NO IDEA has done more to dull thinking about the world economy than the acronym Bric. It lumps together Brazil, Russia, India and China, all with little in common other than that they are the largest economies in their regions. The Bric idea has spawned endless copycats in the last decade, because it was an almost freakishly unusual decade.
Fuelled by easy money pouring out of the United States and Europe, virtually all emerging markets started growing together, many very rapidly. But that synchronised boom was a first and probably a last.
Without easy money, it’s likely that the average growth rate in emerging markets will slow, from a high of 7.5 per cent to the historical average of 5 per cent, accompanied by a return of boom-bust volatility in the business cycle. As recessions return, and growth rates diverge, it will be important for observers to think about emerging nations as individual stories, not one class.
So what will replace the Brics? I would propose breakout nations, a simple framework for picking winners. Winning in a global economic competition is all about beating rivals in your income class, and the expectations for that class. Because it is much easier to grow fast from a low base, it makes no sense to compare the challenges of the Czech Republic, with average per capita income above $20,000, to those of China, which just passed $5,000. Per capita income is the key measure because growth doesn’t improve a nation’s circumstances if the number of mouths to feed is growing just as fast.
To be a breakout nation, the Czech Republic must match or exceed the growth expectations of its class – about 3 to 4 per cent – while most nations in China’s class must beat 5 per cent. China is an unusual case of high expectations. Since it has grown so fast for so long, even 6 to 7 per cent will feel like a mild recession.
It’s a common mistake of bearish forecasters to predict that eras will end in disaster, rather than morphing into a new chapter. In the 1980s, when Japan was riding high, bears thought that if Japan faltered the global economy would crash. Instead, Japan was seamlessly replaced by a resurgent US as the big growth engine. The bears now say China could collapse with calamitous results. But China will likely downshift gradually, by about 4 per cent of growth per annum. This will take the wind out of economies that have grown wealthy supplying raw material to the Chinese export machine, particularly Russia and Brazil, but a lot of the commodity-importing nations will benefit from such an environment.
Antoine Lavoisier, the father of modern chemistry, captured the reality of these turning points in his observation: “Nothing is lost, nothing is created, everything is transformed.” As big emerging markets slow, breakout nations will rise.
It is tough to sum up their unique stories. But they include Poland, the new model for fiscal responsibility in Europe; South Korea, a country that is setting a new standard for how manufacturing can contribute to growth; the Philippines, a nation poised to tap into its own resources wealth; Turkey, which has flowered by deregulating the economic role pious Muslims can play; and Indonesia, the best-run large commodity economy.
The rise of the breakout nations has implications beyond investing. The next two members of the club of trillion dollar economies are likely to be large Muslim democracies. Turkey and Indonesia will force Westerners to rethink the notion that Islam is at odds with modernity.
The natural slowdown of the big emerging markets opens the door to a resurgence in well-positioned Western economies. With the dollar near record lows, the cost of labour stagnating, and productivity rising, US manufacturing is more and more competitive against China, and looks poised for a comeback. There’s a similar story in Germany, which now has the second largest trade surplus in the world. It’s time to rethink not only the Bric idea, but the notion that Bric economies are destined for victory. They will have to make their own destinies.
Ruchir Sharma is head of emerging markets at Morgan Stanley Investment Management and author of Breakout Nations: In Pursuit of the Next Economic Miracles.