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June 8th, 2017 under West Texas Talk » West Texas Talk Highlight

The ‘Chindia’ bomb

By TOM JACOBS

The United States has an estimated 326 million inhabitants, third in the world. China is number one, with 1.4 billion, and India follows with 1.3 billion. About 36% of the world’s 7.5 billion people live in those two countries. India had the highest percentage GDP growth in 2016 at 10.1%, with China twelfth with 6.7%. To compare, the US tied for 49th with 1.6%. Of course, we are growing off a larger base, but still.

Now, consider that until relatively recently in history, neither of these countries’ economies has been remotely capitalist for more than briefly. When India turned from socialism to capitalism, and China towards capitalism – extrapolating backwards – the world’s potential labor force and consumer base grew 60% in a few decades – over eight times the US population! About 36% of today’s world population is a new competitor and contributor to the world’s economy. There are no words to describe this.

The effects are plummeting labor costs and product prices throughout the world. It has also transferred enormous wealth from more developed countries to China. We buy Chinese goods, whose prices have plummeted, and China buys our national debt, in effect financing our consumption. China takes the money and buys assets abroad. It also invests heavily in other countries, extending its political and economic influence. (Sounds a lot like the former US, right?)

India is another story. Charlie Munger, Warren Buffett’s sidekick at Berkshire Hathaway, once discussed their trip to China and India scouting for businesses to buy. Munger praised China and deplored India as places to invest. I could hardly believe my ears. Republican capitalist Munger (Buffett is a Democrat, by the way) preferred an economy in a one-party state with government control of just about everything?!

But I see his point. India is a political and economic madhouse that gives chaos a good name. On one hand, it is a functioning democracy, with parties changing power – no longer the long-time rule by the Congress Party. It is also, thanks to British colonial rule, a massive bureaucratic state. That and decades of socialism, as well as almost complete lack of functioning infrastructure, stifle many kinds of businesses.

Munger saw that even though government decisions on where to allocate investment capital are almost invariably wrong, the Chinese government has done the impossible. In a short time, it has pushed investment in infrastructure from transportation to energy to housing to create the conditions for business success and economic advancement. This has meant empty high rises and roads, but China is planning ahead.

Without a one-party state, India doesn’t have that chance. You simply can’t get anything from here to there in India – roads, railroads, and ports are all a mess – and coordinating local governments from New Delhi is incomprehensible (there’s a great article on how the czar of the new New Delhi subway was able to get it done – he was given dictatorial powers). Some US companies face obstacles in China – not least in the movement of information as with Google – but not like the utterly mad logistics of product manufacturing and distribution in India.

Despite this, India is a demographic bet to surpass China at some point. Its population skews younger, while China’s one-child policy – legitimate fear of overpopulation restricted families to one child – succeeded all too well. China, like Japan, faces the economic and social burdens of an aging population, while India’s younger demographic offers labor force and consumption benefits.

Bringing the two largest populations on earth into the worldwide trade markets in a few decades makes the nuclear bomb comparison trite. Eight times the US population has blown into the capitalist system. I am unaware of any historical precedent on this scale. Eastern Europe’s return in the early 1990s is a grain of sand on the economic beach.

And it’s just the starting line.

Tom Jacobs is the Marfa-based fee-only Investment Advisor and Portfolio Manager of Huckleberry Capital Management, with clients of all means in 20 states and three foreign countries. You may contact him for an informal and free consultation at tom@investhuckleberry.com and 432-386-0488.

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