good afternoon and welcome to capital account on laurin the store here in washington d.c. these are your headlines for tuesday july second two thousand and twelve mexico has elected a new leader reportedly the opposition candidate from the former ruling party and he's promising to put the country back in the big leagues of emerging economies we'll talk to the author of breakout nation roots here sharma about one takes to be a breakout emerging economy and where some of the up and coming booms are likely to be seen also today commodities specifically industrial raw materials lead reported they are concerns about growth and future demand as our guest puts it the game of economic growth is one snakes and ladders so looking ahead what do those countries

climbing up versus those sliding down mean for commodity prices and our central begs afeard set stimulus through q.e. as l.t.r. rose game changer we'll talk about it plus euro zone data out today shows unemployment hit its highest level ever and manufacturing strength last month a u.k. politician warns the monetary union has turned into the titanic lacking enough lifeboats but are there a few nations in the region floating under the radar sure to score as seeds and grow out of this crisis we will discuss let's get to today's capital account.

the last decade let's talk about it it was a great decade for emerging market economies our guest who will be on in a minute points out pretty much every single one of these countries did well beginning two thousand and three to two thousand and seven the average g.d.p. growth rate in these countries almost doubled the peak came in two thousand and seven when only three of the world's one hundred eighty three economies contracted that's it just three now this gave birth to investment opportunities economic miracles and of course acronyms we have the brics perhaps most famously but also the mints and this if it's but even if developing countries lend themselves to acronyms our guest says they cannot be lumped together economically each tells its own unique story which he lays out in his book not only that but now as some of the fastest growing emerging markets are getting to a more mature phase and global growth is slowing with easy money liquidity drying

up and with central bank stimulus possibly reaching the end of its rope at a time when crises and europe for example are dragging a connally's down where could the next emerging market boom come from who are the up and comers looking forward. to traverse is the global looking for them he manages around twenty five billion dollars in emerging market assets for morgan stanley and travels the world obsessing over developing countries as he puts it and he's written about them in his book breakout nations in pursuit of the next economic miracles he's here to tell us what they are so first thank you so much for being on the show mr sharma i really have been enjoying your book and can't wait to pick your brain about it. sure pleasure to be here great so let's just start with kind of this concept of a breakout nation to lay down the ground rules here what constitutes a breakout nation in your view. yeah you know look i think as you put it in the

introduction that the last decade was quite freaky in that every single emerging market did well so there really was no breakout nation as such the rising tide of global liquidity was lifting all emerging markets the western consumer was very strong and capital was easily available to so many of these countries so it was so there were no major standouts there were lots of superstars out there over the past decade and my argument was or is that that decade was truly exceptional it's unlikely to be repeated again and that's because now the conditions have changed demanded some of the western economies is quite weak and is export oriented economies of the developing world will no longer be able to ride that wave and the second point i think this is less appreciated is that the easy money which we know led to the u.s. housing bubble and bubbles across spain and greece and other sort of places in europe that seem easy money also lifted the good streets of many emerging markets

to our normally high levels and i think what we're seeing now is that investors appetite for risk is coming down and that easy flow of capital from western financial institutions into these developing economies is no longer that easily available so in this environment i think we've got to go back to that all rule of emerging markets which is that fear is as or if not more common than success some countries will do will some will not but will depend on each country and its own merits to really be breakout nations this decade so the whole point is lastic it didn't matter which emerging markets you would in because you practically made money by being in every single developing country this decade i think it's going to be a game of much greater difference see asian as it used to be or has been you know there are about one hundred. economy used to be in the global economy thirty five

developed economies everyone is sort of emerging market many of them are. you know struggling. for a long period of time some group they could have been for the nation for me are going to be those economies which i do exceed expectations and grew quicker than what people think and also economies that are able to grow quicker than are that emerging markets in the same per capita income bracket i see and i think that's an important distinction that these are countries you think will grow relative to expectations more than investors are expecting so let's talk about a few of these success stories that you lay out in your book one region that we thought was particularly interesting was the e.u. because of course the eurozone crisis seems to be just wreaking havoc across the whole region but there are a couple of countries that you say could be set up to be the next superstars of

europe you're specifically bullish on poland and the czech republic you even saber mania might fit into the category so why are these nations poised to be the next superstars. you know i think paul ince case is really interesting because what's happened to be is that the moment you mention europe it could jurors up these images of dead to deflation disaster of bad economic management and then you the likes of poland it's a reasonable size economy with a. fairly sort of good domestic consumer b. is it's the only economy in europe which did not contract in two thousand and eight and two thousand and nine the downturn which hurt so many economies across the globe it's the only economy that did not contract in that period and since then it's been growing steadily anyone this year poland could be growing at more than three percent or so now for an economy in europe given the bad neighborhood and for

an economy such as sporting with a per capita income of more than twelve thousand dollars that's a pretty good growth rate and i think that that is something which gets lost in the fact that so many of the european countries are treated with such disdain these days i think poland has a very competitive labor market its exchange rate has been flexible which is a big bonus for it because the fixed exchange rate regime is what's costing europe quite a bit today and also the fact that you've got many bulls now who are returning home after sort of you know this cliche of the last decade but you had the ball or or you know the expired from ball who was you know doing some low end job somewhere in europe so they've really done a pretty good job of managing their economy they don't have a dead problem the exchange rate is quite flexible a fairly good labor force and i think that that's the reason why i expect to continue to do well in the coming few years and be

a breakout nation and then one part of the calculus of these breakout nations that you're forecasting in eastern europe and approach to downturns that. the idea that the government should get out of the way let the free market do what it needs to do to clear mal investment in the economy and that from there an economy can rebuild and you contrast this with the keynesian approach of of papering over things as bailouts and you give japan as an example of that how much does this approach letting the economy clear hitting a rock bottom how much does that allow the countries that you're talking about in this case in eastern europe to be in the position to expand and outperform and grow again. yeah i think that's a great question because my sort of expediency it really comes from what i saw in east asia in ninety seven ninety eight there are many sort of battles toward happen in east asia in the ninety seven ninety eight evasion crisis and what's happening

in europe today and i was there in east asia back in ninety seven ninety eight covering those markets traveling a lot in that region and what i remember from that time is that many of those economies such as korea indonesia had hard landings which is that their economies really went through a very difficult the g.d.p. . contracted a lot in double digit kind of stuff and at that point in time the i.m.f. and world bank were criticize a lot for imposing austerity and other sort of conditions on those economies in return for bailouts and in return for the loans so they really went through a very hard where the entire banking systems all you know were wiped out had to devalue their currencies by a huge amount and they lost a lot of their income in that in that period but that really set the stage for a very strong ten to fifteen years that korea and indonesia which were two of the

biggest sufferers of the east asian financial crisis emotion very strong after that crisis because they got it out structural reforms but this is a thing about countries that they only carry out reforms when they have their back to the wall when you know when this sort of think they can get away with it they can get bailouts they can easily sort of get some sort of concessional aid i think that's when they don't carry out meaningful reforms and that the pain tends to be amortized over time so this really is coming out of the experience of what having been on the ground in east asia in ninety seven ninety eight seeing those economies suffer a lot at that point in time the i.m.f. world bank institutions were criticized for you. imposing austerity on those according to these and the two fifteen years after that they won't bounce back very strongly and to me continued to exhibit very strong momentum even today well in some of it comes from their yeah and some of those southeast asian economies are

ones that you are bullish on today and identify as future breakout nations indonesia being one of them so my question to you do you think that more economies should be heeding those lessons when they're making decisions in the face of massive debts and crises especially as we look at europe especially as we look at the u.s. you point out a great. just factor in your book which is how much debt increasingly needs to be taken out in order to get the same amount of growth you showed how in the seventy's a dollar of debt could get a dollar of growth in the us and then in the eighty's and ninety's that turned into three dollars of debt and then the two thousand that turned into five dollars of debt so the policy lessons you're talking about did they need to be taken into account more fully more broadly. yes i think so you know like the that's the lesson of history. and they want to do is the same they never had any.

and even to the if you go to japan it really feels as if that place is stuck in a bit of a war and is losing its economic relevance in the world in terms of its economic share sort of thing that you know this is true which is that when you have countries that have their back to the wall they see this economic reforms they focus more on structural changes that's what even some of the economies such as sweden and finland did in the aftermath of their crises their banking crises in the early one nine hundred ninety s. so i think that's very very simple point but listen no economy you want to stay to tea for the sequel for stated to you know by these sort of wants to sort of just. being self-inflicted but the hard reality is that economies and governments only reform. when there. is some do this north wind that easy getting bailouts and then being able to have more days that being a war time right and when we get back i want to talk about some more of these countries that have taken their medicine and now are poised to break out nations

because there's so much more in your book hold on tight there for just a minute we're going to go to break and then we will have more with author roots here sharma. also still ahead dallas fed president richard fisher says too big to fail banks get an unfair subsidy from the federal government and guess which bank share of the subsidy is about seventy seven percent of net income for the past four quarters according to bloomberg we will give you that answer on loose change but first your closing market numbers. and what drives the world the fear mongering used by politicians who makes decisions to break through it's already been made who can you trust no one who is you know maybe you who with a global machinery see where we had

a state controlled capitalism is called sessions when nobody dares to ask we do our t.v. question more. you know sometimes you see a story and it seems so you think you understand it and then you glimpse something else and you sure see some other part of it and realize everything. i'm charged is a big issue. here if you want to. look into the alone until you know that the real headline is with none of the most of the problem with the mainstream media today is that they're completely disconnected from the viewers and what actually matters to those viewers and so that's why young people just don't watch t.v. anymore if they want news they go online and read it but we're trying to take those

stories that people actually care about and transfer them back to t.v. . welcome back we're talking about the future for developing economies who will be the next breakout nations and just to give you a little context from our guest books of how developing economies have grown ten years ago they were twenty percent of the global economy five percent of the world's stock market capitalization two thousand and eleven that number jumped to forty percent of the global economy with just under fifteen percent of the world stock market capitalization and to give you a sense of the funds flowing to emerging markets stocks from two thousand to two thousand and five that was up ninety two percent from two thousand and five to two thousand and ten that was four hundred seventy eight per cent so

a lot of money flowing into these economies a larger share of the global population so where are the success stories going to come from where the low hanging fruit hasn't been picked at will ruchir sharma is here talking to us about them he manages emerging market assets for morgan stanley he's author of breakout nations where he traveled the globe looking for the pursuit of the next economic miracle so let's bring mr sharma back in to ask about another one of these possible breakout nations one i thought was interesting you highlight turkey and i thought it was really interesting you factored into your analysis what you called the deregulation of islam that's going on there and promoting new business empires to rise up you in fact think that no other country with average incomes attended fifteen thousand dollars has better prospects of being a breakout nation and just to give our viewers some context you say as average incomes rise it becomes more difficult to get that very rapid growth it seems like

there's less low hanging fruit so why of why do you have such a positive opinion on turkey. yeah i think that the turkish government over the past decade has really focused a lot on getting their economic act together. if i were to list the economy that least in the major part of the last decade which of carried out some significant economic reforms i think turkey would rank right up there and they've given up the you know their obsession with just being part of the european union and just being sort of almost a fundamentally secular look out of economy to an economy and a country that's focused as much now on the middle east on being a regional powerhouse rather than just being another economy aspiring to join the european union i think that you know like in turkey the key message that they have learned from china's economic success is that if you get your sort of. focus right on growing the economy then you can get away with a lot tales and i think that's what he is doing today that it's very focused on on

being an economic powerhouse in the region of being a role model as cited the region's concern and i think this is a really positive message that about fifteen economies in the world today with the size of a trillion dollars or more i think turkey and indonesia could be the next two economies to join that club. and they said of the aisle to the program little more than a hundred eighty economies tracked by the i.m.f. and world bank only fifteen have a size of more than a trillion dollars and turkey and indonesia could be the next to join that club and that's a pretty important message because it's such cynicism in the west about muslim democracies or whether muslim economies can really sort of work in an economic. because of the sort of religious and other sort of reasons and i think that what turkey and indonesia to me are showing is that that model can also work that culture cannot hold you backward does not have to necessarily be a wheat around your around your neck so i think that turkey's reform streak of the

past decade and the fact that there. aspiring to be a regional powerhouse much more connected now with the former soviet republics and also like you know the chain that i've seen i go to istanbul quite frequently five to six years ago you would hardly see any add up tourists in istanbul because this part of turkey has been a bit of a pariah nation that wanted to be european i went there last year and it's teeming with tourists from saudi arabia and other countries in the middle eastern region and they're all coming there because they're sort of now like to think of it as there are. you know think that it's like a big sort of cultural change that we might see a change in the way the middle east region is viewing turkey given the fact that they take nomic performance has been quite good from a decade ago i mean just to put it in statistical terms. at the beginning of the

last decade on many metrics such as per capita even acknowledge the size he was not that different from when egypt is to be a lot of people thought that he was a basket case in the emerging market world because they had so many dead crises a lot of inflation in massive economic volatility so the stability that they were achieved and built on that where the economic growth has been quite impressive over the past few years is i think transforming turkey and making it a role model for the rest of the region and stepping back as we've talked about a few countries here and there's a lot in your book what differentiates the type of foreign investments the type of businesses that want to go in to break out a nation like turkey versus a breakout nation a nation like indonesia you know what differentiates these economies and what are the different opportunities and i just have about a minute here. sure so i think that is fine as in a country like turkey are concerned you know what's remarkable about them and the

reason that i'm bullish on them is that i'm better short of commodities in general and the key is one they've got to me that does not have a single commodity export it's basically completely reliant on imported commodities so if you get lower commodity prices that helps turkey indonesia on the other hand benefits from higher commodity prices but i still like indonesia because i think that they have been managing that commodity wind for quite well unlike the brazils and russia where i think they have not used just this commodity boom of the boss decade to build any meaningful investments and they've used it all on the consumption side of the equation which is not very healthy so the key and indonesia at some level are quite different in that one is a commodity importer almost in full the other one export some commodities noise i can manage that commodity even for windfall on the other end of the likes of brazil russia which i think haven't been doing a good job in terms of managing the commodity boom well that's what differentiates these countries. just in terms of are these retail investment opportunities or

institutional investment opportunities is it stocks is it companies on the ground building factories just just if you could kind of differentiate which which types of foreign investment you're saying are going to go into these breakout nations. yeah i think that my i look at these countries a lot as well as a portfolio investor so for you know for equity investments for debt investments but you know like in emerging markets having done this for nearly two decades i think the most important criteria for the detail of the institution investor to keep in mind is that they need to treat emerging markets individually not as some homogeneous entity though it's an emerging market and you sort of apply the same yardstick for the same criteria to all of them you need to treat them individually and getting the country factor right is most important if you are able to assess the country's economic prospects with the chances increase that you'll be able to buy the right stocks in that in that country as well so for me getting the country factor right is paramount and then just real quickly before we go if there was

a seven huge coordinated central bank effort to a flush liquidity into the economy would that change your view on commodities which plays into your. you know i think you know if you seen with q. you want to do that if they do some massive q e that does have a bullish effect on commodities but i find that very bullish if it doesn't last too long so it lasts for a few months because people get really excited about a couple of these but those but you know when you get high commodity prices nor do to actually demand were due to liquidity infusions i find those effects are quite transience and they are in fact self-defeating because the heart demand even more. with higher prices so i really think that yes these q e one q e two type liquidity infusions that you referred to can have spikes in commodity prices but despite unsustainable because if the whole it's actually demand and when underlying demand

is weak liquidity and fuel spikes can be counterproductive right and you know you're so interesting we blew out the last segment we just want to keep you on for the last couple of minutes here that we have because you have such an interesting view you did bring up the brics the brics of course have been rapid growth success story of the last decade or so in your book you go to great lengths to talk about their individual stories and how you can't necessarily group them all together but if you had to kind of summarize a theme for these nations what i took from it is that these have been rapid growth stories and they're entering to a more mature phase where you're just not going to see that same extent of growth relative to the expectations that you will is that accurate. yeah i think that's politically accurate for china then china really has reached a much more mature stage of its development process will report capita income of around six thousand dollars it's a truly middle income country and especially when you make the exchange rate adjustments one devaluation and so it's very difficult for china to not grow at the

pace it did for the last thirty years it's matured i don't think that's quite true for india i think india's problem is different india's per capita income is one four to that of china a city or entity india should be able to grow much quicker and it's good to profile does not have to sort of paper out as of yet it's like ten fifteen years if not more behind china but india's problem really is the fact that it's not been getting out any meaningful economic reforms over the last decade or so and it benefited from this global liquidity we've and i spent that windfall which came from the high growth rates into sort of social spending and other government spending rather than doing anything constructive in terms of enhancing economic growth prospects over the past decade so i think india's case is different so your argument that you made just now is particularly relevant for china not for the other bric countries what the other bric countries do have in common is that because they became such a hyped up investment over the past decade they all suffer from very high

expectations. for this china or in india if they grew treats i mean if india's growth rate got if he is running at just under six percent and that is seen as a major disappointment not because it's low in absolute terms but worse is what we came to expect out of india it's a big disappointment same thing for china china due to the slowing down to around seven or seven percent or so of that and you miss it that's ok in absolute terms but no when we had come to expect ten percent economic growth a thirty percent reduction in that is something which does feel like a pretty sort of major slowdown so ever i hated expectations is the problem the perverse in. asian of investing more enviable growth sounds disappoints me like every see you being on the show and spelling this all out that was off there also investor ruchi or sharma and that is our show today thank you so much for watching and be sure to come back tomorrow and in the meantime you know you can follow me on twitter at lauren the story you can always give us feedback edge any of the shows

you missed and subscribe at youtube dot com slash capital account you can also catch our show in h.d. on hulu at hulu dot com slash capital dash accounts tomorrow we will have the kind of opposite perspective on commodities with jim rogers as member here capital account have a great night. there hasn't been anything yet on t.v. . it is to get the maximum political impact. before the source material is what helps keep journalism on the we. we want to present. something real.

that's.