Eight years ago, Ross Perot attempted to scare a vote from Americans by talking about "the great suc...
Eight years ago, Ross Perot attempted to scare a vote from Americans by talking about "the great sucking sound" of jobs moving south to Mexico. The Mexican economy is visibly transformed as a result of inward investment.
While there, I realised the extent to which Perot has been proved right. Despite the strength of the peso, there is talk of labour shortages in Northern Mexico and the export figures continue to surprise the generally gloomy pundits. On past form Mexico should be experiencing a currency crisis but is refusing to play ball.
Perot was right about how good Nafta would be for Mexico but wrong in viewing it as negative for the US. The intervening period has seen the longest post-war expansion in the American economy and unemployment has fallen to unattainable levels. Inflation has been ticking up recently but subdued for most of this period, as the productivity 'miracle' has enabled American wages to rise but unit labour costs fall.
Those of us who have spent careers following emerging markets have, at least once, seen something similar to the relocation of manufacturing industry from Hong Kong to China.
This gave a huge boost to the competitiveness of Hong Kong companies and was accompanied by explosive growth in the service sector, offseting the loss of lower paid manufacturing jobs.
While capital flowed out of Hong Kong into China and out of the US into Mexico, even more capital flowed into Hong Kong and US from the rest of the world. Productivity shocks raised returns in Hong Kong and the US.
In both cases it required an upward adjustment in relative prices to restore equilibrium. In the case of Hong Kong with its fixed exchange rate to the US dollar this meant inflation had to rise, in the US with its floating exchange rate the adjustment could take place largely through appreciation of the currency. In both cases there was massive asset price inflation in the form of rising share prices.
Scale is an important difference between the two cases. The US is the 800 pound gorilla of the world economy. The vacuum created by the giant sucking of capital into America drained the rest of the world of its savings. One effect has been the collapse of the euro as investors stampede out of inefficient and decreasingly competitive Europe to purchase American companies and shares. The effect on emerging markets is more dramatic.
In more normal times investors seeking higher returns have gravitated towards the potentially rewarding markets of Asia, Latin America and the European periphery. As the great productivity driven American boom exploded on the world, the avaricious turned away from dreams of the money to be made in economies playing technological catch-up and launched into cyberspace. The poor performance of emerging markets during the great bull-run in America is not a coincidence but a corollary.
Gerald Smith is a partner at Baillie Gifford
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