Book Review_BreakoutNations_Report.pdf

7/27/2019 Book Review_BreakoutNations_Report.pdf

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BOOK REVIEW

BY

PUSHP TOSHNIWAL (11546)

AYUSH GUPTA (11180)


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INTRODUCTION

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 15 years.

The argument of BREAKOUT NATIONS, which offers a picture of state of economy

in different countries across the globe, is that the astonishingly rapid growth over

the last decade of the world's celebrated emerging markets is coming to an end.

The era of easy money and easy growth is over. To identify the economic stars of

the future, he says, we should abandon the habit of simply extrapolating from

general global trends and look at emerging markets individually. The new

'Breakout Nations' will probably spring from the margins - even from the

shadows.

The book covers most growing economies across Asia (China, India, Indonesia,

South Korea, Taiwan, Philippines, and Thailand) Latin America (Brazil, Mexico)

Eastern Europe (Turkey, Czech Republic, Poland, Russia and Hungary) and Middle

East countries like South Africa. Countries like Nigeria, Sri Lanka and Vietnam are

considered fourth world countries which would take longer than emerging

market countries to be next breakout Nation. Further the nations considered

above are classified based on their per capita income.

The authors major focus in identifying the Breakout Nation is on the economic as

well as political conditions of a particular country and the factors driving

economic growth. To support this, the author evaluates each country on followingparameters:

GDP growth of the country and its average per capita income. Distribution of wealth within the country: The number of billionaire and

millionaire in the economy, proportion of wealth in hands of billionaire and

millionaire compared to overall wealth of nation. As higher number of


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billionaires in the country creates off balance in the economy, which could

lead to stagnation. To sustain long term economic growth, it is imperative that

the number of billionaire and their wealth must be in proportion to size of

nations economy.

Foreign Policy: Whether the country has friendly foreign policy to attractforeign capital inflow.

Proportion of GDP spent on consumption and investment: If high proportion ofGDP is consumed by its citizen then there is little amount left of investment in

infrastructure, which would most likely hamper long term growth.

Total debt as percentage of GDP: High proportion of debt to GDP may increasethe probability of default in repayment of debt.

Trend of youth and productive population: If the country has high proportionof young, educated and skilled population then the growth prospects brightenfor that country. However, high proportion of aging population requires the

government to spend heavily on pension and medical welfare, which dims the

growth prospects.

Stock Exchange: The stock exchanges indicates financial sector of the country.The movement and volatility of the stock traded, number of global companies

listed and proportion of stock owned by foreigner are some of the factors

considered by author.

Dependence on export and foreign investment: If the country is heavilydependent on exports and financial assistance from outsiders for its growth,then there is likelihood that change in consumption pattern in foreign country

would hit countrys growth rate.

Size of domestic market: If the country has large domestic market then it canprotect itself during economic crises, when the exports are hard hit.

High capacity utilization rate: If the country has high capacity utilization rate,indicating the frequency with which the economy is employing its total labor

and equipment, then investment in infrastructure must be increased to sustain

growth.

Basic infrastructure and spending at home: If the basic infrastructure is welldeveloped, upgraded to the needs of citizen and maintained, then it would low

the cost of doing business in that country. Lack of basic infrastructure may

encourage home companies to invest in foreign land; thereby the local


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investment would dry up leading to unemployment and excess of product

demand over its supply, which gives way for inflation.

Political capability of the country to support growth: Whether the country hasstrong national leader to implement policy and support economic growth.

Tax burden: Tax on citizen is revenue to the government. So, governmentsreliance on taxes to meet is expenditure plays a vital role in nations growth. If

the high personal and corporate taxes are imposed, then business have less

money to invest in research, technology and training, which would not

increase productivity of the industry and the industry may remain inefficient.

Currency value: Whether the currency of the country command premium ordiscount compare to currency of other emerging markets. If the value of the

currency is high, then its exports would not be favored by other countries.

Also, it would raise the cost of living in its home country, thereby affecttourism.

The economic scenario ofeach country is compared to Rule of the Road (as

quoted by the author) - the dated rules (that is, the performance of other

economies in similar situation) and whether they are relevant in todays scenario.

The authors objective is to identify breakout nationsthe nations most likely to

succeed. Thus, the approach given above, which looks at both conventional as

well as unconventional factors, seems intuitively right.

The book is divided into 14 chapters. Below is the summary of economy scenario

of 5 major countries which we read thoroughly about


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CHINA

The current economy size of China is $6 trillion a year. However, there are visible

signs of slowdown in economy. China has cut its growth forecast to around 6-7%

over next two-three years, compare to double digit growth last decade.

High proportion of population falls in same income class (around $5,000 annual

per capita income). It has few millionaire and billionaire and none of them have

wealth of more than $10 billion.

The country is also facing the disappearing the advantage of cheap labor, on

account of strengthening of Yuan, high inflation, wage increases faster than

employees productivity and ageing of population. Wages for unskilled labor is

growing at faster pace than for skilled labor, thereby increasing the bargainingpower of labor and instances of strike and walkouts by laborers.

The current position of China is similar to that of Japan in 1970s, Taiwan in 1980s

and Korea in early 1990s.

Investment share of 50% to GDP enabled China to achieve high growth last

decade, and it continues to grow at faster pace in comparison to consumption

share. However, the basic infrastructure (roads, telecommunication) is reaching

its maximum capacity.

The domestic consumption as share of GDP is falling, in spite of the fact that

Chinese consumption is growing. Further, there is a ban on advertisement of

luxury goods to restrain consumption among youth and encourage savings.

Liberal credit terms and increase in availability of houses, increased the real

estate prices in major cities which was addressed through Social housing plan.

Although the official government debt is low, it experience high debt of combined

government companies and household. Also there is a presence of shadow

banking sector

Chinese stock market does not facilitate investment by foreigners. Shanghai stock

exchange list mostly state owned enterprises.

Hence, author suggests it has high possibility to be a Breakout Nation.


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INDIA

India have an advantage in form of broad command over English language which

makes it easy for them to approach outside world. Also, high proportion of youth

in demographic provides India a competitive age over other emerging economics

(average Indians age would be 29 years by 2020).

It also has an entrepreneurial zeal and access to global economy which would not

lead to high unemployment once the youth reaches workforce age.

Its per capital income is less than $5,000. However, India has total of 55

billionaires whose combined net worth is $246.5 billion, which accounts to 17.2%

of the GDP. This indicates concentration of wealth in hands of few.

Currently India is facing issues to maintain its GDP growth of around 5%. Also, the

government is incurring high expenditure on food subsidy and to provide

employment guarantee, which is likely to pave way for hyperinflation. Further,

the deficit spending to provide basic necessities to poor may give rise to debt

problem.

Indian businessman prefers to setup companies aboard and thereby the

investment within the country is falling, which is an adverse factor for GDP

growth. Almost 50% of the earning of top 50 companies in India is depended on

exports and international acquisitions.

The commodity boom benefitted states with high proportion of natural reserves

and high agriculture produce. This increased the per capita income and thereby,

the demand for aspirational and luxury goods.

Presence of wide diversity so the concept one size fits all does not work in India.

So marketing a product in India requires much detailed research and conscious

efforts by brand manager.

Considering the above factors, author suggests it has moderate possibility to be

Breakout Nation.


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Brazil

Brazil is worlds leading exporter of raw material sugar, orange juice, coffee,

poultry, and beef. The strong demand for export drives up the currency value

making its export expensive for outsiders. It faces high Interest rate.

The country spends too little on basic infrastructure (roads, airports, factories,

supply chain) and citizen welfare (low investment in creating school or generating

skilled labor workforce), which has increased inefficiencies and thereby overall

transportation cost.

Although, it has per capital income of $12,000. The high capacity utilization rate

of 84%, makes labor expensive. In past, the economy has experienced devaluating

currency and hyperinflation started in 1980s, reached its peak in 1994.

It is one of the most closed economies among emerging markets, with total

import and export accounts for only 15% of GDP. The government has huge

reliance on tax income, with tax burden of 38% of GDP, which is highest among

emerging market countries.

The education level is very low with average schooling age of around 7 years. This

makes it difficult for the country to obtain skilled labor.

Current focus of government is to manage and stabilize exchange rate, interestrate and flow of foreign money in and out of the country.

Verdict: Low possibility to be a Breakout Nation.


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Russia

Russia has an average per capital income of around $13,000 and expenditure on

consumption is one of the highest. Further, the sale of auto and luxury car is

increasing at around 20%, leading to worst traffic jam in and around capital city. It

has high proportion of income inequality, as it is a house for over 100 billionaire

individual in Moscow but does not have many millionaires.

Here, there is excessive government control over strategic sectors like oil and gas.

As the economy is protected by state, the proportion of small and medium size

companies is very low compare to other emerging market.The basic infrastructure

is poor with frequent power outrage, lack of connectivity between top three

cities, aged railways fleet and poor road transport.The Country experience slow

growth rate but faces high inflation, which translates into growth rate that is

sharply falling.

Moscow stock exchange does not have any global manufacturing firm listed. It

has increasing proportion of aging population and reduction in working age

population. Further, the immigration into the country is also low. In addition, the

overall population size is small and dispersed which gives rise to logistical

challenges in transportation of items of basic necessities.

Banking system is poor and mortgage market is almost non-existent. Russiansavoid depositing money in banks, thereby makes it difficult for Russian bank to

lend out efficiently. Heavy investments like buying house are also transacted in

cash. Reliance on foreign borrowing is high, thereby experienced severe adverse

effect during 2008 economic crises.

The high level of presence of crony capitalism with the country has given rise to

Special job category to deal with bribe-seeking public officials within all corporate.

Skolkovo, a city 500 miles west from Moscow has an incubator for startup

technological companies.

To be a breakout Nation, Russia need to find an alternative source of earning and

reduce its reliance on commodity export.


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South Korea

The country have experience growth rate of more than 5% for over five decade. It

has per capital income of more than $20,000, and it is able to maintain income

equality. South Korean consumption expenditure has fallen and as they are now

regarded to be suffering from boomophobia.

Korean Stock exchange is open to foreign investor, who owns more than one-

third of Korean stocks. The economy is heavy dependent on manufacturing

sector, which is expanding steadily. However, it has not been able to develop

service sector. The universe of manufacturing industry ranges from cars to

aerospace, robotics to biotech and rechargeable batteries to material science.

Further, the companies invest heavily in R&D and much effort is made to reduce

income inequality. Exports has grown steadily over past decade and now account

for almost 53% share in GDP. Samsung, Hyundai and LG are the top three Korean

companies that have global presence today. Further, other Korean companies

produce wide range of products, have higher pricing power and strong profits

compare to its global peers.

Korean prefers to invest in home country rather than investing in foreign

countries. This personal drive of Korean has boosted manufacturing sector within

the country. Apart from manufacturing Korean have brought innovation in story

script, films and music.

The Korean stock are normally traded at discount to its value as most of its

business are family owned, which is seen as more interested in generating market

share rather than profits. To overcome, this situation, many reforms with respect

to financial reporting and frequency of reporting are introduced within the

country. Further, the banking sector is under-developed; as a result large

companies are dependent on external funds.

High possibility to be Breakout Nation.


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CONCLUSION

'The old rule of forecasting was to make as many forecasts as possible and

publicize the ones you got right. The new rule is to forecast so far in the future, no

one will know you got it wrong.'

The author does neither. In Breakout Nations he shows why the economic 'mania'

of the 21st century, with its blind faith in the power of emerging markets -

especially China - to continue growing at the astoundingly rapid and uniform pace

of the last decade, is wrong. The next economic success stories will not be where

we think they are. The basic laws of economic gravity (such as the law of large

numbers, which says that the richer you are the harder it is to grow your wealth

at a rapid pace) have already started pulling China, Russia, Brazil and other vast

emerging markets back to earth.

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 our author 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

.

In short, Breakout Nations defies conventional theories and the author does not

follow the path expected. He finds healthy economics even behind dull

architecture and believes a leader who gets economy right can get away with

almost anything in politics.

At last, few words on his writing style: simple and easy to understand. Onedoesnt need to be a professional economist in order to understand the book.

This is perhaps its most powerful plus point. It makes its entire argument in very

simple, easy to understand language avoiding needless details and voluminous

analysis; the analysis is short, sweet and to-the-point. This makes for a fast read;

it also makes for easy absorption of the material presented in the book.

Documents

Book Review_BreakoutNations_Report.pdf