Mark Mobius on the State of Emerging Markets

Mark Mobius, arguably the most respected emerging markets investor and one of the great investors period, answered five questions for Institutional Investor magazine:

1 What did the financial crisis teach us about emerging markets?

Everybody was affected, including emerging markets equities. But what we learned is that emerging markets are much more resilient — they recovered much faster than developed countries. Another thing is that emerging markets have garnered more exchange reserves than Western countries. In the past, emerging markets were always short. Now China has $2.3 trillion and Russia has more than $395 billion in reserves. They certainly do not have to ask for aid.

2 What’s the near-term economic outlook?

This year we expect emerging markets to grow, on average, four times more than developed countries, or 4 to 5 percent versus 1 percent. India and China will be growing at 7 to 9 percent.

3 So are big investors shifting more money from the U.S. and Europe to emerging markets?

Institutional investors are by and large very underweight emerging markets. The average American pension fund has 2 to 8 percent in emerging markets, but all emerging markets stocks globally represent 20 percent of the world’s GDP. During the crisis everybody retreated to what they thought was safe: U.S. dollars. Then you had this rapid buildup, and a lot of these institutions were kicking themselves for not staying in. Now they are thinking, Am I getting in at the top? They have to start building a program that gets them into emerging markets at a much higher weighting. To be underweight emerging markets right now is crazy.

4 How much should investors allocate to emerging markets?

Well over 15 percent. When you travel to these markets you can feel it — the vibrancy and growth. Yes, there are challenges, but then you look at developed markets like Greece. That’s what I call a submerging market.

5 What are the hottest emerging markets now?

Brazil is at the top, then Russia, China and India. But besides the BRICs: Turkey, Poland and Thailand.

An easy way for an individual investor to invest in emerging markets is to buy into an Emerging Markets Stock Index Fund, which is what I have done.

Free Riding on the Innovation That Emerges from America

It's no accident that the lion's share of innovation, world-changing entrepreneurship, patents, pharmaceutical drugs, etc. today emerge from the United States. In America are a unique set of factors that do not exist elsewhere. It assimilates immigrants better than anywhere. There is a relatively low regulatory burden on business. Lower marginal tax rates. More flexible bankruptcy laws. There are flexible labor laws, allowing entrepreneurs to hire and fire at will. There's a culture of risk taking and entrepreneurship. Smaller government, more free markets, more private sector. The result: Google, Pfizer, Ford, Apple, many others.

The American model that produces such innovation does come with significant costs. It is a more cutthroat society. There's more inequality than in Europe. There are bigger winners and bigger losers. There is not as much a safety net if you're out of work or are born with a bad number. It's easier to lose your job. There's a workaholic culture. An obsession with success and self-improvement. Perhaps lower levels of happiness.

For these reasons, I don't blame Europeans who rather enjoy the French way of life and choose to live, say, in the beautiful Loire Valley. And not just that: the Frenchman in Loire Valley gets to use Google! Dell! Microsoft!

In the age of ideas and internet, every individual can take advantage of innovations that originate from anywhere. Ideas know no boundaries.

Just as European nation-states free ride on the American defense shield, allowing them to invest less in military defense than they otherwise would, so too can European individuals free ride on the entrepreneurship that emerges from the American model.

So I'm confused when Europeans criticize the American model and hope for its abolition or transformation into a European-like welfare state. The rational, self-interested view of a European who loves the European model should be, I live in Europe, enjoy the fruits of a stronger welfare state, see only low levels of inequality, access widely available healthcare, enjoy pretty good free universities, AND can use all the innovation that comes out of America.

The varying models of liberal democracies around the world — for example, the different ways to organize the interplay between government and the private sector — serve a valuable experimental purpose. Europeans are lucky to be able to sample from their own menu, and America's. As consumers, they get the best of both.

Bottom Line: If you're a European citizen who enjoys and supports the European economic / social model, you should still be supporting the American model as it stands because it produces lots of innovation you benefit from. If the American model becomes the European model, innovation decreases, and everybody loses.


Counter-argument 1: The American model is increasingly resembling the European model and there's no evidence in a slowdown of innovation. However, the trend is a mixed bag. The overall size of government has increased and the most recent healthcare bill is European-esque. But the Clinton welfare reform in '94 or the Bush tax rates the last 10 years are still distinctly "American model" policies.

Counter-argument 2: It's not the "American model" of economic policies that allows innovation to flourish, it is rather its entrepreneurial culture, a culture that operates somewhat orthogonally to policy.

The Murky, Complicated Reality of China

The one man everyone should read on China — Peter Hessler — posts on the New Yorker blog about Google's decision to withdraw from the mainland and run an uncensored search engine from Hong Kong.

Google co-founder Sergey Brin, who grew up in the Soviet Union, told the Wall Street Journal that China has "made great strides against poverty and whatnot, but nevertheless, in some aspects of their policy, particularly with regard to censorship, with respect to surveillance of dissidents, I see the same earmarks of totalitarianism, and I find that personally quite troubling."

Hessler writes:

“Totalitarianism” is not the right word; China’s current form of authoritarianism is a world apart from Mao or Stalin. “Whatnot” might be more useful—when Brin speaks of China’s strides against “poverty and whatnot,” he touches on the great gray zone that has occupied the energies of most citizens over the past two decades. The whatnot includes vastly improved literacy, unprecedented freedom of movement, the ability to start businesses and change jobs, and the sudden availability of cell phones and Internet. But it does not include political freedom by any definition of the term. This is one reason why China is such a difficult place to do business, or even to analyze accurately: it’s hard to define what it is, and even harder to tell where it’s going.

He goes on to say:

As a personal decision, Google’s stance toward China is admirable, because the company turned down profits in order to make a statement. And it’s an effective way for Sergey Brin to express valuable lessons that he learned during the past in the Soviet Union. But his statement might have less relevance to the China of today and especially to the China of tomorrow. It reflects a frustration that is common among more idealistic foreigners, who have always hoped to provide a guiding light to the Reform years. By now it’s obvious that the Chinese reality is far murkier—all that whatnot, the great gray zone of personal improvement without political advancement. And the country has shown a strong and stubborn tendency to resist following any political model imported from abroad. Outsiders might have a great deal of influence, but it’s often indirect; foreigners can provide key tools, but the Chinese are determined to figure out how to use them on their own. And now, when it comes to the Internet, there’s one less tool out there.

The murky, complicated reality of China. The great gray zone of personal improvement without political advancement. If there's one theme that emerges time and time again when reading the dispatches of the most thoughtful commentators on China, it's the complexity of it all.

As I've said before, I am net net pro-China (whatever that means) and I believe the most virulent anti-China sentiment in the west is uninformed at best and racist and xenophobic at worst.

Here's what I learned on my three week trip there last year. Here's Robin Hanson on the China bashing that takes place in the Western media. Here's Christopher Hayes' astonishingly good (for a two week trip) long-form piece in The Nation.

(thanks to Seth Roberts for the Hessler pointer)

If Economists Were to Write the News Stories About Trade

Mark Perry posted an amusing re-write of a Washington Post article on trade protection, crossing out sentences from the Post and replacing it in bold with how an economist would convey the ideas:

WASHINGTON POST (Reuters) – A U.S. trade panel gave final approval on Wednesday to duties taxes ranging from 10 to 16 percent on cost-conscious firms in the U.S. who purchase low-priced Chinese-made steel pipe rather than high-price domestic pipe, in the biggest U.S. trade case to date against China American companies (and their shareholders, employees, and customers) who shop globally for their inputs and find the best value in China.

Companies in Tthe U.S. imported searching worldwide for the best value purchased $2.74 billion of low-priced “oil country tubular goods” from China in 2008, more than triple the previous year, as a surge in oil prices led to increased demand for the oil well tubing and casing.

Buoyed by success against American steel-using companies and their employees in the tubing case, the Steelworkers union and a number of companies are filing a new petition on Wednesday asking for anti-dumping and countervailing duties taxes on American companies, their employees, and customers that purchase drill pipe used to drill oil wells.

U.S. companies and unions brought about a dozen trade cases in 2009 against American industries that shopped globally and decided to purchase cheap goods from China rather than expensive goods from domestic producers, alleging overly generous government subsidies from the Chinese people and unfair pricing practices that directly benefited American steel-using companies and their employees, and ultimately benefited U.S. consumers with lower prices.

President Barack Obama also angered Beijing in September by slapping a 35 percent duty tax on thrifty, cost-conscious middle- and lower-class American consumers who willingly bought imports of about $1.85 billion of inexpensive Chinese-made tires. The United Steelworkers union, which was the driving force behind the tires case, joined with Maverick Tube Corp, United States Steel Corp and other U.S. manufacturers in asking for import duties taxes on American companies (and their employees, shareholders, and customers) that decide to purchase low-priced Chinese-made pipe rather than high-priced domestic pipe.

Elsewhere, The Economist had a good piece on tariffs and trade awhile back. It asked Americans who support trade taxes and protectionism, if they are so terrific, why stop at national borders? Why not tax imports from other states within the U.S.? Why don't we make each state in the U.S. self-sufficient?

Here's an article arguing against "energy independence."

How Much Are Cheap Chinese Toys Worth to You?

Dan Altman and Dan Gross, two of the wisest economics commentators writing today, had an interesting back-and-forth email exchange about globalization posted on Slate more than two years ago. I just read it the other day and it's still relevant and they do a great job at distilling some of the core issues. It's not too long and worth reading the whole thing.

Globalization is inevitably a political issue, although it no longer breaks down so neatly along the lines of right and left. (The recent Republican presidential debate featured plenty of tough talk on trade.) There are, however, two poles: On the right, there are the unabashedly happy globalists, who see only benefits to all involved from globalization (rising standards of living in the developing world, cheap goods in the developed world) and are indifferent to the plight of those harmed. On the left, there are those who see only gloom, would like to halt the globalization process, and are not all that concerned about the impact doing so would have on those who have yet to benefit.

On the sometimes invisible benefits of trade and interconnectedness:

…Much of the rhetoric surrounding globalization—tend to paint the process as a zero-sum game, in which there is one loser for every winner. This frustrates a (somewhat) committed and enthusiastic globalist like me. And it must really annoy a much more committed and enthusiastic globalist like you. After all, the losses for Americans are so easy to tally—factories closed, jobs lost, pensions terminated. But the gains are more difficult to detect, in part because they're embedded in our supply chains, our manufacturing processes, and our consumer culture. Every time one of my kids has a birthday party, the basement is stuffed with an embarrassment of toys, games, kits, instruments, doodads, and gadgets—or, as I like to refer to it, "plastic from China." In America, we now regard cheap toys and clothes and electronics as something akin to a birthright. But we don't—at least most of us don't—wake up every morning and think of these things as gains from globalization.

People might not tell the truth about how much they enjoy their cheap Chinese goods. I know many Americans who publicly bemoan a dying manufacturing sector in the U.S., but continue to buy the cheapest products they can find:

How could I prove exactly how much those cheap Chinese toys are worth to you, i.e., how much your well-being is enhanced by having access to those cheap products? It wouldn't necessarily be the same boost that I get from the same opportunity. Also, if anyone did ask, you'd have every incentive to lie and say that you weren't better off at all. For these reasons, I think we're going to find ourselves in a second-best world; hence my observation that people need to look out for themselves.

And how does globalization affect income equality?

I'm starting to form the view that globalization is a driver of income inequality within countries, but a driver of income equality between countries. Within countries, globalization tends to result in big income gains for the people who can take advantage of its opportunities—the ones with money and ideas—while depressing incomes for people who face more international competition. At the very least, the income distribution stretches at the top.