Asia's Resource Riches vs. Reform

Dhanbad, an old mining city in eastern India, feels like a dust bowl that belies the fact that it is a city endowed with significant natural resources. On a recent visit to the city, my colleagues and I were surprised at the relatively modest investments in infrastructure that have been made there over the years in spite of its coal mining riches.

While in Dhanbad, we were reminded of the challenges and opportunities that arise from the widespread presence of natural resources such as coal. Our visit to some mines was nearly scuttled due to protests and demonstrations from local residents over the lack of a consistent water supply. While having natural resources should help in the progress and development of the surrounding region, the relative ease of mining can also lead to complacency and steer the focus away from investments in more sustainable sources of development. For instance, in addition to the water supply issue, Dhanbad continues to wrestle with power outages due to insufficient investment in building electrical power plants.

Furthermore, the local coal industry has not benefited the average citizen quite to the same extent as a narrow few stakeholders. The easy availability of a marketable resource as coal in the region is at odds with the abject poverty. While in Dhanbad, we saw children climbing atop coal-laden trucks to pilfer a few pounds of coal—apparently a regular activity to enhance the livelihood of locals.

India's central government tries to facilitate infrastructure investment across the country but its efforts vary greatly from state to state. In some states near Dhanbad, such investment in the mining sector has raised safety standards and led to improved local living standards. However, these benefits depend largely on local government participation and private sector engagement.

Our experience in Dhanbad underscores an important difference between economic developments in Asia and its peers in other parts of the globe. Asian economic growth has not necessarily benefited from an overabundance of commodities and natural resources. If anything, Asian companies and households are among the biggest importers of some of these very resources. Rather, progress in Asia has been built on consistent efforts to improve productivity through a painstaking process of reform and deregulation that has spanned several decades. This may prove to be more sustainable than relying on the easy riches from commodities and natural resources.

Sharat Shroff, CFA

Portfolio Manager

Matthews Asia

The subject matter contained herein has been derived from several sources believed to be reliable and accurate at the time of compilation. Matthews does not accept any liability for losses either direct or consequential caused by the use of this information. Investing in small- and mid-size companies is more risky than investing in large companies as they may be more volatile and less liquid than large companies.

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