Searching for “breakout nations” in the emerging markets

Book Review: Breakout Nations, by Ruchir Sharma (2012).

During the 2000s, almost all emerging markets experienced strong economic growth. However, the global forces that enabled such broad growth are running out of steam, and only some developing countries will continue to grow so consistently. They will be the “breakout nations” of the future. This the message of a recently published book by Ruchir Sharma, the head of emerging markets at investment bank Morgan Stanley.

Sharma describes two broad forces as having supported emerging markets’ growth during the last decade. The first was high commodity prices. The second was a flood of “easy money” in the form of very low interest rates in the US and the Eurozone. Low interest rates in the West stimulated domestic consumption, which fueled demand for exports from emerging markets, which in turn demanded more commodities.

Now, these forces appear to be on the wane. The Great Recession curtailed Western demand for exports. It is true that, to combat the recession, the US Federal Reserve Bank  deployed two rounds of “quantitative easing” of the money supply. However, the Fed has indicated it will be much more cautious with further quantitative easing.

Having set the global context, Sharma takes us on a tour of the emerging world. For many countries, Sharma advances arguments that are largely sobering, if not outright pessimistic. Sharma’s overarching point is that emerging markets can no longer be viewed as a single class, but vary significantly and will have different growth trajectories. If the universal allure of emerging markets was the story of the last 10 years, the divergence between “breakout nations” and also-rans may describe the current decade.

Breakout Nations devotes individual chapters to China, India, Brazil, Russia, Mexico, Turkey, and South Africa. There are also chapters on Central Europe, Southeast Asia, and the “fourth world.” Below, I summarize Sharma’s key takeaways for the BRICs:

China: China has been growing at 10% annually for 30 years, but this cannot continue much longer because the country is becoming richer and workers are demanding higher salaries. China is entering the “middle income trap” where production costs are higher and reforms are more challenging. Expect growth to slow to a new 7% range.

India: After just one decade of high growth, India is experiencing overconfidence and complacency. The government has dropped the ball on economic reforms and is more focused on social programs. Corruption is a major problem and may be worsening. Politics are becoming more decentralized, as national parties give way to state-level ones, and state governments increase their authority over economic policies.

Russia: Since 2008, the Putin-led government has been shedding popularity and, as a result, is reallocating Russia’s oil and gas wealth “to purchase the good graces of the people.” The Kremlin’s deepening involvement in the economy will lead to closer relations with the oligarchs, which will fuel an intensifying “criminalization of politics.”

Brazil: Brazil is blessed with natural resources, but cursed with poor governance. The high cost and complexity of doing business in Brazil means its top rate of growth is about 4%. Growth has exceeded this rate in the last few years, and the economy is overheating. Normally, a central bank would calm an overheating economy by raising interest rates. However, Brazil’s rates are already among the highest in the world; increasing rates would serve to further appreciate a very strong local currency while making economic life much more difficult for Brazilian consumers, many of which are overloaded in debt.

If China, India, Russia, and Brazil have such mixed outlooks, then where are the “breakout nations” of the 2010s? For Sharma, the answer is: South Korea, Poland, Czech Republic, Indonesia, Turkey, and (maybe) Thailand. For different reasons, he sees each of these countries as well-positioned to experience strong growth through 2020.

Elsewhere, he makes convincing arguments for why Vietnam is not the next China, and why Sri Lanka may surprise as a high-growth nation in the coming years.

Sharma’s book is not perfect. The author has a tendency to take a position on a country and back it up with numerous facts, without sharing – and defeating – key counterarguments. For example, his favorable outlook on Turkey excludes inconvenient truths, such as its high rate of consumer indebtedness. Meanwhile, optimistic sections on Thailand and the Philippines seem to glance over those countries’ problems.

Also, Sharma’s coverage of emerging markets was not comprehensive. In Latin America, he did not look beyond Brazil and Mexico. I would have been interested to learn his thoughts on the growth prospects of Chile, Colombia, and Peru.

These are not critical flaws. Breakout Nations is best understood as a summary of a highly informed person’s opinions of the emerging markets. Sharma’s role at Morgan Stanley provides him with access to a variety of data and analysis, travel opportunities, and access to political and business leaders around the world. Presumably, this enables him to cultivate some very well-informed opinions, many of which may have a good chance of being proven in the coming years. But they are not necessarily the final word – as Sharma acknowledges, there is no blueprint for identifying “breakout nations.”

Written by David Gates for Emerging Markets Blog

Posted in Africa, Asia-Pacific, Book Reviews, Business Strategy, Europe, Latin America, Market Analysis, South Asia | Tagged , , , , , , , , , , , , | 1 Comment

Africa’s new oil and gas finds: the good, bad, and the ugly

They say money can’t buy happiness. But what about a billion barrels of oil?

Recently, a series of spectacular oil and gas finds have been announced in several East African countries, including Ethiopia, Kenya, Uganda, Tanzania, and Mozambique. In just one offshore bloc in Mozambique, 30tn cu. ft. of gas may lie below the surface.

These findings will almost certainly provide these countries with important new sources of income. And yet, we must ask, will they really benefit economic development?

On the surface, the answer should be yes. Making use of the new finds will require huge investments in rigs, pipelines, LNG plants, and larger seaports. Intense competition between Western firms and Chinese and Indian rivals will give the region’s governments an opportunity to secure long-term agreements at favorable terms.

The good: In the dream scenario, hydrocarbon wealth channels income to governments, which carefuly spends the billions to build roads, dams, and schools. Over time, investments in education produce a better educated workforce, while those in infrastructure lower the cost of doing business. The local economy diversifies, creating more value-added industries. A virtuous cycle of development sets in motion.

However, natural resource bonanzas rarely match expectations. For most countries, the record has typically been one of disappointment, and for two reasons:

First, translating oil, gold, or whatever lies under the ground into true wealth requires a government that is good at investing the resource income. While corruption may be unavoidable – to a degree – governing officials must have some capability (and desire) to transfer money to the population, so that it tangibly impacts living standards.

Second, even in cases where the government is able to allocate money toward development goals, the country may fall victim to “Dutch disease.” In this scenario, resource wealth pushes up the value of the country’s currency, which hurts domestic producers, because it makes their production more costly. Meanwhile, “easy money” floods the economy, stimulating new service industries, based on the importation and distribution of products from other countries. Over time, this redefines the economy around the consumption of imports, paid for by natural resource exports.

The bad: The first problem is Africa’s. Africa’s modern states were created by European colonizers to drive the export of natural resources to Europe. Long after independence, many of Africa’s economic and political structures continued to follow the colonial modus operandi of transferring the natual wealth to whoever held power. As a result, the continent fell under the sway of strongmen who stole billions from their impoverished countries. The long list of leaders-cum-theives is led by Abacha in Nigeria, Bongo in Gabon, Obiang in Equatorial Guinea, and Mobutu in the Congo.

The ugly: The second problem is more typically Latin American. Here, resource dependence fueled boom-and-bust cycles, where the “bust” was always greater than the “boom.” Few countries illustrate Dutch disease better than Venezuela. Oil initially brought prosperity, but over time, petrodollars crowded out other sectors of the economy. Venezuela’s economy degenerated into one built around the exchange of oil for everything else. Even the national drink (whiskey) and sport (baseball) were imports.

So, what lies in store for East Africa? If it avoids the “African” trap, will it still fall to the “Latin American” curse? Can its create the “good” outcome by adopting and sustaining the long-term vision that requires careful management of resource funds?

Time will tell the answers to these questions, but here are two thoughts:

  1.  East Africa’s traditionally resource-poor countries never developed “extraction economies” as pronounced as those in, say, Congo. There is less of a “framework” to enable the illegal transfer of billions into leaders’ Swiss bank accounts.
  2. Dutch disease is much better understood than it was a generation ago. Today, there are models for managing this problem. Norway has stashed $600bn of its North Sea oil revenues in a rainy day fund. Perhaps more relevant is Chile, which – unlike Norway – is an emerging market with many pressing spending needs. Despite political pressure (and occasional public protests) to use its copper-derived rainy day fund, Chile’s governments set aside some $20bn over the last decade.

Brazil, which is starting to develop enormous offshore oil reserves, has studied Chile’s model, and at the end of 2008, set up its own sovereign fund. Viable models exist for East Africa’s governments, if they have the willingness and ability to adopt them.

Written by David Gates for Emerging Markets Blog

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Brazil’s elusive “future” – is it finally here?

It seems just about every business article written about Brazil in the last five or so years has painted a highly optimistic portrait of the country. Of course, there has been some recognition of Brazil’s high taxes, overbearing red tape, enduring crime, etc., but these facts almost come across as minor exceptions to a narrative of progress.

Much of the good news is deserved. In 2001, I moved to South America – to Chile – where I worked as a journalist in the business press for nearly four years. At the time, I remembered seeing an article that said hunger was experienced by some 25% of Brazil’s children. I once cited that statistic to help a friend understand how much prosperous Santiago contrasted to the “third world” Latin America of the US imagination.

What a difference a decade makes. The government’s flagship social program, Bolsa Familia, launched in the early 2000s, mostly eliminated the hunger problem. Home-grown multinationals such as CVRD, Natura, and Embraer have become leaders in their respective industries. Brazil won international competitions to host not only the World Cup, but also the Olympics. Some 30 million people entered the middle class, so that 50 percent of the population now fits in this income category. Finally, a few months ago, Brazil overtook the UK to become the world’s sixth largest economy.

And yet, it is still difficult to shake off that notorious expression, most frequently cited by Brazilians themselves: “Brazil is the country of the future… and it always will be.”

Despite all the positive news coming out of Brazil, too much of the country’s growth depends on exports of oil, copper, iron ore, and other commodities, Ruchir Sharma, head of emerging markets at Morgan Stanley, argues in this month’s Foreign Affairs. According to Sharma, Brazil has not made the investments in people, infrastructure, or better governance that are required to make the current boom a lasting one.

Sharma backs his case with a number of facts, which I paraphrase below:

  • To protect its citizens from the economic turmoil that plagued it throughout much of the late twentieth century, Brazil developed two signature policies: high interest rates to control inflation and a welfare state to provide a social safety net. The result of this is a “hidden cap” on expansion that keeps GDP growth, at best, under 4 percent. Even in the last decade, Brazil still grew only half as fast as China, India, and Russia.
  • Brazil has funded its growing safety net by increasing public spending, from roughly 20 percent of GDP in the 1980s (a typical ratio for the emerging markets) to nearly 40 percent in 2010. It has underwritten this expansion by raising taxes, which now equal 38 percent of GDP, the highest level among emerging-market countries.
  • Between 1980 and 2000, Brazil’s productivity grew at of 0.2 percent annually, compared with four percent in China, where businesses invested much more heavily.
  • Brazil’s total investment has remained under 19 percent of GDP, one of the lowest figures among emerging markets. Brazil spends only 2 percent of its GDP on infrastructure, far less than the emerging-market average of five percent.
  • Underspending on schools has resulted in a massive shortage of skilled workers. Normally, as a country grows richer, students stay in school longer. But in Brazil, they remain in school for an average of just seven years, the lowest rate of any middle-income country; in China, which is much poorer, the average is eight years.
  • Brazil is one of the most protectionist economies in the world. Thetrade share of its GDP is just 20 percent, the lowest among all emerging markets.

To Sharma’s list of observations, I can add a few other facts:

A closer look at the data suggests Brazil’s hardest reforms have yet to be made. The country is the 120th ranked place in the world to do business, according to the World Bank. Of the 10 “doing business” categories, Brazil cracks the top 100 in only three.

To move up on the rankings, Brazil’s government must become less intrusive. Regulations, taxes, fees, and restrictions need to be reduced and simplified. At the same time, however, the state must achieve a better record in education and infrastructure.

In Brazil’s democracy, vested interests will fight to preserve the status quo, so it could take a long time for reforms to change the system. Until then, however, Brazil’s “magic moment” will remain precariously linked to high commodity prices.

Written by David Gates for Emerging Markets Blog

Posted in Latin America, Market Analysis | Tagged , , , , , , , | 1 Comment

East Africa: the next gold rush?

An article in this week’s Economist brings to attention the surge of oil and gas finds that are now happening in East Africa, almost seemingly on a daily basis.

These discoveries have the potential to attract billions in foreign investment to develop rigs, pipelines, LNG terminals, and other infrastructure. Exploitation of these new hydrocarbon findings may also support broader economic growth, especially if it contributes to reductions in fuel and electricity costs in the once energy-poor region.

A recap: On March 26th,  Kenya learned it has oil, as a British oil firm, Tullow, announced a big oil strike near Kenya’s borders with Uganda and South Sudan. While the scope of the find is not yet known, Tullow, which also discovered some 2bn barrels in Uganda in 2006, compared the find to the North Sea discovery of the 1960s.

The finds in Kenya and Uganda are not blips, but fit into a clearly forming trend. In the last month alone, East Africa had several other finds, in Tanzania and Mozambique.

In Tanzania, Britain’s BG Group found 3.4tn cubic feet of natural gas off the coast. This was on the heels of a 5tn cu. ft. discovery by Norway’s Statoil in February.

In Mozambique, Italy’s ENI found 10tn cu. ft. of offshore gas, while Texas-based Anadarko scored new finds in its offshore bloc, raising the estimate for the zone, dubbed “Prosperidade,” to 17-30tn cu. ft. Both finds were reported in the last two weeks.

Meanwhile, in Ethiopia, the government has ordered construction of a series of dams on the Blue Nile, the biggest of which will generate 5,250MW hours, quintupling the country’s electricity production – which, as noted by the Economist, has the potential to  dramatically lower electricity costs and therefore help country to develop manufacturing industries. (It is notable that Ethiopia is the only emerging market with over 80mn people that was not included in Goldman Sachs’ “BRIC” or “Next 11” groups).

All these finds suggest a surge of foreign investment may be in store for East Africa. The Ethiopian dams will require $8bn, and they may be accompanied by another big investment to exploit newly discovered gas finds in Ethiopia’s restive, ethnic-Somali Ogaden region. A Chinese company, PetroTrans, wants to invest $4bn in this project – a big commitment for a zone with serious political and security risks.

Uganda and Kenya are already talking about building refineries to exploit their newly-discovered oil resources. China’s government just lent $1bn to Tanzania to build a pipeline to bring its offshore gas to land. Surely, there will be many more investments.

In 2010, East Africa received $5.8bn of FDI, or just 0.5% of the world total, according to data from the UN Conference on Trade and Development (UNCTAD). This paltry sum pales in comparison to that received by Africa’s top energy exporters, Angola and Nigeria. Angola alone collected $9.9bn in in 2010, while Nigeria received $6.6bn.

The FDI now likely headed to Ethiopia, Kenya, Uganda, Tanzania, and Mozambique will change the East African numbers. As these and more investments fall into place, they could have a significant impact on one of the world’s most impoverished regions.

A good sign for foreign investors is that doing business may be relatively less painful in East Africa – these five countries’ average Ease of Doing Business Ranking is 122, compared to 138 for all African countries, 133 for Nigeria, and 172 for Angola.

Only time will tell the full impact of these finds. But from today’s vintage point, it appears the once-sleepy countries of East Africa have a great opportunity to attract billions of dollars in foreign investment, which they may use to foster economic growth.

Written by David Gates for Emerging Markets Blog

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Mexico: ready to take on China?

Sometimes it is easy to forget that one of the biggest and most affluent emerging markets lies next door to the United States. Yes, I’m talking about Mexico. 

While Mexico has suffered rising violence and stagnant economic growth in recent years, changing labor and fuel costs are beginning to make a powerful case that Mexico, not China, may be the most attractive base for many types of manufactures. This is particularly true for heavy and bulky items such as cars and household appliances.

This news couldn’t come at a better time. Since 2006, conflict between Mexico’s government and drug cartels, and among the cartels, has increased significantly, leading to a dramatic spike in murders, as well as kidnappings, extortions, and other violent crimes. The drug war has upended stability in what was one of Latin America’s more peaceful countries, and invited comparisons to Colombia’s darkest days (although Mexico’s murder rate still remains low compared to Brazil, Colombia, and Venezuela).  

The Wall Street Journal’s excellent interactive map documents the grim picture. The northwestern states of Chihuahua and Sinaloa have experienced the most pain. However, violence has also surged in areas that once had little of it. 

Particularly hard hit has been Monterrey, Mexico’s third-largest city. Monterrey is home to world-class corporations such as CEMEX, Grupo Alfa, and FEMSA. It is also the site of many of Mexico’s largest factories, set up to export of manufactured goods to the US and other markets. Although only two hours by car from Texas, Monterrey has always managed to avoid the problems of other border cities – at least until now.  

Monterrey’s murder rate rose from about 100 in 2009 to 600 in 2010. Related crimes, such as armed robberies, kidnappings, and extortions, rose in tandem.

The result of this mess is that many people have emigrated to the US. These new emigrants are disproportionately wealthy and well-educated. My local paper, the Austin-American Statesman, recently ran an interesting story documenting the flight of wealthy Mexicans to Austin, as well as the other major cities of Texas. The volume is such that Austin and other cities have set up offices to actively recruit emigrants.

Lorenzo Zambrano, the CEO of CEMEX, and arguably Monterrey’s most prominent citizen, has used the bully pulpit of Twitter to actively campaign against emigration.  Calling the émigrés “cowards,” Zambrano has argued, “We must retake our city.”

Fortunately, help may be on the way. According to a research note released on Tuesday by RBC Capital Markets, Mexico’s share of US imports rose to 12.5% last year, the highest level in a decade. At current rates, Mexico is on pace to overtake Canada within the next five years to become the US’s second-largest source of imports, after China.

Perhaps more important is the fact that Mexican labor wages are now at parity with China’s. The new reality is described in the beyondbrics blog: “While Chinese wages were roughly 300% cheaper than those of Mexico a decade ago, wage inflation in China and wage stagnation in Mexico have combined to close the gap to almost zero.”

Beyondbrics also points out the second, obvious fact that China is a lot further away from the US than Mexico. If oil costs remain as high as they are today, rising transport costs will give Mexico an edge, particularly when it comes to heavy and bulky items.

To capitalize on these favorable economics, Mexico’s government must make the case, through words and actions, that the drug-related violence will not threaten new manufacturing investments. If it can do so, Mexico has a wonderful opportunity to redefine its economy and initiate a virtuous cycle where more young men can aspire to jobs in factories, and not drug cartels. Of course, such a transformation will not be easy, but its possibility is good news for Mr. Zambrano, Monterrey, and all of Mexico.

Written by David Gates for Emerging Markets Blog

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Peru and Turkey: consolidation or disruption?

In the past 10 days, Peru and Turkey held national elections that have huge potential to impact the steadiness of each country’s progress toward greater democracy and economic prosperity.  In Peru, a divided population narrowly opted for Ollanta Humala, a left-wing ex-officer who had backed a military coup attempt only six years earlier. In Turkey, citizens decisively, if not overwhelmingly voted to give a third term to the moderately Islamist AK party, led by Prime Minister Recip Tayyip Erdogan.

Peru and Turkey have experienced dramatic economic growth over the last 10 years. Powered by economic liberalization programs in the 1990s, and by a booming commodities sector since, Peru was Latin America’s fastest growing economy since 2000.  Meanwhile, Turkey has been not only the fastest-growing big economy in Europe or the Middle East, but also the most resilient to financial crisis and rising commodity prices. Most of Europe, including Turkey’s fast-growing East European neighbors, fell into recession in 2008, while the Arab World’s economic stagnation exploded into revolution this year. Turkey, however, has continued to enjoy 7-8% annual growth rates.

In such an atmosphere of growth and progress one might have expected relatively boring elections, where voters and candidates broadly called for “more of the same.”

Unfortunately, the Peruvian and Turkish elections were not so boring. Peru’s Humala may turn out to be a clone of Hugo Chavez, while Erdogan may follow Vladimir Putin’s example and rewrite the constitution so that he can remain in power for many more years.

And yet, neither of these events may come to pass. Instead, Humala may follow the example of Brazil’s former president, Lula da Silva, and focus on spreading the benefits of Peru’s economic growth, while preserving the free market reforms that made it possible in the first place. Erdogan may decide a constitutional power grab is not worth the risks it poses to his party’s long-term popularity, and to his own political legacy. 

This uncertainty will make Peru and Turkey much more interesting places in the next few years. It also highlights the fact, that despite much progress in the last 10+ years, emerging markets still have a long way to go before their politics are as “boring” as some of the developed economies in North America, Europe, and Northeast Asia. 

After all, development is an exceedingly hard game. During the late 1960s and ’70s, many developing countries enjoyed years of unbroken high growth. Brazil, Mexico, Indonesia, Thailand, and others had dramatic transformations during this period, shifting from agrarian, almost feudal societies to relatively industrialized ones. However, the progress did not last. In the 1980s, a regional debt crisis led to a “Lost Decade” in Latin America, while the Southeast Asian nations saw declining rates of growth, especially after China emerged as a more productive center of manufacturing exports.

So, I for one will be keeping a close eye on Peru and Turkey over the next few years. I will also be observing a number of other high-performing emerging markets, where economic, political, or social issues threaten to disrupt the recent pattern of  steady growth.

Written by David Gates for Emerging Markets Blog

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Corruption: which countries are changing?

Emerging markets have done exceedingly well in terms of economic growth over the last 10 years. As I mentioned in my last post, it stands to reason that some of these high-growing countries would have made strong progress to greater transparency. Transparency begets growth, or growth begets transparency. Either way, economic vitality should correspond with reduced corruption. But is that really the case?

Based on the data, the best answer is, “Maybe so, but it takes more than a decade.”

The map at the top shows which countries have changed in the last 10 years, according to data from Transparency International’s Corruption Perceptions Index (CPI). It is surprising to see how few countries show up on the map as big changers.

This map is based on a comparison of countries’ average CPI scores of the three years starting the decade (2001-03) to their average CPI scores over the final three years of the decade (2008-10). (Three-year averages are used to blur any possible single-year discrepancies in CPI scores. This is important because the CPI is calculated from subjective data, and therefore may be subject to some inconsistencies from year to year).

The map excludes the world’s most corrupt and most transparent countries. These are defined as countries whose CPIs were below 3.0 or above 6.0 in both of the two periods. For example, Libya improved its CPI from 2.1 in 2001-03 to 2.5 in 2008-10. However, this “progress” does not mean much as 2.5 was still a very bad score.

What is left, then, is a visualization of which countries are making serious progress from corruption to transparency. No country has gone from highly corrupt to highly transparent in the last 10 years, but some are certainly advancing in the right direction.

I’ve classified the countries with significant change into four groups: Stars, Starters, Sliders, and Slippers. Stars are clearly advancing to greater transparency, while Slippers are moving strongly in the opposite direction.  The top stars from 2001-10 were Georgia and Uruguay (up 1.7 and 1.5 points, respectively) while the worst Slippers were Belarus and Trinidad and Tobago (down 2.4 and 1.4 points, respectively).

The other groups – Starters and Sliders – show evidence of modest change (between 0.25 and 0.5 points on the CPI). These countries still deserve scrutiny, especially if they continue to become more (or less, for Sliders) transparent in the coming years.

Stars: Africa (Madagascar, Mauritius); Europe (Albania, Czech Republic, Estonia, Georgia, Latvia, Moldova, Poland, Romania, Slovenia); Latin America (Costa Rica, Guatemala, Uruguay), Middle East (Qatar, Turkey, UAE); Asia (India, South Korea)

Starters: Africa (Ghana, Senegal); Europe (Croatia); Middle East (Algeria, Jordan)

Most Stars are small countries. Only Poland, Turkey, India, and South Korea have populations of over 25 million people (and most have less than 10 million people). Most of the Stars are also in post-Communist Eastern Europe. These countries had very high corruption in the immediate years after the fall of Communism, but have improved their transparency as they developed mature market economies and sustained years of economic growth and political change, including European Union accession.

It also helps that many Eastern European countries have more egalitarian societies than other emerging market regions. As a result, public sector employees, such as police officers and civil servants, often make enough money to get by without needing bribes.

Going forward, it will be interesting to see whether (or which) Eastern European countries can sustain their progress to the point that they are as transparent as their Western neighbors. Some countries may have picked the “low hanging fruit,” and future battles against corruption may be more challenging, as a recent article by the Economist suggests.

Other countries are Stars because they are genuinely rich nations, where few people need corruption to support their incomes. These include Korea, Qatar, and the UAE.

Slippers: Africa (Namibia); Europe (Belarus, Italy); Latin America (Jamaica, Trinidad and Tobago); Middle East (Egypt, Kuwait, Iran, Oman Syria, Tunisia)

Sliders: Africa (Botswana, Ethiopia); Latin America (Brazil, Cuba, Dominican Republic, Peru); Middle East (Bahrain, Saudi Arabia); Asia (Sri Lanka)

Most of the Slippers are in the Middle East, just as most Stars are in Eastern Europe. Egypt, Tunisia, and Syria are all Slippers. In the last few months, peaceful revolutions have overthrown the old regimes in Egypt and Tunisia, and the same would surely be happening in Syria, if Syria’s authoritarian regime was not so violently repressing its people.

Meanwhile, Bahrain, the site of another recent failed revolution, is a Slider. In contrast, Algeria and Jordan, countries of protest but not revolution, are Starters. It’s possible Algeria and Jordan did not experience revolutions in 2011 because their governments had made modest progress toward more transparency in the previous 10 years.

Oman, Kuwait, and Saudi Arabia are Middle Eastern Slippers that have avoided serious political unrest this year. These countries are wealthy (unlike Egypt and Tunisia) and religiously unified (unlike Bahrain). They are also relatively transparent when compared to Egypt, Tunisia, Syria, or Libya. So, while their descent is a cause for concern, Oman, Kuwait, and Saudi Arabia still have plenty of time to pursue reforms.

There are many more observations that can be deduced from studying this map. Allow me to close by highlighting the plight of a developed Western European country.

It is interesting to note that Italy shows up as bright red, like its marinara sauce. Italy’s decent from relative transparency to corruption is unparalleled among Western countries, including Mediterranean neighbors Greece, Spain, and Portugal (though corruption has increased in each of these countries as well). Italy’s fall is a warning sign to other countries, including the transparency leaders in the West. Transparency is hard to cultivate, but easier to lose. Today’s Stars, should they become complacent in their struggle against corruption, may find themselves among tomorrow’s Slippers.

Written by David Gates for Emerging Markets Blog

Posted in Africa, Asia-Pacific, Europe, Latin America, Market Analysis, Middle East, South Asia | Tagged , , , , , , , , , , , | 4 Comments