Just under 60 years ago, North and South Korea weren’t all that different.
Both countries were dirt poor. Per capita income was below that of sub-Saharan countries. And both were still recovering from the Korean War.
Today the two countries couldn’t be more different.
While North Korea continues to wallow in the mud, South Korea has quickly become one of the most productive societies in the world.
They’re the fourth largest economy in Asia. Living standards are almost the same as that of the average Aussie. What took us hundreds of years, South Korea did in 60.
So what’s caused this miracle on the Han River?
Freedom turns thousands into millions
In 1960, South Korea was still recovering from the war. They were also heavily dependent on foreign aid, like North Korea are today.
But it was the year that changed South Korean fortunes.
Thanks to economic and social development plans launched by President Park Chung-hee, citizens finally had a little economic freedom.
Businesses began to flourish, putting profits above all else.
The nation, poor in natural resources, carved out a manufacturing advantage. Because labour was cheap, they could competitively produce products to export to the world.
As the years went on, South Korea began to move up the value chain. Government controls were relaxed further, encouraging technology companies to innovate and create new products.
By 1980, the economy had already doubled.
Source: Trading Economics
South Korea’s growth story was still far from over.
In the 2000s, the government took their hands off the reigns further. Instead of controlling investments through the state, investments were now dictated by the market.
Today some of the best technology comes out of South Korea. They have world class infrastructure, and continue to invest for the future.
As they rose from poverty to prosperity, opportunities were abundant.
You could have made a fortune investing in companies like DB Insurance Co. [KRX:005830] and Hankook Tire Worldwide Co. [KRX:000240].
Just $10,000 in each would have turned into $29.2 and $12.7 million.
And there’s a chance similar opportunities will emerge as China relaxes their government controls.
A sure bet
How can anyone become rich?
‘Consistently buy an S&P 500 low-cost index fund,’ Warren Buffett explains. ‘I think it’s the thing that makes the most sense practically all of the time.’
Before we look at the China case, I thought it would be apt to discuss this idea.
Why is it that Warren Buffett says anyone can become rich by investing in the S&P 500?
Because the American system (capitalism) works. The US has a relatively hands-off policy that allows businesses to prosper. This is why the S&P 500 (the 500 largest US stocks) continues to rise over the long-term.
Source: Macro Trends
And it will continue to do so for as long as that system stays in place. That’s why, over time, it’s one of the best bets you can make.
As other countries continue to move towards this system, you’ll have more indices you can bank on. If you accept this then you take advantage of countries still deregulating their economies.
Such efforts did wonders in South Korea. And I’m betting it could do the same for China.
China heads the right way
Much like South Korea, China has been under strict controls.
The Chinese communist regime was driven early on by it’s brutal leader, Mao Zedong.
He wanted prosperity for all. He had support from the farming populations, who had close to nothing under the old regime. Yet instead of encouraging investment, Mao redistributed wealth.
He also came up with centralised plans to advance technology and increase food production. Both failed miserably, causing millions to die of starvation.
But since, China has moved away from complete state control.
Throughout multiple Five Year Plans, China has been gradually deregulating their economy. And as this continues to happen, businesses will flourish.
More recently, China opened up their consumer finance industry. As reported by the Financial Times:
‘Since regulators opened up the consumer finance market three years ago, lenders have deployed hundreds of thousands of salespeople to cash registers and even car parks across China to hand out on-the-spot loans for phones, electronic gadgets and cars.
‘The pent up demand was huge. Millennial consumers often struggle to obtain loans from traditional lenders and many in smaller cities do not carry plastic in their wallets.
‘This burgeoning market is expected to be worth Rmb3.4tn ($500bn) by 2019, with the rise in consumption expected to help China wean itself off investment-led growth.’
Along with consumer finance companies, retailers are also seeing earnings grow. Credit has given consumers more purchasing power. And with that, they can now buy things they never would have.
Spending for spending sakes isn’t always good. But it is a sign of a more productive economy, and of higher living standards for the people in it. Demand for goods should encourage businesses to produce more, growing China’s gross domestic product (GDP).
Now could be the best time to get exposure to China.
I doubt they’ll become capitalists overnight. But as they continue to deregulate their economy, growth should continue. You could capture massive gains in the process.
Editor, Money Morning