The Philippines

I've had several articles on the Philippines in the past few years (the

most recent in June '93); so I'm not going to overload you with a repetition

of the same data on the place. But, having made two more trips there since

my last article, an update seemed in order.

Especially after my most recent trip, I had to ask myself why the

Philippines hasn't yet become a flavor of the month in mining popularity.

The answer is, exclusively, its political situation. The country is ranked

second in the world in gold reserves, third in copper, and sixth in

chromite; but mining has dropped from 26% of export earnings 20 years ago to

only 6% today. And not because the Philippine economy has boomed; it's been

the worst in east Asia for decades. Copper production, for instance, has

dropped 40% since 1981.

The reason is that taxes on the industry are among the highest in the

world, including a 5% excise tax on metal products, in addition to

everything else. In 1992, the mining sector paid the equivalent of US$64

million in taxes, despite losing about $63 million. As a result, most mining

firms have closed down over the last few decades, and those that remain

(like Benguet, Atlas, and Philex) are loaded with debt, and on the ragged

edge of collapse. 20,000 employees have been laid off in the last few years

alone.

All of this, of course, is complete insanity in a country with rapid

population growth, and which is known as the poor man of Asia, simply

because it's the only country in Asia that hasn't boomed.

The good news is that the Filipinos are clearly tired of missing out on a

good thing, and being considered the laughing stock of their neighborhood.

Mining law has been changed; so it's now possible for foreigners to own 100%

of a property, and more changes are on the way. But what's going on in the

Orient in general, and is just starting to happen in the Philippines, leads

me to a broader issue.

 

Wealth

The more time you spend in the Orient, the more it becomes totally apparent

that these societies are going to completely overwhelm Europe and North

America. That's not because the orientals are intrinsically smarter (well,

they say the average IQ of Orientals is 5 points higher than that of

Caucasians- but let's not open that can of worms), or harder working, than

Americans or Europeans, but because there is vastly more economic freedom.

You may be interested in knowing that there are an estimated 2,000

individuals worth more than US$100 million in Hong Kong alone-such a city of

six million-and an estimated 500 centemillionaires in Indonesia, a

relatively poor country of 175 million. Among the Overseas Chinese

community, when a billion dollars is required, it's known as a "four man

deal"; you don't go to the public markets, or banks, you just round up three

friends. In the U.S., by contrast, you can qualify for the Forbes 400

richest with just a couple hundred million. What's going on here, anyway?

The answer is the government, with its taxes and regulations. In the

Orient, no one with any sense pays a meaningful amount in taxes, and

regulations are few and easily avoided. So not only do these people have

many more avenues in which to invest, and a lot more capital with which to

do it; but their returns are vastly higher, and they keep all of it.

Let's suppose that an overseas Chinese and a homegrown American, the two of

them equally clever, each start out with a dollar. Let's forget about the

fact that the Chinese, in a relatively regulation-free environment, will get

a much higher return, and assume they're both able to double their capital

each year-but the American has to give 35% (unfortunately, an

unrealistically low figure) to his government each year.

After 20 years the American's dollar has grown to $22,370 (1.65 to the 20th

power). The Oriental's dollar has grown to $1,048,576 (2 to the 20th power).

That's why the Orient will eat America's lunch over the next 20 years.

Actually, the situation is much worse than that description indicates, since

not only is the tax differential greater than 35%, but the taxes are used to

actively destroy wealth, and prevent more from being created. So the

Oriental is bound to be able to grow his savings at a greater rate than the

American, even before the tax bite. And his savings as a percentage of

income will be vastly higher as well (a difference of 4% for the American,

versus something on the order of 20% for the Oriental). There is no welfare

in the Orient, so everyone is trying to become a millionaire, whereas a

substantial, and rapidly growing, percentage of Western populations are

structurally out of the process. It will take the American 27 1/2 years to

make $1 million; at that time the Oriental's dollar will have grown to $200

million.

The really big hit won't be felt, though, until the next generation. When

the American dies, his estate will be hit with a 50% inheritance tax,

leaving his progeny with only $500,000 - not enough to buy a starter house

in a lot of places. The Oriental will leave his kids $200 million tax-free.

To say that's a huge head start would be the understatement of the century.

Don't get me wrong. The governments in the Orient have loads of problems.

But they generally don't involve themselves in the economic affairs of their

subjects. And their subjects (unlike Americans) feel absolutely no guilt

about keeping their wealth out of the hands of their rulers. Orientals see

their governments as predators, populated by corrupt power-seekers. They

have no illusions about democracy, and feel no moral compunction whatsoever

to pay any taxes at all.

This trend of the Orient becoming very wealthy, while North America and

Europe coast on diminishing momentum, is firmly in motion. And the trend

will almost certainly stay in motion (and likely accelerate) for at least

the next generation. And by that time, the Orientals will (rightly) view

America with a combination of nostalgia, pity, and contempt-much the way we

viewed the British in the '70s, and the Russians today. By then even the

U.S. military will have imploded, like that of the Russians, for lack of

capital.

It's really a shame. But then, America has never been so much a place as an

idea, and many forward-looking Americans will have moved abroad, so as not

to be left behind. You should think about it, and encourage your children to

log the time needed to stake a claim in a part of the world that will

prosper. Certainly this letter has thrown out lots of suggestions along

those lines in the past- and plenty more are on the way.

And what should you be or do if you decide to stay in the U.S. and ride the

political/economic escalator down? My friend, The Great Winfield, suggests

that you be a young, good-looking girl. That way at least you'll eat regular

if you snag a rich Chinese boyfriend.

 

POST MORTEM

 

These comments deserve some amplification. Hong Kong has more really rich

people than it did then; Indonesia less. That's because many of the

Indonesians made their money through payoffs and political connections. The

Philippines are doing better, but only marginally. The general trend of the

Orient v. the West, however is still in motion as far as I'm concerned. The

Orient was in the midst of a financial bubble in 1996; the US is in the

midst of an even bigger bubble at the moment. Despite the endemic corruption

of most countries in the Orient, the environment is still (economically)

much freer than n the West (see my issue on China of x/x/99 for more on

this).

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