Asia’s Economic Non-Miracle
January 2nd, 2011Asia vs. Philippines, and the Power of Long-Term, Low-Rate Compounding
Philippine President Benigno Aquino III intervened this month in efforts to restructure flag carrier Philippine Airlines (PAL.PSE); managers were barred from spinning off inefficient ground operations or laying off workers, while labor was instructed not to strike until after Christmas. PAL is reportedly near bankruptcy, despite its dominance in one of the more pricey, uncompetitive airline hubs in Asia.
This is interesting not for its direct investment potential, but as a microcosm of the sad trajectory of Philippine industry generally, and as a nation-scale illustration of the power of compounding. For both the airline and the country, present travails contrast with a long and once-prosperous history, while populist meddling hobbles restructuring and may help explain stagnation.
Few now remember that PAL is the oldest surviving airline in Asia, operating continuously since the 1930s. Almost as few will remember that just 50 years ago, the Philippines was east Asia’s third most prosperous country, behind only Japan and Malaysia in GDP per capita (this excludes Hong Kong and Singapore, which were still British colonies). Today, as once-destitute neighbors like South Korea reach 1st-world prosperity levels, the Philippines has fallen to the bottom of the east Asian heap, and well below the average for sub-Saharan Africa.
Though surrounded by shining examples, and despite its strategic location, decent seaport sites, cozy relationship with the U.S., and the best English fluency in east Asia (again excluding the British city-states), the Philippines under Marcos missed the memo on export-led growth, and perennially lagged its neighbors. For this and cultural reasons, its birth rate remained pre-industrial, and population tripled after 1960. There are now more Filipinos than Vietnamese, Thais, Koreans (even if reunified), Germans, French, Italians or English; in fact, with the highest birth rate in east Asia, they look likely to outnumber Japanese within 20 years. For all that, the country remains relatively invisible on the world stage, because of slow industrialization.
There was no single moment of failure. Though there were a couple of economic impairments along the way, the Philippines lost the prosperity race mainly through a small but consistent shortfall in GDP growth per capita, compounded year after year for decades. How small a shortfall? Since 1960, it has lagged the slowest Asian success story, Malaysia, by “only” 2.5% per year (nominal), and Thailand by less than 4%. If it had instead delivered even Thailand’s per capita growth, it would today have aggregate GDP comparable to South Korea or Taiwan, and economists would visit Manila seeking lessons, instead of offering them.
From a Western perspective, the east Asian economic “miracle” appeared to emerge suddenly, but this is the usual misapprehension of hockey-stick exponential growth. Asia’s success stories did not suddenly strike it rich. They did not find oil or gold, or buy into the seed round of Facebook. They instead exploited a series of low-risk tactics to compound at a relatively consistent 8-10% CAGR, without serious impairment, for decades. That was enough. Those who could not or would not do the same were left behind.
Like a Mandelbrot image, this principle appears the same at every scale, from individual investors all the way up to nation-states: choose a series of low-risk tactics to generate consistent, slightly supernormal returns over a long period, without serious impairments, and you will win. Food for thought.
[...] wasn’t rocket science. As mentioned at in an earlier post, it was a game of long-term, low-rate compounding, and the self-discipline to stay on that track. « Hedging for [...]