Argentine Economy



matt 120pxThe Argentina economy over the past decade makes for an interesting case study. Argentines went through a painful crisis and just when everyone thought it was all in the past, financial uncertainty has recently reared its ugly head once again. Throughout the 90’s, the Argentine peso was pegged to the US dollar, one-to-one. While the US (and consequently the dollar) was riding the dot-com boom, South American (and their pesos) commodity-export-centric economies were being hurt by the weakened global demand caused the Asian Financial Crisis of 1997-98. The Argentine peso-US dollar peg was a joke, given the vastly different economic health of the two nations (similar to the obvious discrepancies with Venezuelan exchange rates today). Even as Brazil’s (SA’s largest economy) currency (the real) lost half of its value in 1999, the Argentine government clung to full convertibility. While some politicians advocated “dollarizing,” others turned to the IMF who recommended various fiscal targets if convertibility was to be protected. But it was unrealistic and nearly impossible for the Argentine government to pull itself out of the hole. The artificially-high FX rate pummeled Argentine exports and unemployment was getting out of control. By 2001, everyone knew that the one-to-one peg was unsustainable and as rumors or devaluation swirled, Argentines pulled out their savings and exchanged pesos for dollars in droves. The government then banned withdrawing money from bank accounts, pensions, and even limited access to salaries! Can you imagine the government banning people from accessing their bank accounts?! By January 2002, the government did abandon convertibility and the peso dropped to a quarter of its value, before bouncing to and settling at around 3 pesos:1 USD later that year. Many Argentine’s life savings were wiped out, inflation soared, and Argentina defaulted on its debt.

            Since then, the country has gone backwards, infrastructure-wise and poverty-wise. And since the government never settled with all of its defaulted-debt holders, the country has largely been locked out of international credit markets and is unable to fund much potential growth. On the bright side, Argentina has hydrocarbons (oil and natural gas) and benefited from the most recent global boom. Argentines had hoped that the worst was behind them. A popular billboard from a recent election said, “Your kids don’t know what the IMF is? We’ll make sure they never will.”

            While commodity prices and emerging market economies strengthened through 2007, even as developed economies began to fall, 2008 was disastrous. The credit crisis didn’t affect Argentina initially too badly, because there wasn’t really a market for Argentine bonds since 2002. The main investors of Argentine debt were domestic funds (pensions and mutual funds) who were forced to invest in the worthless things by the government. Since it cannot access international funding, the government really pushes for domestic investment in government bonds and discourages the use of dollar-denominated bank accounts (which began being offered earlier this decade for obvious reasons). When oil (and all commodities) began to tumble in July 2008, government revenues began to fall sharply. While we were living in Buenos Aires in October, the president announced a plan to nationalize all the private pension funds. This drew outrage from the media, educated, and professional classes, since the government was basically stealing workers’ money. Remember, the ban on bank withdrawals is still a recent memory. But with a majority in the Senate and public support among the lower classes, the bill was passed in the Senate. The government gets a few things from this. One, they get control of all the money in the pension funds to spend as they please. The government has already announced that it will sell foreign debt held by the funds and buy domestic debt. Two, since the pensions are some of the only ones who hold domestic government debt (and only because they’re forced to), the treasury is relieved of much of its debt payments (because it’d just be paying itself). Foreign media widely reports that the government will likely default on their debt in 2009, while domestic media seems to think that it’s a political move designed to (literally) enrich the party. Whatever the reason, these moves have obviously had consequences. The Argentine benchmark index, the MERVAL, has tanked. Argentine bonds have tanked and the prices of CDS (credit default swaps) on the aforementioned debt has soared (last I read, it cost a quarter to insure a dollar of Argentine government debt, which is ridiculous). While the government defended the peso for a couple weeks, they finally capitulated as most countries do when trying to defend their currency. When we arrived in BA, it was 3.14 pesos to the USD; today, it is over 3.4, which has made Argentina increasingly cheaper for us to travel. Several times, I encountered empty ATMs and on several days saw lines at banks around the block. With further currency depreciation expected, people are trying to get dollars.

            Travel finances aside, what is the state of the Argentine economy and what is in store? Like its neighbors, Argentina is heavily dependent on commodity exports and the worldwide slowdown has and will continue to seriously hurt it. The pain will be intensified by the fact that the government cannot get international funding, its recent history of debt-default, and the current perception that the government is scrambling to not default on its debt in 2009. Not only are state revenues falling, the state has no other means of acquiring cash. The government is running populist campaigns (“We’ll protect the pensions” or “Why is America lecturing us on financial responsibility, when they started the mess”) and only in November did it admit that the country was in trouble. Well, I think the country is in real trouble without any hope in sight: demand and prices for the country’s two most important exports have tumbled (oil and soya), the currency will certainly continue to depreciate due to both domestic and international factors, unemployment and inflation will result, and the government may default on its debt for the second time this decade.


Exchange Rate Tangent: Since I wrote about the weak dollar and its negative effect on our travel expenses, the credit crisis has intensified and initiated a “flight to safety” in currency markets. The dollar has strengthened against every single currency we’ve used over the past 18 months, except the Japanese Yen (since Japan’s central bank is deemed to be more solid than even America’s and the yen was heavily undervalued due to the carry trade which helped fuel this latest bubble). The Yen has strengthened from about 125 to 90 over the past year (it was 107 when we were there). Although I’m glad we weren’t in Japan a month later than we were, it kills me to see the Korean Won at 1500. It was around 1000 when we were there, which means we would’ve spent a third less money if we visited now- a good margin in a somewhat expensive country. Honestly, I don’t care if the Indian Rupee, Thai Baht, or any other developing nation’s currency has fallen 20-30%, because those countries were so cheap anyways. Argentina and Chile were expensive countries to travel, but considerably cheaper due to FX moves. Bolivianos are pegged to the dollar, many Peruvian prices are denominated in USD (although still payable in soles), and Ecuador’s official currency is USD, so I think we’re pretty much done watching exchange rates. But, for you Americans out there, now may be the cheapest time to travel literally anywhere in the world (except Japan).


My tangent’s tangent: In my opinion, the best value destinations for American’s right now are: three of the world’s most expensive nations have become way cheaper: the UK (pound down over 25%), Iceland (kronor down between 60-90%), and Russia (ruble down over 30% and getting weaker). Additionally, I believe the Euro will continue to weaken due to all the once-boom-and-now-bust-nations like Spain, Greece, and all of Eastern Europe. Commodity-centric economies like Australia and all of South America are getting cheaper by the day too (all currencies hurting bad versus dollar). All of Asia has become even more cheap, except China (RMB remains up about 20% versus USD for 2008) and Hong Kong (HKD is pegged to USD at 7.8). Okay, I was going to list three countries as being a good value, but almost everywhere is as cheap as its ever been. I know times are tough in the US, but with cheap oil and a strong dollar, flying to and traveling almost anywhere internationally is unbelievably cheap. This is one long post….I think it’s time for me to sleep….

Chilean Economy


matt 120pxI haven’t written a market or economic-related post is awhile. It’s definitely not because nothing has been happening. Since my last post about the Vietnamese economy, we’ve visited China, the US, Korea, and Japan while the oil/commodities bubble has popped, the credit crisis has intensified, the currency markets have crashed, stock markets have been taken down substantially, and governments and the IMF have been rolling out aid/bailout packages daily. As a student of economics and finance, its been an unbelievably interesting past few months (of course, that’s ignoring the extreme pain I’m experiencing in my portfolio). Perhaps, at some point, I’ll have to write a post chronicling our journey during the credit crisis (this trip and the credit crisis began in July 2007) and the impact its had/having in the places we’ve visited. I’m not sure if anyone even reads these posts, but at least it would be interesting for me to record.

            For now, I’ll just refresh my financial writing with a little tidbit on the Chilean economy. Developmentally speaking, Chile is the most developed South American country. It’s a small country, measured both by area and population (only 18 million), which was ruled by a dictator for 20 of the last 30 years (I feel that they know how to get things done). It has enjoyed a huge economic boom for the past few years, with both the Chilean peso and the IPSA (Chilean benchmark index) outperforming. This is due to the fact that 70% of Chile’s GDP is commodities-related (mostly mining, agriculture, and fishing). Chile’s mineral exports have supplied the rapidly growing economies of Asia and, thus, helped fuel the huge bull market of the past few years. Everything was good until the commodities bubble popped in July 2008. Everything from oil to wheat has crashed from their historic highs, while the current deleveraging of all assets around the world has added increased pressure. The Chilean peso has crashed in the past few months, which has made traveling here substantially cheaper for us (locals say this is the first time in years that Chile is cheaper than Argentina).

            So things are bad in Chile. But things are bad around the world right now, so what’s the outlook for Chile? Well, the good news is that the country is not strung out on credit like Iceland, the Ukraine, or Pakistan (or any of the other countries that need massive IMF loans to function) and probably won’t default. The bad news is, of course, that Chile is dependent of commodities. And with a worldwide slowdown/recession/depression looming, demand for Chile’s (and all commodity exporters) commodities have fallen off a cliff. From the copper mines in the north to hydrocarbon reserves in the south, the whole of Chile is entering a tough period. The problem with commodities is that their value is determined solely by supply and demand. Thus, Chile is dependent upon world growth for its own growth. It doesn’t have enough domestic industry to pull it out of this global downturn. The bottom line? Chile is better prepared than most other commodity-centric economies in SA, but it still is reliant on global demand/growth. Chile is not in control of its fate: Chilean GDP growth is directly correlated to global GDP growth and that does not bode well for Chile, for the foreseeable future.

Vietnam Market Analysis


Don’t put all your eggs in Vietnam’s basket

Although I’ve written a fair amount about my dislike for Vietnam’s strictly business attitude devoid of any friendliness, and its growing consumerism and obsession with money, the flip-side is that Vietnam has a rapidly growing economy. Perhaps the focus on making money and buying “stuff” is a reaction to decades of economic imprisonment. Whatever the reason, the growth was evident from the moment we stepped into Saigon. The building everywhere, the new ATMs, the preponderance of motorbikes. While this could describe many Asian locales, it’s the type of buildings going up, the fact that nearly all of the ATMs and motorbikes are new, and the absence of cars (the next step up from motorbike) that indicate Vietnam’s growth is rapid and new. In Indonesia, I picked up a copy of The Economist whose cover-story was a special report on “Vietnam: Asia’s Other Miracle. Indeed, it was just over twenty years ago that Vietnam was on the brink of economic collapse and famine. Vietnamese were synonymous with “boat people” for the whole the 1980s. It had only taken a decade for the Communist party to totally destroy the country with its policies. By the mid-80s, they saw the writing on the wall and began to liberalize. Since then, its been a slow, but gradual process, with private property becoming legal in 2000.

The abandonment of Communist economic policies for capitalist ones is the reason that today (scales aside) Vietnam looks more like China than Lao. In the past five years, two stock markets have been formed, in Saigon and Hanoi, repectively. Between the encouragement of somewhat free markets and the government’s concerted effort to help the poorest segments of the population (something other Asian nations should at least attempt), the middle class is growing rapidly and driving domestic consumption. Not only is foreign direct investment (FDI) flowing into the country at an accelerated pace, but Vietnam is also investing heavily in neighboring countries to meet the demand its creating. Writing about specific market opportunities in Vietnam is futile for several reasons. One, unless you’re part Vietnamese, foreigners cannot open investment accounts. Two, the only fund (besides hedge funds, PE, and institutions) that offers a Vietnam-focused fund is small UK-listed one (Americans can buy it OTC, using symbol VTOPF). Three, with so few offerings, it makes more sense to write about individual stocks, rather than sectors, something beyond the scope of this post (not to mention my expertise). All that being said, many analysts and market observers say that Vietnam is a ten-year buy. Its 8-9% GDP growth is projected to sustain itself at least another decade. Looking at Vietnams two largest and fastest growing firms (Vinamilk and Vinpearl, foodstuffs and tourism respectively), it is clear that this is not going to be a purely export-driven boom. Even more exciting is that Vietnam is in the very early growth stages. Very early. Imagine investing in China or India ten years ago. Imagine investing in any OECD country in the 50s. Vietnam is at the bottom of what many expect to a huge parabolic spike in economic growth.

But before you throw all your money in that UK-based Vietnam Fund or any of the other funds that are bound to open in the near future, you better know the risks of investing in Vietnam. Yes, Vietnam is growing extremely rapidly, but so is inflation. GDP growth is hovering around 8%, but the April inflation reading indicated 21% inflation (year over year). To give you a frame of reference, China’s GDP is growing at about 9% with a high 9% inflation, while India’s GDP is just below 9% with 7-8% inflation. Vietnam’s economy could very well overheat and derail, with inflation dually destroying Vietnamese wealth/savings/earnings and increasing businesses’ input costs to fatal levels. We just came from Indonesia, which was more developed in 1997 than Vietnam is today, but was stopped dead in its tracks and remains the same today. The Asian Financial Crisis wreaked havoc on Indonesia and Indonesians, who watch their rupiah go from 3,000 to the dollar to 10,000 to the dollar within a weeks span. Inflation or a similar financial crisis could do the same to Vietnam, especially since Vietnam’s government is inexperienced and ill-equipped to deal with the growing free market economy. Even if the government can bring inflation down without seriously hurting growth, there’s still the danger of market volatility. Market caps are small and trading thin, plus 25% of Viet securities are owned by foreigners. To witness the effects of foreign outflows, look at a 2008 YTD chart of Vietnam’s index. Down 50% ytd, making it the worst performing market in the world this year. I’ve outline a lot of big risks, so if you’re still interested, perhaps this correction provides a good buying opportunity. Even if you’re not interested, you may consider allocating a very small portion of your portfolio to Vietnam (which can be done via a plethora of Asian-focused funds out there), as even just a few dollars can grow to a sizable sum with good returns. At this moment in time, I feel that Vietnam offers both the biggest risks and returns in Asia.

Of Rice and Races


164_6445-4.JPGA big theme in the local and international news that I’ve been reading has been food prices, namely grains. The main stories I come across when reading US news is the presidential election. Although seemingly quite disparate, I think there’s actually a strong correlation between the two, which I will try to expound on.

Singapore’s PM announced yesterday that Singapore had enough rice stocks. Earlier this week, Malaysian and Thai officials have had to publicly state that grain supplies are ample. Today’s Straits Times had a photo of Filipino troops guarding sacks of rice at a distribution event. While eating dinner last night, the TV showed that food riots are sweeping Latin American, from Argentina to Haiti. Grain shortages and the corresponding rise in prices is not a sudden news event. While in India last year, I noticed constant newspaper headlines about the government adding export bans on various varieties of wheat and rice. Today, almost all grains are banned for export from India. China has banned export of many agricultural commodities as well. This week, the Philippines and Vietnam have halted rice exports. In the past year, the price of rice has nearly doubled. The prices of corn, wheat, soy beans, and a host of other agricultural commodities have had a meteoric rise as well. Good for commodities investors, bad for the majority of the world who depend on these staples for food. Its not so bad for consumers in the developed world, where only 10 to 20 percent of household incomes go towards food. But in many developing countries, over 50 percent of incomes go towards purchasing food, namely grains. Some say that the increase in price is the natural result of simple supply-demand economics. Others argue that we’re in a commodities bubble (including oil, gold, etc.) driven by, among other things, volatile capital markets. I believe that there is a shortage of grain worldwide (whether or not sufficient government stockpiles exist doesn’t mean supply exists, if those governments will not open up the silos), but other factors are driving up the food prices as well.

Most experts and economists accept that the price increases are caused by three main factors, although each factor’s weighting is disputed: climatic factors that are hurting agriculture, a rapidly growing global population, and the increased demand for agricultural products as developed nations try to move away from petroleum towards biofuels. A leading cause or not, part of the reason grain prices are skyrocketing is the potential demand to use them in the production of biofuels, namely ethanol. The movement to produce ethanol from corn, soy, and other grains was based on two things: cleaner fuel and cheaper fuel. Proponents argued that corn-based ethanol is cleaner burning than current fuels, thus helping to reduce global warming and it is cheaper than oil, which will help the US (and the world) to reduce its dependence on oil. In the past year and a half though, the promise of ethanol as an alternative fuel source has been shot-down, as both of its advantages have evaporated. One, several studies have shown that ethanol is not any cleaner burning. It does produce less greenhouse gasses than current fuels, but when you include the greenhouse gases emitted during the production of ethanol, the total pollution is more than traditional oil-based fuels. So its actually worse for the environment than what cars run on today. Secondly, ethanol was at one time cheaper. But the price increases in corn and soya have wiped out its competitive advantage there as well. Yet despite numerous environmental studies and cost projections, the demand for ethanol as an alternative fuel source is still driving up the prices of the related commodities. Why is the demand for grains to produce ethanol increasing, even as ethanol has been rejected as a viable fuel source?

This is where the US presidential elections come in. The only people in the world that still support ethanol as a viable fuel source are American farmers that have seen windfall profits in the past couple years due to the spike in grain prices. But why should that matter, since they’re such a small demographic numerically? I believe the answer lies in the structure of the American presidential election. The electoral college was designed to protect small states’ interests from large states, who would dominate in a popular vote. Thus, in the US presidential election, people is smaller states get a “louder” voice than residents of larger states. A South Dakotan’s vote matters more than a New Yorker’s, in terms of population relative to electoral votes. The last two elections have been nearly evenly-divided and candidates are fighting for every last electoral vote. Consequently, the only reason the idea of ethanol as a fuel-source is still alive is because there’s things like Iowa caucuses. Presidential hopefuls cater to small Midwestern states, by pouring money into the industry to get votes, and (the other BIG factor in all-time high prices) aware and opportunistic investors hop on to capitalize on the commodity boom.

Post-note: Since I wrote this post, the Phillipines abandoned a huge rice tender due to high prices and an insufficient supply, a cyclone has turned Myanmar from a rice exporter to an importer, Thailand has proposed a rice cartel, and the US Senate is poised to pass a farm bill delivering even more subsidies to US farmers (despite windfall profits the past couple years, this is an election year of course).

Malaysian Economic Report

164_6445-4.JPGI haven’t done an economics-related post since we left Cambodia, but our recent travels have got me thinking again. While Brunei’s development can be simply described as wise stewardship of petrodollars, Singapore is truly an economic miracle. For a state that was in tears when it was kicked out of the Malaysian Federation, it has done pretty well. Its ability to attract not just trade to its port, but also huge inflows of intellectual and monetary capital, has made it global business center. But we weren’t in Singapore long enough to get anything more than an academic feel for its economy (although the shopping tempted Joylani to contribute to their GDP). Instead, this post will be mainly focused on Malaysia, where we’ve spent the past month.

Traditionally, Malaysia’s economic story has been commodities. This is apparent as soon as you travel anywhere in the country. Driving through the country, you could go for hours without seeing anything but palm plantations. Flying over or into the nation, the landscape looks like a bunch of green dots arranged in nice straight rows. For decades, the nation’s fortunes has risen and fallen with the price of palm oil and rubber. Malaysia’s other major commodity is oil. Malaysia’s early Malay leaders sought to include parts of Borneo in their new state, in order to increase the ratio of Malays to Chinese in the future Malaysian Federation. Along with a bunch of ethnic Malays to bolster their political power, Borneo came with a lot of oil. The country’s most iconic images, the Petronas Towers, were built by the nation’s largest corporation, Petronas, an oil conglomerate. Pick up any financial paper and you’ll undoubtedly read about the so-called “commodities super-cycle.” Super-cycle or not, commodities across the board have enjoyed a meteoric price increase in the past several years. Consequently, unprecedented amounts of capital are pouring into country, fueling its economy. Additionally, its large, educated, English-speaking population is beginning to be noticed by multi-national corporations (MNCs). Hi-tech manufacturing plants have been established in Malaysia (chances are, your hard-drive casing is made there) and I expect more growth in that area as China’s currency continues to appreciate. Electronic components are already Malaysia’s largest export and the reason why the US and Japan are its largest trading partners, respectively. As far as services are concerned, some are looking towards Malaysia for their IT/BPO needs. As India’s wages increase and competitiveness in that sector begins to rely more on quality than price, Malaysia should be a prime benefactor. Travelling around SEA, Malaysia seems to be the most developed country aside from tiny Brunei and Singapore. It has invested heavily not only in traditional infrastructure projects, but in business-dependent areas such as telecommunications. The government is keen to attract foreign capital and is consistently ranked as one of the easiest nations in which to do business. Its GDP hovers around 5%, while inflation has been contained below 3% (thanks in part to government subsidies, which most Asian countries use).

Before you throw all your money in Malaysian ETF though, know the risks. Although the subprime crisis did not hit Malaysia directly, the resulting global market turmoil took the KL Composite down along with virtually every other bourse around the world. As a former British colony with a huge Chinese population, Malaysia’s markets are highly connected and thus, correlated, with both European and Asian markets. The risks of this have been evident in the past few months, as the markets been dragged down despite no real changes in fundamentals. Secondly, although commodities have done quite well lately, a downturn could have negative affects on the nation, much as they did after other commodity bubbles popped. Lastly, Malaysia is still feeling the effects of the 1997 Asian Financial Crisis. Many buildings built 10 years ago are still vacant, unable to attract tenants. Even the famous Petronas Towers, completed 10 years ago, still have not reached full occupancy. The vast oversupply of real estate, that was built during the bubble leading up to crisis, has still yet to find sufficient demand. Although currencies in the region are now much more correlated to fundamentals, the prospect of an overheating economy or one that grows just a bit too quickly for its own good is still a possibility. Despite the risks, Malaysia should be on any Asian investor’s shortlist or anyone looking to gain exposure to Asia or commodities. The growth potential and the government’s commitment to encourage that growth is attractive. Plus, Malaysia has far less political risk than most Asian markets. I believe Malaysia to be a great long-term buy, especially given the recent correction in valuations.

Cambodian Development


164_6445-4.JPGJoylani saw the title of this post and asked, “What do you know about Cambodian development?” I told her the few things I am going to write about and she replied that its all anecdotal. That is true, the information is all anecdotal. It’s based on the observations and conjectures of myself and the Khmer I’ve spoken with. Like the other country-specific development posts I’ve written, I’m not planning on submitting this article to the WSJ or FT. I haven’t researched Cambodian economic data or even fact-checked what people have told me, so read accordingly.

Like most places we’ve visited, Cambodia is a poor country relative to the West. I’ve been told average salaries range from 70 to 80 USD per month, with teachers earning a measly 30-40 USD/month. I recently read that inflation has just surpassed 15 percent. Unemployment is high as well, although I cannot believe it is 60 percent as one person told me. Well, it might be true, based purely on the number of moto drivers that offer us rides. We’ve been to quite a few places with persistant rickshaw and tuk-tuk drivers, but Cambodian moto drivers take the cake. First of all, they’re everywhere. Two, its cheap. And three, they’ll always offer to wait around and take you back with almost no charge for waiting. They are an indicator of just how scarce work is. I mean, look at our driver in Siem Reap who drove us around all day for 10 USD! Granted, most of the time he waited for us, but keep in mind, he also incurred the cost of renting the vehicle and paying for gas. Regardless, the low incomes explain why corruption is such a large problem. I already detailed how the police extort money, but corruption even touches public primary schools. In Phnom Penh, public school teachers charge students 500 riel (.12 USD) per hour, although this amount is less in the provinces. It doesn’t seem like a huge sum, but when you consider that the average household only earns 20 USD per week and one week of school for one child costs about 4 USD, you can see it is quite expensive. And that’s for government-run public schools. Consequently, NGOs are everywhere in Cambodia. Like Lao, we’ve seen plenty of fancy World Vision and UNICEF SUVs driving around. USAID logos are on a lot of things too. At least their logo communicates who’s paying for it: “A gift from the American people.” At least my tax-contribution is recognized. I’d like to see the World Vision SUV’s have decals saying, “A gift from (list of people who think their money is going to sponsor a Cambodian child).”

Counterbalancing the foreign aid, is the massive amounts of corruption. Corruption actually inflates the prices of everything, from school to transportation. Additionally, corruption is responsible for other social ills such as curbs on political freedom and the continual negligence of certain areas. However, despite the barriers that corruption creates, Cambodia is developing. Many new roads have been paved in the past several years and Phnom Penh is full off new scooters and motorcycles. Yet, the rural areas are a different story. We’ve driven on plenty of dirt roads throughout Cambodia and most areas we have seen do not have power lines, but must rely of generators instead. The rural areas are more developed than Lao though, as agriculture is done on a much larger scale. Rather than the little few meter by few meter vegetable plots of Lao, Cambodia has multi-acre fields. This is in addition to the miles and mile or rubber plantations we’ve seen. In some ways, the agricultural development is too fast though. We’ve seen large swaths of smoldering forest, where planters and farmers are clearing land. Numerous billboards denounce slash-and-burn and state its illegality, but the problem is apparent. The monetary temptation is too much and a little forest seems like a small sacrifice for aspiring farmers. I have heard that all the new plantations and factories being built are for the Vietnamese market- everyone in Cambodia wants to make a buck exporting to Vietnam. Development is happening, but its inefficient and it has a high cost.

I’m not sure if I’ve written about my observation that developing countries are the ugliest. Undeveloped countries don’t have industrial waste and have relatively little waste from consumer products. Developed countries have huge amounts of industrial and consumer waste, but they’ve figured out how to deal with it. But developing countries have the industry and technology without the laws of a developed nation. Like many developing countries, Cambodia has the following problems: it has a growing economy, but no limits on building or destroying nature; it has a growing number of autos, but no emissions regulations; Cambodians have consumer goods, but the population has no education on how to dispose waste (plastics and paper litter, etc); it has industry, but no effective way of disposing or recycling the by-products. At some point, Cambodia (and India, and Nepal, and a bunch of other places we haven’t yet visited) will address these problems and reach the level of development as modern-day first-world nations, but its an ugly stage. Britain went through it at the outset of the industrial revolution, followed by the rest of Europe and America in the late-19th century. Japan went through it in the 50s and 60s too. Sorry to go off a tangent, but Cambodia is definitely changing rapidly and I foresee it getting uglier before it gets prettier.

So what have I learned: Cambodia is poor, it relies heavily on foreign aid, corruption is rampant, development is happening but haphazardly, and everyone would rather have dollars than riel. It will be interesting to see how Cambodia’s attempt at development will turn out: will the Cambodian people benefit (like Estonia, Turkey, or Thailand to give some examples from this trip), will the politicians benefit (like Russia), or will China and Vietnam benefit the most?

“Before the fall of Sihanouk, Cambodia was the last paradise, the last paradise.”

-helicopter pilot, Victory in Vietnam

Lao Development


164_6445-4.JPGThe title of this post is a bit of an oxymoron, as Lao is the poorest and least developed place that we’ve visited yet. Infrastructure is lacking, consumer services are noticeably absent, amenities are basic, and NGOs are omnipresent. I can’t say exactly why Lao is the way it is, but learning its history sheds some light on the subject. In the 19th century, Thailand (then known as Siam) pawned Lao off to the French in a successful effort to retain its independence and autonomy. Lao is like other French colonies I’ve visited, which is to say that the French did not do too much to develop the place. (Soapbox moment: The French were some of the worst imperialists, up there with the Belgians. Unlike the Brits and Americans, they did absolutely nothing for their territories, except exploit their resources solely for French benefit. And when the rest of the world gave up their colonies following WWII and France had just been liberated from foreign occupation, they hypocritically took back their colonies! Unfortunately, France still has colonies today that it neither develops nor grants provincial status.) The Japanese took control during WWII. Not surprisingly, after the US had finished off the Japanese in 1945, the newly-freed French enslaved Lao once again. The Lao nationalist movement finally did win independence for Lao is 1953. The next twenty years were mostly a violent civil war, as Lao was part of the proxy war that the Soviets/Chinese/Vietnamese and US fought for control of SEA. By 1975, the US had bombed Lao into oblivion and the communists (Pathet Lao) had taken control of the nation. Under Communist policies, Lao stagnated in its destruction and fell farther and farther behind the rest of the world. This went on for nearly 20 years until the early 1990s, which is when I think the Lao government saw the writing on the wall; the Soviet bloc had failed and crumbled, while Lao’s communist neighbors China and Vietnam were liberalizing. Lao first opened its borders fifteen years ago, which was the beginning of the tourism industry in Lao. Ten years ago, it first allowed travelers to visit anywhere in the country. This was a huge step, as tourism has become a relatively large industry in an agrarian and industryless land. And five years ago, the government began to allow foreign investment in Vientiane, which hopefully will allow the country to really industrialize and develop. Although still chronically underdeveloped, everyone we’ve spoken too about the matter has indicated that Lao is changing incredibly fast. But like I said, despite the rate of change, Lao is still pretty undeveloped. Aside from a handful of major cities, the only paved roads are two-lane highways. These highways are the single paved roads running through most towns and most roads throughout the country are rock/dirt/unpaved. Many of the highways have only been paved in the past several years. Not sure if the roadbuilding is a cause of this or an effect, but supposedly there were barely any motorcycles or scooters around two or three years ago; today, these are by far the most common vehicles. Oh, and by major cities, I mean Vientiane (pop 200,000) and several other cities with populations between 50,000 and 75,000. With a population of just under 6 million, these figures show just how rural Lao is. We’ve seen a lot of villages and most aren’t much more than a bunch of bamboo huts stilted on 4x4s on a couple acres of cleared land. Some are just huts strung alongside the road or a few huts clustered together. It seems like anywhere there’s 3 or more huts, it’s a village with a name. Most of the structures in Lao are wood and bamboo, although the larger cities (and more so in the south) have more concrete structures. One of the oddest things is seeing the prioritization of satellite dishes over other needs. Despite needing to be replaced about once per year, everyone at least has a basic bamboo shelter. The next expenditure it seems most people take is to get a satellite dish. People do this before they build a permanent home out of wood or concrete, as we’ve seen plenty of huts with sat dishes and a TV inside. It seems even more ludicrous to me that people would get sat dishes before running water or hot water. But we’ve also seen people bathing in somewhat dirty roadside water channels and under water pumped from wells, while their hut has a sat dish. And people worry about America’s youth being couch potatoes. In addition to the lack of infrastructure, Lao industry and commerce is extremely young and small. Of course, there’s all the nationalized industries run by the government, but actual commerce is barely existent. Ever seen a Visa commercial that closes with, “Visa. Its everywhere you want to be”? Well, apparently that does not include Lao. There was one ATM in Luang Prabang and one ATM in Vang Vieng and I saw about a dozen in Vientiane- three in Vientiane accepted international VISA cards. So barely anyone uses ATMs (except foreign tourists), credit cards, or debit cards (or even checks). It’s the first place we’ve been where its so hard to get cash- good thing we brought a few travelers checks and have some baht to exchange. Lao also has no coins and the USD equivalents of its bills are between five cents and five dollars, so everyone carries ridiculously massive wads of cash. Transportation in the country is slow and service is infrequent. Shopping for consumer goods like clothes is non-existent and most people wear worn, or old, or donated clothes like in much of the rest of Asia. Consumer goods are rather scarce, although the two growing industries seem to be telecom and scooters, as lots of people are getting cell phones, internet, and bikes/scooters. And besides Beer Lao, the only advertising I’ve seen for anything in the entire country is for autos or from one of the two telecom providers. Yet despite the growing number of people that own scooters or cell phones (and even the few that drive new Toyotas), most Lao are poor. Most live in villages, work the land, ride bicycles, and if the need ever arises take longer journeys in an overcrowded truck. And while the government museums made much of the ‘American imperialists,’ it’s the governments communist policies that have held the country back. How else can one explain why the nicest buildings in the country are Party ones, dedicated to military heroism, revolutionary struggle, or our dear leader, while the country starves? The government has isolated its population and economy from any development whatsoever. And now, it must turn to Thailand, Vietnam, and China to develop its infrastructure and who will make a lot of money doing it. Its whoring its natural resources, like the Mekong, in its aspiration to become the “battery” of SEA. I’ll get back to writing about the poverty of the people, but its sad and concerning as all the development projects I’ve read about don’t seem like very good ideas; most of them seem good for other countries but at Lao’s expense. But that’s the history of Lao right? Thai, French, Japanese, French again, and Communist rule has been good for anyone except the Lao people. Today NGO offices can be found all over the country and attest to the problems Lao faces. Lao doesn’t appear to be as poor as South Asia, but there’s a few key differences. One, South Asia has a lot more people, so its problems will be more visible. Two, the population and its poverty are overwhelmingly rural, so we don’t see it as much. And the rural places we have visited have benefited greatly from the influx of tourist money. Thirdly, as Joylani points out, urban homelessness is not the single indicator of poverty. It is clear that people in Lao do not have a lot, although almost everyone seems to have at least temporary shelter. This month is Lao has been really eye-opening. In my Nepali development post, I wrote that Nepal made India look like the US. Well, Lao makes Nepal look like a high-powered Western state. We’ve visited a lot of rural or remote places on this trip, but to see an entire country with so little is really amazing. I think I could live anywhere we’ve visited so far, but I’m not so sure about Laos. Limited access to internet/email, barely any ATMs to access my money from, and difficult transportation. These, of course, are trivialities compared to what most Lao live without.

Political Economics

164_6445-4.JPGWhile I was on my trek, Thailand held much-anticipated national elections. The elections were very important and highly publicized as they were the first since the military’s coup in 2006. I’m not sure if they do this for all elections, but Joylani said that no one was able to sell alcohol on the day of the election. Anyways, the electorate voted overwhelming for the PPP, which was the party that was sacked during the coup. The results look pretty good with the exception of three PPP members who were caught by the election commission with large amounts of cash and lists of registered voters. Unsurprisingly, with his party back in power, ousted former PM Thaksin Sinawatra immediately announced he would now return to Thailand to face the military’s corruption charges.

Regardless of the Thaksin fiasco, free elections to install a civilian government and the military’s promise to respect the result is good for Thailand. Personally, as an investor and an international traveler, I have been disappointed in the failure of the generals’ economic policies. Their coup pummeled the Thai stock market and their inept policies further battered it, all this in addition to the volatility that results from military rule. Their monetary policy was a failure and they let the baht rise out of control, which has wreaked havoc on Thai exporters. The baht has risen to 30/dollar from the mid forties! It has risen so much that the military government regulates domestic exchange rates, setting the (current) ceiling at around 33.6/dollar, about a 10% premium international spot rate! As a traveler, the baht’s appreciation has increased our Thailand expenses by about a third, although the fixed domestic forex rate presents some interesting arbitrage ideas… The rise of the baht has, of course, benefited Thai importers and ultimately Thai consumers who have become significantly richer, so to speak. I think this partly explains why there seems to be so many brand new cars in Thailand.

I was going to keep this post solely on Thailand, but I cannot help but draw comparisons to Nepal. On paper, they look somewhat similar; medium sized nations (25m and 45m people, respectively), tourism is the number one industry in each, and both are engulfed in the latest of a long history of political turmoil. Yet things could not be more different in reality. Besides superficialities like Nepalis hate their king and Thais practically worship theirs, its two different worlds. Despite having undergone a dozen coups and just as many constitutions, Thailand is a growing economy. And when there is a political hiccup (which Thai coups have become), the country continues to function. Contrast that to Nepal, where a single party of ignorant ideologues can jerk the nation around. They use a guerilla war to get every single one of their demands met, including elections. When they realize they’ll lose any such election, they cancel it and make more demands (accompanied, of course, with threats of “renewed armed struggle”). And even in times of peace, they enjoy calling arbitrary transportation strikes, shutting the entire country down for days on end. I would say the Nepalis should take some plays from the Thai military’s playbook, but since Nepal is a poor country the military and law enforcement is ripe for bribes and corruption. Anyways, I just think its interesting to compare the differences in these two states that are in somewhat comparable situations.

Nepali Development


164_6445-4.JPGThird-world countries are sometimes referred to as developing countries. Nepal definitely isn’t one of those places. Unlike my other posts on Nepal, this isn’t meant to be negative; I mean Nepal is one of the most beautiful countries I’ve visited and development might mar its natural beauty. Back to my main point though, comparing Nepal even to third-world India makes India look like a fully industrialized western nation; developed infrastructure, a functioning economy, and a stable political situation. Nepal’s development (or lack thereof) was evident from our first day in the country. Our bus from the border to Pokhara passed through hours and hours of fields- not villages and small towns, but fields of grain. It was later that I learned that 80% of Nepalis are farmers. The majority of these 20 million farmers are sustenance farmers, as very few grow any surplus to sell. A majority of the farmers are sharecroppers though, with most farms owned by zaminders. It is these landowners who are the Maoists secondary target, as their propaganda always speaks of “the royalists and the feualists.” I’ll get back to the Maoists in a moment, but 10% of the population works in tourism while the other 10% works in everything else. Understandably, there is very little industry in Nepal and most raw and finished products are imported. The peanut butter that Joylani carried the entire trek was from Belize, while the national Nepali beer (Everest) that I tried had an Everest label, but had Tuborg stamped on the bottle (a Danish beer). Surprisingly, Nepal does have a stock market and it daily statistics are reported in the Nepali papers. Not once did I see the number of daily trades exceed 500 and although I didn’t do the rupee-to-dollar FX conversions, I’m pretty sure the volume and market caps are unfathomably low too. By every measure, Nepal is an undeveloped country.

Nepal is not developing either though. Here are just a few of the challenges that need to be overcome. One, Nepalis are chronically undereducated. Only 70% of children ever attend school and only 30% ever complete secondary classes. This is probably due to Nepal being an agrarian society, which is also why its so poor; even the average non-farming Nepali makes only $210 per month. Secondly, poverty usually goes hand-in-hand with a lack of rule of law. The police are just as poor as everyone else, so conflicts of interest and corruption is rampant. We’ve gone to a lot of corrupt places, but Nepali cops are some of the most useless I’ve ever encountered. And lastly, there’s no political stability. Why develop if the government and laws are going to change and tear down what you build? The king is widely unpopular and several political parties are vying for power. The most notorious, of course, are the Maoists who are jerking the political system around at will. With their recent threats to take up arms again and resume their People’s War, things are looking dire. In the US, war bolsters the economy, but a Nepali civil war is sure to destroy what little there is.

Nepal is one of the first really undeveloped and not-developing countries I’ve been to. But, its shown me what I learn time and time again traveling- people are basically the same wherever you go. Every human has common needs, wants, and desires. The kids are happy, the teenagers care about the same things, and adults are concerned with the daily challenges of life and providing for themselves and families. Nepalis are generally happy, because like most people, they’re making the most of the life they’ve been given. And like I began with, Nepal’s lack of development isn’t so bad, for it’s a beautiful place. I don’t think anyone would want to see little Kathmandus popping up all over the countryside. As my guide Udaya said, as we looked at a deforested area on the trek a few weeks ago, “Development is the cause of destruction.”

Flip Side of Growth Story


164_6445-4.JPGSince I’ve covered the Indian markets and the phenomenal growth that’s occurring here, it’s only fair that I present the other side of the story. And while I mentioned that the market is being fueled by India’s emerging middle class and driven by financial institutions and the upper crust of society, the vast majority of Indians are not benefiting from the growth here. Equally amazing to the near double-digit GDP growth, is the fact that 77% of Indians live on less than .50 USD per day. That’s nearly 850 million people, more than double the population of the US! And while the middle class is growing rapidly, only 4% of Indian’s live on more than 2.5 USD per day. Think about that; that means that the Indian upper and middle classes combine for less than 4% of the population, while three-quarters of the population live below the poverty line. Aside from the occasional editorial or op-ed pieces in the papers, the economic stories focus on the growth or trivial things like how third and fifth richest people in the world are Indian.

I opened up this post by saying that this is the other side of the story. And so why is this the other side of the story rather than just another gloomy article listing horrific poverty stats? The reason it’s the other side of the story is because the central government is, in many ways, prioritizing growth over welfare. Trickle-down theory of course indicates that the poorest will at some point receive some benefit from India’s growth, but its hard to agree with some of the central governments policies. It’s ironic that after riding the brand new, clean, multi-billion dollar Delhi Metro, we emerge from the station in the middle of people living and trying to survive on the streets. Not just provide food or shelter for themselves and their families, but literally survive. And its not like India built the Metro with its own capital. Japan financed the Delhi Metro and the building contracts went to Japanese countries. So India paid billions to Japanese companies and will be sending billions in interest payments to Japan for the coming decades. The same goes for the much-anticipated Delhi-Mumbai freight corridor and a number of other projects. Its even more ridiculous because India is financing projects in even poorer countries, like Nigeria. Why not help your own before helping abroad? Still don’t think the Indian government has misplaced priorities? The reason that the Delhi-Mumbai Freight Corridor project is being delayed is that the Indian government does not want to shell out the money to compensate farmers fair-market-value for the land that will be confiscated for the project and provide relocation assistance for the people the project displaces, a condition that the Japanese are insisting on. How can the Japanese be stronger advocates for rural Indian rights than the Indian government? A number of other projects including the proposed nuclear deal with the US, have the Indian government sending billions to other countries. If India is the next big economic power and has tons of money, why doesn’t it finance its own railroads, metros, and nukes. Why doesn’t it build up its own arms industry instead of buying all their jets and tanks from Europe and America? On another note, India has one of the largest grain stockpiles in the world, but millions of Indians go hungry every day. Why? Because over 50% of the grain is siphoned off (as previously mentioned) and India wants to sustain grain prices for Indian farmers. But this comes at the expense of many more Indians. Why doesn’t India just subsidize the farmers, rather than starve its population?

Two things are clear. One, the central government is prioritizing growth and modernization over welfare. Two, the bureaucracy and corruption within the lower levels of government and slowing growth and hurting the poor. A third, less obvious, but equally important point, is that the massive impoverishment could derail the Indian growth train. Even within the financial press, there’s a fear and much talk about how India’s poor could instigate massive civil unrest that could stop growth in its tracks. The Maoists have already turned Nepal upside down and are now agitating things out in the Indian countryside. Their influence and the number of “incidents” has been growing rapidly. There’s a large movement against western retailers and chains in India, while they’ve already shut down Indian chain-retailers in major states such as UP. The possibility of massive civil unrest is small (maybe even smaller if you look at the history of India and the absence of any major class violence). Yet, it still remains a possibility, perhaps increased with the growing influence of radical left-wing groups. Yet, regardless of the effects on growth, it seems like taking care of your people should trump investing in growth, to some extent.