The Politics of Poverty
Some Things Never Change
Part of the difference in prosperity between Northeast and Southeast Asian economies boils down to whether their leaders – at pivotal points in economic development – decided to tackle poverty, or entrench it.
In this article, I'm going to outline some of the all too common, short-sighted mistakes made in Southeast Asia and of course, how to find investment opportunities despite these botched government policies.
A Lack Of Focus
Really, what happened to make Northeast Asia’s economic miracles and Southeast Asia’s paper tigers so different?
Thailand, Indonesia, and the Philippines have all failed to harness agricultural, banking or land reforms to different degrees, leaving their economies without a strong domestic consuming class that can support their manufacturing sector.
This has led them to become very reliant on exports for economic stability.
Vietnam, which has made more positive steps towards land reform, has done better and is now reaping the benefits, with a growing middle class buying more and more of its domestically-produced products.
Let’s take a closer look to see what went wrong perhaps seeking out a few investment opportunities in the process.
Tripping Down The Path Less Followed
Not all Asian countries followed the Asian Capital Development model (ACD). Indonesia, the Philippines, Malaysia, and Thailand each attempted some form of it, but all fell glaringly short in the first step: land reform. This is where the path diverges and two ‘Asias’ emerge.
Historically in Southeast Asia, powerful land-owners have maintained an iron grip on the agricultural sector. The rural poor work for wages and are not incentivized to boost productivity, rendering them as largely unmotivated and indebted tenants.
And without land as collateral, the rural poor have historically had no way of gaining access to bank credit to launch their own ventures.
Power Corrupts And Absolute Power Corrupts Absolutely
The Philippines, the most extreme example of land policy dysfunction, tried multiple times to implement land reform and failed miserably.
At one point, the Philippine government took land from Catholic estates, but following pressure from conglomerates insisted on the full market price in its redistribution.
The rural poor - who owned practically nothing - couldn’t afford to buy, or even borrow to buy, so almost all of the land in question ended up in the hands of businessmen or foreign companies.
It’s estimated that between 1900 and 1986 only 315,000 hectares of land were redistributed to the people actually working on it, or about 4% of the cultivated area.
In a country where cultivable land is one-third of the landmass, far more than Japan, Korea or Taiwan - not to mention naturally more productive - the Philippines should have been able to develop its agricultural sector.
But today, 8.5 million of 11.2 million rural workers live in poverty. Yield volumes remain relatively low and growth levels aren’t showing signs of increasing.
Without proper land titles for most farmers, inefficiency continues to plague the agriculture sector in the Philippines.
Today, average yields of rice and corn – the two biggest crops – are only 3.8 tons and 2.6 tons per hectare respectively. By comparison, Taiwan (a country that successfully enacted land reform policies) has yields of 4.8 and 3.8 tons per hectare.
These half-hearted land reform policies weren’t unique to the Philippines.
Indonesia also attempted to implement land reforms but corruption at all levels of government hindered the process.
When President Suharto came to power in 1967, his regime introduced minimum price guarantees for rice. At first, yields improved. But by the mid-1970s, the money allocated to pay farmers minimum prices was pocketed by village officials and yields declined.
Unlike the Philippines, the Indonesian government at least supported agriculture through extension campaigns and funds for infrastructure. But in the absence of land reform, these had little impact on yields.
Indebted tenants and agricultural laborers had no incentive to produce more when most of the upside would go to landlords. Moreover, landlords and other local elites pilfered a large part of the development funds.
A Land Of Smiles and Parasitic Government
If the Philippines, Indonesia and Malaysia are first-rate examples of countries with failed land reform, Thailand takes the prize for zero land reform. It also wins the top spot for predation.
For much of Asia’s colonial period, Thailand’s economy depended on exporting rice. Yields were a fifth of post-land reform output in Northeast Asia.
But the abundance of land relative to the population made this unimportant and by the 1930s, Thailand was exporting 1.5 million tons of rice a year.
But after the Second World War, scarcity grew in Thailand’s countryside. The population grew, landlessness increased and there was a big jump in income inequality, especially in rural areas.
Poverty gave rise to rural insurgencies, which still affect the country’s security today.
To add to the plight of Thailand’s peasants, the government set up a monopoly state buyer for rice export. This policy pushed domestic prices down, meaning that farmers received even less money.
The government pocketed the difference between domestic and export prices and at times, this amounted to a third of total state income.
Understanding The Investment Landscape And Profiting
Regardless of whether you like certain government policies or their outcomes, a smart investor can always find an opportunity to profit.
Despite Southeast Asia’s ineffective agricultural policies and stunted manufacturing sector, there remain plenty of opportunities in the agriculture sector. The landed elites in each country continue to grow their vast estates and create highly profitable companies that are protected via monopoly.
Strong players to look out for?
Malaysia’s IOI Corp Bhd (Bursa Malaysia Stock Exchange; ticker: IOI), a global palm oil giant and Kuala Lumpur Kepong Bhd (Bursa Malaysia Stock Exchange; ticker: KLK) a conglomerate involved in cocoa and rubber, have the second and third highest market caps in the Asian agriculture sector respectively.
Indonesia’s Charoen Pokphand Indonesia Tbk PT (Indonesia Stock Exchange; ticker: CPIN), an animal feed producer ranks fifth in the region.
And as we discussed earlier, these big agriculture businesses are labor-light but machine-intensive. So as these companies grow, they will buy more high-tech agriculture inputs, like ‘smart’ agriculture systems, which is another industry we’ll keep our eye on.
After agriculture comes one of the most important Asian sectors for you to invest in. Naturally, I'm talking about manufacturing. We'll get into that in another article.