China, Taiwan, Four Asian Tigers and 1997 Asian Financial Crisis

Posted by PITHOCRATES - June 18th, 2013

History 101

Both Mao Zedong and Chiang Kai-shek were rather Brutal to any Political Opposition

Today many of the things we buy are stamped ‘Made in China’.  Because the Chinese can manufacture things cheaply.  For they have a booming export economy.  Which the Chinese built by introducing a little capitalism to the communist state.  And some things that were as un-capitalistic as you can get.  Like artificially low interest rates.  Currency manipulation.  Cheap labor.  And the strong arm of the communist ruling party to keep that labor cheap.  All of this to make their exports about the most inexpensive in the world.  Giving them a huge trade advantage.  Filling stores around the world with products stamped ‘Made in China’.

But before there was ‘Made in China’ there was ‘Made in Taiwan’.  Taiwan.  Officially the Republic of China (ROC).  Not to be confused with the People’s Republic of China (PRC).  AKA mainland China.  Taiwan (or the ROC) is an island in the Pacific Ocean off the China coast with Japan to the northeast and the Philippines to the south.  And is where Chiang Kai-shek and his Chinese Nationalists (Kuomintang or KMT) fled to during the Chinese Civil War when Mao Zedong and his communists conquered mainland China.

Both Mao Zedong and Chiang Kai-shek were rather brutal to any political opposition.  But while the PRC suffered some of the world’s worst famines and abject poverty Taiwan at least modernized into an advanced industrial economy.  Helped in large part by the KMT taking China’s gold reserves.  Their foreign currency reserves.  As well as the intellectual and business elites.  Who typically flee ahead of advancing communists.  As those are the people the communists usually kill or send off to reeducation camps.

International Investment poured into Southeast Asia and Spread the Asian Miracle beyond the Four Asian Tigers

Taiwan is one of the Four Asian Tigers.  Taiwan, South Korea, Singapore and Hong Kong developed advanced economies beginning in the early Sixties.  Thanks in part to laissez-faire economic policies of free trade, open markets, privatization and deregulation.  They also shrunk the size of their public sector.  And had a high savings rate.  Providing the capital for their industrialization.  While keeping personal and public debt levels low.  Because debt matters.  And the more of it you have the more difficult it is to get through a crisis.

But some of these countries also implemented non-laissez-faire economic policies.  Such as keeping domestic interest rates artificially low.  Even having special low rates for select export industries.  And there was some crony capitalism.  Government loaning to their crony capitalist friends.  Some of which disappeared thanks to a certain amount of corruption.  While a lot of it was used to make bad investments.  What those in the Austrian school of economics call malinvestments.  Investments not driven by the laws of supply and demand.  But for non-business reasons.  Growing big for the sake of being big.  Expanding just because of cheap interest rates.  Or the government choosing which businesses to expand.  And often choosing wrong.  Because those decisions were based on political reasons.  Or just a poor understanding of business in general.

The Asian Tigers served as a model for other nations.  Who followed their lead.  And got onto the export bandwagon.  Some even attracted foreign capital to build an export economy with high interest rates.  And pegged their currencies to the U.S. dollar.  To further encourage foreign investors to invest in their countries.  And it worked.  International investment capital poured into Southeast Asia.  Spreading the Asian Miracle beyond the Asian Tigers.

The Asian Tigers recovered the quickest thanks to their Laissez-Faire Economic Policies and their High Savings Rate

Then came the 1997 Asian financial crisis.  Starting in Thailand.  A nation that had a lot of foreign investment.  And a currency pegged to the U.S. dollar.  Then came a massive speculative attack on the currency.  Speculators were trying to force a devaluation of the Thai currency (the baht) by selling mass holdings of the baht.  In hopes of profiting by entering into agreements to repay a debt in baht at a later date.  If the baht devalued they could repay that debt with a cheaper baht.  Thus making a profit.  Thailand fought this devaluation, though.  By selling their foreign reserves to buy baht to maintain the peg to the U.S. dollar.  But they eventually ran out of foreign reserves to sell.  And had to let the baht float.  Causing a massive devaluation.  Making all that foreign debt much more expensive to repay.  Leading to defaults.  And bankruptcies.

Worried foreign investors started pulling their money out of Southeast Asia.  As they sold their holdings they flooded the foreign exchange market with these devalued currencies.  Putting additional pressure on exchange rates.  At the same time the United States was raising their interest rates to head off inflation there.  Those nations that pegged their currency to the U.S. dollar had to strengthen their currencies, too.  Raising the price of their exports.  Making them less competitive.  So exports fell.  Those higher U.S. interest rates made investment there more attractive.  Increasing the capital flight from these countries.  To try and stop this capital flight countries raised their interest rates.  Which further hurt their economies.  As it was more difficult and more costly to borrow money.

Before it was all said and done currencies, stock markets and other assets lost a lot of value in countries hit by the crisis.  Including the Asian Tigers.  But thanks to their laissez-faire economic policies and their high savings rate (except for South Korea) they recovered faster from the crisis than the other Southeast Asian countries.  Of the Four Asian Tigers South Korea suffered the most.  Thanks to a high level of foreign investment.  And numerous corporate bankruptcies.  Because of those malinvestments.  The causes of the 1997 Asian financial crisis are still debated today.  However what can’t be disputed is that those who suffered the least were those nations that embraced laissez-faire economic policies the most.  And those who interfered with market forces to stimulate an export economy tended to suffer more.  Something China (PRC) is doing.  Interfering with market forces to stimulate an export economy.  And making a lot of malinvestments.  As they try to bring their economy up to the standard of Taiwan (ROC).  Only without the laissez-faire economic policies the ROC used.  All but guaranteeing another financial crisis in the region.


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Argentina adds 15% Tax on all Out of Country Credit Purchases

Posted by PITHOCRATES - September 2nd, 2012

Week in Review

Argentina has a problem.  They have depreciated their currency so much that no one wants to hold on to it.  And they are taking aggressive measures to that end (see Argentine tax agents to track all credit card buys by MICHAEL WARREN, Associated Press, posted 8/31/2012 on Yahoo! News).

Argentina just made it more expensive for its people to use credit cards outside the country, and more dangerous for cardholders who aren’t paying all the taxes they should.

One measure published in Friday’s official bulletin adds a 15 percent tax every time people make a purchase outside the country using a card issued by an Argentine bank. Another requires the banks to report every credit card purchase, home or abroad, to the tax agency.

The moves target Argentines who have discovered that by using credit cards outside the country, they can get around increasingly tight currency controls and shelter their money from soaring inflation. Purchases outside Argentina using peso-denominated cards soared 48 percent in June compared to the year before, obligating the central bank to send $289 million out of the country in just one month. Overall capital flight soared to $23 billion in 2011.

Argentina likes to print money.  Which means Argentine pesos don’t hold their value.  If you don’t spend them this week they will buy less next week.  So Argentines don’t want to hold on to them for long.  They’d rather buy stuff while the buying is good (before their pesos loose too much of their purchasing power).  Or quickly exchange their pesos for a currency that holds its value longer.  Like U.S. dollars.  And out of country credit purchases help Argentines minimize the effects of runaway inflation on their earnings.   But when Argentine banks have to settle these international accounts it takes a lot of a depreciated currency to do that.  Hence the soaring capital flight.

If printing so much money causes so many problems why do they print so much money?  Because Argentina governments like to use class warfare.  They like to tax the rich.  And give to the poor.  As well as pay for a lot of big government projects to employ highly compensated union workers.  All to help their shirtless.  Their descamisados.  The poor laborers who work so hard that they must remove their shirts.  But they have so little because of the evil rich people running companies.  And their foreign investors.  So the Argentines gear their whole economic system to favor the unions. And the descamisados.

Argentines don’t have to declare their income unless they are salaried and make more than $20,000 a year or are self-employed and make more than $30,000, so many register with the tax authorities as if they make less than the limit, dealing in cash and trying to keep their income and purchases off the books.

But Argentina also taxes accumulated wealth, giving the government license to scrutinize people’s private property to an extent that foreigners are ill-accustomed to. People whose incomes don’t match their lifestyles can find themselves closed out of the financial system until they come clean.

Since November 2011, Argentina’s government has sought to stem capital flight by closing down nearly every avenue people have to legally trade their inflationary pesos for U.S. dollars. The black-market peso price has spiked as a result, trading now at 6.37 pesos to the dollar, compared to the official rate of 4.65. That 37 percent gap represents what people with undeclared pesos have to lose in order to convert their cash to dollars inside Argentina.

Credit cards, meanwhile, are paid at the official rate, and many cardholders have figured out ways to use them to avoid this loss. The 15 percent tax raises the effective cost of purchases to 5.35, reducing the gap by nearly half.

Of course if you try to implement massive transfers of wealth those with wealth will do everything within their power to keep what is theirs.  So the government has to do everything within their power to let as few as possible to escape their wealth-destroying policies.  Hence the clampdown on out of country credit card purchases.  While the government clamps down it’s the simple workers who ultimate suffer.  The descamisados.  For it is their savings that are made worthless over time.  Making their retirement more difficult.  And less enjoyable.

Argentina has pursued the same polices since Juan Peron in the Forties and Fifties.  And little has changed over time.  Other than a great debt default.  Meanwhile their neighbor, Chile, is doing quite well.  Thanks to a different set of economic policies implemented by a dictator.  Who had help from a great economist.  Milton Friedman.  Who worked with the brilliant Chilean economists known as the Chicago Boys.  Who did things very un-Argentina-like.  And how did that work out for their retirees?  Suffice it to say their pension plan is a better model than the U.S. Social Security program.

Argentina is a great country.  Filled with people just waiting to exploit their human capital.  And the only thing in their way are the bad policies of their government.  Which must be so frustrating for Argentineans.  Because they could explode their economy if only they were allowed to.  And the only thing preventing them are the class warfare policies of their government.  As the class warfare polices of so many previous governments have denied previous generations lives of comfort and plenty.  Lives that were just out of reach.  Of the middle class.  And the descamisados.


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