Saturday, April 19, 2003
Tampa Musings-Eileen's at the Tampa Convnetion Center taking teacher-certification tests today; I earned a stack of husband points by driving her into Tampa and dropping her off; that way she's only thinking about the test and not thinking about driving into the downtown of a big city. I've been hanging out at the Temple Terrace library in metro Tampa with my laptop making up two exams for Monday and typing up some notes for my Investments class-we're covering international investing and I felt that my comments on the EU and Canada might pique the interest of my gentle readers and also allow me to catch any blatant errors before I hand this out Tuesday. [Update 7PM-I added stuff on Japan, the Asian Tigers and the rest of the developing world while hanging out at Burger King this afternoon; I also tweaked the Canadian part a little]
Current International Financial Issues
EU-There are two big events on the EU horizon. The first is the admission of ten new countries to the EU in 2004, formally accepted last week; most of the new members are from the formally-communist parts of central and Eastern Europe (Czech Republic, Hungary, Poland, Slovakia, Slovenia, Estonia, Latvia, Lithuania, Malta, and Cyprus). This will add a block of lower-wage counties that could grab jobs away from an already-rough job market in the current EU. It will also add a block of countries that just got away from communism a decade ago that are more free-market oriented that the French and Germans.
The second issue will be about the form that the EU will take. France and Germany are looking for it to take on more governmental roles, moving power to EU HQ in Brussels and away from the member governments and being allowed to pass laws by majority vote rather than by the consent of all countries. Others, such as the British, are leery of a giving away more sovereignty.
The same players split over the Iraq war, with the French being very fervent in stopping a US-led invasion; Germany and Belgium were also vocal in opposition. The British were a key ally in the war, with their troops taking over Basra while the US went for Baghdad. Italy, Spain, Portugal, the Netherlands and Denmark all supported the US-UK invasion plan, as well as most of the new eastern members.
This split tends to break down on liberal-conservative lines, with the pro-centralization, anti-war camp being to the left (France’s ‘conservative’ Chirac government is well to the left by US standards) while the skeptical-of-centralization-and-pro-invasion camp tends to the right (British Prime Minister Blair’s New Labour government’s centrist by European standards). Some pundits have suggested that these splits might cause the EU to split in two before the end of the decade, with a French-German lead social-democratic EU being left by the more free-market-oriented countries.
Investors in Europe will have to look at the possibility of increasing regulation from a centralizing EU, decaying civil sphere as increasing unemployment from completion from the new eastern members, and increasing Muslim unrest among sizable immigrant communities in France, the Netherlands, Germany, and the UK. Declining birthrates will mean a greater burden on younger workers to look after their grandparents; immigration to meet the need for younger workers will exacerbate the immigrant-native frictions already coming to the surface. The Franco-American (oh-oh Trade War-ios) diplomatic riff over Iraq and other issues will add to a volatile mix where investments in continental Northern Europe are going to be very dicey.
Britain, Ireland and Eastern Europe might be good investment locales, as well as southern Europe (Italy, Spain and Portugal). These countries have less baggage than their Northern continental colleagues.
Canada-I’ve been a big critic of the Chretien government, but this might be a good time to look to put some money in the Great White North. The Canadian dollar seems to be rebounding against the US dollar, the Liberals’ win in Quebec earlier this month shows a move away from separatism, and the next prime minister is likely to be economically to the right of Chretien, whether it be Alliance party (the main party of the right; the big-C Conservatives are smaller and centrist) leader Stephan Harper or, more likely, former Liberal Finance Minister Paul Martin. Martin, former Canadian Shipping Lines owner (he just gave the company to his sons to get away from conflict-of-interest questions) has a lot of support from Bay Street (Toronto’s financial district); thus, the investment climate would seem likely to improve either way.
There are a lot of things that need attention by the next government. Federal reforms seem to be a big issue; while Quebec has kicked the pro-secession Parti Quebecois out of power, there isn’t a lot of love for Ottawa there or in Alberta, where conservatives have been not-so-quietly talking about secession as well. The national health care system needs to be reexamined and partly privatized. Taxes, especially capital taxes, will need to be lowered if the Canadians want to compete with the US.
However, the moves for reform seem to be headed in the right direction. A true Canadian economic revival might be two elections away, as the Canadian right hasn’t coalesced around either the more centrist Conservative party nor the more free-market-oriented Alliance Party that broke off from the Conservatives a decade ago; that splintering of the right-half of the Anglophone political spectrum all-but insures a Liberal win in the next election. If a Martin government has the courage to institute reforms in the mid-00s, the Canadian economy could rebound nicely, but the Liberal attachment to national health insurance and other big-government items might be hard to shake; Martin may have fights with his left wing like Blair is having in Britain.
Japan-The tiger that scared the US shi silly in the 70s and 80s has gone into hibernation for over a decade; the computer-generated boom in the US in the 90s didn’t make it across the northern Pacific. Banks are burdened with bad real estate debt that they’re unable to foreclose on due do the poor real estate market. The industrial policy that lent support to the electronics and automotive industries, making them the most productive in the world, hasn’t worked as well in the computer era. The keiretsu system of conglomerates has helped to drive debts higher and accountability lower. The political system is unstable, not having settled into a stable pattern after the breakup of the Liberal Democratic Party a decade ago. A mama-san and papa-san retail sector shows the growth of consumer spending. Deflation has led to near-zero interest rates, taking monetary policy out of the picture.
The Japanese are overdue for a recovery, but they’re overdue for a recovery like the Detroit Lions are overdue for a good team; it’ll happen someday, but probably not next year. There’s a lot of pent-up demand for goods that could help boost the economy if Japanese consumers got into spending mode. Better utilization of women in the workplace could spur things along as well; the Japanese are a couple of decades behind the US in getting women into positions of authority.
One big train-wreck waiting to develop is the low birthrate creating a bad elderly-to-worker ratio; Japan doesn’t have an immigrant mind-set, so importing workers is a more difficult proposition than in the US or Europe. If Japan makes the right reforms, it could have a good second-half of the ‘00s, but that’s a big if.
China-The billion-person market tempts quite a few investors, but the political risk of dealing with the Communist government is very large. If you’re ready to play financial Calvinball, their can be some profits to be made. However, if you don’t like the idea of the Party changing the rules in the middle of the game, this might not be the place for you. Beijing has largely lived up to its promise to keep Hong Kong’s legal and economic system intact until mid-century, so there might be a Hobbesian element to Chinese Calvinball. Caveat Investor.
The Asian Tigers-A mixed bag. South Korea and Taiwan seem to morphing into mature democracies and are all-but-ready to be moved off of the “developing country” list. Both have problems on their plate. Korea is in the process of reforming the chaebol system of mega-conglomerates and making cautious overtures of rapprochement with the North; a warming earlier in the decade has cooled with an increase in belligerence from the North and an acknowledged resumption of their nuclear weapons program. One point to ponder-Korea is nearly a majority-Christian country, the only country I can think of that became that way without Western colonialization. Taiwan has to keep an eye on Beijing who wants to reclaim the “renegade province;” the two governments have growing economic ties despite the irredentist rhetoric from the mainland.
Singapore and Malaysia seem to be riskier bets. The prospects for political unrest in both countries make investments there less secure. Malaysia may find itself increasingly isolated from the west if the pro-Muslim attitude of the current government continues. The largely benign autocracy of the Lee regime in Singapore has create a pro-business, pro-Western climate, but the political and free-speech restrictions might have finally worn out their welcome; look for a lot of civil unrest like we saw in Korea in the late 80s as Singapore moves away from the one-party system.
Developing Nations-India is an increasingly good financial bet. A well-educated middle class is starting to turn India into a software powerhouse; Bangalore is turning into the Asian Silicon Valley. The current Hindu-centric BJP government has turned away from the socialist and anti-foreign-investment leanings of the Congress party and is trying to tap into the Indian diaspora for investment help. Nuclear saber-rattling with Pakistan and attacks on Indian Muslims and Christians by BJP-affiliated thugs give some indigestion to the investor, but India has a big up-side.
The Philippines seem due for a continued economic revival. The political system seems to be stabilizing and an educated, English-speaking workforce could be the next Asian growth story if they can avoid the political turmoil and corruption that has slowed them down for the last quarter-century. Muslim rebels in the south are a downside, as is a tendency for making politics a contact sport, but not enough to avoid it.
For those with a strong stomach, Israel is another promising country. Close ties to the US, a good computer industry and a free-market-oriented government (the last election moved out the devoutly-Orthodox but pro-social-spending Shas party and brought in a militantly-secular libertarian party in its place) bode well for the Israeli economy. The Palestinian problems still loom, as does a possible war with Syria, but the US presence in Iraq make those more likely to be solved in the Israeli’s favor.
Chile seems to be the best bet in South America; the Pinochet years were lousy for civil rights but good for economics and the democratic successors have kept the free-market economic system. Membership in an expanded NAFTA isn’t far around the corner.
Much of the rest of South America is in flux, as leftists have taken over dysfunctional economies in Argentina and Brazil, Venezuela has a dysfunction democracy currently led by an autocratic socialist and Columbia has to fend off Marxist rebels. Things were looking promising a decade ago, but it may take until the end of the ‘00s before most of South America works out the political and economic kinks.
Mexico is another good long-term play. There’s a bit of bad blood at the moment between the Fox and Bush administrations over Iraq (Mexico has a temporary seat on the UN Security Council and wanted to spend more time with inspections), the death penalty (Mexico vocally protests the execution of Mexicans convicted of murder in the US) and immigration issues. However, the free-market-oriented Fox government should improve the Mexican economy over the long haul as Mexican wages improve with greater access to the North American economy via NAFTA.
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