Fortunes Change

Posted on January 13, 2010 by David Laidlaw 

Earlier in the year, I read a fantastic novel entitled Balzac and the Little Chinese Seamstress by Dai Sijie following the tragi-comic exploits of two young men sent to the Chinese countryside for “retraining” during Mao’s Cultural Revolution.  The young protagonists are able to maintain a degree of relief from their labor which includes hauling dung to mountain-top plots through their ability to retell movies they have seen to the villagers in a remote mountainous outpost.  The author contrasts the urbane main characters with their crude surroundings where their talents are devalued. 

During the late 1960s and early 1970s, the Chinese leadership transplanted over 17 million students through the Down to the Countryside Movement as part of the Cultural Revolution.  Though the story is fictional, the author himself was part of this forced relocation and likely drew material from his personal experience.  Aside from untold human suffering, this social policy implemented by Mao to reduce opposition to his policies in Chinese urban centers devastated economic growth for a generation.  The idea that a country would transfer its best educated youths, who were poised to lead the society intellectually and economically, to remote locations is absurd.  

However, China has been able to recover from its tragically flawed socio-economic policies.  During the full decade of the 1960s, China’s per capita output only increased by 17% according to Wikipedia.  However, the country’s gross domestic product has grown at almost 10% annually for the past 20 years.  China now serves as the manufacturer for the world and will soon catapult past Japan as the second largest economy in the world behind the United States.  China’s manufacturing capabilities are also moving up the value chain producing more and more output with higher levels of intellectual capital and not solely relying on low wages to compete against the rest of the world.  We are by no means devotees of China’s system and suspect that these numbers are inflated, but the economic renaissance there has been real and a major driver of the world’s growth over the past two decades.

China’s rapid development demonstrates that policies are reversible and that countries do not typically spiral down due to faulty social and economic policies forever.  China rebounded from the most irrational economic leadership possible and altered its growth curve.  

There is a frequently espoused view that the United States has seen its best days and that our country is on the road to indefinite stagnation.  Many commentators point to our economic destiny mirroring continental Europe with its larger public entitlements, systemic underemployment and slower economic growth.   In the past year, the Federal Government has nationalized Fannie Mae and Freddie Mac, taken a majority ownership position in GM and Chrysler and controlled large swaths of activity in the financial sector.   

Contrary to the inevitability of future decline, we view the future as malleable and believe that our country is a nation of pragmatists regarding economics.  During the First World War, the U.S. Government nationalized the railroads and telegraph lines and subsequently returned them to private hands after the war.  These industries were much more vital to the economy and represented a much larger portion of the domestic output than GM and Chrysler today.  Those policies that work and serve the public interest will be maintained while those that hamper growth and limit employment will most likely be discarded to be replaced by reforms that create a better balance between public and private enterprise.  It is impossible to predict long-term trends such as whether the U.S. will stagnate for another decade similar to Japan and the consequences of investing on the wrong side of a prediction are severe.  Therefore, we will continue to invest in sound businesses with strong cash flows and managements that serve their shareholders and let history take care of itself.