Asia Insight

December 2008

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Shifting Attention

Robert J. Horrocks, PhD
Director of Research
Matthews International Capital Management, LLC

When economies weaken, investors pay more attention to political issues. This shift of attention can sometimes create the impression that political movements or events have recently “erupted” as part of the economic downturn, when the truth may be that the issues have been present for far longer. Looking at three current events in India, Thailand and China, we try to outline a framework for assessing the investment impact of political events. To put it simply, such impact is limited unless the political event will cause a significant change in the running of the government or its policies.

Last month terrorists struck Mumbai, India’s financial capital, attacking high-profile targets including hotels and hospitals. In Thailand, a wave of anti-government protests led by a movement called the People’s Alliance for Democracy (PAD) has gripped the country for several months. In China, Zhang Ping, head of the National Development and Reform Commission, worried out loud that “excessive bankruptcies and production cuts will lead to massive unemployment and stir social unrest” while China’s official media reported that 500 displaced workers protested violently in Guangdong. It is tempting to link all of these events to some vague notion of discontent or impoverishment, but to paint social movements as unpredictable spontaneous outpourings of anger is to be taken in by politicians’ rhetoric. Studying each of these events in turn can give us a way of looking at political unrest that may guide investment decision-making.

Horrific acts grab our attention in a way that may exaggerate their real effects. The most terrible of recent events, the attacks in Mumbai, may prove in investment terms of lesser significance. The local stock market was able to shrug off the events the next day. Why? In weeks to come, we may learn more of the attackers’ motives—but for now their act appears to have emerged outside of the normal political process and was bent on causing terror and ultimately inciting conflict with Pakistan. More tension between India and Pakistan remains possible, even though Pakistan has offered all possible assistance in finding the perpetrators. These atrocities were, sadly, merely the latest such attacks suffered by India. Over 3,000 people have been killed in terrorist attacks in India since 2004 and over 300 since July 2008. Markets become accustomed to living with terror because of the difficulty of factoring in sporadic bouts of violence. Unless there is a real threat to the politics of the country, markets tend to discount such events lightly.

Political movements may or may not have an economic motive; however, they attain political significance and greater investment impact through being backed by organized political power. In China, politicians fret that too low a rate of growth may raise unemployment and lead to social unrest. There is a clear economic linkage to the threat of political upheaval. Yet, economic development in China has repeatedly caused strife in rural communities when the government appropriates land, as well as in towns and cities when people are moved out of their homes to facilitate new developments. In foreign factories, labor disputes can turn violent as local workers clash with factory owners and destroy property. And yet, real as these grievances are, there is no organized political force to transform such sporadic outbursts of unrest into a cohesive political movement. There is no sign that the Communist Party is going to relinquish one-party control of the central and local state. Thus, the issues are for the most part fought and settled at the local level. For investors, the real issue is the economic slowdown itself, rather than the unrest it may cause.

Arguably the least violent of the three events, in Thailand, is probably the most significant for markets because it seems to be funded and organized by members of the political establishment. The dissident PAD supporters are mainly the well-to-do and advocate the scrapping of Thailand’s “one man, one vote” system and replacing it with a system of restricted suffrage and political appointees. And the movement could influence policy changes: although it is partly organized against the corruption of the Thaksin regime, it also appears to want to protect the wealth and power of the traditional elite. Some commentators worry that a PAD-inspired government might hinder the micro-credit reforms and health care initiatives from the Thaksin era because of the transfer payments they imply from rich to poor. The movement has a real chance of gaining power but a big hurdle will be their apparent lack of broad popular support.

If we argue that political actions have diminished significance unless they deflect governments from their current objectives, then what are those objectives and where might they lead Asia economically and politically? As a matter of the data, greater wealth is correlated with more equal distribution of wealth. Taking the GINI coefficient as a guide—a measure of income inequality where the lower the number the more equal the distribution of wealth—we can see that, with a few exceptions¹, wealthier societies tend to be more equal.

Governments across Asia are more aware than any of the stresses caused by economic development within their societies and are more incentivized than any to cope with them. Asian governments have examples to follow when it comes to the development of institutions to manage a rising middle class and the complexities of a capitalist economy. Both Europe and the United States have developed the institutions of the modern state and the welfare society to deal with the cyclical stresses imposed by economic cycles on the professional classes.

Alongside a better-developed welfare state to help with frictional unemployment, Asia’s governments are building sophisticated banking systems that allow individuals to borrow more efficiently to smooth incomes over a lifetime. Home ownership is another tool to ensure a more stable and individualistic society and it is a foundation for the growth of a mass consumption society which should help realize a more equal distribution of incomes. So, however much political unrest of the kinds we have witnessed recently leads to concerns about the political sustainability of economic growth, the long-term view suggests that economic and political development will progress hand-in-hand, so long as governments are not deflected from the domestic reforms that are already underway. With the possible exception of Thailand, there seems little suggestion that governments will change course.

¹ High migrant worker participation as well as political, geographic, demographic, and differences may influence results.

The views and information discussed in this article are as of the date of publication, are subject to change and may not reflect the writer's current views. The views expressed represent an assessment of market conditions at a specific point in time, are opinions only and should not be relied upon as investment advice regarding a particular investment or markets in general. Such information does not constitute a recommendation to buy or sell specific securities or investments vehicles.