Power is returning to asset base as productivity gets distributes more widely
Lowering scale will cost dearly in surplus generation
Thursday, September 15, 2011
Wednesday, September 14, 2011
Linking surplus, investment, innovation and scale to the Indian Varna classifcations
Well it is fashionable to critique caste and I for one do not believe in hereditary caste, but the caste categories stand as memory aids to these four sources of power
Surplus Generation: Profits seems the natural Vaishya Turf
Investment or Sacrifice: Kshatriya turf, involves taking risks
Innovation: R& D , Brahmin , idea driven turf
Scale: Mass markets, the Shudra element
Even one of this failing will weaken the society
Innovation and surplus without scale is the European predicament
Investment , surplus and scale without innovation is the Asian predicament today !
Surplus Generation: Profits seems the natural Vaishya Turf
Investment or Sacrifice: Kshatriya turf, involves taking risks
Innovation: R& D , Brahmin , idea driven turf
Scale: Mass markets, the Shudra element
Even one of this failing will weaken the society
Innovation and surplus without scale is the European predicament
Investment , surplus and scale without innovation is the Asian predicament today !
Surplus, investment, innovation, scale
This is the virtuous cycle to create a super power. Many countries have one of it but not the other and fail.
Let us take European powers, they suddenly had surplus due to the discovery of the new world. Land was capital and that was an infusion in to their system.
Investment was a result of the demographic dividend due to late marriage in Europe as people consumed less as they had smaller families and saved more.
Innovation due to the industrial revolution gave avenues for investing those savings. The progress of the scientific method made innovation a systematic discipline that produced more and more productivity improvements. The invention of the textile mills is an example.
But that alone was not enough, they needed to scale up a good and productive idea. They had the colonial markets to do that.
Bargaining power due to political and military control, siphoned off the surplus and that started a virtuous cycle.
The case of United States, surplus and scale was due to the large size of the country. Innovation and investment was due to the system that came to be because of the founding fathers of the country and the general ethic of limiting consumption.
Asian economies generated surplus due to growth of exports arbitraging the cost differences. They invested, but when it came to innovation they have a huge hurdle to cross still as the institutions are still not mature to churn out inventions at the pace at which the West does. They do have the internal scale.
Russia, had the investment ethos as a communist regime, but innovation was limited to certain spheres. In-efficient non market system squandered surplus, limiting the capability to continue investing and lost leadership
European countries and Japan, have innovation capabilities, investment as a % of GDP was not as much an issue, but lacked scale once the Europeans lost access to colonial markets !
If Brazil and India need to achieve the super power status they need to focus on all four, generate surplus, invest it wisely, innovate to improve productivity of investment and then scale up to generate significant surplus once again !
Let us take European powers, they suddenly had surplus due to the discovery of the new world. Land was capital and that was an infusion in to their system.
Investment was a result of the demographic dividend due to late marriage in Europe as people consumed less as they had smaller families and saved more.
Innovation due to the industrial revolution gave avenues for investing those savings. The progress of the scientific method made innovation a systematic discipline that produced more and more productivity improvements. The invention of the textile mills is an example.
But that alone was not enough, they needed to scale up a good and productive idea. They had the colonial markets to do that.
Bargaining power due to political and military control, siphoned off the surplus and that started a virtuous cycle.
The case of United States, surplus and scale was due to the large size of the country. Innovation and investment was due to the system that came to be because of the founding fathers of the country and the general ethic of limiting consumption.
Asian economies generated surplus due to growth of exports arbitraging the cost differences. They invested, but when it came to innovation they have a huge hurdle to cross still as the institutions are still not mature to churn out inventions at the pace at which the West does. They do have the internal scale.
Russia, had the investment ethos as a communist regime, but innovation was limited to certain spheres. In-efficient non market system squandered surplus, limiting the capability to continue investing and lost leadership
European countries and Japan, have innovation capabilities, investment as a % of GDP was not as much an issue, but lacked scale once the Europeans lost access to colonial markets !
If Brazil and India need to achieve the super power status they need to focus on all four, generate surplus, invest it wisely, innovate to improve productivity of investment and then scale up to generate significant surplus once again !
Sunday, April 17, 2011
Peaks versus Averages
Why is the BRICS phenomenon different ?
It has to do with peaks versus averages.
Let me explain, the whole host of theories of developing poorer economies has focused on averages, good macro economic management to slowly increase per capita gdp, and other indices of human development
Given the gap between west and the rest, there is no way developing countries can catch up this way
The BRICS have focused on peaks rather than averages, in specific industries they have begun producing companies that threaten western peaks- i can name several such companies, infosys and TCS in IT services, Mittal and Tata in Steel, huawei and ZTE in Telecom equipment, JBS and Cosan in agribusiness, Vale, Gasprom, Petrobras, Rusal in natural resources, Embraer in Civil Aviation
These peaks have given greater attention and bargaining power to the developing nations
As a result, investment climate is perceived to be better and both foreign and domestic investment is pouring in, Governments have also become more confident to take up ambitious programmes like UID in India, Bolsa Familia in Brazil as they see a future for their civil societies based on these peaks, for instance the growing commodity exports of Brazil to Asia, spearheaded by these peaks, has given the confidence to increase social spending that is creating a middle class in Brazil
When i was at Mckinsey, in 1999 i met Roberto Newell, Miami's Partner in Charge, Roberto mentioned one thing he would have liked to have encouraged the Governments he advised to do would be to create national champions
I believe this is the key micro economic difference in addition to the general macro economic hygiene factors that has been behind the sudden rise of the brics as aphenomenon
It has to do with peaks versus averages.
Let me explain, the whole host of theories of developing poorer economies has focused on averages, good macro economic management to slowly increase per capita gdp, and other indices of human development
Given the gap between west and the rest, there is no way developing countries can catch up this way
The BRICS have focused on peaks rather than averages, in specific industries they have begun producing companies that threaten western peaks- i can name several such companies, infosys and TCS in IT services, Mittal and Tata in Steel, huawei and ZTE in Telecom equipment, JBS and Cosan in agribusiness, Vale, Gasprom, Petrobras, Rusal in natural resources, Embraer in Civil Aviation
These peaks have given greater attention and bargaining power to the developing nations
As a result, investment climate is perceived to be better and both foreign and domestic investment is pouring in, Governments have also become more confident to take up ambitious programmes like UID in India, Bolsa Familia in Brazil as they see a future for their civil societies based on these peaks, for instance the growing commodity exports of Brazil to Asia, spearheaded by these peaks, has given the confidence to increase social spending that is creating a middle class in Brazil
When i was at Mckinsey, in 1999 i met Roberto Newell, Miami's Partner in Charge, Roberto mentioned one thing he would have liked to have encouraged the Governments he advised to do would be to create national champions
I believe this is the key micro economic difference in addition to the general macro economic hygiene factors that has been behind the sudden rise of the brics as aphenomenon
Is Brazil the new France ?
The Recent brics summit shows the continuing relevance of brics. For the first time a poor country club is attractive enough for another poor country to join.
Also learnt that oecd is desperately trying to add india and brazil without much interest from either of them. How havw things changed ?
I could not but compare these new powers to 19 century European powers. Here is my take :
China is the new Germany, Brazil the next France, India could be Italy or Britain, Russia will always be Russia. Will elaborate these points in this blog over the next few days.
Germany and China.
Homegenous ethnicity, Sense of National Shame, manufacturing excellence, centralized planning, Tibet as Poland
France and Brazil
Sensuality, Life Style, French influence among elite, left of center ethos, distinct language, a general egalitarianism
India as Italy + Britain
Long cultural tradition, Religiosity, hierarchy, diversity of Britain, Cynicism, double faced, weak centre and multiple minorities / barons
Russia as Russia
Pre USSR russia not very different from today's Russia
Also learnt that oecd is desperately trying to add india and brazil without much interest from either of them. How havw things changed ?
I could not but compare these new powers to 19 century European powers. Here is my take :
China is the new Germany, Brazil the next France, India could be Italy or Britain, Russia will always be Russia. Will elaborate these points in this blog over the next few days.
Germany and China.
Homegenous ethnicity, Sense of National Shame, manufacturing excellence, centralized planning, Tibet as Poland
France and Brazil
Sensuality, Life Style, French influence among elite, left of center ethos, distinct language, a general egalitarianism
India as Italy + Britain
Long cultural tradition, Religiosity, hierarchy, diversity of Britain, Cynicism, double faced, weak centre and multiple minorities / barons
Russia as Russia
Pre USSR russia not very different from today's Russia
Monday, November 1, 2010
Creating National Champions
The recent election of Dilma Rousseff has been accompanied by varied reactions. One of them caught my attention, that of the ETH CEO, who claimed Dilma will strengthen National Champions and his company was ready to be one of them.
The idea of national champions is often associated with development economists as opposed to monetary theorists who for a long time ran Latin American economic policy. However there are many nuances involved that often escapes the unsuspecting.
Since Europe and the West led globalization, they never had to worry about creating their own national champions that will dominate the globe. It was the follower nations that had to worry. Korea and Japan are examples. Latin American economists seize on these examples on how National Governments nurtured their firms through protectionism. However they forget a major difference. These firms were exposed to international competition the way most Latin firms are not because they were usually operational in export led, value adding industries, unlike investment heavy process industries. We recognize Japanese cars and cameras, Korean white goods, where competitiveness was defined as a skill and not as priveleged access to resources.
Latin American like Telmex and Cemex have grown by seeking concessions in their home markets by increasing prices, persuading the Government to give them a monopoly status and avoid competition. Their expansion in to other markets have also relied on either similar markets where Capital intensity and scale will provide competitive advantage or their ability to form a Oligopolistic arrangement. The cement price increases in multiple markets where G3 ( Cemex, Lafarge, Holcim ) market shares reach 80-90 % is legendary. As a result, their ability to compete in truly competitive markets is limited.
In India and China, no single firm holds more than a reasonable market share in industries where they have created Global champions. IT services is very fragmented in India, and so is Pharmaceuticals. Capital Goods industry in China has many competitors. These Global champions are helped yes, by Government through promotion, tax incentives and some hidden subsidies. When they make acquisitions aborad and there are obstacles, Government does step in like when Mittal wanted to acquire Arcelor or Tata wanted to acquire Corus.
But at no point atleast in industries where they are competitive, Government tries to create a single large firm that represents the nation, effectively by reducing competitive intensity. Even in Japan, several companies like Sony, Panasonic, Mistubishi, Sanyo etc competed in the Camera industry for instance.
If Brazilian Government truly wants to create Globally competitive National Champion, it should act like a responsible parent- reward and protect your kids, but do not spoil them, demand they improve their grades and do their home work, demand performance. And often performance does not improve unless one is threatened by competition. If competition is reduced favoritism, corruption and in-efficieny sets in. That is the risk I am afraid of in the new Nationalistic Government by Dilma.
I am all for Nationalism provided it is accompanied by fierce competition among 7-8 National firms, and no one holding an oligopolistic prosition. Being a large market, the surplus needed to invest abroad can come from scale even if market share is smaller compared to say Sweden or even Italy. So by making sure market share is reasonable , one forces companies to also improve productivity in addition to achieving scale to generate surplus. Thus when they go abroad where they do not automatically have scale, their productivity will help them to compete.
The idea of national champions is often associated with development economists as opposed to monetary theorists who for a long time ran Latin American economic policy. However there are many nuances involved that often escapes the unsuspecting.
Since Europe and the West led globalization, they never had to worry about creating their own national champions that will dominate the globe. It was the follower nations that had to worry. Korea and Japan are examples. Latin American economists seize on these examples on how National Governments nurtured their firms through protectionism. However they forget a major difference. These firms were exposed to international competition the way most Latin firms are not because they were usually operational in export led, value adding industries, unlike investment heavy process industries. We recognize Japanese cars and cameras, Korean white goods, where competitiveness was defined as a skill and not as priveleged access to resources.
Latin American like Telmex and Cemex have grown by seeking concessions in their home markets by increasing prices, persuading the Government to give them a monopoly status and avoid competition. Their expansion in to other markets have also relied on either similar markets where Capital intensity and scale will provide competitive advantage or their ability to form a Oligopolistic arrangement. The cement price increases in multiple markets where G3 ( Cemex, Lafarge, Holcim ) market shares reach 80-90 % is legendary. As a result, their ability to compete in truly competitive markets is limited.
In India and China, no single firm holds more than a reasonable market share in industries where they have created Global champions. IT services is very fragmented in India, and so is Pharmaceuticals. Capital Goods industry in China has many competitors. These Global champions are helped yes, by Government through promotion, tax incentives and some hidden subsidies. When they make acquisitions aborad and there are obstacles, Government does step in like when Mittal wanted to acquire Arcelor or Tata wanted to acquire Corus.
But at no point atleast in industries where they are competitive, Government tries to create a single large firm that represents the nation, effectively by reducing competitive intensity. Even in Japan, several companies like Sony, Panasonic, Mistubishi, Sanyo etc competed in the Camera industry for instance.
If Brazilian Government truly wants to create Globally competitive National Champion, it should act like a responsible parent- reward and protect your kids, but do not spoil them, demand they improve their grades and do their home work, demand performance. And often performance does not improve unless one is threatened by competition. If competition is reduced favoritism, corruption and in-efficieny sets in. That is the risk I am afraid of in the new Nationalistic Government by Dilma.
I am all for Nationalism provided it is accompanied by fierce competition among 7-8 National firms, and no one holding an oligopolistic prosition. Being a large market, the surplus needed to invest abroad can come from scale even if market share is smaller compared to say Sweden or even Italy. So by making sure market share is reasonable , one forces companies to also improve productivity in addition to achieving scale to generate surplus. Thus when they go abroad where they do not automatically have scale, their productivity will help them to compete.
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