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Herve van Caloen
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Herve van Caloen, a managing partner at Belpointe Asset Management, is an investor with more than 25 years of experience managing international equity portfolios for Scudder, Mitchell Hutchins, Provident Capital Management. He is currently a portfolio manager at Belpointe Asset Management in... More
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  • The Collapse Of The Asian Economic Model 0 comments
    Mar 14, 2012 10:22 AM
    The Collapse of the Asian Economic Model

    The Asian Economic Model

    For two years now, every second financial headline has been on Greece and the possible breakdown of the euro. When Greece pretends to behave, markets react euphorically. When markets realize Greece was just pretending, a sell-off ensues. This makes for great drama, but misses the real international challenge: the collapse of the Asian economic model.
    The Asian model originated in Japan after World War II when, in defeat, the country of the rising sun embarked on a deliberate policy of catching up to the West industrially and technologically. It was designed at the top and brilliantly orchestrated by MITI, the Ministry of International Trade and Industry. Simply put, Japan developed a fabulous export machine.
    Combining hard work, flexible labor with high education standards and a fast learning curve, Japan became the envy of the world. Good old protectionism and currency manipulation helped too. So did outrageous dumping policies and a great ability to copy Western products. But the success of this mercantile policy was made possible, first and foremost, by US laissez-faire. Without American consumers' insatiable appetite, the Japanese miracle would never have existed.
    Nevertheless, it worked miracles. It is hard to explain to today's new generation of portfolio managers but missing out on the Japanese boom was a costly proposition in the 1980's. Japan was the future. The Japanese stock market was soaring. Japanese industries from consumer electronics, to cars, to ship building were unrivaled worldwide. Trade surpluses ballooned to new highs every year. The country was raking in massive amounts of dollars which naturally flowed into the leading Japanese banks, eight of which ranked among the world's top ten by the end of the decade.
    Eventually, the accumulation of current account surpluses resulted in a spike in domestic asset prices. The yen appreciated and Japanese investors started to look for alternative opportunities abroad. Everything looked cheap from Van Gogh paintings to landmarks in New York and Los Angeles.
    That's when neighboring countries took notice. The way to prosperity had been laid out for them. South Korea, Taiwan and the other Asian Tigers followed in Japan's footsteps. In due course even Communist China jumped on the bandwagon. The Japanese model had now become the Asian model.
    Success attracts competition. Starting in the 1990's, while the Asian Tigers were roaring, Japanese hegemony receded. Hyundai challenged Honda in North America and Europe. The Samsung brand overtook Sony in consumer reviews. Acer and Lenovo laptops replaced NEC and Toshiba. Shipbuilding activity picked up in Changwon and on the Yangtze River at the expense of Kobe and Osaka.
    All this is resulting in too many Asian corporations chasing the same US consumer - and his European little brother. Not only have we reached some kind of saturation point, but it is happening as Western economies are in a slump. US consumers are deleveraging and Europeans have embarked in a German-inspired austerity.
    An overcrowded space and shrinking demand is not a good combination. Yet it is not the real problem. Japan ran out of steam in spite of ballooning global demand. What Japan did demonstrate is more fundamental. It is the limitation of an economy that systematically privileges production at the expense of the consumer.
    That model focused on the needs of large exporting corporations put Japan in the forefront of global manufacturing. It also took hundreds of millions of Asian people out of poverty and should thus not be dismissed. However, it is a bit reminiscent of the cartoon character chasing a rabbit. He quickly catches up and gets in reaching distance of his pray. Then, after they both run for a while at the same speed, just a few inches apart, the chaser always, somehow, manages to run off a cliff. He does not fall off the cliff, mind you. He just hangs in the air, not noticing the abyss. Then he looks down and realizes his predicament.
    One day Japan will stop refusing to look down.
    The core of the problem lies in a society that relies too heavily on top-down decisions. Maybe it is cultural. Asian societies are still quite hierarchal and power is concentrated in few hands. From the keiretsu in Japan to the chaebol in Korea, their economies are still very pyramidal. Not to mention communist China.
    Hierarchical societies are petrified of chaos. Consumer-driven economies are not orderly. Doesn't it make more sense to have the whole country pulling together in a synchronized way? Channeling everyone's efforts toward a common goal seems so much more efficient. It avoids waste. It prevents working at cross-purposes to the common good of the country. In a different place and era, Lenin famously predicted that capitalists would sell him the rope with which he would hang them.
    Indeed, Japan's orchestrated allocation of resources to export oriented industries proved very successful at first. So what if a Japanese consumer had to pay twice as much as his US counterpart for the same, Japanese-made Sony camera? If that was the price to pay for global supremacy, so be it. The country as a whole would benefit. It did.
    Until it didn't. While Sony was perfecting their cameras and laptops, Apple responded to consumer demand with new products, like the iPhone and the iPad. Facebook and Twitter also emerged from the chaotic American consumer-lead economy. Nobody at the top of MITI or of a keiretsu saw these changes coming.
    At the end of the day, in a hierarchical society, capital and energy are applied to preserve the status quo. Why would anyone give up a privileged position in society if not challenged?
    The Asian economic model's shortcomings are becoming more and more apparent. The world is flattening. Organizational structures are increasingly horizontal, a movement greatly magnified by the internet and social media.
    The consequences could be devastating for societies or companies that cannot adjust quickly. Take the music industry. It is used to sell CD's, a product rapidly becoming obsolete. Kids nowadays download their favorite songs from the internet. How does one react? Produce better CDs? Put internet users in jail?
    Left alone, the market will adapt. Bottom-up solutions will appear and new business models will emerge. Rigid, top-down systems will only tweak the existing world order.
    Recent history makes this abundantly clear. When confronted with a downturn, Japan's production-obsessed bureaucrats exacerbated the problem. All they could think of to do was double down and invest heavily in production capacity.
    An investment glut later, the same people in charge then decided to manufacture a top-down domestic demand recovery. Consecutive paternalistic Keynesian stimulus packages were introduced with a regularity that tended to coincide with election cycles. Public deficits shot up. Government debt exploded. The economy never got its footing back. Japan had entered its first lost decade.
    The parallels between China and Japan are striking. Neither country seems to understand that chaotic markets are the way to salvation. In China a shift toward a consumer-driven economy will at best take time. But the first steps have not yet been taken. Instead, China has initiated a Japan-like investment bubble. Keynesian policies are next.
    Marx may be in China's dustbin of history, but dirigisme is not. The Central Committee in Beijing will never laud the merits of 1,000 points of light. It wants to remain the unchallenged lighthouse.

    Disclosure: I have no positions in any stocks mentioned, and no plans to initiate any positions within the next 72 hours.

    Themes: economy
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