Ah, developed Asia. It's a wonderful set of countries: Japan, beset by a near-two-decades-long recession; Korea, a country with a single economic driver -- exports; and Singapore, a "fine" country that would fit easily in the footprint of southern Rhode Island, offering a wonderful port and 3 million industrious people.
And then we have Australia and New Zealand, which have as much to do with Japan and Korea as lampreys do with accordions. But they're on the list, too. My Foolish colleague seems to have omitted that other Asian tiger, Taiwan, but let's not pick nits, shall we?
First, allow me to tip my hand -- these are some of my favorite countries on Earth. Nate hit all the right points -- capitalist (basically), high level of protection for minority shareholders (most of the time), and economies that offer diverse industrial bases. But the problem is one of competition. If there's any sense of fear in the U.S. of the burgeoning Chinese Dragon, if anything, in the developed East Asian economies, there's sheer, unadulterated terror. Compared with the United States or Europe, (the unmentioned) Taiwan and Korea are low-cost manufacturing centers. Compared with mainland China? Forget it. And Japan's productivity numbers tend to be lower than those of the United States -- the potential for a drain of its heavy industry and manufacturing jobs is immense.
These are countries -- all of them -- that are trying to figure out not just how to fend off competition from China but also how to supply this awakening giant. This comes at a time when each has its own struggles.
The difference between Japanese and Korean consumers shows just how tenuous these countries' positions can be. In Japan, the elongated financial recession has eviscerated consumer confidence. Japanese consumers save way too much, packing their money away into low-return vehicles and thereby slowing the country's money velocity to a crawl. The root of their unease comes in no small part as a result of the double whammy of rapacious speculation in the late 1980s, followed by the government's decision to allow money-destroying firms to keep operating rather than enter bankruptcy and churn the tanks to force money to more productive uses. The result is that the Japanese economy suffers from dual energy drains -- low consumption and the metastasis of resources into companies that routinely and invariably destroy wealth.
Korea has the opposite problem -- its consumers spend like drunken sailors. As a friend of mine once said, Koreans have gone "kimchee wild" on credit card debt in the past few years. The result is a consumer balance sheet that would make the most profligate subprime lenders in the U.S. seek cover -- nearly one in every 12 Korean families is behind in its debt payments. Look at Korean corporate balance sheets, and you'll find they're horribly leveraged. This works very well in a growth environment, but remember that a significant portion of Korean output is export-based. Korea's economy is dependent on the American and Chinese ones in ways that the average investor (and, directly, by the average Nate Parmalee) probably doesn't appreciate. View the mauling Korea took during the Asian crisis in 1998, and you're viewing the future. It's not a matter of "if."
As for Australia and New Zealand -- both have gone to great lengths to bring free-market forces to bear on their economies, decentralizing and privatizing in aggressive manners. This is to be applauded. But neither, given their small population bases, inconvenient geographies (the Gateway to Papua New Guinea!), and high-cost manufacturing, is going to offer substantial competition to China or India. What these economies offer are raw materials galore, tourism, banking and finance, and information technologies.
That sounds like a couple of other countries I've recently written about ... ah, yes, I remember. Israel and South Africa. Of course, those two countries offer lower cost bases and tremendous geographic advantages.
Maybe the 21st century really will be the Century of Africa. OK, that may be a long putt. But to say it will be the Century of China is not a long one by any means ... and the high-cost economies nearby really aren't sure how they're going to compete.
Africa and the Middle East are facing Developed Asia in this Investing World Cup match. Go back to the intro page to navigate your way to another part of this contest, and then vote for the region that you think should advance to the next round of the tournament.
For more international stock ideas, check out The Motley Fool International Report: Around the World in 80 Minutes.
Bill Mann owns shares of none of the companies mentioned. He is the co-advisor of the Motley Fool Hidden Gems newsletter, which has turned up some dandy international companies since its inception.
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