The book provides a nice summary of economic events of recent past (~50 years) and builds upon the case for coming 10 years.

The book is divided in 14 different chapters covering emerging and frontier (less liquid and smaller than emerging).

The Myth of the Long Run

  1. All emerging markets are different – a herd approach to investing in “emerging markets” is dangerous rather each market should be analyzed individually.
  2. Long term predictions are essentially random – a lot can happen in next 20 years or so, so any predictions made about 2050 are meaningless.
  3. 2003-2007 was the period in which credit was flowing into emerging markets – the stock market growth of that era is more due to cheap credits rather than structural reforms in these economies.


China’s annual growth rate will probably slow down to ~6%. Its aging population is of course a concern. Inflation is threatening the long term growth.
Ruling party is good enough to avoid a hard landing.

Rule: political leaders (and government’s stability) matter more than political ideologies.


The socialist schemes might take India down to path of welfare state of Brazil of 1970. India being a high context society (like latin americas) is misleading for most foreigners. Being more heterogeneous that (say) China or Brazil also is (culturally) more similar to EU. The missing infrastructure is bad since it leads to supply chain problem leading to inflation which further leads to less capital for investment (in infrastructure). Demographic dividend is overrated.

Brazil is doing good because (its only export) commodities have become really expensive (due to availability of cheap credit from central banks which is fueling commodity speculation). Infrastructure has become horrible. Cities are more expensive than in developed world. CEOs use helipads for commute. High interest rates (to control inflation) reduces investment in infrastructure. High commodity prices further makes the currency expensive and leads to decline in manufacturing exports (Dutch disease).

Market dominated by nexus of oligopolists and politicians.
Heavy net emigration (2.4 Million in 2006-2012) due to bad internal security and stagnating economy.

Rule: Rulers who have outlived their usefulness (in this case Putin) are dangerous since they are looking less to prove themselves and more to protect their position.

Another country dominated by nexus of oligopolists and politicians.
Middle class is missing (Russia has disproportionately larger number of billionaires than millionaires). The economy got a recent boost due to (oil) commodity prices but growth is not sustainable. Population is graying fast, infrastructure is poor and sparse population density discourages big retail.

Rule: If a country generates disproportionate number of billionaire then something is wrong. 


The two emerging countries which have performed well in Europe are Czech Republic and Poland – they controlled government debt and focused on free market economy. Hungary has fared worse due to its government’s approach to interfere with economy.

Rule: Common currency (in this case, Euro) is bad for nations with lower productivity since at the time of economic crisis, the government usually allows its currency to fall in price and hence, keep its exports competitive (and save wages and jobs). But since Euro members cannot make the currency cheaper on their own, this lead to internal devaluation of currency (fall in wages) to keep exports competitive.

Since the arrival of new Prime Minister Erdoğan in 2001, Turkey saw several major economic reforms, its exports are growing and the ruling party has been able to develop a stronghold among both secular and Islamic voters. The future of Turkey looks bright.

Indonesia use to be a commodity exporting economy but after the bust in rubber and tin prices in 1950, it focused more on its non commodity exports (now ~25% are commodity). The country suffers from corruption but its very “efficient” (once you find the right person, work will be done).

Rule: Population of second city must be at least one-third of first city. Otherwise, it indicates unbalanced economic growth.

Philippines is still stuck with crony capitalism, though with new President (Aquino) there is a hope for change. Sudden development of call center industry (~350, 000) is also a ray of hope.

Thailand suffers from strong regional imbalance between urban and rural population, its domestic market is small and hence, exports play a huge role in economy and that caused the downturn in 2008. The future of Thailand is still doubtful.
Rule: A balanced economy should be devoid of excesses, even export excess becomes a liability (since economy becomes vulnerable to fall in exports).

Malaysia decided not to fix its economy after the crisis of 1998 (and rather blamed it on Jewish conspiracy). The economy is still not in good shape and is dominated by government spending. Foreign investment is falling. The strife between bumiputeras (Malays) and Chinese/Indians is growing due to affirmative action in favor of Malays leading to further tensions between the ethnicities.

Rule: When financial crisis happens, money flows out in three phases, first one to leave are local investors who move money through underground channels (due to rules limiting capital flow) – this shows up as  “errors & omissions” in balance of payments or over-reporting of imports /under-reporting of exports. Second is the foreign creditor, when they leave, short term interbank loans from foreign banks slow down or reverse.
The last one to leave are foreign investors – they are easiest to spot and media usually have an eye on them – therefore, they get the blame (as in Malaysia in 1998).

South Korea
An economy which has grown at 5% annually for 50 years (only other one being Taiwan) while keeping a check on income inequality. Samsung, Hyundai and LG alone account for 16% of GDP. Unlike Taiwan, Korean companies are increasingly outward looking and have developed global brand names. Korea used crisis of 1998 as a basis to clean up its economy, even companies like Daewoo were not saved by government. Interestingly, most Korean companies are family-controlled.
Taiwan, even though, has gained stronger control of PC market, its manufacturers are commoditized name-less entities used by HP, Dell and other brands who play these manufacturers against each other to maintain prices.

South Africa
The ANC (African National Congress) which fought against Apartheid is still enjoying dividends from the same and has no chance of getting displaced anytime soon, so the sense of complacency has overtaken it.
This is equivalent to complacency which INC (Indian National Congress) had in India, since it takes almost a generation (~25 years) for the new generation voter (which is not thankful to Congress for independence) to emerge. The economy has become more welfare oriented which is a bad sign in long run.

Key point: If local population is large but the companies are still going global, it might be a sign of national weakness (as in South Africa).

The Fourth World
Though most emerging markets move in sync, that does not hold true for frontier markets.
Combodian Stock Exchange has only one company listed (which also appeared after two years of its creation).
Laos has just two companies listed in stock exchange.
Ukraine has 500 companies since it forced companies with more than 100 stockholders to list them who gave out a small free float of their stocks. This made stock market a joke, and most companies who wants to go public go to either London or Warsaw.
Saudi Arabia is closed to foreign investors.
At the time of financial crisis, emerging markets take either the Keynesian view (of protecting the market) or Hayekian view (of letting market crash). But frontier economies, simply close the markets, Nigeria did that in 2008. Same happened with Pakistan and Argentina in 2009 (both limited the trading). Most information about these markets is available in form of rumors.
Sri Lanka looks promising since the LTTE issue is resolved and will hopefully get peace dividend now. Same goes for Uganda and Mozambique
even though wish to have Chinese style economic growth has failed due to its inability to handle foreign inflows properly and take harsh steps like China to build infrastructure. An attempt to jump too fast (Intel’s plant) has been an audacious attempt. The education system is still weak and the government spending is fueling inflation.
African countries suffer from poor infrastructure and are primarily commodity exporters but (at least) the emergence of democracy and end of civil wars has given some hope. Nigeria has shown promise due to strong leader (Jonathan) and stable government.
Middle East suffers from subsidies (people are paid instead of being taxed). The Saudi Arabian officials believe “its cheaper to provide subsidy then to build public transport” and the country still imports refined gasoline since it has no refineries. Quatar has world’s highest per capita income (~100,  000 $ per annum) and still has gas reserves for about two centuries. While nations are emphasizing on oil funds and education (for future), the citizens has become lazy due to subsidies which is evident due to large army of expat consultants which do everything for them. Investing in these markets is dangerous due to opaque books, murky rules and too few good companies. Interestingly, none of these countries are susceptible to dutch disease (due to complete lack of exports in the first place).

Predictions for coming years
Commodities has lost price for ~200 years but have seen sudden upswing in past 10 years. The fear of Chinese manufacturing surging commodities is overhyped since the overall manufacturing is shrinking. Low interest rates provide cheap money and thus, encourage investment in items based on scarcity (gold, oil etc.) rather than productivity and thus, is fueling commodity speculations. Food prices might increase in short run but should go down in long run (due to population stabilization) and a lot of countries in emerging and frontier world still have ample room to improve productivity. Further, rising prices of gold and oil fuel further investment into their mining/exploration. The eventual crash in prices of commodities is evident and is (similar to .com of 2000). The strength of USA lies is its strong R&D specially in software companies. Japanese companies are more inward looking (eg. mobile payments were started in 2004 in Japan but no Japanese company launched it globally).

The Third Coming
The phrase Emerging markets is pretty new from investment standpoint.
Its first phase was 1987 to 1994 followed by dip from 1994 to 2002. The second coming was 2003 to 2007. The third phase started in 2009 where markets are going to return smaller gains and smaller boom-bust cycle (~3 years). The breakout nations could be

  1. Czech Republic and South Korea – in 20,000 to 25,000 $ income range
  2. Turkey – in 10,000 to 15,000 income range
  3. Thailand – in 5,000 to 10,000 income range
  4. China, Malaysia, Sri Lanka, Nigeria – in under-5000 income range

The inflation is expected to go down (in emerging markets) in coming years. The increased integration of global supply chain implies a strong correlation in economies and hence, more volatility. BRICS will not be able to come out as a single political clout due to conflicting economic interests.

A few issues with the book:

  1. Factual mistake: Author says that Google purchased Orkut in 2002 which is incorrect.
  2. In the chapter on Sri Lanka, the author while referring to Sinhalese – Tamilian conflict (which started in 1970), mocks (economic) analysts by saying that they know how to do financial modeling but fail to understand the societal conflicts leading to war. Its weird that the author fails to mention the same for India. Any mention of growing threat due to China or islamic terrorism is completely missing.

Overall, its a really nice book.