When most of us think of “breakout nations,” the BRIC juggernauts come to mind. But Ruchir Sharma, head of emerging markets for Morgan Stanley Investment, has a more nuanced view. And it’s a good thing, too, because every one of those miracle economies is in trouble. “The biggest mistake markets make is extrapolation,” he told guests at the Chazen Institute–sponsored Sir Gordon Wu Distinguished Speaker Forum in April. “We assume a trend will continue ad infinitum.”

Although he doesn’t predict any superpowered economy will rival the BRICs in the next three to five years, Sharma does identify a number of countries that will 1) grow faster than market expectations, and 2) beat their peer groups, the two conditions that he says create a breakout nation. During his talk and in his book Breakout Nations: In Pursuit of the Economic Miracles (2012, W.W. Norton), Sharma identified some of the most promising areas:

In Asia

Asian breakout nations have all seen good times before. Most are looking at a resurgence based on market reforms that set them apart from their neighbors.

The Philippines President Benigno “Noynoy” Aquino III was originally dismissed as the unimpressive son of a legendary father who was assassinated by Marco supporters and a mother who was a former president. But he is delegating power and passing reforms. This island nation has much going for it, including the world's fifth-largest share of natural resources. Half the population is under 21, and Filipinos are well-educated and English speaking. Its average income of just $2,500 leaves room for growth.

Indonesia Noting that Indonesia was the country hardest hit by the crisis of 1997—1998, Sharma said it had regained its mojo by 2011, calling it “by far the best-run large commodity economy.” The world’s fourth-most populous nation has a large enough domestic market to generate demand, and less of a post-crisis debt problem than any other big emerging market. Although generally pessimistic about countries that rely on commodities, Sharma noted that Indonesians (both the government and individuals) are investing in the future and, unlike Russia or Brazil, not living beyond their means.

South Korea Sharma calls South Korea the gold medalist of emerging markets, thanks to its “rare ability to stay at the cutting edge of fast-changing industries” such as robotics, aerospace, and biotech. Unlike Taiwan, the country has spawned genuinely global brands. As for political risk, Sharma wrote that South Korean leaders have assumed the North is doomed to failure. The government has kept debt down to just 34 percent of GDP as part of its preparation to “absorb the high cost of rebuilding the North.”

Sri Lanka Even during its disastrous civil war, Sri Lanka managed an average annual growth pace of nearly 5 percent. As it rebuilds over the next decade and creates a new trade regime with neighboring countries Sri Lanka could well achieve 7—8 percent growth.

In Eurasia

Only one country spans East and West so well.

Turkey “Unleashing growth is often about lifting rules that don't make economic sense,” Sharma wrote. “Turkey is now growing by deregulating Islam...and allowing Turkey to resume the commercial position it held as a bridge between Europe and Asia under the Ottoman Empire.” He says the moderate reforms of Prime Minister Recep Tayyip Erdoğan have created conditions such that “no other country with an average income in the $10,000 to $15,000 class has better prospects of being a breakout nation.”

In Africa

Although South Africa is officially one of the BRICS, Sharma saw no particular momentum there. Instead, his choice of a breakout nation is the biggest country on the continent (population 162 million).

Nigeria Rising oil prices and the economy’s low per capita income base of just $1,500 made Nigeria one of the fastest-growing nations in the world over the past decade. Beyond oil, Nigeria's $300 million-a-year-movie industry (known as “Nollywood”) is the second-largest producer of films in the world — ahead of the United States and behind only India. Although the country has been infamous for its corrupt regimes, President Goodluck Jonathan “looks to be targeting all the right steps to unleash growth,” Sharma writes.

In Eastern Europe

Two former Soviet satellites stand apart. Both the Czech Republic and Poland have followed the reform template required to enter the European Union, but neither have chosen to become part of the Eurozone monetary union — meaning they enjoy free movement of people and goods within the EU but are not restrained by the currency or debt problems. And Central Europe labor costs are only 27 percent of those of Western Europe.

The Czech Republic With an average income above $20,000, the Czech Republic has been growing at a fast clip for some time — about 6 percent until its economy contracted in 2009. But it jumped back up to 2.5 percent in 2010.

Poland Representing the only European economy that did not contract in 2008—2009, Poland starts from a far lower per capita base of about $14,000, leaving it plenty of room to grow.

In Developed Countries

Sharma extended his definition of breakout nations to include two long-established economic leaders who he said will surprise on the upside in the next few years.

Germany As troubled as many parts of the EU are, Germany is experiencing a boomlet thanks to lower borrowing costs. The country has the lowest unemployment level in over 20 years.

The United States In 2007, Sharma wrote, the emerging market economies averaged three times the growth of the United States. “Today they are growing only twice as fast.” Although he decried the American debt problem, Sharma noted that US households and businesses have already greatly reduced their credit load, and “foreigners eager to store money in dollars (often in Treasury bills) lowers the cost of borrowing for the government and for consumers.” A manufacturing revival, cheap energy, and especially entrepreneurial innovation make America a breakout nation.

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