1st May 2012
Think of the Brics – Brazil, Russia, India, China, and, arguably, South Africa and investment success plus economic growth come straight to mind. All the more so because North America and Europe have had such a miserable time over the past decade or so.
But a new book – Breakout Nations, – from the pen of Morgan Stanley head of Emerging Markets Ruchir Sharma, suggests that their rise over the past decade could be a blip rather than a permanent trend. While there will be rewards from emerging markets, taking uncritical positions could be impoverishing.
For most, however, it's taken as axiomatic that these nations – and some others – will rule the economic roost for the next few generations, with most commentators expecting China to overtake the United States as the world's number one economy within a few years.
But besides growth, what else has characterised these economies some degree or other?
Bribery and corruption
They all share bribery, corruption, lax labour laws and often non-existent healthcare – let alone health and safety legislation.
Investors have a choice. They can hold their collective noses and shun emerging markets investment. Or they can turn a blind eye to the human rights and financial violations that would be prosecuted in the advanced economies. Or they can accept that corruption, low wages and Victorian labour conditions are an essential both to current success and to future growth. Where would nineteenth century Britain have been without those dark satanic mills? Or where would the United States of the same period have been without slavery, indentured labour and railroad barons who saw the workers as expendable as the bison they slaughtered or the trees they chopped down?
This is not a pleasant choice to have to make either for individuals buying into emerging markets via funds or for firms looking for joint venture and other arrangements to grab a slice of Brics emergence.
As international fraud and security consultants Kroll put it, bribery and corruption risks should be a paramount focus when expanding or investing into these and other emerging economies.
Jason and the emerging Sirens
It says: "The fertile and fast-growing economies of the BRIC (Brazil, Russia, India, and China) countries are calling to international corporations, investment banks, and investors like the Sirens sang to Jason and his shipmates in Argonautica. The haste to take advantage of these burgeoning markets can lead to rushed decisions, shortcuts in diligence and potentially unmeasured business decisions." And the same can apply to indirect investment via funds.
Security consultants Kroll warn: "The BRIC economies are enormously attractive investment opportunities. Participating in the world's fastest- growing economies carries growing risks, too. American, British, and multinational corporations need to understand the potential corruption dangers in the BRIC and similar emerging economies and undertake effective due diligence to avoid running afoul of anti-corruption laws. Certainly the US Department of Justice, the SEC, and Britain's Serious Fraud Office have recognised the risks and stepped up their scrutiny of activities in these countries as part of the overall trend in rising enforcement of anti-corruption laws globally."
If these anti-bribery and anti-corruption activities are enforced and re-inforced, then it could have an effect on slowing down growth in the emerging markets.
Brown paper envelopes
But many from the fast emerging economies believe developed nations have their own forms of corruption -although more sophisticated than simply passing a brown paper envelope full of cash to a police officer or other official.
They also believe that the corruption is opportunistic rather than systemic – that bribes are taken because they are offered but they are not natural part of their economies so they can be minimised if not abolished.
They talk of a "transition period" where countries which have grown rapidly start to slow down (as they must). This may be the high-water mark to take on corruption. But if not then investors will be warned.
Emerging market investors are looking for greater and faster returns than from established markets. While many see risks, few doubt the Bric-growth version of the world economy.
Cold water on the Bric story
Sharma, the head of emerging markets at Morgan Stanley, is one of that minority. In his new book Breakout Nations, he throws some cold water on accepted concepts such as China overtaking the United States by 2020 or 2030, suggesting that the huge Bric boom of the past ten years was a blip rather than a continuing and relentless trend. He refutes the idea than the decline of the West is a foregone conclusion.
So rather than indulge in futurology, he is very much feet on the here and now ground.
He worries what happens when the cheap money – and the cheap unregulated labour run out. He points to past emerging market bubbles – South East Asia in the 1990s was a classic case.
Growth is already slowing in China where corruption is now faced by increasing (if unreported) civil unrest.
Western investors will find it increasingly difficult to find cheap labour. Take a look at textiles which have migrated over the past three decades in turn from Europe and the United States to Latin America, to Hong Kong, to China, and to Vietnam. There are even "hopes" that Africa will be able to take over as a source of people willing to work for a dollar or two a day in sweatshop conditions.
Sharma believes that after the slowdown, emerging markets will start to look like established markets in the 1950s and 1960s, when growth averaged 5 per cent and gains by some countries were offset by crises in others. "Failure to sustain growth is the general rule," Sharma writes, "and that rule is likely to reassert itself in the coming decade."
Two of the Bric nations – Brazil and Russia (and maybe South Africa) are dependent on commodity prices, hardly the background for long term success.
Perhaps the rule is that investors need to look at individual opportunities rather than markets – just as they do for established economies.
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