Saturday June 9, 2012
Have BRICS lost steam?
Review by JOHN LOH
Title: Breakout Nations: In pursuit of the next economic miracles
Author: Ruchir Sharma
Publisher: Penguin Group
AT a time when so much of the world’s attention is trained on the so-called BRICS nations – the quartet of Brazil, Russia, India, and China – Ruchir Sharma, author of Breakout Nations, takes a contrarian view.
In his book, he asserts that the faith investors and analysts have heaped upon these and other emerging markets, which no doubt grew astonishingly for a period, is misplaced.
“Over the next few years the new normal in emerging markets will be much like the old normal, dating back to the 1950s and 1960s, when growth was averaging around 5%, and the race was in its usual state of churn,” he writes in the book.
Sharma, who is head of emerging markets equities and global macro at Morgan Stanley Investment Management, tells StarBizWeek that he has been a writer and investor for over 20 years, and with the insight gathered throughout his career at the bank and his travels, pooling his observations in a book was a natural progression.
The “big idea” to write Breakout Nations, he says, came in late 2010. Of Indian origin, Sharma is based in New York but makes it a point to travel regularly to developing economies.
He visits the Morgan Stanley’s Singapore office every quarter, and has for the past 15 years spent a week every month in a particular emerging market, “obsessing about it, meeting all sorts of local characters, and travelling the breadth of the country, mostly by road.”
The relatively untrammelled success of the BRICS and its counterparts, he argues, have blinded them and their backers.
“Momentum in the BRICS has slowed, they have lost steam,” he says by phone. In China for example, he explains that it is undergoing a structural shift to a lower growth plane, the indication of which one may find in the ghost cities of unsold apartment blocks in Beijing and vacant sports venues that are a relic of the 2008 Olympics.
“But as the economy has matured, the high-speed fun and games are coming to a close. Plans to extend the Shanghai line have been put off, apparently because of local protests over electromagnetic radiation from the trains, and concern about the expensive nature of such projects,” he writes pointedly in the book.
Rising labour costs, he posits, are starting to spill over into higher inflation, and Beijing has openly acknowledged that all this is pointing to a slowdown in the economy.
“Yet such is the overblown faith in China’s economic stewards that the China bulls seem to think Beijing can achieve growth targets the country itself no longer aims to achieve.
“The amazing story of China’s relentless reform, which has persisted in good times and bad since the landmark reign of paramount leader Deng Xiaoping and his immediate successors, appears to have exhausted itself in the last few years.
“The signs of the coming slowdown are already clear, and it is likely to begin in earnest within the next two or three years, cutting China’s growth from 10% to 6% or 7%,” he writes, adding, “As a result the millions of investors and companies betting on near double-digit growth in China could be wiped out.”
And what of the belief that Chinese consumers, whose collective buying power comes from well over a billion people, can pick up the slack?
To Sharma, this hope rests on a myth that Chinese buyers were suppressed in the first place. Instead, its consumption has been growing at a near-double digit pace, making short work of claims that Chinese demand can be the panacea to the world’s economic ails.
Among the countries featured in the book, one that might hit home with Malaysian readers would be his chapter on Indonesia, tellingly titled The Commodity Economy that Works.
Indonesia, Sharma posits, is “by far the best-run large commodity economy” and one of the few emerging markets where its leaders have come to accept the “new normal” and are not taking drastic steps to return to the high growth rates of the previous decade.
“As a result, Indonesia has less of a post-crisis debt problem than any other big emerging market. It has not blown through the profits of the commodity boom, as Russia and Brazil ultimately did, and has the savings to increase investment in the economy,” he writes.
Its investments as a share of GDP stands at 32%, surpassing even the pre-1998 high.
In his chapter on Malaysia, Sharma has a more stark prognosis.
“Malaysia’s economy slowed dramatically after the Asian crisis,” he writes, adding, “There is a widespread sense in Kuala Lumpur that the economy has been growing because of extensive government spending and fortunate circumstances – rising global commodity prices have been a huge boost to its rubber and palm oil exports – not from smart choices.”
The dramatic reforms taking place in Indonesia, Sharma argues, have “no parallel” in Malaysia, putting it at risk of sliding backward.
Malaysia, he points out, is the only Asian country where FDI is declining – as at the last quarter of 2011, it was flowing out at a rate of 2.5% of GDP.
Sharma also tells SBW that the country is obsessed with central planning and grand schemes, but has often fallen short on execution.
“This is the biggest difference with other South-East Asian markets such as Indonesia: Malaysia has fallen off the investment map,” he writes.
“Malaysia needs to move on and rebuild the institutions damaged during the later stages of Mahathir’s rule. Nearly a decade after his retirement, Mahathir should not be casting such a long shadow on the country.”