Why Developing Countries Aren't Rich

I've come across an interview Templeton's Mark Mobius gave PBS in 2001. He was asked "why aren't developing countries rich?" He answered:

I've come to the conclusion it's about corruption, really, at the end of the day. What I mean by that is of course there's different degrees of corruption. Every country has some corruption, but in the emerging markets the corruption goes all the way to the top, so therefore the population does not have faith in government structures, in law and order, because if you have corruption, in essence you don't have the rule of law; you have the rule of people. And that's really what separates a poor from a rich country, because there's no shortage of money.

There's absolutely no shortage of money in this world, plenty of money. The problem is is where that money is willing to go, and as we've learned from the debt crisis now -- we were just talking just recently to people about Malaysia, Indonesia, [Thailand], the crisis and everything -- if you really dig down deep enough, the problem is law and order. If someone lends money to a company or to a country and does not get paid back, they're not going to come again, or at least they're not going to come in a long while, and that's one of the reasons why I'm strongly against debt forgiveness for the poor nations of the world, because that's the worst thing you can do to a nation is allow them to get away from their debts and obligations.

It's a very bad lesson, because it means that for the future they will try and do that again, and eventually they'll have no credibility again, and no capital will go to that country.

You'll find much more if you go to the linked piece. And, sadly, Mobius' thoughts about corruption and debt forgiveness still rings true six years later.

Remember, when money managers invest money in a country they're putting their clients' (and hopefully their own) cash to work. When Do Gooders and World Savers demand your government "invest" money or "forgive" debt, it's your money at stake -- not theirs.

Comments

[Hopton]

You seem to forget that political and cultural risks are part of investing... they cannot be separated... especially in emerging markets. When the "animal spirit" spring forth, investors seem to easily forget this again and again. Mark Mobius is appearing on TV to promote his services and has an incentive to understate political risks.

When the U.S. was developing, did it "respect" British intellectual property rights and such? The British were likely using the same arguments against the young United States that Mobius is using against Asian and African countries (corruption, rule of law, property rights, defaults).

Shiller had a good piece called The Political Stock Market at Project-Syndicate that is worth a read.
http://www.project-syndicate.org/commentary/shiller12

[Anonymous]

Why developing will always be developing country?
-The Little Book of Value Investing

Poor country and 'always developing' country is the manifestation of the other side of Adam Smith invisible hand. If you have individual trying to benefit only to himself/herself, they will inevitably change the society. I'm from Malaysia and I've seen the first hand of corruption, police department, immigration department, custom officers when you cross over into Malaysia from Singapore. These all can be traced back to the people in charge - the Prime Minister and their 'gang', and they won't give away their 'right' to control and use of power because they do not have a pre-make system to guard them. So the easiest way for them to do is to make sure they can continue to possess the power, and the worst way to do it is using religion. Same reason for most other religious country. I always like to say religion is good after office hours because that's none of my business.

A developed country usually goes like,
1. They don't ruled by religion
2. They have a bunch of thinker and executioner
3. They set up a (political) system so others can follow cause not everybody can think.

Think Singapore (instead of USA , which everybody knew),
It is the smallest country in Southeast Asia. It split from Malaysia in 1965. Lead by Lee Kuan Yew (thinker/executioner) set up a constitution (political system) that's amazingly efficient, by the way, I would not want to be his party opposition. In just 40+ years they are 22th wealthiest country in the world with US$119b reserved while Malaysia still submerge under huge foreign debts and rely heavily in natural resources and low end factory. These are the same mix of people in Singapore and Malaysia but the system produce different result.

It's the system.

[John]

Hopton: I haven't forgotten. I'm well aware of political and cultural differences, even in developed markets where I've posted several times about countries with Anglo-Saxon style capitalism generally treating shareholders better than those, say, on the European Continent.

Your point about the US is well taken, but business conditions here have gotten better over time, despite the rare Enron here and there.

Anon: Great comment, thanks for reading and giving us all the perspective of someone on the ground.