Rubber and Rice

by Dan Denning

Admit it. When I say Thailand, at least part of what you think is beautiful women and sex, right?

That’s part of the country’s tourist image. Of course it’s completely superficial…if not entirely inaccurate…

Superficially speaking, Thailand is a lot more developed than I expected after having been in Bombay. Not to slight Bombay. But in Bangkok, the airport is modern, the taxis are air conditioned, and there’s a good expressway that runs from the airport to the city in less than 40 minutes, traffic permitting. The city also has a relatively new, elevated subway that makes getting around cheap and easy.

I point these things out because I think it’s worth remembering that they don’t happen overnight. And by the time they do happen, and make it possible for foreign business and tourists to operate in the country, a lot of the low-hanging investment fruit has already been picked.

To put this in the context of India, when you look around Bombay, you need to think of what it will look like in ten to fifteen years, not what it looks like now. In investing, image is not everything. A gleaming city with lots of neon and great infrastructure isn’t a sure sign that you’re going to be able to find good businesses at good values.

And in India’s case…thinking down the road also means thinking of a 24% national savings rate as somebody else’s future cash flow. If you can do that, your next question is to figure out who’s going to get that cash flow and how can you buy them right now, at a discount to that future cash flow. At least that’s how I’m looking at it.

Back to Thailand…the real business part of the trip begins tomorrow when I hope to visit the floor of the exchange and then later meet with some Westerners who’ve been doing business here for a while.

My first (superficial) impressions are favourable. And to be honest, that has to do, at least a little bit, with actually seeing the city, travelling around in it on public transportation (we took a long boat up the river to the temples we visited), and even getting some of its cultural heritage.

I’m beginning to think that it’s worth studying eastern religions, more just to see how compatible they are with capitalism. If you’re an economics student, get on it…read Max Weber’s The Protestant Ethic and the Spirit of Capitalism…then read Confucius, the Tao te Ching, and all the other books about Eastern religions I should know but don’t.

It’s the main reason for my trip over here to Asia – I believe the spirit of capitalism IS moving East…after having been slowly corrupted and eroded in the West.

Money moves where there is opportunity. And opportunity comes when you put natural resources and abundant labour in close contact with risk capital. You’ve got all the ingredients here in Asia. But do you have the required “spirit”…?

In China, I’d say yes. In Japan, I’d say it’s a tired spirit. In India…I’d say you have a lot of spirits…and a lot of destruction is needed before there can be more wealth creation (Siva first, Vishnu later.)

Here in Thailand? Too early for me to say.

But Debra and Mike, readers of Agora newsletters, pointed out that Thais are culturally anti-competitive. No one wants, at least visibly, to have more than other people. From what I could gather from them, there’s an innate sense of egalitarianism, although they probably wouldn’t call it that.

For example, Mike and Debra tell me that back when the baht crashed in ’97, the government rolled out the “One tambon, one product” policy. In order to…what? Get the economy back on its feet…the government told each village (tambon) that it could produce only one item. Call it the reverse division of labour…or the concentration of production.

The result, Debra and Mike said, is bizarre. You have whole villages in which everyone produces exactly the same thing and sells it for exactly the same price. The idea, I suppose, is that no one is going to put anyone else out of business and every village will have a monopoly of sorts that supports the economic livelihood of its residents.

The problem, of course, is that you can’t command production efficiently, nor can you strip out the roll of price in allocating resources and labour effectively to satisfies people’s needs and wants.

Think about it. One village produces nothing but spam. Just spam in a can. Maybe people buy it. Maybe they don’t. But the village cranks it out no matter what. What if the village can’t make enough? What if it makes too much? How does it adjust?

Or, take an expensive item like say, caviar. A whole village cranking out caviar. All at the same price, and regardless of demand.

You can see that it simply can’t work. Prices communicate valuable information. They tell producers what people want and what they’re willing to pay for it. High prices attract more producers because the margins look so good. This brings down prices…and as price goes down, demand increases, a pretty simple lesson in supply and demand curves.

The problem with a supply and demand curve is that it’s static. It takes a picture of the marketplace at any given moment. But the market moves. And the only way you can know which way it’s moving, how consumers tastes are changing, what they’re willing to pay, is if you allow prices to perform their communicating function.

Sorry for the educational digression. But the point is that most of the Western world – except for Europe, and the United States, and OPEC – understands that through competition and prices, you get the best products and services at the lowest prices (unless you’re providing subsidies to politically powerfully constituencies).

It’s not a complicated idea. But perhaps it’s an idea that has to take root organically and be proven to work over time. Ideas are their most dangerous when they’re simply imported as theories and divorced from real human experience.

I suppose my question about Thailand is whether the lack of a competitive culture (and an economy where prices move freely) is a serious investment disadvantage. We’ll see. I still think that as one of the world’s largest exporters of rice and rubber, Thailand’s got a lot going for it. It can feed the Chinese and put tires on their 100 million new cars. Now, let’s find us a rubber company and a rice company…

Okay, time to shower. I lost five pounds in water weight today, even with the fruit binging. A big dinner awaits.

Regards from Bangkok,

Dan Denning
for the Daily Reckoning

P.S. I promised I would tell you more about my meeting at the Reserve Bank of India. I’m not breaking that promise. It’s just fulfilling it turned out to be less interesting than I thought. The whole conversation was “off the record.” It was a great conversation, if you’re fascinated with how central banks sterilize the money created in open market operations to prevent inflation. But as travel writing, economics is boring. And in any event, I didn’t really find out much about the rupee and Indian interest rates that I didn’t already know.

The notable difference between India and China right now is that the Rupee probably wont’ appreciate that much against the dollar, even in a major dollar collapse. On the other hand, as you well know, the Chinese currency has a built in springboard to strength that currency speculators love.

The direct implication of this is that China has had a much easier time attracting foreign direct investment and money to Chinese banks, with the revaluation of the Yuan lingering as an implied benefit. No such luck for India. Which means India must work harder to attract foreign capital to meet its large development needs. The July budget will be telling.

Finally (I really mean it this time), I wanted to pass along a thought that’s not totally developed. This is a blog, though, so I’m not ashamed. I’ve noted in the past, along with others, that 21st century Asia is a lot like 19th century America, namely a vast repository of raw commodities and future demand for both raw commodities and finished goods. It’s deflationary for finished goods in the rest of the world (flooding the world with goods) and inflationary for raw materials prices (consuming raw materials at break neck rates.)

There IS one big difference between 19th century America and 21st century Asia. America was an empty continent waiting to be tamed and harnessed by eager immigrants. Labour wasn’t in surplus.

In China and India, labour, both skilled and unskilled, is part of their respective competitive advantages. But it’s also part of the political and social risk you face as an investor. How will Asia feed its millions and care for them as they get older? How will it provide enough water and electricity to accommodate densely packed cities?

And what will happen when millions of Chinese and Indians feel left out of the prosperity they see in their gleaming new cities?

This is all part of figuring out what the spirit of capitalism is really like here. Much to consternation of intellectuals and Leftists, Americans never took to class warfare, even in the face of opulence and waste by the richest Americans.

Even with the epic number of huge swindles coming out of corporate America in the last four years, you still don’t see an uproar that the wealthy are too wealthy. Why?

Americans (generally) don’t begrudge the wealthy their wealth. Instead, Americans see the rich as examples of what we all might become if we’re lucky, we work hard, or we invent the next operating system of the personal computer. What can that outlook be attributed to? Good question…let me know if you have any ideas. I have a few, but I really DO have to get showered before dinner…