Are Capitalism’s Competitive Demands Wearing on World Opinion?

When it’s going your way, capitalism naturally seems like the only logical economic system. What’s not to like about the gloriously healthy U.S. economy and the ever-rising stock market, for instance?

But when capitalism goes awry, the cost in human terms can be devastatingly high. And suddenly the wisdom of abiding by a free-market system is lost on many people.

There have been rumblings to the latter effect in several places on the globe this year: in France, for example, where the conservative, pro-market government was tossed out in May; in Mexico, where Cuauhtemoc Cardenas, the newly elected mayor of Mexico City, wants a “more social face to economic policy”; and now in Southeast Asia, where speculators have attacked the Thai and Philippine currencies, forcing those countries to devalue.

Southeast Asia’s currency woes, which may well become a regionwide issue very soon, probably come as a surprise to Americans who have long assumed that Asia’s young “tiger” economies were in great competitive shape.

Despite continued economic growth in recent years, however, Southeast Asia’s all-important export volume has been weakening; the region is shipping more than it had several years ago, but the growth rate of exports has decelerated sharply, in part a function of Europe’s economic weakness and rising competition from other exporting countries.

At the same time, many Southeast Asian economies, including those of Thailand, Malaysia and the Philippines, have been on massive building booms, funded to a great degree by cheap foreign loans.

Apparently, Thai developers never visited Texas in the late 1980s--or Southern California in the early 1990s. Today the Thais have their own forest of see-through skyscrapers across smoggy Bangkok and other cities.

The combination of falling export growth and domestic overbuilding naturally has raised questions about Southeast Asia’s credit-worthiness and long-term economic prospects. Stock markets across the region have been falling all year, despite the bull market in stocks in most of the world.

And now the global army of currency speculators, smelling blood, has begun to attack the region’s currencies, on the simple premise that weakened and/or indebted economies ought to have their status reflected accordingly in their paper currencies.

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A government has two choices when largely faceless speculators wielding billions of dollars try to profit by betting on a decline in a currency’s value: Put up a fight, spending untold billions of accumulated hard reserves (i.e., American dollars) to purchase the currency and keep its value stable; or let the currency go, allowing the market to devalue it.

The concept of devaluation may seem alien to most Americans, but in fact the U.S. dollar has been dramatically devalued since the mid-1970s. Then, a dollar bought 300 Japanese yen; today it buys about 114, or 62% fewer. Against the German mark, the dollar’s value since the mid-1970s has fallen from 3.5 marks to 1.78.

That makes the 20% devaluation of the Thai baht, from 25 baht per dollar two weeks ago to 30 today, look modest by comparison.

As American exporters know, devaluation has one highly favorable effect: If Thai exporters of clothing and electronics, for example, leave their prices unchanged in baht terms, they are immediately 20% lower for foreign buyers--a nice markdown in a world where everybody loves a good sale.

That same benefit has accrued to U.S. exporters, large and small, over the last 10 years in particular, as the dollar has slumped.

The downside of devaluation, however, is that it slashes a country’s buying power. The Thai population has just gotten poorer, all other things being equal. Ditto for Filipinos, whose currency, the peso, plunged 12% on Friday when the country’s central bank finally stopped fighting the speculators.

The loss of purchasing power has many implications, not the least of which is that any Thai or Filipino company that had borrowed in dollars has seen its overall debt load rise overnight, since it will take more baht or pesos to retire one dollar of debt.

What’s more, everything that Thailand and the Philippines must import--especially the foreign-made high-tech equipment the countries need to continue modernizing--now will cost more.

Americans, too, have had to pay more for many imports in recent years (German luxury cars, for example). But when your country is the dominant global economic superpower, devaluation isn’t the same for you as it is for Thais, Filipinos or Mexicans.

After all, a foreign company that can’t sell its products in Thailand because devaluation has made them too expensive may not miss that market much. But a company that can’t sell in America--the richest consumer nation of all--may have its long-term growth prospects seriously impaired unless it takes steps to better compete.

Hence, the cost-cutting and restructurings that Japanese and German exporters have been forced into in the 1990s to keep their products reasonably competitive in the U.S. market. (And, of course, it isn’t as if U.S. firms have been sitting still; cost-cutting is all but religion here.)

The same argument--”this will make us more competitive in the long run”--now is heard as justification for the Thai and Filipino central banks’ decisions to let their currencies go, making life instantly miserable (or perhaps just more miserable) for many ordinary Thais and Filipinos.

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The risk out there is that at some point, ordinary people in large numbers will reject the idea of greater sacrifice in the name of the capitalist competitive edge. Thais and Filipinos may already be asking why they have been subjected to the whims of “greedy” currency speculators motivated solely by short-term profit.

Similarly, the message of the French left’s victory in the May election was that the French aren’t willing to suffer the social-welfare cuts, privatization of state enterprises and other austerity programs that the rejected government insisted was necessary for France to be competitive globally. With the unemployment rate already in double digits, the French said “enough is enough.”

And in Mexico, in capitalist eyes the model of virtue after enduring a horrendous 50% devaluation in 1994, the rebuke of the ruling party in the July 6 election so far isn’t being read as a rebuke of unchained capitalism. But it remains to be seen what Cardenas’ desire for a “social face to economic policy” will mean.

Is there really no turning back from global capitalism and free markets? As an investor, one can only hope. Because the greatest threat to the longevity of the (mostly) worldwide bull market in stocks would be a potent combination of populist demands for capital controls, the reversal of the trend toward privatization of inefficient state enterprises and, worst of all, the imposition of new trade tariffs aimed at insulating economies from foreign competitive pressures.