29 December 2004
How can it be? Despite all the death and destruction, the lost lives and lost livelihoods in so many different countries in south Asia, how can it be that the world's financial markets can simply shrug off this terrible tragedy? The tsunamis that have wrecked so many coastal towns and whose aftermath threatens disease and malnutrition have registered not much more than a collective flicker of an eyelid amongst the world's investors.
One reason, the most trivial, is that a lot of investors simply aren't around, it being that time of year. Next, and more importantly, this is a natural disaster that should not represent an ongoing threat: fewer people died on 11 September 2001, but the geo-political implications of that event were enormous. A natural disaster is a different story altogether: there is no need for risk premiums on financial assets to shift upwards unless the natural disaster has ongoing ramifications (it's difficult to think of any event in modern times that fits this description: global warming might but that's a threatened man-made disaster, not a natural one).
Finally, the sad truth is that the affected countries aren't rich. They don't have a huge command over the world's economic resources. Even if everyone can see the human tragedy, financial markets can tell relatively quickly that, apart from those most directly affected, there is not going to be a major economic tragedy. It's almost as if investors have said: "Thank God it wasn't New York or London".
This attitude reflects a process that has scarred the development of the global economy over the last 50 years. The growth of free trade and free capital flows has undoubtedly led to huge increases in income for the world as a whole but the gap between the haves and the have-nots has generally got wider. This is not to say that all the countries affected by the tsunami disaster are poor: you would never include Malaysia or Thailand in that category. Rather, the affected countries do not have the command over economic resources that an average Briton or American might enjoy.
I've assembled some comparative statistics for the affected countries together with equivalent statistics for the US and the UK. The differences are huge. Thailand has come a long way in recent decades and still, on the whole, continues to enjoy very high rates of economic growth, even allowing for 1997's Thai baht crisis. But its GDP, measured in US dollars, is less than 1/10th the size of the UK's. As a result, the average Thai individual can expect to get by on just $2,190 (£1,134) per annum compared with the average Brit's $28,350 per annum.
Thailand, though, appears not to have been the most badly affected country. Those that appear to have suffered the greatest loss of life are those that are also the poorest. Gross national income per capita in Sri Lanka is just $930 per annum. In Indonesia, it's $810 per annum. And, in India, it's just $530 per annum. By contrast, the average American can expect to live off $37,610 per annum.
I'm not suggesting that we only live well at the expense of other countries. As Diane Coyle argued in this paper the other day, many developing countries need to "progress in creating an environment favourable to economic growth: reducing red tape and corruption; establishing a banking system that allows poor families to make payments safely and save and borrow a little bit; and running a competent legal system and public bureaucracy." Nevertheless, we need to recognise that the process of globalisation has been decidedly skewed, with some countries and peoples benefiting hugely, while others have been left far behind.
Niall Ferguson's book Empire: How Britain Made the Modern World concludes with a number of interesting comparisons between the globalisation of the late 19th century and the globalisation that's taken place over the last 50 years: "In 1996 only 28 per cent of foreign direct investment went to developing countries, whereas in 1913 the proportion was 63 per cent. Another, stricter measure shows that in 1997 only around 5 per cent of the world stock of capital was invested in countries with per capita incomes of 20 per cent or less of US per capita GDP. In 1913, that figure was 25 per cent."
Of course, if there's an empire today, it's not Britain's: rather, it's America's. Yet America - notwithstanding Iraq - is a reluctant imperial power, at least relative to the ambitions of Victorian Britain. Nowhere is this more obvious than in its attitude towards foreign investment. 19th century Britain was more than happy to pour its money into foreign countries. The US has chosen not to. Instead, it has been a net recipient of investment from abroad.
Personally, I don't think this is sustainable. As western societies age, they will increasingly have to engage with countries and people elsewhere in the world. Of course, multinationals do this already - not always in the most enlightened way. Yet the scale of our involvement is still rather limited relative to our own future needs.
The writer is managing director of economics at HSBC
