Eat Pray Nepal Blog: Marc Faber visit to Nepal

Friday, May 24, 2013

Marc Faber visit to Nepal

-  NEPAL   - by Marc Faber

I have just spent a week in Nepal, following my own suggestion, which I made last year at Christmas, to visit
a new place at least once a year. Nepal is one of the world's most scenic countries - it is also one of the
world's poorest.

Entirely landlocked, Nepal is squeezed between India to the south, and Tibet (now China) to the north. Its GDP per capita is just US$240 - the third-lowest in Asia. The life expectancy of its population, 60 years, is among the lowest in the world (Botswana has the lowest at 36 years; Japan the highest at 81.5 years), and its literacy rate of just 42% is also one of the lowest in the world.

Nepal's capital city of Kathmandu offers many unusual and impressive cultural sites, which suggest some wealth in earlier times. Kathmandu also has some charm and a pleasant atmosphere. Rapid population growth over the last 100 years became a burden, as a growing number of people had to be supported by the same quantity of land, which, in the absence of industry and commerce, simply impoverished the country. In addition, while certainly poor, Nepal's population of 22 million distinguishes itself by having supplied the world with some of its toughest and most courageous warriors, who form the renowned Gurkha batallions of the British and Indian armies and guards, who are nowadays widely employed in the Middle East. (It is worthy of note that Nepal has never been colonized or conquered by any of its formidable neighbors.)

After spending a few days in Kathmandu, we flew to Pokhara, which is situated beneath the Annapurna and
Dhaulagiri mountain chains and, in clement weather, offers sensational views of the mountains. Unfortunately, we were only able to admire them from postcards and photos, because it rained solidly for the four days we stayed in the town. The continuous rain provided me, however, with the opportunity to read about Nepal and its history and also to think about the global economy and the financial markets.

While in Nepal, I had some very mixed feelings, altering between being depressed by the poverty of some of its farmers, who live in small and remote villages high in the mountains, without electricity or water supply in their homes (agriculture - predominantly rice and corn - makes up 40% of GDP, compared to 1.4% in the United States) and moments of high mood because of the friendly nature of the Nepalese, who seem to be quite content and happy even while being poor and conscious of the privileged lives most of us enjoy in the Western industrialized countries.

I also had some time to ponder on the future of Nepal and on a question I was recently asked by a reader, who wanted to know if the Asian stock markets would suffer should the U.S. stock market experience a serious correction or a crash in the next few months. This question prompted me to look at some very simple economic, financial, and social statistics in Asia, and to compare them to the rest of the world. My conclusion? The long-term favorable potential of the Asian region may remain intact even if the Western
economies were to weaken once again. In fact, a decoupling of the Asian stock markets from the performance of the U.S. is a distinct possibility.

Officially, the U.S. has a GDP of about US$11 trillion, while China's GDP amounts to US$1.1 trillion and India's to about US$500 billion. Moreover, whereas the world's GDP stands at about US$32 trillion and the advanced economies have a combined GDP of US$25 trillion, the emerging Asian economies (including China and India, but excluding Hong Kong, Japan, Singapore, South Korea, and Taiwan - countries that are classified as advanced economies) have a GDP of just US$2.2 trillion. However, if we look at some
production figures, it becomes obvious that the U.S. economy is nowhere near ten times as large as the Chinese economy, or more than 20 times the size of India's GDP. Neither do the G7 countries have a GDP ten times larger than the emerging Asian countries.

According to The Economist's World in Figures 2003 directory, China ranks as the world's largest producer of cereals, meat, fruits, vegetables, rice, zinc, tin, and cotton. It is the world's second-largest producer of
wheat, coarse grains, tea, lead, raw wool, major oil seeds, and coal, the world third-largest producer of
aluminum and energy, and ranks between fourth and sixth in the production of sugar, copper, precious metals, and rubber. India ranks among the top three producers of cereals, fruits, vegetables, wheat, rice, sugar, tea, and cotton. Indonesia ranks among the top four producers of rice, coffee, cocoa, copper, tin, and rubber; while Thailand is the world's largest producer of rubber, and Vietnam the world's second-largest producer of coffee.

"So what?" some readers may think, since these are just commodities... and thus are 'irrelevant' in post-
industrialized societies! However, if we consider that China is already the world's largest manufacturer of textiles, garments, footwear, steel, refrigerators, TVs, radios, toys, office products, and motorcycles, just to mention a few product lines, and if we then add the industrial production of Japan, Taiwan, South Korea, and India, we get a totally different picture of the size of the Asian economies than is suggested by

Why? Nominal GDP figures don't take into account the difference in the price level between different countries.

In fact, statisticians, in order to account for the fact that in some countries the price level is far lower than
in the Western industrialized countries, have calculated the GDP level based on purchasing power parities (PPP). And while I have some doubts about the methodology of PPP-adjusted GDP figures, it is nevertheless interesting to see how large the emerging economies are when based on this measurement: Asia - including China, Japan, India, South Korea, Indonesia, Taiwan, Thailand, the Philippines, Pakistan, Bangladesh, Malaysia, Hong Kong, and Vietnam - has a PPP-adjusted GDP of US$14 trillion, which is 50% larger than the U.S.'s PPP-adjusted GDP of US$9.6 trillion.

In fact, by this measurement, Asia, in which we should probably also include Central Asia, Australia and New Zealand, as well as parts of Far East Russia, would be by far the world's largest economic bloc. Just taking manufacturing output into account would show that the combined outputs of Japan and China alone, not to mention those of South Korea, Taiwan, and India, would exceed that of the U.S..

"So what?" the skeptics will say again. "Europe and the U.S. have a thriving service sector, which is far more
important than the manufacturing sector." But the point about the service sector is that in Asia, with its low
urbanization rate, many services never enter the GDP statistics. In Nepal, I took some interest in the economy of a remote mountain village of around 25 houses. I saw that most services in this small community never involved any cash transaction and, therefore, could not have an impact on GDP. Although land is individually owned, villagers harvest their small rice fields together. When a new house is built, everyone helps with the construction. Or, when a house changes ownership, which is most infrequent and usually only happens when people get married or pass away, no real estate agents, legal documents, cleaning services, and other real estate-related services are required.

In a developed country, each time an existing home is sold, it boosts the service sector's component of GDP, as commissions and fees change hands.

Now, it ought to be obvious that if existing home sales in the U.S. increased overnight by, say, ten times and people bought and sold homes at the pace they traded stocks online a few years ago, then GDP would be boosted significantly as a result of a rise in real estate transaction-related service income. But what would have been added to the wealth of the nation?

In poorly developed Nepal, most services in rural communities don't involve any cash payment and therefore
have no impact on GDP figures; whereas in our mature, developed, and highly differentiated economies, such
services tend to lift the GDP figure. I should like to stress that one should not underestimate the importance of a well-developed service sector - health care, financial institutions, distribution, retailing, etc - in maximizing the potential of an economy, but in our developed and industrialized countries, the service sector may somewhat overstate GDP. By contrast, in emerging economies, the underdeveloped service sector may understate the size of the economy.

Just think of it this way: I am a very poor GDP booster, since when I travel I never eat breakfast, I clean my own shoes, do my own laundry and shave myself, and I don't use all the available towels in my bathroom and, for ecological reasons, don't change them daily. And since I have few hairs left on my head, I hardly ever require the services of a barber. Compare this with a fellow traveler who daily employs the services of a shoeshine boy, a laundry, and a barber, eats five times and changes his towels twice and, instead of walking one block to an appointment, takes a taxi.

That such a person enlarges GDP and contributes statistically to economic growth ought to be clear, but
what economic value has really been added?

I admit that some economic value might have been added if the shoeshine boy, the laundry, etc, use their income from our fellow traveler to build a modern, well-functioning electric utility, which then improves the power system and eliminates power blackouts. But if the recipients of this income just turn around and use their income themselves to eat five times a day and to use the very same services from each other, then precious little value has been added to the system.

At Kathmandu airport on the way back from Nepal, I almost went berserk, since it took about an hour to clear immigration and security checks. I cursed poor countries like Nepal, which have an underemployment rate of at least 50% and more likely even higher, for not putting sufficient immigration officers and security personnel in place to ensure that foreign visitors, which are Nepal's most important revenue source, can arrive and leave satisfied with their experience of the country and in good spirits.

But then I remembered that, when I arrived in Chicago in late July, it took me more than two-and-a-half hours, waiting in line in a packed and totally disorganized arrivals hall, to pass through immigration. When I
complained to an immigration officer about this deplorable state of affairs, I was told that the immigration
department was understaffed because of the State of Illinois employee cutbacks and that all the immigration
officers who were on duty that day were already doing overtime work. But not to worry, as in many other
businesses, these cutbacks will show up in higher productivity figures in U.S. economic statistics and boost
the stock market.

But what about the consumer's productivity, who is forced to wait in line for two hours? His productivity is, of course, conveniently never measured.

Warm regards,
Marc Faber,

P.S. It would be my guess that we have, in Asia today, the
largest economic bloc of any region... and that the current
ongoing economic expansion may already have replaced the
United States as the engine of real growth for the global

Asia is a large producer of resources, but it still
requires the import of an increasing quantity of
industrial commodities, including copper, cotton, crude
oil, iron ore and food. In my opinion, the Asian block is
largely responsible for the strength in commodity prices
we have seen over the last two years and which is likely
to continue for the foreseeable future - particularly if
economic growth is now picking up in the industrialized
countries, including Japan, as most experts currently seem
to suggest.

Editor's note: Dr. Marc Faber is the editor of The Gloom,
Boom and Doom Report and a contributor to Strategic
Investment. Headquartered in Hong Kong for the past 20 years,
Dr. Faber has specialized in Asian markets and
advised major clients seeking down-and-out bargains with deep hidden value.

Looking ahead to where the real growth opportunities of
the next 30 years lie, Dr. Faber has distilled his
analyses into the ground-breaking book, "Tomorrow's Gold"
- a wake-up call to Western investors.