.

Some have bet on China continuing to grow at its current pace. Yet, in reality, China is reaching natural economic barriers that make high growth rates harder to achieve.

Many emerging economies benefitted from rising commodity prices over the last decade, but this bubble will soon burst.

Almost all emerging economies have grown over the last decade, with behemoths like China and India as the most prominent examples. So where did this growth come from? It is largely the result of a price ‘bubble’ in the commodity market.

In order to engineer growth, Western economies lowered interest rates, encouraged borrowing and spent heavily. Much of the capital released found its way into the hands of investors and speculators who poured it into the commodity market expecting, rightly, that commodity prices would go up as China increased its demand for raw materials to fuel growth. Prices rose further still as speculators hoarded commodities like gold to take advantage of future price increases.

Economic prosperity depends not on a nation’s political system but on the stability and dynamism of its leaders.

Economists have often argued whether a democratic or an authoritarian system is better for securing long-term economic growth. Some point to examples such as South Korea, which had an authoritarian government for much of its history but has still been the ‘gold medalist’ for growth, securing high growth rates for five consecutive decades. Others highlight Japan, which grew tremendously with a democratic system after World War II.

The truth is that the political system is largely irrelevant. Governments of either form are just as likely to achieve high growth rates or to produce economic failure. Of the best performing economies over each of the past three decades, 52% were democratic whilst 48% were autocratic.

An abundance of natural resources in an emerging market can lead to an unbalanced and uncompetitive economy.

Most emerging economies are currently riding on a wave of high growth rates. Many of these, like Brazil, Russia and South Africa, are rich in natural resources and have profited from high prices in the commodity market. Yet, despite this success, such nations can suffer from a resource curse. A nation can become too dependent on its natural resources to an extent where the other areas of the economy suffer.

One of the ways in which a resource curse can damage an economy is currency appreciation. The influx of money from the export of natural resources makes the currency – and therefore other exports – more expensive. This is the problem in South Africa: when the price of gold increases, their currency’s value also climbs, making the South African manufacturing industry less competitive globally.

The consistent success of South Korea is an example of how an emerging nation can secure long-term growth.

Only two emerging markets have achieved a growth rate of over 5% for five consecutive decades: Taiwan and South Korea. Whilst Taiwan may struggle over the coming years, South Korea shows every sign of maintaining this level of success. The nation is a perfect example of how an emerging market can succeed in the long run.

One reason for the extraordinary success of South Korea is that its firms are extremely competitive and innovative, investing heavily in research and development. This allows them to compete in markets across the globe, just as South Korean multinationals like Samsung do. Other emerging markets, most notably Mexico and South Africa, have their own multinational firms, but their reach is mostly regional, not global.

The next explosion of economic growth is likely to come from “frontier economies.”

One group of nations that did not follow the same patterns of economic growth as other emerging economies over the last decade were the frontier nations. Nations in this category include Nigeria, the Gulf States and Sri Lanka. This ‘forth world’ differs from other emerging markets because frontier economies don’t follow the established orthodox economic rules. This leads to wildly varying growth rates that depend heavily on the differing local conditions in each country. Investors are therefore required to conduct in-depth local research to get a true understanding of the economy.

Frontier markets are not defined by lack of wealth: included in this group is Qatar, the world’s richest nation with a per capita income of $100,000. What does characterize these economies is their disregard for the expected rules of running an economy.

As the economic conditions change, some nations are in a promising position to become breakout nations.

The unique economic conditions that have seen almost all emerging markets grow at once are coming to an end. In the future we will see a more uneven situation, with many emerging nations suffering a slowdown. Others will, however, beat expectations and rivals, and grow to become breakout nations.

So who stands the best chance of becoming a breakout nation in the future?

As the global wave of economic growth slows, confidence in Western economies, especially in the United States, will return.

George Orwell once remarked: “Whoever is winning at the moment will always seem to be invincible.” At the present time, China and the emerging economies of the East and the South seem to be winning. While low growth rates and high debt levels plague the West, emerging economies are enjoying some of the fastest growth in history. Because of this, there is a fear in the West that the global balance of power is shifting from the United States to China.

But these fears are largely misplaced. China’s economy remains only a third the size of the United States’ and the unique set of economic circumstances that generated the high growth rates in emerging markets is ending. The future will see many emerging markets struggle to adapt to a changing global economy, whilst the economies of the West, especially in the United States, will re-emerge from their current plight.

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What is Breakout Nations about?

Although many emerging markets across the globe grew at historically high rates over the past decade, for many nations these growth rates are unsustainable and are the result of a unique set of conditions in the global economy.

Breakout Nations (2012) examines the factors likely to determine which emerging markets can take advantage of changing economic conditions and become breakout nations.

Who should read Breakout Nations?

Anyone who wants to predict which economies will be next to deliver unexpectedly high growth
Anyone who wants to understand why the growth surge experienced by developing countries cannot continue
Anyone worried that Western economies are doomed to fall behind the likes of China and India

About the Author

Ruchir Sharma is head of the Emerging Markets Equity team at Morgan Stanley Investment Management. He physically spends one week per month in emerging markets to gain key insight and a hands-on understanding of local conditions.

He has written articles for Newsweek, The Financial Times and The New York Times.

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Economics Money & Investments

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