Friday, 13 December 2013 00:00
“Pakistan is not alone in its powerlessness. South Asia as a whole is running on empty – insufficient investment, poor planning and corruption dog the regions power sector… Each country’s factors are different: a massive unresponsive bureaucracy in India, a fast growing population in Bangladesh; war in Afghanistan; old technology in Nepal…” – Time Magazine, October 2013.
Although the above analysis is particularly in reference to the energy sector, it nevertheless holds good for most sectors of the South Asian economies. Their path towards development is scattered with daunting obstacles some of which like capital shortages and deep-rooted systemic weaknesses seemingly insurmountable.
Anyone you speak to in Sri Lanka will tell you how important foreign investments are for the country. For decades now policy makers have been uttering the mantra. Every government has offered various encouragements and incentives in order to attract them. But the truth is, in comparison to other comparable countries in the Asian region, our efforts have borne only modest results.
Obviously, any foreign investor will look at a country’s fundamentals in order to assess the security of his investment as well as the potential for better returns. Nobody likes to lose their money. Equally, if there is a possibility of a better return at home why venture into new and uncharted territories? One vital form of foreign investments is by way stock markets and other securities like government bonds. Globally, the volume of foreign investments to the stock markets in newly emerging/developing countries has increased exponentially in recent times. The ‘BRICS,’ the acronym for Brazil, Russia, India, China and South Africa, have attracted a major portion of these investments. Being relatively big markets they have the capacity to absorb Billions of dollars. Other large markets like Singapore, Hong Kong, Thailand, Dubai, Turkey, South Korea, Israel, etc., also receive huge inflows.
A few weeks back Sarath Amunugama, our debonair Deputy Finance Minister, declared in somewhat colourful terms that Sri Lanka could compete for investments in “our own bikini”. With an unerring eye for beauty, the Minister has judged that the right moment for the coming-out party on the beach is now.
Investing in Emerging Markets
Last year Morgan Stanley’s Head of the Emerging Markets Investments Unit Ruchir Sharma brought out a book titled ‘Break Out Nations: In pursuit of the Next Economic Miracles,’ which attempts to guide investors in the developed world looking for superior returns by investing in such markets.
Sharma says that while in a developed market the key is for the investor to pick the right industry sector, in emerging markets it is crucial that he finds the “best countries” to invest his money. And these may no longer be the ‘BRICS,’ which according to Sharma may be losing their competitive edge.
According to Ruchir Sharma, a potential investor in emerging markets should attempt to answer certain questions about the country before committing himself.
1. A foremost issue in assessing the potential of a country is the size of the economy that is owned or controlled by the State. State institutions by and large fare poorly in comparison to the private sector in terms of efficiency and allocation of resources. Both China and Russia are loaded with State-Owned Enterprises, a reality bound to impact their future progress.
2. The fastest growth rates of emerging countries were registered when cheap labour was a major attraction. As the middle class expands and wages increase the growth rate diminishes. He points out that actual as well as potential labour/unemployment problems are danger signs for continued growth. Sharma sees these happening in many of the BRICS.
3. Gaping inequalities in the distribution of wealth is a warning sign to be heeded. While most cannot even afford a bus ticket a few travel about in gleaming convoys of vehicles. In countries like India and Russia the so-called billionaires have made their money mostly on mining, oil, gas and real estate which are more or less based on government patronage than entrepreneurship. Close connections between business and policy makers is a bad omen.
4. The author is enthusiastic on economies with a booming manufacturing sector as opposed to commodities. Sharma cannot praise Thailand, which has marched forward as a major manufacturer, enough. From a laid back country known for rice paddies and later during the Vietnam War as a rest and recreation centre, Thailand has now become the engine of growth for the entire region. Conversely, Sharma is doubtful about the long term health of economies which are over dependent on commodities.
5. When businessmen of the country go out or prefer to invest overseas the alarms should ring. Why do Indian businesses invest more in overseas projects than domestic when their country is such a large consumer market asks Sharma? They are finding it tough to do business at home. The notorious bureaucracy and impossible regulatory processes are making it tough going indeed.
Talking about excessive bureaucratic processes, a friend of mine after his retirement decided to set up a small stationary shop with the hope of generating some income. He is not a rich man by any means and his total capital input was only Rs. 300,000.
Being somewhat old fashioned, he is a stickler for doing things by the book. He had to register a company which carried both legal costs as well as registering fees. His landlord insisted that he pays, in addition to the rent, the difference in the municipal rates between residential and commercial classifications. Both his electricity and water are metered on commercial assessments.
He was then informed that he needs further permits from both the Kotte Urban Council as well as the Urban Development Authority which is purely for the privilege of doing business in the that suburban area. These organisations do not give any services in return. Even to have the garbage collected money has to pass. My friend also employees a female relative as an assistant at the store, more as a family obligation, a financial burden he cannot really afford. On the average his daily turnover has been about Rs 500-1000. You don’t need to be a business guru to know that his prospects as a small businessman are bleak.
6. Sharma says corruption is endemic in emerging markets but in some countries like India despite the bribe the desired result is not achieved. Another aspect of such corruption is that to get a public servant to do even what he is legally expected to do palms must be greased. Politicised and demoralised the public sector is bereft of any real self esteem, finding an outlet only in creating obtuse systems for the innocent. As a rule, less corruption, healthier the economy says Sharma urging investors to look for indexes showing decreasing corruption levels in a country.
7. Sharma is also high on countries emerging out of long periods of crisis with fresh leaders focused on sound economic management. He is optimistic on leaders like Jonathan Goodluck of Nigeria “It is a long time since Nigeria has had a leader who is not looting the country” Sharma also doesn’t like leaders who stay for too long either. “They start with fresh ideas, but after a while they are mostly interested in staying in power.” This could apply to top policy makers as well. A man whose ideas were relevant in the 1990s is not necessarily the answer to issues of the second decade of the 21 Century.
Sharma looks at investments in emerging markets from the perspective of the investors. But it will be useful for policy makers in emerging countries to look at some of his primary concerns.
Minister Amunugama, who is well-intended, thinks that our girl in the locally-turned-out bikini is a sure head-turner. But the good Minister would readily acknowledge she is not the only beauty on the beach and beauty is in the eyes of the beholder.
(The writer is an Attorney-at-Law and a freelance writer.)