Chapter 1:The Myth of Long Run

Break Out Nations- By Ruchir

Sharma
“‘A penetrating look at the countries he believes are likely
to flourish, or fail, in the years
ahead … Sharma’s story line is enlivened by unorthodox
insights’

—Matthew Rees, Wall

Street Journal
 Economic Forecasting
• Forecasting – Old School thought & New School thought
• Forecasting is valuable but the time horizon should not exceed 10 years.
• In 1960’s Philippines was projected to become 2nd richest nation in Asia,
but today the condition has deteriorated due to various unfavourable
conditions.
• Global economic cycle last for a decade and typical business cycle last
for about five years.
• CEO’s limits their strategic vison for three, five or at max seven, while big
institutional investors limit themselves to 0ne,three, or at max five years
returns.
 Economic Forecasting
● New “manias” in every new decade – Reshaped the world economy and huge
profits were generated
● Manias – Macro Economic Uncertainty
• 1970s US top companies like Disney
• 1980s Natural resources like Gold & Oil played important role
• 1990 Japan played important role
• 2000 Silicon valley took over the charge
• 2010 Big Emerging market – BRIC concept

● But this manias busted within first few years of decade.

 Miracle year 2003
In early 2000s Russia was highly burdened with debt-crisis but by the end of decade
its economy was booming.
Countries spent wisely in education, communication, transportation that could raise
productivity but ease of money also supported the world growth.

Market and Demand Uncertainty: Abundance cash flow and central banks also kept
the money supply high, money flow increased in speculative oil futures, luxury real
estate, and other non-productive investment, this lead to high inflation and which
resulted in declining the purchasing power of consumer across the globe.
 The $4000 Barrier
● Barrier related to per capita income
● Growth Rate 4-5% compared to 9-10% before barrier
● Reason - Structural Inflation
● Transfer of Fund of emerging markets
● Wall Street Analysts support the claim
● Macro Level Uncertainty – Developed Vs Developing country
● Competitive Uncertainty – Developed Vs Developing country
● Market (Demand Uncertainty)
● Technology Uncertainty
 Not All Trees Grow to the Sky

● Strong Economic Reforms in China- Macro Level and Market Uncertanity

● Followed by Indian Economy to some extend
● Reasons for failure:
○ Unable to sustain group
○ Income and Inflation barriers
○ Point of Stagnation
● Difference of Opinion and Operations – Brazil vs China
 Level of Residual Uncertanity

● Level 1: Post Budget- Strategy adopted by Companies

● Level 2: Pre-Budget Adopted by Companies
● Level 3: Entry into emerging or new markets
● Level 4: True Ambiguity
 The Rules of The Road

● Rule for identifying breakout nations is to understand the economic regimes ( growth
drivers )
● Once an economic indicator gets too popular, it loses its predictive value- Charles Goodhart
( Former Bank of England Adviser ).
● Steps for economic stimulus- lowering int rates and inc public spending, demographic
analysis ( financial consulting), assumptions ( workers to be skilled ).
● Understanding signs like going global not always positive but intent of disagreement with
government working style.
● Overpriced currency not always a sign of strong current of cash flow as in case of brazil and
cheap currency sign of competitiveness and overpriced currency creates options for
opposition like it did for Detroit.
 Dimensions of Uncertainty

● In case of countries like Mexico and south Africa we can see from the paragraph that Macro-
Environmental uncertainty is described which depicts political stability leading to domestic
companies going global.
● Competitive uncertainty is analyzed in case for Brazil which due to overpriced currency is
facing competition from Detroit ( USA) gaining competitiveness against emerging markets.
● Forecasting the workers as skilled one which influence government to ire them for their gain
and undermining this can be technological uncertainty. Forecast needs to be more certain.
 Counters by USA and How to View Emerging
Market
● Dependence on foreign energy in a decline phase with currently standing on 22% from 30% a decade
back.
● Development of new technologies to extract with better data and more precision leading them to
discoveries of oil and gas trapped in shale rock.
● Overtaking Russia in terms of production of natural gas production a milestone.
● Target of re-emerging as a major energy exporter in the word in next 5 years.
● American strengths- rapid innovation in competitive market , developing of all social networking sites
to cloud computing back in silicon valley to emerging tech hotspots in Austin Texas.
● View of emerging market – Monitor everything from per capita income to top billionaire list, speeches
of political radicals, prices of black market money changers, profit margin of big monopolies, locals to
be known first, habits of businessmen.
● Emerging economies now matter as their contribution to world stock market is now near 15 % from 5 %
and 40% of global economy from 20% and all this changed in a decade.
● Its just levels and dimensions and type of uncertainty should be managed with above mentioned view
for emerging market to outlay uncertainty and its roots.