Book review: Breakout Nations

When I saw the title of this book, I feared it was going to be yet another attempt to reheat the cooling emerging markets bull theme. My concerns were misplaced. Breakout Nations is no cheerleader’s handbook but is a thoughtful analysis of the factors that determine the vigour and sustainability of growth in emerging economies.

A central idea of the book is that emerging markets investors should be wary of extrapolation. The boom in emerging economies that began in the early 2000s was “the most encompassing growth spurt the world has ever seen”. The author believes that this boom era of broad-based growth is over and the future will be defined by the sort of modest and volatile growth seen in the decades before the boom.

One by one, he works through the economic and political histories of more than 20 emerging economies, analysing the factors that explain their economic performance and prospects. The Bric nations do not emerge well from this analysis. China faces a downshift in growth. Brazil and Russia need new economic models and mindsets if they are to break out of their low-growth trajectories. India seems best of the bunch, albeit with only a 50-50 chance of remaining a breakout nation.

Much of the analysis is based around the sort of conventional macroeconomic metrics that one would expect from Mr Sharma, as the head of emerging market equities and global macro at Morgan Stanley Investment Management. However, acknowledging that this endeavour is as much art as science, he interweaves this analysis with insights gleaned from his one-week-a-month travels in the developing world.

With his “rules of the road” the author attempts to identify unconventional predictors of growth, such as the behaviour of local investors and companies, the relative size of second cities and the proliferation and turnover of billionaires in a country. Most of this works well, although I was unconvinced by the merits of his “Four Seasons Index”, using hotel prices as an indicator of a country’s competitiveness.

One notable conclusion to emerge from the book is that neither autocratic nor democratic political systems have the edge in stimulating growth in emerging economies. The quality of political leadership matters more than the nature of the political system.

So which economies stand out best? South Korea, “the Germany of Asia”, is Mr Sharma’s gold medallist. He also has high hopes for the Czech Republic, Turkey and Poland. Among the lower-income economies he sees Thailand, Indonesia, the Philippines, Sri Lanka and Nigeria as the most likely breakout nations.

The shortlist is interesting, but it is not the most valuable aspect of the book. Its real value is the insight it gives into the complex flux of forces that shape economic development and the reasons why a failure to sustain growth is the general rule. I would have preferred to see more statistics, charts and tables in the book, but that is a small quibble.

Paul O’Connor is Co-Head of Multi-Asset at Henderson Global Investors