Yesterday, I wrote about how Argentina has fallen from one of the world’s richest nations just 100 years ago, to a spending much of the last eight decades in decay. Once the world’s tenth richest nation, it has fallen quite a long way.
Set aside this so-called Argentina Paradox, however, and the list of wealthiest nations at the turn of the 20th century foreshadows some interesting ideas for today’s economy. At the top of the rich list of that era were the UK, the US, Germany, France, Australia, and Canada.
Interestingly enough, the US, Australia, and Canada all had ties to the UK. France is just across the English Channel. While the US and UK had an interesting, sometimes complicated relationship during the first several decades of the 1900s , the power of trade between the two can’t be denied. Australia, while given some limited independence, was still under British control. Having a history with and/or connection to Britain was a key component of economic success in this era.
Fast forward to today. The US is the only one of those economies with wealth superpower status. Nipping at its heels and soon to overtake it is China, which will usher in a new era of Asian dominance. While there’s no doubt places like Hong Kong and Singapore have and will benefit from Asian success, I’m talking about resources that feed China’s best.
Take Mongolia. I doubt most people know anything about it. But it’s rapidly becoming a huge success story on the back of China. Historically a nation of nomads with a livestock-based economy, it has recently turned to extracting minerals from it’s rich soil. Like yesterday’s tale of Argentina, Mongolia was once a aligned with the Soviets and, after their fall, was driven into deep recession at the hands of the People’s Revolutionary Party. They’ve since instituted market reforms and, with new foreign investment in mining, have been seeing GDP growth upwards of 17%. While some believe that growth could fall a few points this year, other analysts predict 18-20% growth for the next several years.
What makes an economy like Mongolia appealing is its natural connection to China and the ease of exporting across the border. They have a similar history, albeit for different reasons, with their neighbor to the north, Russia. Yes, a slowdown in China could hit resource imports, but Mongolia is currently the low-cost provider and, being right next door, I suspect China would opt to reduce imports from nations further afield first. While Mongolia is determined to keep Chinese influence at bay with immigration and other restrictions, they will continue to strongly benefit from the developing world’s growing need for resources. As a frontier market themselves, there will be plenty of other development needed to keep up. Migration by semi-nomadic herders from the steppes to the city has created a population increase of 50% in the capital (and only substantial city) of Ulaanbaatar.
There’s no question China will be an economic superpower in the century to come. Just like 100 years ago, they will bring their partners along with them. Second only to Mongolia in exports to China is the equally mysterious country of Turkmenistan, with other “Stans” following behind. Understand that while the players may change, general principles usually don’t. To focus only on China’s “world’s factory” status to western economies is to ignore the other side of the equation in which today’s fastest developing nations have the potential to make their frontier (and perhaps unheard of) trading partners richer than ever.
If you pay any attention to the news, you’ve no doubt be reading a lot about Argentina. Whatever you think about the Falkland Islands debacle, I doubt any freedom-loving capitalist would have many good things to say about Argentina’s President, Cristina Fernández de Kirchner. From capital controls to nationalization to confiscation of assets, populism is back on the move in Argentina, and it’s not the first time in their history. But it wasn’t always that way.
In fact, back in the early 20th century, Argentina was one of the world’s richest countries. Exploration of the country’s rich agricultural lands made it a powerhouse, exceeding Australia and Canada in population, economic strength, and income per capita. Farming exports from this once ignored nation became so plentiful it was widely expected to become the United States of the southern hemisphere. Locals earned as much as the British and the French.
Argentina’s fall from grace has created “the Argentina paradox” and has been the source of great wonder among scholars. How did a nation so successful at the turn of the 20th century come in dead last in terms of income and social growth at the turn of the 21st?
How it happened was that the 1930s brought an era of instability that brought the days of prosperity to an end. The new government adopted a strategy of reducing imports and working toward self-sufficiency. Sounds great, except that they abandoned their farming sector in favor of sexier, industrial might, and things turned ugly. By the time they had to put their tail between their legs and scrap that policy, inflation began to rise, production was inefficient, and government spending was unsustainable. Sound familiar?
By 1913, exactly one century ago, Argentina was the tenth wealthiest nation in the world. It’s amazing how quickly things can change when you bite the hand that feeds you. And in this case, how long it can take to turn back around when you refuse to admit it. Tomorrow, I’ll explain what Argentina’s counterparts at the top of the charts one century ago can teach us about what’s to come in the next century.
With a new year comes new resolutions. I’ve endeavored to spend more time visiting developing countries, finding opportunities in frontier lands, and exposing myself to more and more people in the global economic community. I’m also hoping that some of my fellow Americans resolve to get out a bit more.
Several days ago, several media outlets, including the New York Times, covered the story of a ski resort on the Vermont-Quebec border that has attracted hundreds of millions of dollars of foreign investment under the US EB-5 visa program. The EB-5 program allows foreign nationals to invest $1 million in American businesses (or, in this case, $500,000 in a rural, high-unemployment area) in exchange for a provisional green card, contingent on ten jobs being saved or created. The ski resort’s co-owner, Bill Stenger, has held court over perhaps the most aggressive use of the program to date, courting more than 500 investors to help him redevelop the place.
Yet this New York Times piece seems to poo-poo the idea, calling Stenger’s purported hold on the small community a “fiefdom” and asking him if his investors are “buying their way into the country”. Of course, Nomad Capitalists know that the US is hardly the only place in the world investors get special treatment for pouring in cash. A laundry list of countries from EU states like Ireland, Spain, Portugal, and more, to rich Asian city-state of Singapore, to islands and mini-states on almost every continent offer the same, sometimes for less money. Even Canada is bringing back it’s temporarily suspended investor program. Heck, Hong Kong’s program lets you put the required $1.3 million investment in a bank CD until you qualify for their version of permanent residence. Yet some Americans, who have never visited another country let alone studied their economic policies, find the idea of “cutting in line” distasteful. It’s a first world way of thinking based on an aversion to admitting that money opens doors not available to those without it. For rich westerners, it’s distasteful to admit, so much so that it permeates throughout society. Try overtly bragging to your date this weekend that you own a Ferrari and see where it gets you. Tacky tacky.
While I’m not saying we should fall in love based on money (although plenty of good people in the world do), the reality in much of the world is that money really does open doors. People in places like Asia, the Middle East, and South America get that. The irony is many of those countries are becoming the new rich, while the US is deeply in debt and still facing high unemployment. Yet Americans, fixated with being a “rich country”, find it odd, even distasteful. (Of course, news that illegal aliens can stay with their legal spouses while applying for green cards is heralded by many of the same news outlets, NYT included). It’s the last form of acceptable xenophobia, even among those who champion immigration among people of lesser means, and cleverly couched as some sort of economic sovereignty.
Why the affluent class from countries like China want the headaches associated with US green card status is largely beyond me, but I’ll cover that in a future post. As we move deeper into the 21st century, the playing field continues to be leveled as the US and western Europe remain mired in an economic mess. The BRICs and other fast developing players are beginning to assert their dominance and will create new opportunities for their citizens which will not only curb many of their desires to emigrate for the west, but, in turn, less of an ability for nations like the US to take advantage of foreign wealth to bolster themselves. Eventually, enough Americans may want to emigrate to the same countries today’s EB-5 seekers hail from. Competition for talent will only increase and staying mired in a bygone era of American (or European) dominance will lead to ruin.
It’s 2013, not 1913. I hope the west understands that they spurn foreign capital at their own peril.
I’m writing from Las Vegas where I’m wrapping up a brief stay. Remember the $3.99 shrimp and prime rib buffets that used to dot the city here? They’re long gone as they’ve embarked on a campaign to destroy every low-priced hotel left on the Strip and ushered in new super-luxury hotels where $3.99 won’t buy you a bottled water.
I recently finished reading The $10 Trillion Prize, a brilliant book discussing the current and future trends of class ascension and increased consumer spending in China and India. If you’re an investor or entrepreneur, these are two markets you need to be focused on and you need to read this book. (Click here to get it on Amazon and help keep our pirate ship afloat). One thing that stood out to me as I stood at a $100 craps table on one of the slowest days of the year was just how the massive increase of wealth from these two nations will shape the global economy this century. If you embrace it, you’ll flourish. Those who don’t will suffer the consequences.
For example, while the US has been mired in a recession, Vegas is back on the upswing, with fresh new casinos and more rooms than ever. It’s not Americans filling those rooms. It’s cash-flush Chinese, Middle Easterners, and the new affluent from other developing countries. They’re flooding into the West with cash in hand to experience fine hotels and dining and to stock up on luxury goods of indubious authenticity. When the mob ruled Vegas, it was all about gambling, a bit seedy, catered to Southern Californians who drove in and other Americans who could fly. As it has become a global entertainment destination, Vegas has de-emphasized gaming, added a slew of me-too gourmet steak joints run by celebrity chefs, and rolled out more and more luxuries. If you’re an American who was used to cheap gambling, generous comps, friendly service, and cheap food, the globalization of Las Vegas and the new international demand has priced you out.
China and India will add hundreds of millions to the rolls of their new middle class in your lifetime. Countless new developing world billionaires will be created as there have been over the past decade alone. These people come from another culture where consumer demand is shaped in different ways than you may be used to. Entrepreneurial innovation in those countries will eventually force innovation and, in kind, lower prices in the west. But it will also create a larger demand for resources for luxury goods to oil. Prices for westerners will be higher, but I suspect Americans will be hit the hardest. Save the falling value of the dollar; compared to Europeans, Americans have grown accustomed to cheap fuel, cheap food, and the cheapest standard of living among first world democracies.
As China and India rush to grab their share of the world’s resources, prices will go up, just like in Vegas. You can learn the lessons of The $10 Trillion Prize, embrace the future, and profit, or you can watch the world change before your very eyes. Unfortunately, I suspect as this phenomenon causes disposable incomes to decrease in the west, the middle class here, far less secure in outlook than their Chinese and Indian counterparts, will put more demand on people like you to “do your fair share”.
I’ve recently been talking with some of the top experts on FATCA, the USA’s far-reaching new law that effectively makes every foreign financial institution an unpaid tax collector for the American government. In fact, I’ll be interviewing one on my radio show early next year. You’ve no doubt heard stories of banks around the world slamming the door in the face of US citizens looking to open accounts with them, or closing accounts of current account holders, ahead of a deadline that will subject them to unheard of penalties for failure to not report even so much as one US citizen’s financial data.
Of course, to the masses of Americans who rarely leave home let alone travel outside the country, the plan sounds completely reasonable. Why should rich fat cats be able to stash their dough out of the reach of their home country’s tax authories? Who needs a bank account in Singapore or Switzerland or Panama after all? Of course, it rarely occurs to those without international credentials that you just might need one of those accounts if you live in Singapore or Switzerland or Panama. Or built or inherited a business there. Or had family there. That you might not be a furtive robber baron carrying bulletproof suitcases (I really need to get myself one of those) with millions inside completely escapes them.
That brings me to the real lesson to be learned from FATCA: culture is everything. In the minds of those who take aim at our Nomad Capitalist mentality of going where our capital and talents are treated best, it must be all about the money. After all, why start a business in Singapore when you owe your appreciation, and your money, to the United States or France or the United Kingdom for the privilege of being born there? We know that greed isn’t really the main reason at play here, because if it was, we’d all move to Russia and avail ourselves of a low 13% flat tax rate. Other than the fact that I’ve always wanted to live in a country that called itself a “Federation”, I know almost no international entrepreneur has designs on moving there. Nevertheless, projecting an archetype of greed onto those who want to expatriate sounds good, and because humans are emotional creatures, most don’t give it a second thought. Score one for the politicians.
The problem with FATCA isn’t just that the US wants to snoop on your every dollar. It’s not even that they’ll liking use that snooping to enforce new and more rigorous capital controls to force you and your money to stay put. The problem is that the US, cheer on by a large swath of its citizenry, figure they can do whatever they want to you and to any other sovereign nation as if the world is their sandbox. To them, there are one group of countries that make the decisions and the rest that live with them. They don’t think they have to be competitive, and when people start to gripe, they’ll just tighten the nuse. And the US has a habit of exporting more than just Hollywood movies and fashion styles; other countries who don’t want to be competitive now have proof of concept to develop their own draconian schemes. The UK, for instance, is working to implement it’s own version of FATCA.
Try going to a US embassy overseas and getting in. I showed up for an appointment at the Embassy in Dublin several years ago only to be shouted at and demeaned by the bureaucrat behind the glass; when I flashed a passport, I begrudgingly was let it. Ever bought a train ticket in China? Arrogant government workers will shoo you away, and, if their computers freeze while you’re next after an hour on line, tough luck. But go to a post office in Hong Kong or the immigration office in Dublin and you’ll be greeted with a smile and efficient service. In Macau, a postal worker offered to walk me to my next destination as he was leaving on a lunch break. Ireland, my favorite (and perhaps the most beautiful) European country with great quality of life, has steadfastly stood by it’s low 12.5% tax rate, refusing to cave into the avarice of fellow EU states who wanted it scrapped as part of a bailout. How dare Ireland make its own laws and try to attract foreign talent? There are plenty of countries, mostly smaller or recently-developed and, out of necessity, more nimble, operations that know and respect the people who keep their ship afloat. They know where their bread is buttered and know how they go there. They know they shouldn’t take you for granted.
If you’re upset about the United States’ latest arrogant attempt to make every other country on earth their bitch, consider why they feel they can do that to sovereign nations and what it means for you. The US, for example, took it upon themselves to lead the charge in the late 1990s and early 2000s to bring a forceable end to almost every citizenship by investment program, usually run by impoverished Caribbean nations who needed the cash to, among other things, feed their people; in an effort to prevent free human and capital movement. The writing has been on the wall. Nomad Capitalists never put their full trust in any government because they know how government inherently works. Study your options thoroughly; you know going global means more than just the lowest tax rate. It’s about culture, quality of life, and respect. Find a place to knows it has to work to earn your money.
I’m at the Houston airport’s United Club now, spending a three hour layover on a mileage run that will take me in every direction across the U.S. over the course of fourteen hours today. I’ve always felt strangely at home at airports; they’re a great place to let your imagination run wild. Ever since my mother put a huge map of the world on my bedroom wall at age eight, I’ve wondered what it would be like to take off to all sorts of far-reaching places.
Surrounded here by ultra-frequent-fliers leaving to conduct business in all sorts of places (some of these people are serious George Clooney “Up in the Air” types), I’ve been passing the time keeping an eye on the departing flights board, letting my imagination run wild. Dubai. Amsterdam. Moscow. Panama City. Singapore. Lagos. Rio.
As an entrepreneur, it’s imperative to keep an open mind and stay open to new opportunities. Let the departure board be a reminder to do just that, on a scale greater than you may have ever thoughts possible. Every one of those cities and the many more offer a unique opportunity waiting to be cultivated. Whether it’s oil services in Brazil, commodities in Australia, or high-tech in Singapore, each place offers its own path for you to take hold of, and countless other tangents you can develop to stake your claim. Don’t constrain yourself to one city, one country, or even one hemisphere. Think globally and explore what each place, even (perhaps especially) those up-and-coming places most of your fellow citizens couldn’t find on a map, can offer you. Then be ready to take the opportunity best suited to your goals and ambitions and grab hold of it. Get yourself on a tarmac and be ready to take flight.