Investing Caffeine

Jumping on the Globalization Train

March 22, 2010 at 12:32 am 1 comment

What happens when you mix a group of Saudi Arabians, Germans, Chinese, French, and South Koreans with billions of dollars? This is not the lead-in question to a politically incorrect joke, but rather a teaser related to a multi-billion infrastructure project currently under a bidding process in Saudi Arabia.

The proposed $7 billion, 450 kilometer high speed Saudi Arabian railway connecting Islam’s two holiest cities (Mecca and Medina) is expected to ease congestion of the 2.5 million Muslims making the annual journey to Mecca as part of the Hajj pilgrimage.

Amidst the fallout from the recent global financial crisis, the benefits of capitalism, globalization, and free trade have come under attack. There obviously were some horrible decisions made and the collapse of financial institutions around the world underscored the necessity to shore up our regulatory system. Nonetheless, this microcosm of a project is proof positive that globalization is alive and well (see also Friedman Flat World article). How else can you explain China Railway Construction Corp./Beijing Railway Administration (China), Siemens (Germany), Hyundai/Samsung (South Korea), Alstom  (France), and Saudi Binladin Group (Saudi Arabia) coming together on a multi-billion project bidding process?

Oil Rich Countries Think Strategically

Saudi Arabia is not the only oil-rich country that has used the dramatic increase in oil revenues to fund investments in the future. Beyond Saudi Arabia, other oil rich areas like Qatar, Russia, and the UAE (United Arab Emirates) federation are examples of regions wanting to join the 21^st Century global party rather than sitting around idly. The billions of black gold being pumped from the oil reservoirs is getting poured into infrastructure, such as technology, roads, bridges, hospitals, and yes…railways. These countries realize the importance of diversifying their economies away from the dependence on any one sector. Leadership from these regions understand the damaging economic impact of boom-bust energy price cycles, therefore they are doing their best by diversifying into other economic areas – including infrastructure. How serious is Saudi Arabia when it comes to investments? Well, the United States stimulus program was a drop in the bucket (single digit percentage of GDP) relative to Saudi Arabia,  which according to BusinessWeek had the largest stimulus package among the Group of 20 (69% of GDP).

The Case for Free Trade

As protectionists and trade union organizers scratch and scream in response to expansion of globalization, competing countries around the world have their economic foot on the pedal when it comes to extending trade borders.

Tariffs, quotas and various other taxes only serve to drag down the competitiveness of our country’s most treasured industries.

These economic trade concepts are not new. Adam Smith, considered by some as the “father of economics” wrote about the “invisible hand” in his famous book Wealth of Nations (1776) and economist David Ricardo explained “comparative advantage” in his book On the Principles of Political Economy and Taxation (1817). Without getting into the nitty-gritty, suffice it to say the advantages to free trade have been well documented over the centuries.

As the standards of living climbs for hundreds of millions of people in developing countries, these populations are becoming fertile ground for the sale of U.S. technology, pharmaceuticals, appliances, automobiles, and other goods and services.

Rather than pouring sand into the gears of innovation, incentives need to be established to motivate product excellence. Otherwise, capital  and jobs will migrate to other countries. Intel CEO (INTC) Paul Otellini, who was recently quoted in a New York Times article, is urging Congress to improve business, tax, and education incentives. Thanks to  China’s tax policy and availability of a skilled labor pool, Intel is able to save $1 billion on  a $4.5 billion plant being constructed this year – not exactly chump change.

Certainly, rules need to be created that promote fairness and credible enforcement of penalties, otherwise the benefits of trade become diluted.

Overall, the recent financial crisis caused economists, politicians, and various pundits to question the validity and benefits of capitalism, globalization, and free trade. In the vast spanning web of global commerce, the recent high speed Saudi railway may only represent a very tiny thread in the whole world’s infrastructure spend. Nonetheless, this multi-billion project integrating international heavyweights from all over world proves that despite the shortcomings of globalization, capitalism, and free trade, the benefits remain substantial and there is still time to jump back on the train.

Read The Financial Times article on the Saudi Arabia railway project.

Wade W. Slome, CFA, CFP®

Plan. Invest. Prosper. 

*DISCLOSURE: Sidoxia Capital Management (SCM) and some of its clients own certain exchange traded funds, but at the time of publishing had no direct positions in Intel (INTC), China Railway Construction Corp., Beijing Railway Administration, Siemens, Hyundai/Samsung, Alstom, and Saudi Binladin Group or any security mentioned in this article. No information accessed through the Investing Caffeine (IC) website constitutes investment, financial, legal, tax or other advice nor is to be relied on in making an investment or other decision. Please read disclosure language on IC “Contact” page.

Entry filed under: Themes - Trends. Tags: Adam Smith, Alstom, comparative advantage, David Ricardo, infrastructure, INTC, railway, Samsung, Saudi Arabia, Siemens.