“I’m so stunned by my prosperity that my happiness has begun to make me anxious” – Urdu Quote
Below is the synopsis of ‘Breakout Nation’ by Ruchir Sharma. This book is a reflection of emerging markets such as Russia, Brazil, Turkey, China, India, South Korea and Mexico.
The central theme of the book has been one single question -“Where else will the money go?”
To trace money, he talks about the hot investment trend such as 1970’s spike in US company’s stock, 1980’s volatile market due to oil crisis, 1990’s Japan progression market growth and 2000’s market growth due to outstanding performance of silicon valley .
The book contains lots of facts. For instance, Russia’s annual average income grew from $1.5k to 13k$ in course of decade.
Then he talks about US economy that is based on Goldilock’s economy formula of High Growth and low Inflation. As a result US economy has spent wisely on education, communication and transportation to raise productivity and spur economic growth.
But at the same time we should learn lesson from our history such as Mexican peso crisis, Russian Crisis and Asian Crisis of 90’s.
In the era of globalization, poor nations have easy high growth while richer countries have tough time in maintaining high growth rate hence richer nations will buy less from export driven economy like China.
This phenomena has been a major concern of China’s 6 trillion export market i.e. to grow at current growth rate 10%, it needs to expand its market by 600 billion which is 30% of the global market. Also saturation is attained due to borrowing and exchange of technology among the nations. This saturation is called middle income trap.
To explain further, china is going through “Lewis turning point” where most underemployed farmers have already left the farm to work in Industries yet china is battling with deficiency in workers due to Mao’s child policy, later nicknamed as one child policy. There is a huge chunk of old age population in China.
Due to high corruption level in china, there is no billionaire in china above 10Bilion $ while there are 11 in Russia. Also house deed is given in china i.e. you can’t own a house.
The rise of China is based on its philosophy – Outsiders see no & hear no downside. In 1977, Deng replaced Mao and started implementing Mao’s vision but in 1989, Tienanmen Square protest occurred that was crushed by the government.
The author says for every China, there is Vietnam.
He quotes a Chinese proverb “A dead camel is still larger than a horse” and shares interesting facts such as more rolls Royce are sold in china than in Britain,
there are 17 Louis Vuitton stores in china.
He called Indian market as the ‘Great Indian Rope Trick’ as it is dependent on global market. India has greater than 5000 listed company, Uttar Pradesh can be world’s 6th populous country while West Bengal population is greater than Germany’s population.
India is quite similar to Brazil i.e. it is colourful , noisy, quick to make promise that cannot be relied, there are lots of casual meetings, business is family oriented, words often full of flowery and vague while apologies are long, and Indian wedding’s are flamboyant showcase of wealth
MGNREGA 100 DAYS Employment scheme cost $10Billion every year that is riddled with corruption malpractices. India ranks 88th out of 178 countries in terms of corruption. India’s land acquisition is nothing but a joke.
No. Of billionaires in Russia =100; India =55 and China =115. If you really want to understand a country’s economy observe how these billionaires make money, you will know a lot about the economy.
He describes Brazil by referring to a famous quote – ‘God is a Brazilian’ which was quoted after discovery of Oil near the country as a result Brazilian currency, real has become one of the most expensive currencies against dollar. In brazil’s Sao Paula, items/property/movie tickets/haircut is expensive than the most expensive city yet least amount of money is spent on infrastructure development in brazil. Brazil is the leading exporter of raw material while china is its leading importer. Before 1994, brazil’s currency was changed 5 times that caused hyper inflation (it still exists). The government is tackling it by high interest rates but this approach is doomed to fail. To explain, he talks about Hammer in hole game where if you try to hit on head, another head will pop up hence one problem solving leads to another problem.
As goes America, goes Mexico. Mexico economy is heavily dependent on American economy. Also Mexico’s currency, peso is cheap. It has little borrowing and is dominated by oligopolistic that controls high exodus rate.
In Russia, there’s a room only at the top. They say money talks and wealth whispers but In Moscow, money dances on the bar with the highest number of prostitutes and wild parties.
The country suffers from frequent power outrages, poor infrastructure invest anent (20% of economy), worst and oldest airport and roads. They are still living in their past glory.
Putin has taken some good measures to cut down debts yet it is still oil dependent and there is very less foreign investment.
27 Nobel Prize winners are Russian. They are the makers of vodka yet no top 5 vodka selling company is Russian. There currency ruble has been devalued twice in 1991 &1998.
He referred EUROPE as the Sweet spot.
Budapest & Dubrovnik are beautiful places to visit but not to invest. Poland (strong education infrastructure) & Czech (due to post communist era and velvet revolution) have remain debt free, have stable banking and financial institutions hence ideal for investment while Hungary has huge debt due to government bad policies.
TURKEY is a rising star due to its Prime Minister, Erdogan who is a good orator, has huge base support (AKP party) and is the longest serving leader in modern Turkey.
Turkey acts as a bridge between Europe and Asia but in 2001, Turkey crisis occurred and it was bailout by IMF for more than 20$ billion.
In modern times, it has achieved stability due to low inflation; huge infrastructure investment; high speed train and Canal in Istanbul. It is trying to get an EU membership by taming inflation and attracting foreign investment but its Achilles’ heel is FDI and France and Germany (hostile to Turkish EU membership). Its currency, Lira fluctuates a lot due to high import of industrial commodity such as oil and copper.
Turkey is also experiencing a cultural shift. Example, there is night club partying scene In Bosporus where women smokes and wear indecent dress that is strange for a Muslim country. There is a sin tax on goods banned by Islam (spirits/liquor) which is a huge source of income.
Egypt has a huge strategic geographic position in the form of Suez Canal but has no natural resources.
In Jakarta (Indonesia), Suharto regime was overthrown after 32 years of rule in 1998. Similarly, in 1998 Asian crisis occurred due to fall in price of baht (Thai currency). Huge South East Asian banks were borrowing from abroad but when stocks fell, locals flew without paying triggering Asian Crisis. In Indonesia, it is easy to open a plant due to easy corruption which is good for economy as bribes collected locally are spend locally. There is a lot of decentralization occurring in Indonesia.
Philippines decline due to political instability. In Manila, public transport mode is still old Jeeps. The new president, Aquino won due to public sympathy after her mother died. Manila has poor infrastructure and worst airport. Major Filipino’s are settled abroad as maid or middle men jobs. In recent times, Philippines has become a strong competitor to India in business processing.
Thailand is suffering from political instability. There is frequent clash between yellow shirt v/s red shirt in Bangkok. In 2011, Yingluck Shinawatra, sister of thaksin Shinawatra, won by major victory. “What goes up, comes down”, Thailand enjoyed a export boom but was badly hit by 2008 recession.
A fun fact in Thailand – groom’s family has to pay dowry to the bride family. There are high majority of working women in the country but they have less impact on the economy as they take low wage or have temporary jobs.
In Malaysia, there is a huge govt spending. It has high commodity prices and largely dependent on the export of palm oil and rubber tree but kaulalumper has major
competition from tiny Singapore. Malaysian is against Chinese business class and FDI.
Singapore, a former British colony, modernization was done by vision of Lee Kuan Yew in 1960′s.
Below is the best part of the book –
Truth – First to flee the market are mostly well connected well positioned insiders. Hence tracking insider trading is necessary through stringent laws.
When financial crisis looms, money flees in 3 phases –
1. Large local investors through underground or back channels.
2. Foreign creditors.
3. Foreign investors in local stock market who are easy to track and blamed.
Perfect example of back channels happens when company’s under report exports and over report imports as a cover up.
“The later a nation develops, the more opportunity it has to learn from nations that came before and to leapfrog entire development steps in the process.”
South Korea & Taiwan
According to Ruchir ‘when I need to check pulse of global economy, I look for vital signs at Seoul stock index – KOPSI a.k.a Dr. Kopsi.’
South Korea and Taiwan are former Japan colony and adopted Japan’s model of high spending on R&D. South Korea stock market is called KOSPI while japans’ is Nikkei.
South Korea is called Germany of Asia due to high manufacturing units i.e. its’ manufacturing export forms 31% main part of the GDP. Samsung, LG and Hyundai own 16% GDP.
Both South Korea and Taiwan were ruled by Japan for ages; Taiwan was happy under Japan rule while South Korea was against it. They have a major cultural difference such as Taiwanese encourage entrepreneurship while South Korean is happy to work in organization. Taiwan has entrepreneurship culture which is a disadvantage as employee’s leaves to start rival company hence no big corporation is formed.
South Korea is open for investment but it is not open for outsiders to work in an organization. South Korea started attracting heavy investment in diversified sectors from rich nations while Taiwan was happy to make IT goods such as laptop spare parts etc for dell and HP. Now a day, major IT companies’ such as Dell & Hp play with Taiwanese top spare part producing company in contract. The company which quotes the lowest bid wins the contract hence in order to win the contract, top companies started bidding war among them leading to lesser margin and downfall.
Taiwan is dependent on Japan for technology while South Korea hence aim’s to beat Japan in every sector. On the contrary, Stagnation problem occurred in Japan yeth they are happy in their own world.
In 98 Asian crises, South Korea’s 40% companies went under and it took loan of $58 Billion from IMF that was a huge humiliation for the country. This humiliation led to national mobilization and more hard work. In many instances people gave their own gold to pay off IMF loans.
Hyundia took a big gamble by entering USA market in 1986, it was a joke for many years as it failed but in 98, it offered 10years warranty which was a very bold move and won its’ sceptic over quality. In 2005, it opened its’ first plant in Alabama, USA.
South Korea has mainly family run companies and it proves that family own business is good as it gives more authority and easy decision. Family keeps view on long term goal while for day to day operation hires experts. Warren buffer responded “Family business is good until they don’t start fighting
South Korea is the leader in ship building (Top 3 world ship building companies are South Korean) while South Korean has blindness for service hence less 5 star hotels are located in Seoul.
China wants divided Korea hence keep supporting North Korea. North Korea is close to china and china always want Korean peninsula to remain divided.
In South Africa, African National Congress (ANS) is enjoying long honeymoon since it is in power from 2 decades and is showing very less economic boom (3%). People still remember how ANS removed apartheid. South Africa has done its basic right by controlling government debt and inflation but failed to create dynamic competition in politics or economy.
South Africa suffers from ‘Dutch Disease’ which induces a resource rich nation to suffer from its own riches. Example, when price of gold increases, union workers of gold mines demand higher profit share but wages are rising faster than inflation & productivity. (Gold companies get punished due to gold price rise as labor cost increases).
South Africa politics referred as ‘cappuccino economy’ with white cream over a large black mass, sprinkled with black chocolate on top’. Debt is rising in South Africa as people borrowed lot of money due to economic boom while unemployment remains still high. 56% of South Africa companies earn from developed countries and 80% African trade is commodities like oil and precious metals.
Most Breakout nation’s stock market works on insider trading and connections. It is a saying you don’t have to look at the number crunching data but keep your ear closer to wall.
Broker always rely on rumor. For Example, Sheikh of Dubai during Dubai bubble burst in 2008 told investors about the crisis days before it became public. Ukraine stock market is a joke as it has more than 500 listed companies as it forces companies to list hence companies starts floating a small share called free float and are not responsible to any investors.
Iran, Iraq & Syria are still closed economy.
Nigeria is under hands of ‘good luck Jonathan’. There is lot of oil and movie industry, Nollywood (2nd largest producer of films behind India) but there is an acute power failure problem and high cost of doing business due to poor infrastructure such as road, rail and public transport.
Currently, there is no official ID proof in the country leading to lot of scams. Its’ stock market closed due to technical glitch in 2008 which led to drop in stock to 76%. Businessman entering Nigeria are told to be cautious as people kidnap using name holder in airport, hence check the actual picture. Also follow Turtle tactic by sitting on chair rather than sofa i.e. in case of an explosion, chair can be used as armour.
Sri Lanka Peace dividend finally paid as absence of conflict can unleash growth in any country. Sinhalese v/s Tamil began under British Empire when minority tamilians started prospering as they held top government jobs and were very rich.
In 1948, independence came and Sinhalese started providing subsidies and more public jobs to their own people (Sinhalese). Hence in 1977, LTTE (Liberation tigers of Tamil Eelam) was formed which used child soldiers and suicide bombers. In 2009, in a closed seize out, Vellupillai Prabhakaran was killed along with thousands civilians.
According to US agency of International Development, after any conflict ends, growth typically rebounds at a below average rate in first 4 years and above average rate after 5 years.
China is investing heavily in Sri Lanka hence India is trying to strike a trade balance with Sri Lanka.
GULF is a world unto itself. There are no taxes in gulf and their main source of income is oil and gas (referred as black gold).
In Saudi, cost of gas = 3% of UK. Saudi spends 10% of its GDP in subsidies on electricity, fuel and gas as they believe giving subsidies is better than building infra and these subsidies goes into foreign pockets.
Saudi is the largest crude oil producer but most of refineries are foreign and it is dependent on west for finished fuel. To avoid Arab spring, monarchs of Arab are sharing more oil profits through increasing pension pay, wage hike and new housing.
Arab doesn’t have plan B to sustain funding of its subsidies if oil prices fall.
Gulf has limited progress in putting its citizen to work; mainly all companies are run by consultant. Typically CEO will be royal family but below will be Indians, British and Americans running the company.
“After the ecstasy, the laundry” – Buddhist monk phrase
Those who leave early may be saved but the music and the wine are so seductive that we don’t want to leave but we do ask, what time is it? what time is it? Only none of the clocks have any hands. This is called The MONEY GAME
Next burst will be commodity burst. Rising oil prices is risky as they stall economy and puts more pressure on the poor population. When investors are feeling confident, they pile into all these assets all at once, and when confidence ebbs, they pull out at once.
Antoine Lavoisier, father of modern chemistry said”nothing is lost, nothing is created, everything is transformed”. Hence countries such as China will transform as per time.
George Orwell “whoever is winning at the moment will always seem to be invincible”.
Software has higher profits than hardware. Example, Apple employs 50k & its stock increases while Taiwan makes apple phone, employs millions yet its’ stock decreases.
When asked why evil exits, Indian saint Ramakrishna answered “to thicken the plot”, same goes for recession. They add dramatic tensions, imposes pains but also reforms and restructuring. The worst case scenario however is not the countries that accept no pain when they reach bottom but those that take no risks on the way up.
The Third World is coming hence “If there is no wind, row”. India will grow if more billionaires are formed in productive industries such as technology rather than politically connected sectors like mine and real estate.
Book rating : 8/10
A must read for economic’s lover.
P.S – This – Urdu poetry “I’m so stunned by my prosperity that my happiness has begun to make me anxious” inspired Ruchir to write the book.