Many Western investors have not been able to fully grasp the Asian market. The difficulty lies in understanding how and why Asian economies, and stock markets, have grown differently from the rest of the world. In Asia, governments play a far larger role in the economy and this point must be understood. Otherwise, you are in for a difficult ride.
Regardless if you are a financial services expert, an individual investor or government policy maker, understanding the structure of Asian economies (and the light speed jump they made to economic growth), is vital information. Look no further than Northeast Asia to find evidence of how capitalism isn’t the only pathway to prosperity.
What Is The Model And Where Did It Come From?
Just as East Asian technologies, such as printing, the compass, and gunpowder, were fundamental to Europe’s success, Western economic ideas helped jump-start Northeast Asia’s explosive global rise.
Asian Capital Development (ACD), with roots from Germany, was a notable tool.
ACD, also known in some form as state-sponsored capitalism, lets governments influence how investment enters the public and private sector. ACD causes pre-determined growth stimulation of new or specific industries.
German manufacturing policies, which aimed to protect and develop domestic industries, caught the eye of top Japanese lecturers and bureaucrats. They studied and introduced the concepts to Japan, making it the first Asian country to implement such policies.
The Developmental Process
Agriculture is the foundation of every economy prior to industrialization. As a result, a government’s agricultural policies decide if (and when), a country can step-up and become a manufacturing super-star.
Once a solid manufacturing sector is safely established, the economy can steadily move into services. This is the model: Agriculture (paired with land reform and banking policies) – Manufacturing (with attention to education) – then, Services.
The graph below tracks China’s GDP from 1967 to 2015 by sector. First, the Chinese government shifted a majority of its investment from the agriculture sector into manufacturing. Then, investment shifted again, this time from manufacturing into services. Today, the services sector accounts for over half of China’s total GDP.
Private Property Is The Key
Before moving into manufacturing, a healthy agricultural sector is necessary.
For a long time, small scale, household farming was the most reasonable (probably only) employment option in Northeast Asia. Unlike large-scale farming, which generated fewer jobs and an inferior crop output, small-scale farming made use of the available low-skilled labor force and produced higher crop yields.
When massive land reform took place throughout Asia, land transferred from wealthy ownership to peasants. The expansion of private property was essential in expanding the economy and creating a ‘consuming’ class who bought manufactured goods.
After World War Two, the Japanese government decreased land ownership – with a limit of 3 three-hectare farms. Wealthy landowners gave their extra land to the government. It was then redistributed to poorer farmers.
This redistribution helped spread economic equality. It also gave way for growth in rural productivity and consumption, surpassing even pre-war levels. Harvest yields also increased by half, as the bigger outputs led to surpluses. The government taxed these surpluses and the revenue was reinvested, rebuilding much needed infrastructure.
For the first time, the new class of farmers began earning enough to consume manufactured goods and now having land as collateral, they even started investing in new businesses.
Supporting Home Industries
Though many like to believe that the only factor needed to generate wealth is competition through free-trade, it simply isn’t true. Aside from a few offshore financial hotspots, like Hong Kong or Singapore, no nation has gotten rich through free-trade alone.
For instance, Northeast Asian governments spurred development by implementing policies that protected, invested in and backed growing (and sometimes fragile), domestic industries.
Shielding domestic businesses establishes an environment in which industries can grow, and become more competitive before they enter the global market. One way, is to imitate and improve foreign technologies.
The American power company, Westinghouse’s deal with the Chinese government is a prime example. Westinghouse gave China vital technology about basic turbine production. To protect the young Chinese turbine industry, the government kept trade barriers up and blocked foreign competition. The efforts were repaid as today China is home to the top three largest thermal turbine producers in the world.
Northeast Asian governments played a big role fostering fierce domestic competition. They safe-guarded domestic companies from international opposition and supported national entrepreneurs with favorable policies and funding.
For instance, in China during the 1990s, companies not meeting target profits were tossed aside. Productive companies received benefits, such as subsidies. They were also incentivized to make preparations for future export and foreign competition.
The majority of early manufacturing in Asia was mostly inferior Western imitations, adaptations and ‘knock offs’. Yet, through sheltered domestic competition and government help, the quality of products improved drastically – making them internationally desirable.
For instance, in South Korean during the 70s, the government nurtured the nation’s vehicle industry. With only three private firms competing in a domestic market that sold a measly 30,000 cars per year, the government stepped in to encourage growth. To boost exports, they gave more loans to companies with higher export outputs. Today, one of these domestically supported companies, Hyundai Motor Company, has grown into a global motor giant – being the third largest car manufacturer in the world.
We cannot stress enough how important it is to understand regional difference before you consider investing in Asia. This region simply plays by a different set of rules.
In the last article, we discussed the importance of making effective and consistent models to help determine your investment decisions. In tomorrow’s daily we will be diving deep into the idea of capital.
We may all be familiar with the term, yet people tend to have quite different perceptions of what capital actually represents. Tomorrow we will explore this truth further…