A Tale of Three Cities
Marc Faber
In all the more advanced communities the great
majority of things are worse done by intervention of
government, than the individuals most interested in
the matter would do them, or cause them to be done,
if left to themselves.
John Stuart Mill (1806-1873), Principles of Political
Economy
After having returned from a trip, which took me to eight different countries, I
applied for a tourist visa at the Indian consulate in Chiangmai since, as the
chairman of two India funds, I had to travel to Dehli and Mumbai, for some
speaking engagements. The visa was refused on the ground that my
passport was damaged. Welcome to the Indian bureaucracy! I still made it
eventually to Mumbai after having had to get a new passport from the Swiss
embassy in Bangkok and then went on to Delhi, Singapore, Shanghai, and
Dubai. Mumbai and Shanghai are both impressive cities from an economic
development point of view. In the case of Mumbai's inner city, the remarkable
feature is that little has changed since my first visit to the metropolis in 1973,
except that its buildings are now even more dilapidated. The reason for this
lack of development of the infrastructure in the inner city is a maze of totally
antiquated property laws that have prevented landlords increasing the rents
on the premises they let out, with the result that they have no incentive to
maintain their properties in good condition. Furthermore, tenants have the
right to stay in their apartments for as long as they wish, and the children of
tenants can even inherit the leases taken out by their parents, many of which
date back to before the Second World War. A friend of mine told me that
years ago he inherited an apartment building in the city for whose apartments
he is collecting a rent of less than US$1 a month! This lack of any property
development over the last 25 years, unlike elsewhere in Asia, is also
interesting given that economic activity is shifting to the outskirts of the city
and to other regions of the country, where India's totally incompetent
government is unable to hamper economic development to the extent that it
has in Mumbai's inner city. I can do no better, in describing the Indian
bureaucracy, than quote the 11th-century Chinese poet Su Tung P'o, who
wrote:
Families when a child is born, Want it to be intelligent.
I through intelligence Having wrecked my life Only
hope the baby will prove Ignorant and stupid. Then he
will crown a tranquil life By becoming a Cabinet
Minister.
Still, what is reassuring about India is that, despite its horrendous
bureaucracy, entrepreneurs have thrived and India is now home to many very
promising companies doing business in all kinds of sectors, but especially in
the fields of pharmaceuticals and software. The good news, not only for India
but for the entire global economy, is that entrepreneurs are like rats who
manage to survive in just about any environment, no matter how difficult, and
that they show an impressive ability to adapt to even the harshest
commercial and legal infrastructures by developing a high degree of immunity
to these unfavourable conditions. Moreover, entrepreneurs can mutate rather
quickly in order to take advantage of opportunities in sectors such as
software, for which there were no government impediments or regulations in
India. Such is the power of free markets over bad governments and
governments' interventions in the economy. Yet it is discouraging to see
Mumbai, the business capital of the world's second-most populated country,
lacking a large foreign business community, such as we find in New York,
London, Tokyo, Singapore, and Hong Kong, because of the government's
inability to provide an efficient infrastructure and a more conducive business
environment. Even more discouraging is the virtually non-existent nightlife in
India's capital, Delhi! So my advice is to travel to India for its beauty and very
interesting cultural sites, but forget about nightlife (I found some but it is
certainly not Bangkok, which is at present the world's best - by far.)
The Indian tragedy is that, in the absence of its bureaucracy and with, to
paraphrase Adam Smith, a tolerable administration of justice (an efficient
legal system with straightforward commercial laws and property rights), the
country could easily grow at around 8-10% per annum - admittedly from a
low base - and boost per capita incomes significantly compared to the
present environment, which allows the economy to grow at only around 5%
per annum while per capita incomes hardly budge. Still, this may be an
opportune time for investors to purchase Indian shares. The Indian stock
market, which shouldn't have a meaningful correlation to foreign markets
since India's economy doesn't depend much on foreign trade and foreign
portfolio flows (exports amount to just 10% of GDP), is at present extremely
depressed and is, in my opinion, discounting to a large extent the country's
problems. In addition, time deposits as a percentage of total market
capitalisation, which has declined to just 21% of GDP, are now at an all-time
high. The various listed India Funds, such as the Jardine Fleming India Fund
(JFI), the MSDW India Investment Fund (IIF), and the India Fund (IFN), all sell
at discounts of around 20% from net asset value and might be a suitable
vehicle for investors wishing to participate in the Indian corporate sector. For
an investment in a fund with a stronger bias towards a bottom-up approach to
stock selection, our readers might contact Jon Thorn
(jon@indiacapfund.com) who manages the Indian Capital Fund, of which I am
the chairman. Jon Thorn has, in the past, written about India for the Gloom
Boom & Doom report. (See his contribution entitled "The Best of Times, The
Worst of Times" in GBD report of July 20, 2001.)
There could hardly be a stronger contrast than traveling to Shanghai after
Mumbai: whereas inner-city Mumbai has stagnated in terms of infrastructure
and real estate development, Shanghai has emerged as a modern and
impressive city over the last decade. In fact, the rapid development of its
physical and commercial infrastructure is unprecedented in history.
Furthermore, as an Indian minister pointed out to me, although it was
achieved at a certain price in terms of human rights, the success Shanghai
has achieved in improving people's standard of living and per capita incomes
far outweighs those shortcomings. I have been visiting Shanghai regularly
since 1989, and on each visit I am struck anew by its continuously changing
skyline and the extent and speed of its modernisation. And this is the same
city that, ten years ago when I first began to write about its impending
emergence as Asia's most important commercial and financial metropolis,
businessmen in Hong Kong dismissed as being far too bureaucratic and
lacking the necessary educational infrastructure to develop!
I also visited Suzhou, a city I hadn't visited for over three years. At that time,
there were just two industrial parks under construction on the outskirts of the
city; now there are factories everywhere, with trucks continuously moving
goods to and from Shanghai's port along a newly built highway. While I am
fully aware of the problems that are endemic to the Chinese economy,
including the difficulties facing foreign companies wanting to make money
(due largely to the tremendous overcapacities in all industrial sectors and the
inevitable "speed-bumps" the Chinese economy will periodically hit), the
changes that have occurred in China in the last few years are simply
extraordinary. (And you may recall that I am rather well known for my
somewhat cautious views about the health of China"s social and financial
system.) While seated comfortably, on my way back to Hong Kong, in a
business class seat on China Eastern Airlines with significantly more
legroom than in any first class seat of a US air carrier, not to mention the far
friendlier service, I mused how in the future airlines such as China Eastern
and China Southern would dominate the skies, while the Swissairs of this
world, with their high cost structures, would become extinct. I also thought
that if I was twenty or thirty years old, I would move to China right away, as
the opportunities there are just mind-boggling. Many people keep telling me
that I was lucky to move to Hong Kong in 1973, when there lots of
opportunities in Asia and at a time Asia was not yet discovered. But, the
same is true today. However, the opportunities may no longer be as great in
Hong Kong, Singapore, Taiwan and South Korea, but what about Bangalore,
Shanghai, Beijing, Dalian, etc! Most unfortunately, I did not have time to go
out at night while in China, but from my previous trips I can recommend
Shanghai as a promising nightlife center.
My visit to the United Arab Emirates also held some surprises. As in the
case of Shanghai, both Abu Dhabi and Dubai have developed rapidly in the
last few years and have now become far more cosmopolitan than in the past.
In particular, Dubai has emerged as an important trading center, being the
gateway to a large number of Middle Eastern, Central Asian, and North
African nations, as well as an enjoyable entertainment and tourist center for
well-to-do people from around the region. Whereas Shanghai is impressive
because of its size and rising economic power, Abu Dhabi and Dubai
impress the visitor because of the money the ruling families have spent over
the last few years on building extravagant gardens and parks, as well as
monumental hotels. In fact, Dubai is worth visiting just to see the Burj Al
Arab Hotel, the world's only seven-star hotel, whose stunning architectural
structure rises to more than 40 storeys from a man-made island in the
Persian Gulf. I may add that Dubai has also one of the world's best
nightclubs called Cyclone (conveniently located next to the American
Hospital), which is littered with girls from all over the world. I have never seen
anywhere such a quantity and diversity of professionals! Truly a melting pot
for one's heart, which alone makes a trip to Dubai worthwhile.
Admittedly, one could argue that the Middle Eastern economies are
"artificial", since they depend largely on the price of just one commodity - oil.
But what is the difference between the Middle Eastern economic system,
which depends on the price of oil, and the Western industrialised nations,
which over the last few years have increasingly become dependent on the
price of their stock markets for economic growth? And on what would you
rather bet your future: oil, whose price is now rather depressed (at least in
real terms); or Western stock markets, which by any valuation standard still
appear to be expensive?
The purpose of this brief description of my recent trip is not, however, to draw
any conclusions about the relative investment merits of emerging economies
compared to the Western industrialised nations. (For such an analysis, see
Gloom Doom & Boom reports of May 16, 2001, entitled "Emerging Markets:
An Unpopular but Depressed Asset Class", and of July 20, 2001, entitled "If
the Purchase of Emerging Stock Markets is Financial Suicide, What Then is
the Buying of US Equities?") Rather, it is to note that, despite the fact that
the emerging markets have grossly under-performed the Western developed
markets since 1990, impressive economic progress has taken place in
most developing economies over the last ten years. Who, ten years
ago, had heard of Bangalore and of India's now famous software and
pharmaceutical companies, or spoke at dinner parties about Shanghai's
stunning development and China's large trade surplus with the United
States? And who, at that time, was aware of Emirates Airlines, an airline that
is now certainly better managed than Swissair or Sabena in recent years, or
of the Emirates Tower Hotel Group, which owns and manages several luxury
properties in Dubai (among them the Burj Al Arab Hotel) and now also runs
the Carlton Tower Hotel on London's Cadogan Square?
While I am aware of all the shortcomings of globalisation, it would seem to
me that, over the last ten years or so, whole regions that in the past were
absent from our Western market economy and which shunned our
capitalistic system as a result of their adherence to socialist ideologies and
to the ideas of self-reliance and hostility towards foreign investments have
1/4now been fairly well integrated into a "global economic system".
Moreover, there is no doubt in my mind that over the same period, an
unprecedented amount of knowledge, new ideas, technology, management
techniques, and capital was transferred to these developing economies.
However, such a major and rapid change for the global economy - the
integration of close to three billion people into the world's economy
who, until the late 1980s, were participating only on the periphery of
the capitalistic market economy - also brings about a state of lasting
disequilibrium. Following an initial boom that lasted from the mid-1980s to
the mid-1990s, the emerging economies experienced severe crises in the
late 1990s. These crises were accompanied by significant currency
devaluations or, in the case of China, by a deflationary environment, which in
aggregate badly deflated the price level of the emerging world. In turn, the
emerging world is now exporting their deflated price level to the Western
world and contributing to a structural "deflationary shock" in the global
economy, very much in the same way the opening of the western territories
in the US and the opening of Australia to the production of grain in the
second half of the 19th century led to a deflationary period that lasted from
the mid-1860s to 1900. |
