Sun, 27 Sep 2020

DEEP DIVE | Who has the 'freest' market?

22 May 2020, 16:13 GMT+10


Thus far I have focused more on economic than political outlooks. Disciplined politicians know economic data shapes politics: Tony Blair once dubbed this phenomenon "Numbers count". Numbers do count; one cannot consider politics without them. But the opposite is also true. Politics can make or break the numbers: think Venezuela, Zimbabwe or Lebanon.

Asset management companies often avoid public political commentary as industry norms suggest "it is not our business". But this is disingenuous especially when investing globally. Our industry may not openly admit to paying close attention to politics. But asset managers do. And today - when politics often trumps economics - more so than in 2000.

As always, our industry seeks investment opportunities in countries described by Adam Smith in 1755 as follows:

Asia is not yet central to the investment community's universe: the US constitutes a 50%+ majority of the MSCI All Country World Index. But the more our industry looks East - and the East emphatically includes China - the more Asia passes Adam Smith's test.

Whilst Asian politics - unlike a certain White House phone call! - are far from 'perfect', they are increasingly 'good enough'. And, in the investment world, once 'good enough' status is attained, relative differences are ironed out in prices.

The term 'Holy Roman Empire' is history's most famous triple oxymoron: not holy; not Roman; not an Empire. Likewise, the 'We' elite's favoured nirvana - liberal economic order - is today's equivalent. It is increasingly illiberal: witness Victor Orban of Hungary's 'illiberal democracy'. Trumpian populists emphatically reject its free trade foundations: Western-centric globalisation is retreating as trade multilateralism descends into bilateralism and even unilateralism. And its order is fragmenting, from the EU to NATO to the WTO and now even the WHO.

As an aside, it is commonplace today to maintain that 'globalisation is in retreat'. And, in the world of 'We', it is. But, largely unrecognised in the West, a new version of globalisation is dawning, one centred on Beijing.

The individual vs. the collective

One distinction stands out when contrasting liberal democracy with administrative centralism: the former prioritises individual rights; the latter favours collective rights. This difference is founded in the etymological and ethical origins of the Greek word for economy, 'economia', and Mandarin Chinese word, 'jingji xue'. Aristotle's 'economia' derives from how an individual household might manage its wealth; 'jingji xue' evolved from how central administrations distributed surpluses generated by communities.

This distinction still manifests itself today variously. Most topically, it is reflected in how the West and China approach data handling.

In the West, the individual's rights are generally sacrosanct, as exemplified by the EU's General Data Protection Regulation programme or Apple's stonewalling on decryption. In China, widespread use of facial recognition technology prioritises the community's needs with the Chinese approach to comprehensive control of the spread of Covid-19 being an epoch defining case-in-point. The Chinese approach creates both collective convenience and 'big picture' insight. Whether this sort of monitoring can happen in the West is questionable; as was noted in the Wall Street Journal, "Virus Surveillance Clashes With Privacy". Despite this, London is the world's most CCTV'ed city!

READ | EXPLAINER | 5 questions about virus 'tracing' by smartphone

Elsewhere, Western libertarians strive to keep the internet as "the world's largest ungoverned space". Behind the Great Firewall of China, the internet is governed as a space where only acceptable behaviour - acceptable as defined by Beijing - is permitted. Both approaches have shortcomings; neither is unblemished. My point is not to debate which is 'best', but rather to highlight the philosophical differences between a Western system which puts the individual before the collective versus an Eastern system which does the opposite.

Paradoxically, in the world of 'We', it is me that rules. Yet in China, it is 'we' that ultimately reigns.

In China, politics and economics overlap more than they are acknowledged to do in the West. I say 'acknowledged' as government spending as a percentage of GDP - the essence of how political preferences reflect in economic numbers - is higher in every leading Western country than it is in China.

The G7's historic average is 43% and will easily breach 50% in 2020. China's is 34%. The hard fact is that Western politicians subsidise and so manage demand far more than Chinese administrative centralism directs supply. This prompts the question: which economic system has the 'freest' market? And before the reflex response is "The West", as noted above, consider that most of the biggest companies in the West succeed because their key good or core service is built upon on a monopoly either protected by law (Microsoft, Apple, Merck, Disney, Intel) or not being challenged by the law (Amazon, Facebook, Google, Visa.) And, in the wake of the Covid-19 pandemic, as weaker competitors go out of business, industry concentration will only increase, perhaps even sanctioned by the Government citing 'creation of national champion' or 'promotion of strategic industry' justifications.

The kernel of Western macroeconomic practice is captured in the Keynes quote often cited as eschewing involvement in directing supply, instead focusing on managing demand:

In passing, note Keynes's casual use of that word 'we'. His 'we' describes the elite charged with executing demand management: the Whitehall Mandarin class of which he was a leading member.

The Mandarins of China's Whitehall, Zhongnanhai, see macroeconomic management differently, though not as a mirror image: state-directed capitalism does not merely manage supply and leave demand to its own devices. Rather China's macroeconomic approach partially conjoins both supply and demand. Thereafter, the Chinese administration decides how best to redistribute any surplus arising from this market interaction.

An uncomfortable ride

In a short essay, one cannot do full justice to the subject of how global politics and economics will evolve over the 2020s. But the West should expect an uncomfortable ride: their rusty blueprints need urgent reform. And even repaired, Western domination of the global narrative faces profound challenges.

The age of the Royal 'We' of the West - which deep down is more a case of 'us in the West' versus 'them in the Rest' and even that 'us' is a pronoun that is subservient to 'me' - is passing. Some noble ideals will fall away; others still prosper. Prioritising individual rights over those of the community is a luxury today's world cannot always afford. As Greta Thunberg highlighted, dealing with climate change demands a collective response. And few serious observers now question whether it is collective responses that should neutralise coronaviruses out of China, computer viruses out of Russia, debt contagion out of Wall Street, economic migrants out of Syria or locust plagues out of Somalia. There is no doubt: they all require collective responses.

Adam Smith is held to have fathered modern economics. And, for those familiar with his Wealth of Nations, it is easy to conclude the economic world he lauded was based upon the individual's motives and actions. Indeed, in extremis, his argument seems to celebrate the Self Centred Human. How else can the following quote be interpreted?

But using this quote to justify unbridled individualism misrepresents Smith's ethical foundations. These are found in his second, lesser known, work: The Theory of Moral Sentiments. (Interestingly, (Wen Jiabao, China's head of government from 2003 to 2013, cites it as one of his favourite books.)

This quote from Smith's second masterpiece neatly finesses the divide between Western individualism and Eastern collectivism:

In today's idiom, this means 'me too' cannot exclude 'we too' in the broader sense of 'humanity too'. As Governor Cuomo of New York noted in his 09.04.20 press conference:

Or, as the Zulus say: "umuntu ngumuntu ngabantu" or "I am because we are."

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