fizzer, page-4

re: fizzer-heremes please take note Tigger, do you agree with this peice by Doug Casey ?

April 2003
The Philippines

I've had several articles on the Philippines in the past few years (the most recent in June '93); so I'm not going to overload you with a repetition of the same data on the place. But, having made two more trips there since my last article, an update seemed in order. Especially after my most recent trip, I had to ask myself why the Philippines hasn't yet become a flavor of the month in mining popularity.

The answer is, exclusively, its political situation. The country is ranked second in the world in gold reserves, third in copper, and sixth in chromite; but mining has dropped from 26% of export earnings 20 years ago to only 6% today. And not because the Philippine economy has boomed; it's been the worst in east Asia for decades. Copper production, for instance, has dropped 40% since 1981.

The reason is that taxes on the industry are among the highest in the world, including a 5% excise tax on metal products, in addition to everything else. In 1992, the mining sector paid the equivalent of US$64 million in taxes, despite losing about $63 million. As a result, most mining firms have closed down over the last few decades, and those that remain (like Benguet, Atlas, and Philex) are loaded with debt, and on the ragged edge of collapse. 20,000 employees have been laid off in the last few years alone.

All of this, of course, is complete insanity in a country with rapid population growth, and which is known as the poor man of Asia, simply because it's the only country in Asia that hasn't boomed.

The good news is that the Filipinos are clearly tired of missing out on a good thing, and being considered the laughing stock of their neighborhood. Mining law has been changed; so it's now possible for foreigners to own 100% of a property, and more changes are on the way. But what's going on in the Orient in general, and is just starting to happen in the Philippines, leads me to a broader issue.

Wealth

The more time you spend in the Orient, the more it becomes totally apparent that these societies are going to completely overwhelm Europe and North America. That's not because the orientals are intrinsically smarter (well, they say the average IQ of Orientals is 5 points higher than that of Caucasians- but let's not open that can of worms), or harder working, than Americans or Europeans, but because there is vastly more economic freedom.

You may be interested in knowing that there are an estimated 2,000 individuals worth more than US$100 million in Hong Kong alone-such a city of six million-and an estimated 500 centemillionaires in Indonesia, a relatively poor country of 175 million. Among the Overseas Chinese community, when a billion dollars is required, it's known as a "four man deal"; you don't go to the public markets, or banks, you just round up three friends. In the U.S., by contrast, you can qualify for the Forbes 400 richest with just a couple hundred million. What's going on here, anyway?

The answer is the government, with its taxes and regulations. In the Orient, no one with any sense pays a meaningful amount in taxes, and regulations are few and easily avoided. So not only do these people have many more avenues in which to invest, and a lot more capital with which to do it; but their returns are vastly higher, and they keep all of it.

Let's suppose that an overseas Chinese and a homegrown American, the two of them equally clever, each start out with a dollar. Let's forget about the fact that the Chinese, in a relatively regulation-free environment, will get a much higher return, and assume they're both able to double their capital each year-but the American has to give 35% (unfortunately, an unrealistically low figure) to his government each year.

After 20 years the American's dollar has grown to $22,370 (1.65 to the 20th power). The Oriental's dollar has grown to $1,048,576 (2 to the 20th power). That's why the Orient will eat America's lunch over the next 20 years.

Actually, the situation is much worse than that description indicates, sincenot only is the tax differential greater than 35%, but the taxes are used toactively destroy wealth, and prevent more from being created. So theOriental is bound to be able to grow his savings at a greater rate than theAmerican, even before the tax bite. And his savings as a percentage ofincome will be vastly higher as well (a difference of 4% for the American,versus something on the order of 20% for the Oriental). There is no welfarein the Orient, so everyone is trying to become a millionaire, whereas asubstantial, and rapidly growing, percentage of Western populations arestructurally out of the process. It will take the American 27 1/2 years tomake $1 million; at that time the Oriental's dollar will have grown to $200million.

The really big hit won't be felt, though, until the next generation. Whenthe American dies, his estate will be hit with a 50% inheritance tax,leaving his progeny with only $500,000 - not enough to buy a starter housein a lot of places. The Oriental will leave his kids $200 million tax-free.To say that's a huge head start would be the understatement of the century. Don't get me wrong. The governments in the Orient have loads of problems.

But they generally don't involve themselves in the economic affairs of their subjects. And their subjects (unlike Americans) feel absolutely no guilt about keeping their wealth out of the hands of their rulers. Orientals see their governments as predators, populated by corrupt power-seekers. They have no illusions about democracy, and feel no moral compunction whatsoever to pay any taxes at all.

This trend of the Orient becoming very wealthy, while North America and Europe coast on diminishing momentum, is firmly in motion. And the trend will almost certainly stay in motion (and likely accelerate) for at least the next generation. And by that time, the Orientals will (rightly) view America with a combination of nostalgia, pity, and contempt-much the way we viewed the British in the '70s, and the Russians today. By then even the U.S. military will have imploded, like that of the Russians, for lack of capital.

It's really a shame. But then, America has never been so much a place as an idea, and many forward-looking Americans will have moved abroad, so as not to be left behind. You should think about it, and encourage your children to log the time needed to stake a claim in a part of the world that will prosper. Certainly this letter has thrown out lots of suggestions along those lines in the past- and plenty more are on the way.

And what should you be or do if you decide to stay in the U.S. and ride the political/economic escalator down? My friend, The Great Winfield, suggests that you be a young, good-looking girl. That way at least you'll eat regular if you snag a rich Chinese boyfriend.

POST MORTEM

These comments deserve some amplification. Hong Kong has more really rich people than it did then; Indonesia less. That's because many of the Indonesians made their money through payoffs and political connections. The Philippines are doing better, but only marginally. The general trend of the Orient v. the West, however is still in motion as far as I'm concerned. The Orient was in the midst of a financial bubble in 1996; the US is in the midst of an even bigger bubble at the moment. Despite the endemic corruption of most countries in the Orient, the environment is still (economically) much freer than n the West (see my issue on China of x/x/99 for more on this).