LONDON: American and European capitalism is euphoric nowadays. By contrast, Asia's capitalists are glum. In 1996, New York's stock market broke all records, rising to greater heights since. The same in London, Frankfurt, Zurich and Paris. But in Tokyo, Taipei, Bangkok and Seoul, stock markets are gloomy. Japanese shares are worth half their 1990 prices. Even in Hong Kong, where shares recently hit new highs, they are only 10% above the peak of early 1994. In the same three year period, prices in Wall Street and Europe skyrocketed by 60% or more.
This picture bears no relation to what we hear in political speeches or read in business newspapers. Politicians warn of the challenge posed by Asia's "tiger economies". Investment experts urge us to put our savings in "emerging markets", since these are certain to grow three times more strongly than the sclerotic, over-regulated economies of Europe and America for decades. But stock markets love nothing more than frustrating politicians and making pundits look foolish.
Market professionals have been betting since early 1995 that share prices in America and Europe would collapse, while Asia would begin another bull market run. Instead, Wall Street and European stock markets have bounced back after every setback and continue their stratospheric rise. Asian markets, meanwhile, have gone nowhere but down.
Part of this can be explained by misunderstandings about the relationship between stock market prices and economic growth. A strange conventional wisdom developed in the inflationary 1970s and 1980s: that strong economic growth and falling unemployment was bad for share prices. Prosperity, it was felt, would incite inflation, provoke high interest rates, triggering a stock market rout. While experts spent the last two years propounding this thesis the market quietly restored an older, more common-sense rule: prosperity is good for profits and therefore good for shares. Here is one message from the markets worth pondering, even for non-investors: political confidence may be at a low ebb in Europe; businesses and consumers may be shell-shocked by the last recession and gloomy about the future; but judging by the market's behavior the years ahead are more likely to resemble the stable and prosperous 1950s and 1960s than the crisis-ridden decades from 1973 to 1989.
More intriguing are relative movements in global stock market prices. Why is it that share prices did well in America and Europe, while falling in Asia to the embarrassment of investment managers who pumped tens of billions of dollars unprofitably into Asia, while reducing their US holdings? The easy answer is that share prices rose strongly in Asia in the late 1980s and early 1990s and therefore Europe and America were catching up. But this answer begs the next question: How is it that Europe and America were able to catch-up with (and overtake) Asian markets? After all, the tigers were supposed to have eaten the "old countries" for breakfast, or at least to have left them permanently maimed.
Part of the answer lies in free market reforms undertaken in America, Britain and parts Europe, that made them more competitive by shifting the balance of power from labour and consumption to capital and investment. Such reforms, on their own, could never begin to close the cost advantage which Asia's tigers enjoyed. Nor could they transform pampered Europeans and Americans into fanatically hard workers. Some politicians and businessmen in the West began to fear that the key to Asian success was the discipline and respect for authority of non-democratic, Confucian cultures. If this were so, then far nastier medicine than a few years of Thatcherite reforms would be needed before the democratic Judaeo-Christian west could close the gap in competitiveness with the Confucian authoritarian east. Financial markets, however, reached opposite conclusions: among investors, if not politicians, admiration for the Asian model fell out of fashion. .
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Nowadays, a choice between Asian and western models of development exists even among "emerging markets". Eastern Europe and Latin America generally follow western pluralistic models. By contrast, backward Asian economies -- Indonesia, Vietnam, Burma, and, above all, China -- are confident that they can advance economically by repressing democracy and stressing Asian authoritarianism. Intriguingly, stock markets in Eastern Europe and Latin America have done better than in Asia, but these fledgling markets will have to operate for many more years before worthwhile comparisons can be made.
It is absurd to suggest that pessimism about the relative prosperity of America and, still more, of Europe can be laid to rest by a few years of rising stocks. The stock markets, particularly in Europe, represent only a small cross-section of businesses. Some big companies have been more dynamic in meeting the challenges of global competition than traditionally-run small firms. Many American and European multinationals moved aggressively into world markets and derive much of their growth and profits from the rapid growth in Asia.
But it would be equally be unwise for western Jeremiahs to ignore the message of the markets. Investors have found -- despite initial judgments -- that putting money into Europe and America produced better returns than investing in the far east. All too often, the advantages of low costs and social conformity were negated by corruption , arbitrary government and lack of innovation. Confucian values are conducive to mass production of relatively simple manufactured products, but as Asian countries became efficient at making these, the value placed on them by world markets dropped. Meanwhile, the value commanded by the imaginative goods of individualistic, disordered western societies rose. This allowed western companies to stay ahead in the economic sectors with the highest profit-margins and the fastest growth.
The dichotomy is illustrated by an embarrassing question many investment managers will face reviewing their 1996 results. What was the best way for investors to buy a stake in the growth of Asia's emerging markets? The answer -- by buying shares in Coca-Cola, Walt Disney, Intel or Microsoft: all rose faster than emerging stock markets; all enjoy the fruits of growth in the emerging markets; all are traded on Wall Street.
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LONDON: American and European capitalism is euphoric nowadays. By contrast, Asia's capitalists are glum. In 1996, New York's stock market broke all records, rising to greater heights since. The same in London, Frankfurt, Zurich and Paris. But in Tokyo, Taipei, Bangkok and Seoul, stock markets are gloomy. Japanese shares are worth half their 1990 prices. Even in Hong Kong, where shares recently hit new highs, they are only 10% above the peak of early 1994. In the same three year period, prices in Wall Street and Europe skyrocketed by 60% or more.
This picture bears no relation to what we hear in political speeches or read in business newspapers. Politicians warn of the challenge posed by Asia's "tiger economies". Investment experts urge us to put our savings in "emerging markets", since these are certain to grow three times more strongly than the sclerotic, over-regulated economies of Europe and America for decades. But stock markets love nothing more than frustrating politicians and making pundits look foolish.
Market professionals have been betting since early 1995 that share prices in America and Europe would collapse, while Asia would begin another bull market run. Instead, Wall Street and European stock markets have bounced back after every setback and continue their stratospheric rise. Asian markets, meanwhile, have gone nowhere but down.
Part of this can be explained by misunderstandings about the relationship between stock market prices and economic growth. A strange conventional wisdom developed in the inflationary 1970s and 1980s: that strong economic growth and falling unemployment was bad for share prices. Prosperity, it was felt, would incite inflation, provoke high interest rates, triggering a stock market rout. While experts spent the last two years propounding this thesis the market quietly restored an older, more common-sense rule: prosperity is good for profits and therefore good for shares. Here is one message from the markets worth pondering, even for non-investors: political confidence may be at a low ebb in Europe; businesses and consumers may be shell-shocked by the last recession and gloomy about the future; but judging by the market's behavior the years ahead are more likely to resemble the stable and prosperous 1950s and 1960s than the crisis-ridden decades from 1973 to 1989.
More intriguing are relative movements in global stock market prices. Why is it that share prices did well in America and Europe, while falling in Asia to the embarrassment of investment managers who pumped tens of billions of dollars unprofitably into Asia, while reducing their US holdings? The easy answer is that share prices rose strongly in Asia in the late 1980s and early 1990s and therefore Europe and America were catching up. But this answer begs the next question: How is it that Europe and America were able to catch-up with (and overtake) Asian markets? After all, the tigers were supposed to have eaten the "old countries" for breakfast, or at least to have left them permanently maimed.
Part of the answer lies in free market reforms undertaken in America, Britain and parts Europe, that made them more competitive by shifting the balance of power from labour and consumption to capital and investment. Such reforms, on their own, could never begin to close the cost advantage which Asia's tigers enjoyed. Nor could they transform pampered Europeans and Americans into fanatically hard workers. Some politicians and businessmen in the West began to fear that the key to Asian success was the discipline and respect for authority of non-democratic, Confucian cultures. If this were so, then far nastier medicine than a few years of Thatcherite reforms would be needed before the democratic Judaeo-Christian west could close the gap in competitiveness with the Confucian authoritarian east. Financial markets, however, reached opposite conclusions: among investors, if not politicians, admiration for the Asian model fell out of fashion. .
Don’t go back to school without Project Syndicate! For a limited time, we’re offering PS Digital subscriptions for just $50.
Access every new PS commentary, our suite of subscriber-exclusive content, and the full PS archive.
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Nowadays, a choice between Asian and western models of development exists even among "emerging markets". Eastern Europe and Latin America generally follow western pluralistic models. By contrast, backward Asian economies -- Indonesia, Vietnam, Burma, and, above all, China -- are confident that they can advance economically by repressing democracy and stressing Asian authoritarianism. Intriguingly, stock markets in Eastern Europe and Latin America have done better than in Asia, but these fledgling markets will have to operate for many more years before worthwhile comparisons can be made.
It is absurd to suggest that pessimism about the relative prosperity of America and, still more, of Europe can be laid to rest by a few years of rising stocks. The stock markets, particularly in Europe, represent only a small cross-section of businesses. Some big companies have been more dynamic in meeting the challenges of global competition than traditionally-run small firms. Many American and European multinationals moved aggressively into world markets and derive much of their growth and profits from the rapid growth in Asia.
But it would be equally be unwise for western Jeremiahs to ignore the message of the markets. Investors have found -- despite initial judgments -- that putting money into Europe and America produced better returns than investing in the far east. All too often, the advantages of low costs and social conformity were negated by corruption , arbitrary government and lack of innovation. Confucian values are conducive to mass production of relatively simple manufactured products, but as Asian countries became efficient at making these, the value placed on them by world markets dropped. Meanwhile, the value commanded by the imaginative goods of individualistic, disordered western societies rose. This allowed western companies to stay ahead in the economic sectors with the highest profit-margins and the fastest growth.
The dichotomy is illustrated by an embarrassing question many investment managers will face reviewing their 1996 results. What was the best way for investors to buy a stake in the growth of Asia's emerging markets? The answer -- by buying shares in Coca-Cola, Walt Disney, Intel or Microsoft: all rose faster than emerging stock markets; all enjoy the fruits of growth in the emerging markets; all are traded on Wall Street.