Breakout Nations was a book I purchased quite some time ago. But it was till recently that I have decided to start reading it. Note that this book is published in 2012. Hence, the content is pretty outdated if you are reading it now. However, it is pretty insightful if you want a quick glimpse of what has happened over the past years. The following overview is for my own future reference but feel free to read if you find it helpful.
Starting 2003, there is a harsh interest rate reduction in the US which aimed to alleviate the effect of the tech bubble that burst in 2001. This has been the common factor that has triggered the rapid development in developing countries through the high levels of money flowing into these economies.
This book focuses more on potential breakout nations in the developing nations which it gives you a quick overview of what has happened in that country in the past few decades. It talks about countries individually and occasionally uses it as a comparison to another.
China is one of the countries known for its rapid development from its increase in export of almost 20% per year over the last decade. Investment share of GDP increased from 35% to 50% which contributes to the growth of the country.
However, the level of improvement is not looking very optimistic with the total debt China increasing. Although the official numbers of the government debt are just 30% of GDP, this percentage does not include companies debt. Many of which are government owned. In which after factoring in will be a rate of 200% of debt to GDP ratio of China.
The slowdown will also be from its rising labour costs. As a result of the one-child policy introduced in 1979, there will be a significant decrease in labour supply in the next decade. China has also increased the in legal minimum wage for factory work at least by 18% each year since 2003, except for 2008, which was an economic crisis year. The drop in labour supply and increase in demand for skilled labours will cause a rise in labour cost.
With China economy reliance on export, a drop is expected with the western side currently struggling with their debts.
India has been one of the second breakout countries of the last decade being the second fastest growing economy. This comes from an average 9% increase in real GDP between 2003 and 2007. The major difference between China and India is of their demographic structure. China is expecting a decrease in labour supply whereas India has a growing population of youth ready to participate in the labour force. Hence, youth has been a competitive advantage for India.
On the other hand, the increasing official (corruption and etc.) transaction costs of initiating new enterprise in India discourages growth. This causes the investments by Indian entrepreneurs to diminished from 17% to 13% of GDP from 2008 to 2012. The extent of corruptions and personal connections is an issue that put potentially productive assets into the wrong hands.
Brazil has been the top exporter of every commodity that has seen huge price increases making them one of the largest beneficiaries of the last decade’s rally. The value of stocks and bonds in Brazil has also increased from five billion dollars to 50 billion dollars from early 2007 to March 2011. Petrobras value, a government-owned oil company, reached 300 billion dollars in 2008. This is greater than the total stock market value of Turkey at the same time.
The downside of Brazil is once prices of commodity decline from the slow down in the world’s growth and demand, balancing will be complex. Secondly, another downside is from their lack of investment resulting in lower productivity. Lack of investment in roads, transportation and factories caused a higher demand and lower supply resulting in a hike in price. On another end, lack of investment in education caused lesser skilled worker causing wages to rise.
The productivity growth rate of Brazil between 1980 and 2008 was 0.2% per year in comparison to a 4% increase for China. This indicates that China has invested more in their workers and machines to work more efficiently. The current total investment of China is approximately 50% of GDP, while only 19% for Brazil. Also, the huge spending of money on welfare instead of development is now too expensive to maintain. As a result, the government has implemented an increase in tax causing companies to not be able to invest in their companies.
Mexico is a country which is controlled by rich tycoon whereby one-third of the share market is controlled by the top ten richest families in the country. This is a country predominated by the rich families and drug cartels, making it a dangerous place where the risk of being shot dead and kidnapped for ransom is high (compared to Billionaires in India).
Their major revenue stream is from their export to the US in which now they are facing a major threat from China with better infrastructure resulting in a stronger competitive edge. Nevertheless, they still have a strong advantage due to higher labour cost in China.
In order for Mexico to thrive, they need to cut down on the oligarchy but it would be hard in the near future. Unlike counties like Philipines with the arrival of new president pressing on reform, there is no roadmap for change visible in Mexico. It comes to a consensus Mexico will continue to underperform. People are frustrated with the security threat and conditions that they are choosing to leave the country instead of pressing for change.
Similar to Brazil, Russia has been the beneficiaries of last decade’s prices increases in imports of oil and natural gas. Being a big energy exporter, it comes with a similar energy price risk with Brazil. A deterioration in oil price could slow the growth of the country. In order for Russia to regain its momentum, Russia needs to find a new non-oil economic model. And most importantly, the needs a non-czarist mindset (non-absolute ruler mindset).
South East Asia
The Philippine is still stuck with crony capitalism, though there is a hope for change. A huge population of the educated population compared to places like Indonesia is an advantage they can capitalize on. Also, there has been a rise of Philippines against India as a business process outsourcing centre.
There is a strong imbalance in Thailand between urban and rural population. Regular street fights and protest deter corporation from making investments. Its domestic market is small and hence, exports play a huge role in the economy. Over-reliance in exports is becoming a liability to the country. During the 2008 crisis, drop in demand hits export reliance country badly. What they need is a strong leadership and maturity to prevent another coup. They have the funds for investment and what they need now is political stability and confidence.
I read the book selectively in which I only read through countries that I am interested in. There is an overview of other nations such as South Korea, Vietnam and etc. in which I did no summarize. Overall, this is a good read. I would find it more relatable if I have started reading it earlier when it is more relevant.
Nevertheless, this is insightful especially for someone like me who are not aware of what’s happening in other countries. Reading it sort of make me make further research on certain incidents I am not aware of.