Why Corporate Cash Flows to Third World
Believe it or not, there’s a connection between new highs occurring on stock markets in Shanghai, Bombay and Mexico City at the same time stocks and bonds reach new heights in New York and London--but few people can see it today.
Instead, contradictions and confusion are everywhere. Fears that renewed inflation will send interest rates higher--and thus hand losses to the many new investors in mutual funds--mingle with concerns that the U.S. economy will slide back into recession in early 1994.
Some U.S. businesses complain that they can’t get credit while government figures show overall corporate cash flow exceeding corporate investment by $250 billion. That means there’s plenty of money around, but companies don’t see many profitable opportunities for putting it to work in the United States.
So restructurings and downsizing continue as the corporate cash, along with U.S. pension fund and mutual fund investments, flows into world money markets, which are finding opportunities in hitherto undeveloped parts of the world. Power plants are being built in China and Indonesia with money that comes partly from U.S. investors. Companies and stock markets are growing in Argentina, India, Mexico and Morocco.
That means business. While U.S. exports to Europe and Japan are lagging, those to the Third World are exploding; Coca-Cola is opening bottling installations everywhere.
The really big economic story of the next 10 to 20 years is unfolding in the spreading and growth of world capital markets, which have devised ways to invest with reasonable safety in countries that never saw much investment before. Growth may be flagging in the developed industrial countries, but it’s just beginning to hum in the Third World. And stock and bond markets in the United States and elsewhere are rising in anticipation of further global expansion.
Then why is there fear instead of rejoicing? Because the shift of capital can be unsettling and leave many people to question how America will provide jobs for its own people.
The changes inherent in shifting global capital are behind the growing opposition to the North American Free Trade Agreement and the popularity of Ross Perot’s “Take Back Our Country” movement. Those changes are also behind the profits buoying U.S. global companies and paying for comfortable retirements for many Americans, but that beneficial connection often goes unrecognized.
What is going on, says John Rutledge, head of Rutledge & Co., a Greenwich, Conn., investment bank, is that capital is being invested in equipment and workers in developing countries because returns are better there. The economics are elemental. A subsistence farmer feeds one family, but if new machinery and investment allow one farmer to feed many families, then other laborers are freed to work in industry, to make products and earn cash.
A new economy is born, and returns on investors’ capital are immense. The value of stocks on Mexico’s market has risen seventeenfold in the last five years; stocks on China’s fledgling market have gone up ninefold in one year.
Some of that capital comes from U.S. investors. We are thus becoming like 19th-Century Britain, another society that had surplus capital, which financed cattle ranches in Texas and railroads in Argentina.
More than portfolio investment is involved. Power plants in China are being built by Westinghouse and General Electric, with engineering by Fluor and other U.S. engineers and earthmovers by Caterpillar. Los Angeles, which in merchandise and services handles well over $10 billion worth of U.S. trade with China, benefits directly from such global commerce.
Nor are opportunities restricted to overseas work. Mission Energy, the power generation subsidiary of Rosemead-based SCE Corp., is building a power plant in Indonesia, bringing electricity for the first time to parts of that enormous nation. But it is also building a plant in Grant Town, W.Va., that will use waste coal--material mined and discarded decades ago that has become an environmental hazard. The Grant Town project, using brainpower and technology to turn a negative value into a positive, can earn great returns on investment too.
So why should there be misgivings about global capital? Because markets can be cruel taskmasters. Eastman Kodak is an example of a traditional U.S. company, most benevolent to its hometown of Rochester, N.Y., that was failing to earn satisfactory returns on investments. Last month, investment managers forced Kodak to cut 10,000 employees and replace its chief executive. It’s not enough to compete to sell film, the markets told Kodak. It also had to improve profits to compete for capital.
That U.S. companies--and workers--must now compete for investment capital that, after all, comes in large measure from the $2-trillion coffers of U.S. pension funds, is confusing and threatening to many people. They don’t readily see how investment that results in higher living standards in Mexico can also benefit U.S. living standards. So you can be sure that pension fund investment policies will be a big political issue in coming years. Jobs will have to be created for workers who are restructured out, like Kodak’s 10,000, or there will be trouble.
So it’s important to understand that, politics notwithstanding, the economics of global capital are clear. U.S. pension funds and other investors are earning extraordinary returns today just because their areas of opportunity are expanding to include the whole world, not only the United States, Western Europe and Japan. That’s why fears that stock prices are too high may be overblown in some cases: Coca-Cola may be at 27 times earnings in anticipation of great new profit from China; Caterpillar may be rising on expectations of 20 years of global construction projects.
The opportunities and benefits of global capital markets may not be obvious--but, believe it, they are real.
Emerging Markets One indicator of the surge of business and investment in previously underdeveloped countries in recent years is the growth of their stock markets.
1987 1992 Argentina $1.5 $16.6 Brazil 16.9 45.3 China* 2.0 18.0 India 17.0 65.0 Indonesia 0.7 12.9 Jamaica 0.6 3.2 Mexico 8.4 140.0 Pakistan 2.0 8.0 Philippines 2.3 13.8 Thailand 5.5 58.3
*Figures are for 1991 and ’92 Source: G.T. Global Financial Services
