Towards affluence

I say 'writing', but, actually, I'm reading. My reading matter is 'The Affluent Society', which was that rare achievement, a best-seller about economics. It was written in the late 1950s by a great populariser of the dismal science, an American academic, JK Galbraith. Reacquainting myself with Galbraith's Affluent Society on a trip to Vietnam and Cambodia seemed appropriate because the book dealt with poverty in the midst of affluence - why it's there, why we tolerate it, and what can be done to tackle it.

True, Galbraith focused his study on the US, but he was writing of his time. Today, naturally enough, we would extend the issue to a global context - and especially if we have investment thoughts in mind because making money from the progress of nations from poverty to relative affluence has been and remains perhaps the leading investment theme of the past 20 years.

Galbraith's central notion was that so much production in a modern industrial society was wasteful because it supplied wants that had been contrived by producers rather than needed by consumers. Simultaneously, the elevation to affluence of so many, which was prompted by this self-reinforcing link between contrived demand and production, also meant that those comparatively small numbers who had been left in poverty were marginalised.

There's plenty of affluence on view here. On my left are the nouveaux affluent - a group of noisy Chinese doing callisthenics to the rhythm of what may be the company song. Rather nearer are the Russians, whose males look slightly sinister - including the one with a T shirt bearing the logo, 'vagina entry' (honestly, that's true) - and whose females look surgically enhanced unless they are over 50, in which case they look ridiculous. To my right are those more familiar with their affluence: the Brits - the beach's most unathletic specimens - who squabble among themselves and the Americans, all can-do enthusiasm who talk in exclamation marks.

Marginalised in this scene - literally and metaphorically - are the Cambodians. They serve the drinks, keep the beach tidy, man the life guard's post. Despite this, Galbraith's argument seems quaintly outdated. In particular, in Cambodia it seems highly unlikely that the tens of thousands who work in the giant garment factories strewn around the outskirts of the capital, Phnom Penh - most of them owned by Chinese companies - would subscribe to the idea that there is something vaguely immoral in meeting the contrived demands of affluent customers.

True, the garment workers start in the sweat shops at $80 a month. Out of that they have to pay for rent, food and transport before sending some money home, leaving just a few dollars for themselves. Yet that's better than the alternative - poverty and unemployment in the countryside, or what Marx labelled "the idiocy of rural life". If $80 a month - rising to maybe $110 when you become experienced - is what you get for helping meet the faintly immoral demand for yet another pair of trainers, then bring on the immorality.

Still, that prompts the obvious question: how many pairs of trainers does it take to lift a country from poverty to affluence? The answer is implied in the question: it's just not possible. Making trainers can only go so far largely because there is a definite limit to the value that can be added in the construction of a pair of pumps. A trainer is a trainer. It's much the same whether it's sold at £60 a pair with a swanky designer label or for £6 a pair at Asda. Besides, for the Cambodian or Vietnamese factory making the trainers - or blouses, pants, skirts or whatever - the difference between retail prices in the west is irrelevant. For the most part, their input costs are the same, as is their profit margin. The massive difference in price paid by UK consumers is largely the proof that demand can, indeed, be contrived, as Galbraith suggested; although that does mean higher marketing costs.

Yet it does not necessarily matter that Vietnam - and, say, China before it - doesn't raise itself to affluence on the back of making clothes and plastic goods. The important point - both for local people and for outside investors - is that producing stuff that's low value-added in the west substantially adds value to a poor country and sets it on the upwards path. That path begins with the creation of a middle class - ie, those who don't just subsist, but can plan, save and spend a little - and ends who knows where.

Quite where the middle classes start is debatable. Among economists who study these things, the assumption is that an income below $2 a day (£1.25) traps people in poverty. In that sense, anything above that level puts people in the middle-class bracket. Meanwhile, in the US, $13 a day is considered to be the poverty line so it might be convenient to use that figure as the definition of comfortably middle class in the developing world. That would also mean millions of people living below that income line - about £3,000 a year - would be middle class. Assume also that we are talking in terms of 'purchasing-power parity' - ie, adjusting income between countries for varying standards of living - and it is clear (see table) that a big proportion of Vietnam's 93m population must be middle class. The same would even apply to a fair proportion of Cambodia's 15m population even though that country is sandwiched between Sudan and Western Sahara in the global league table of per capita output.

Even if the 'middle class' suffers from a muddled definition, its role in a country's development is clear. The assumption is that the middle classes are the engine of economic growth largely because they do a lot of consuming. For proof of that - and of the growing importance of the emerging world's middle class - consider that as far back as 2008 the number of cars sold in the developing world exceeded the number sold the in the US for the first time.

Second, the middle class is deeply devoted to self improvement. This means a commitment to education, which helps create a virtuous cycle of rising know-how, rising output, rising consumption and rising wealth that permits more education and so on. Third, the middle class is likely to be entrepreneurial, which implies a willingness to accept - and to participate in - capitalism's 'creative destruction'. Fourth - and not least - all this rising wealth and confidence produces a certain 'arsiness' that demands greater political participation. Or, as an outstanding American sociologist, Barrington Moore, once remarked: "No bourgeoisie, no democracy".

True, it's by no means certain that once a nation starts on this course it will complete it successfully. As I say, chances are, it won't. Or at least its chances of making it into the club of the world's 30 or so richest nations are distantly remote. That does not matter. On the wall of the restaurant in Cambodia's Angkor Archaeological Park, where we lunched the other day, was the slogan: "We may be poor, but our dreams our bigger than your guess". That's relevant because - especially from the investment perspective - what matters most is not that a nation can become rich but that it can pursue the dream; in other words, that it can climb out of poverty and grow.

That provides the hope on which share ratings can reach crazy levels. More's the pity, perhaps, that Cambodia does not yet have an investible stock market. There is a market - the Cambodia Securities Exchange - but it has only two listed companies: Phnom Penh Water Supply, which is state controlled, and Grand Twins International, a Chinese-controlled clothing maker. At least Vietnam has a comparatively well-developed market - Hochiminh Stock Exchange, which has 342 listings and a market value of about £9.4bn.

Then again, Vietnam is much further down the path to modernisation than Cambodia. The trauma of its internal wars are more distant and less profound than Cambodia's and its reconciliation with capitalism started sooner. Those looking for the next 'China' have found it easy to light on Vietnam. Like China, it is ruled by an authoritarian 'communist' party that manoeuvres between promoting growth and protecting stability. It still has a young population - good for growth - just as China did when it was at a similar stage of development to today's Vietnam. It has high levels of domestic saving, too. This helps fund high levels of capital investment. Drive around the urban parts of south and - especially - central Vietnam and there seems to be a continuous road-building programme. However, unlike China, in Vietnam both the government and the trade account are in deficit, which contributes to the country's high rate of inflation.

If Vietnam is mentioned in the same breath as Turkey, Bangladesh and Mexico as the next big thing, Cambodia is barely at the frontier. True, growth is expected to run at a fair lick (see table). But that's partly because the base is so low and its challenges are huge, as America's CIA spells out in its World Factbook: Cambodia is "inhibited by endemic corruption, limited educational opportunities, high income inequality, and poor job prospects. Approximately 4m people live on less than $1.25 per day, and 37 per cent of Cambodian children under the age of five suffer from chronic malnutrition. The population lacks education and productive skills, particularly in the impoverished countryside, which also lacks basic infrastructure." Yet that provides too dismal a litany. The vitality of Cambodia's scruffy cities is evidence of that.

Meanwhile, the beach has emptied. The Chinese have gone to splash noisily in the pool. The Russians have gone to wash down copious amounts of alcohol with their lunch. The Brits have gone to squabble elsewhere and - thank heavens - the Americans have simply gone.

I am left alone with the thought that the Vietnamese and - especially - the Cambodians stand almost no chance of matching the affluence of the thoroughly undeserving Brits and Americans. Eventually, they may do better than the Russians, but that will be all about Russia's personal tragedy. Their best target is to match the Chinese for whom an enormous middle-income trap may await. Yet for the Vietnamese and Cambodians to fall into a middle-income trap would be a fate dearly to be wished. Currently they travel hopefully and it's axiomatic that there is no better way to go. That's as true for investors as it is for the people involved. Hope is where the money will be made as these south-east Asian countries journey towards their dream of the affluent society.