Last week a visiting economist from the IMF (International Monetary Fund) lectured on "The Social Benefits of the Stock Market." As might have been expected, it was far more graphs and charts than pictures of needy children, but all the same, some pretty interesting things were said. The economist was looking at the issue from a macro level ... that is, how international investors could potentially make a difference in a place such as Mozambique or Vietnam without actually going there. ... as opposed to talking about on-the-ground type aid.
Anyway, most of us probably remember the Asian crisis of 1998. Essentially, a whole bunch of "Asian Tiger" countries - Thailand, Indonesia, Malaysia - had some serious economic problems and it triggered a sharp regional recession. The currencies had become overvalued and so international lenders jumped ship. It was a big mess.
Most of these lenders were banks and banks care deeply about their own money. If a unstable situation develops like what happened in Bangkok, they are going to do whatever they can to get their cash out (or as much cash as possible) immediately. The reason for this is that banks do not like risk. When you look at a chart of the 4 or even 6 quarters after the crisis happened, the flow of capital for banks was going out of the Asian Tigers. There was a negative cash flow into those economies.
Stock investors did the same thing as bank investors ... at least initially. Their holdings were suddenly worth a lot less, so they sold. But investors have a different perspective on risk. Once the market had lost some of its value (after 2 quarters or approx. 6 months) the equity flow into the Asian Tigers began to increase. Investors realized that if they invested in Thailand in a risky situation, there was statisticly a better chance of having a big win than if they just stayed on the sidelines.
So how does this all benefit the poor? In many developing countries, the in-vogue method of helping is micro-credit. I'm a big believer in this, but many lenders are finding that even though some people can turn their lives around, those who do not have an entrepreneurial spirit are left to find other ways out of desperation.
Several years ago, I spent some time in Guatemala. Nike and several other multinational companies operated factories there and, at the time, I thought this was a cynical way to take advantage of the poor. Our Guatemalan host, Salomon Hernandez, had spent his entire life serving the poorest of the poor and so I was shocked to hear him comment about these "sweatshops" that they provided a wonderful opportunity for his countrymen to get a comparatively good paying job. My point is not that sweatshops are great. I certainly wouldn't want to work in one. Rather, the point is that large companies usually employ large amounts of people. If countries open their doors to foreign investment, the capital will come. If countries open their markets to competition, the poor countries of the world will find a way out. (i.e. South Korea)
So what am I saying with all this? Banks are afraid of risk, so they stay away from the "risky" countries that missionaries go to. But investors love risk and this works out to a win-win situation for the poor.
Consider this quote
by IMF economist Kenneth Rogoff:
"Perhaps the greatest challenge facing industrialized countries in this century is how to deal with the aging bulge in their populations. With that in mind, wouldn't it be more helpful if rich countries could find effective ways to invest in much younger developing nations, and later use the proceeds to support their own increasing number or retirees? And let's face it, the world's developing countries need funds for investment and education now, so such a trade would prove mutualloy beneficial--a win-win. Yes, recurring debt crises in the developing world have been sobering, but the potential benefits to financial integration are enormous. Full-scale retreat is hardly the answer."
Many people, understandably, are afraid of integration and the turmoil it brings when economies are joined with one another, but closed economies (like China's ... possibly until recently, and North Korea's more sharply) are hardly the trend today and are clearly not the answer.
To Reward Ingenuity or Not
How to effect social change in the developing world? Encourage local ingenuity by opening risky markets to foreign investors. Those who do well will be rewarded with investors and those who do poorly will probably not be any worse off than they were anyway. The stock market is well suited to make these changes and the economic incentives will encourage those who want to succeed to do so. Do we believe those in the developing world can do it? That is the question.
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