Enterprise Resilience Management Blog

Will Asia Drive Global Growth?

The news out of Asia was good this morning as China reported "its economy [had] accelerated in the second quarter, expanding by 7.9 percent, amid a surge in consumer spending and factory output on the back of massive government stimulus measures" ["Asia stocks rise as China growth buoys confidence," by Jeremiah Marquez, Washington Post, 16 July 2009]. Marquez continues:

"Analysts said the quicker expansion, above most market forecasts, put the world's third-largest economy within reach of the government's 8 percent full-year growth target. It offered yet more assurances for global investors who, thrilled by China's ability to keep its economy growing as other countries slump, have already driven Shanghai's stock market up nearly 75 percent this year. 'This should give people confidence that China's economy is on strong footing and that there are a lot better days ahead,' said Alan Landau, Hong Kong-based president of Marco Polo Pure Asset Management, which oversees about $120 million in mostly mainland Chinese equities."

Back in March, a panel of Asian researchers claimed that "the global financial crisis has underlined the critical need for the region to grow less export-dependent and instead foster domestic demand" ["Experts Say Asia Needs to Rely Less on Exports," by Yuri Kageyama, AP Business Writer]. They believed the recession would provide the catalyst needed to change.

"The representatives from the Asian Development Bank Institute, which brings together economic experts on the region, acknowledged such change will require time, perhaps as much as a decade. ... The vulnerability of Asia economies caused by their extreme reliance on exports has been viewed as a major problem for decades. But the U.S. financial crisis, which threatens to bring more joblessness, poverty and social instability to Asia, is making the need for change more pressing than ever, researchers said."

Even if Asian economies become more consumer-oriented, the experts believed that most of the demand would be for products from within the region. For western countries looking to increase exports to Asia in the near future, this prediction doesn't offer much encouragement.

"'Exports to developed economies will be less of an engine of growth for the region,' said Masahiro Kawai, dean of Asian Development Bank Institute, and one of 19 researchers from Asian think tanks who signed the report. 'East Asia will need policies to facilitate a shift toward inclusive, sustainable growth driven by regional demand,' he said at the Foreign Correspondents' Club of Japan in Tokyo."

The Economist, however, notes that the rest of world hopes that a change in consumerism in Asia will have positive repercussions globally ["Shopaholics wanted," 27 June 2009 print issue].

"Asia’s emerging economies are bouncing back much more strongly than any others. While America’s industrial production continued to slide in May, output in emerging Asia has regained its pre-crisis level. This is largely due to China; but although production in the region’s smaller economies is still well down on a year ago, it is rebounding in those countries too. ... Meanwhile, export markets in developed economies are likely to remain weak. So the recovery in Asian economies will stumble unless domestic spending, notably consumption, perks up."

Every country, of course, has unique challenges and spending patterns. The article observes that "consumers’ appetite to spend varies hugely across the region." One reason is that about 50 million people who were on the verge of becoming part of the lower middle class have been plunged back into "absolute poverty" according to the World Bank ["Is Globalization Beating a Hasty Retreat," `, 6 July 2009 print issue]. Nevertheless, The Economist indicates that in some regions consumer spending is growing impressively.

"In China, India and Indonesia spending has increased by annual rates of more than 5% during the global downturn. China’s retail sales have soared by 15% over the past year. This overstates the true growth rate because it includes government purchases, but official household surveys suggest that real spending is growing at a still-impressive rate of 9%. In the year to May, sales of household electronics were up by 12%, clothing by 22% and cars by a stunning 47%. Elsewhere in the region, spending has stumbled, squeezed by higher unemployment and lower wages. In Hong Kong, Singapore and South Korea real consumer spending was 4-5% lower in the first quarter than a year earlier, a much bigger drop than in America. But Frederic Neumann, an economist at HSBC, sees tentative signs that spending is picking up. Taiwan’s retail sales rose in May for the third consecutive month. Department-store sales in South Korea rose by 5% in the year to May."

Although government stimulus packages are important to ensure that credit remains available, economic recovery rests in the perceptions, hopes, and activities of individual consumers. The article reports that much of developed world views Asia as a region where people save too much and spend too little. It claims that picture is not a fair one.

"During the past five years consumer spending in emerging Asia has grown by an annual average of 6.5%, much faster than in any other part of the world. It is true that consumption has fallen as a share of GDP, but that is because investment and exports have grown even faster, not because spending has been weak. Relative to American consumer spending, Asian consumption has soared. In most Asian economies, private consumption is 50-60% of GDP, which is not out of line with rates in countries at similar levels of income elsewhere."

The article reports that there is one surprising exception -- China.

"Private consumption there fell from 46% of GDP in 2000 to only 35% last year—half that in America. In dollar terms, spending is only one-sixth of that in America. (Singapore’s consumption is also low, at just under 40% of GDP.) This explains why China’s government has recently taken bolder action than others to boost consumption. Over the past six months the government in Beijing has introduced a host of incentives to encourage households to open their wallets. Rural residents get subsidies for buying vehicles and other goods such as televisions, refrigerators, computers and mobile phones; urban residents get a subsidy if they trade in cars and home appliances for new goods; tax rates on low-emission cars have also been cut. There is huge potential for higher consumption in the countryside as incomes rise: only 30% of rural households have a refrigerator, for example, compared with virtually all urban households."

China is also trying to shore up its social security system to ease its citizens long-term concerns and, hopefully, spend a little more of their hard-earned money. Increased consumerism would certainly help turn the global economy around, but that consumerism can't be based on credit given to people living beyond their means. So far, that has not been the case in Asia. The article concludes:

"A bigger test of Asian governments’ resolve to shift the balance of growth from exports towards domestic spending is whether they will allow their exchange rates to rise. A revaluation would lift consumers’ real purchasing power and give firms reason to shift resources towards producing for the domestic market. But so far, policymakers have been reluctant to let currencies rise too fast. Asian spending is already an important engine of global growth. Even before the crisis, emerging Asia’s consumer spending contributed slightly more (in absolute dollar terms) to the growth in global demand than did America’s. But it could be even bigger if Asians enjoyed the full fruits of their hard labour, rather than subsidising Western consumers through undervalued currencies. It is time for an even greater shift in spending power from the West to the East."

In the BusinessWeek article cited above, it was reported that "global trade is set to fall this year, for the first time in more than two decades, while capital flows to emerging markets are projected to decline by more than half from 2008; commodity prices, with the exception of oil, are in the dumps. That's all taking an especially hard toll on developing nations." What all this indicates that the U.S. is unlikely to emerge from this crisis with the same amount of economic influence that it possessed going in. Even the world's poorest countries believe they should have a greater say in the economic system because they are often victims of crises not of their making ["Poor countries want greater role in world economy," by Michael Astor, Washington Post, 25 June 2009]. Astor reports:

"At ... a three-day U.N. financial summit, country after country laid blame for the crisis on financial liberalization and deregulation in the United States and other rich nations and said it was time to reform the world financial system under the auspices of the United Nations. 'The reforms based on the belief in the efficiency of the market and the diminution of government did not work,' said Bangladesh's Foreign Minister Dipu Moni, speaking on behalf of the world's poorest nations. 'Reforms are needed to enhance productivity and capacity to cope with risks.' Nobel Economics Laureate Joseph Stiglitz, who headed a Commission of Experts on Financial and Monetary Reform that developed recommendations for the conference, said that 'as globalization has proceeded we haven't created global financial institutions.' He called for the creation of a Global Economic Coordination Council to deal with the fallout wrought by the crisis that began in 2008. ... The draft [report presented at the conference] calls for the International Monetary Fund, the World Bank and other lending institutions to be flexible in imposing conditions on developing countries so they can take action to deal with the economic crisis, including adopting stimulus packages. The draft also calls for measures to avoid a new debt crisis and new approaches to restructuring debt."

Bangladesh's Foreign Minister was correct in his assessment that the world's poorest nation's need to "enhance productivity and capacity to cope with risks." Part of that increased capacity must include the diversification of national economies. As the BusinessWeek article noted, "commodity prices, with the exception of oil, are in the dumps" and nations dependent on high commodity prices are suffering. Zambia is a good example of a bad situation ["Zambia's Copperbelt Reels From Global Crisis," by Karin Brulliard, Washington Post, 25 March 2009]. She reports:

"The global economic meltdown swept into this company town [Luanshya] and took down the copper mine in January. It left in its wake a crisis measured in unsold tomatoes at the market, empty stomachs and desperate people. ... Mines here in Zambia's Copperbelt region drive this poor nation's economy, but a plunge in global trade has slashed demand for the copper used to construct electronics and houses in the United States and Asia. That is prompting mines here to slow and shut, limiting tens of thousands of Zambians' access to schooling, health care and regular meals."

Brulliard notes that Zambia is not alone:

"Africa's resource-fueled economies have grown steadily in recent years, improving the lives of millions of people. Now, as prices drop for Botswana's diamonds, Chad's oil and Tanzania's cotton, a crisis that began in the rich world is threatening to drive millions more into poverty, according to the World Bank, and raising the specter of unrest."

Both economic diversification and increased regional trade can help mitigate the effects of fluctuating commodity prices. That is a message I continually communicate as I discuss Enterra Solutions' Development-in-a-Box™ with government and business leaders in emerging market companies. Brulliard also discusses a number of other subjects that I've been talking about for years -- including the need for increased foreign direct investment in developing countries.

"The problem is not just a collapse in commodities prices. Foreign investment is receding in countries such as South Africa and Kenya. Remittances are dropping in Liberia. Aid flows from economically stressed donor countries might retreat. Much will depend on how quickly advanced economies recover, according to experts and African leaders, who warn that a prolonged downturn could stir turmoil."

If The Economist is right, African countries shouldn't be looking to "advanced economies" as much as emerging market economies for the quickest recovery from the current recession. Like Asian nations, African nations need to become less dependent on exports (in their case, commodity exports) and they need to encourage more local consumerism. This can't happen without a good strategy for economic diversification. Even with a good strategy, most African countries are decades away from achieving sustainable economies. Asia, however, is much more likely to diversify and as a result will drive global economic growth over the next few years.

Emerging Market Recovery

In a recent post entitled Crises and the "Next Big Thing", I mentioned Austrian economist Joseph Schumpeter, who popularized the term "creative destruction" to describe the process of transformation that accompanies changes resulting from radical innovations or crises. Earlier this year, Washington Post op-ed columnist Robert J. Samuelson began a column by quoting Shumpeter ["American Capitalism Besieged," 23 March 2009].

"Can capitalism survive? No. I do not think it can." -- Joseph Schumpeter, 1942

Samuelson notes that "the story of American capitalism is, among other things, a love-hate relationship. We go through cycles of self-congratulation, revulsion and revision." The current economic downturn, of course, began the cycle that will take us through revulsion and revision. He continued by discussing his reference to Schumpeter.

"Schumpeter, one of the 20th century's eminent economists, believed that capitalism sowed the seeds of its own destruction. Its chief virtue was long-term -- the capacity to increase wealth and living standards. But short-term politics would fixate on its flaws -- instability, unemployment, inequality. Capitalist prosperity also created an oppositional class of 'intellectuals' who would nurture popular discontents and disparage values (self-enrichment, risk-taking) necessary for economic success. Almost everything about Schumpeter's diagnosis rings true, with the glaring exception of his conclusion. American capitalism has flourished despite being subjected to repeated restrictions by disgruntled legislators."

Samuelson notes, for example, that the unbridled pursuit of profits has been subordinated by concerns about working conditions and the environment. It was Schumpeter's failure to see how flexible and adaptable capitalism can be, Samuelson claims, that made his conclusion so wrong. Nevertheless, Samuelson concedes that "there is a thin line between 'saving capitalism' from itself and vindicating Schumpeter's long-ago prediction." Desmond Lachmond also believes the U.S. economy is teetering and that it looks more like an emerging market country than a developed one ["Welcome to America, the World's Scariest Emerging Market," Washington Post, 29 March 2009]. Lachmond is a fellow at the conservative American Enterprise Institute and he was previously chief emerging market strategist at Salomon Smith Barney and deputy director of the International Monetary Fund's Policy and Review Department. Lachmond concludes his article this way:

"In the twilight of my career, when I am hopefully wiser than before, I have come to regret how the IMF and the U.S. Treasury all too often lectured leaders in emerging markets on how to 'get their house in order' -- without the slightest thought that the United States might fare no better when facing a major economic crisis. Now, I fear time is running out for our own policymakers to mend their ways and offer real leadership to extricate the United States from its worst economic calamity since the 1930s. If we insist on improvising and not facing our real problems, we might soon lose our status as a country to be emulated and join the ranks of those nations we have patronized for so long."

Lachmond may be right. The Economist believes that "the biggest emerging economies will recover faster than America" ["Decoupling 2.0," 23 May 2009 print issue].

"A year ago, many commentators—including this newspaper—argued that emerging economies had become more resilient to an American recession, thanks to their strong domestic markets and prudent macroeconomic policies. Naysayers claimed America’s weakness would fell the emerging world. Over the past six months the global slump seemed to prove the sceptics right. Emerging economies reeled and decoupling was ridiculed. Yet perhaps the idea was dismissed too soon."

I have been supporting the notion that emerging markets are probably going to recover faster and provide better investment opportunities than more developed economies for some time. I moderated a panel on investing in Iraq at The Milken Institute's Global Conference (see my post The Milken Institute Global Conference] and tonight I will appear on Fox Business News' Cavuto show with Brian Sullivan at 6pm EDT to discuss the issue. The Economist notes that China's economy has started to grow once again. "Fixed investment is growing at its fastest pace since 2006," it reports, "and consumption is holding up well." It notes that China's growth rate could reach 8 percent this year and that the optimism over China's growth has stirred optimism in other emerging market countries that are dependent on commodity prices. The magazine, however, tempers its optimism.

"Even the best performing countries will grow more slowly than they did between 2004 and 2007. Nor will the resilience be universal: eastern Europe’s indebted economies will suffer as global banks cut back, and emerging economies intertwined with America, such as Mexico, will continue to be hit hard. So will smaller, more trade-dependent countries. Decoupling 2.0 is a narrower phenomenon, confined to a few of the biggest, and least indebted, emerging economies. It is based on two under-appreciated facts: the biggest emerging economies are less dependent on American spending than commonly believed; and they have proven more able and willing to respond to economic weakness than many feared."

The article concludes that even the best-positioned emerging market economies need to continue to reform.

"Government activism helps explain why the creditworthy big emerging economies can recover more quickly. But it cannot create long-term resilience. China’s rebound will only be sustained if the economy shifts further from state-sponsored investment to private consumption. That will require tough structural changes, from forcing state-owned firms to pay fatter dividends to a stronger social safety net. Other countries, notably India, must calibrate their government finances even more carefully. The idea of decoupling lives on, but that does not mean sustained prosperity in the big emerging economies is a foregone conclusion."

One country whose name keeps popping up is Brazil. "Brazilian leaders and economists are relatively optimistic about the region's largest economy. Brazil, they point out, has stable banks, high levels of reserves and sturdy domestic demand for products that keeps many businesses humming along" ["Brazil Sees Reason for Hope Amid Downturn," by Joshua Partlow, Washington Post, 17 April 2009]. In an interesting twist, some analysts are now advising emerging market countries to look at ties with other emerging market countries (rather than strengthening ties with developed economies) as the best course of action out of the current recession ["S.E. Asia Faces Long-Term Trade Shift," by Tim Johnston, Washington Post, 7 February 2009].

"Regional analysts say ... that the present crisis is not just another cyclical downturn but is instead a structural realignment and that Southeast Asia's export economies need to act quickly to adjust to a new reality in which American and European consumers will no longer be the main market. 'We are geared towards selling what the U.S. and Europe want, not what Asians want. We need a readjustment,' said Supavud Saicheua, the managing director of Phatra Securities in Bangkok. 'In the long term, Asians have to consume more, and Europe and the U.S. have to consume less.' ... At one end of the spectrum will be countries such as Indonesia, the region's largest economy. Economists say it is better off than most, thanks to its lower dependence on exports, particularly manufactured products. Economic growth, which was about 6 percent last year, is expected to slow to 4.5 percent this year. However, the country's longer-term prospects are considered relatively healthy. At the other end is Singapore, which has seen domestic exports shrink and is already in recession."

The point is that regionalization within globalization is likely to increase. As a result, supply lines are likely to change. Some supply lines will shorten, some will disappear, and new ones will emerge. African countries hope that some of those supply lines will include them. There have been some signs of improvement on the continent ["Keeping Africa's Turnaround on Track," by Ellen Johnson-Sirleaf, Washington Post, 9 April 2009].

"While international attention has been understandably focused on events in Darfur, Somalia and Zimbabwe, countries across the continent including Ghana, Tanzania, Mozambique and Liberia have been quietly turning around. Economic growth rates regularly exceed 5 percent in many nations. Since 2000, 34 million more African children are in school. More than 2 million Africans are on lifesaving HIV/AIDS medicines. Malaria deaths have been halved in Rwanda and Ethiopia, and the disease has been virtually eradicated in Zanzibar. Poverty rates are falling fast, from 58 to 51 percent across the continent in just six years, according to the World Bank. The key to this progress is stronger African leadership and more accountable governance. Today, more than 20 African countries are democracies, up from just three in the 1980s; they have competitive elections and improved human rights, and their news media are much freer. These efforts have been supported by increasingly effective development assistance from the United States and other partners."

Even so, getting businesses to risk their scarce resources on investments in Africa is going to be difficult (see my post entitled Investing in Africa). Ms. Johnson-Sirleaf is president of Liberia. In order to keep Africa moving forward, she claims five additional steps are critical. They are:

"First, the G-20 pledge to provide the International Monetary Fund with new resources must be fulfilled, and the IMF needs to get those resources to countries quickly and without onerous conditions.

"Second, the World Bank and the African Development Bank must better leverage their resources; aggressively front-load support; and better target growth, jobs and safety-net programs. The International Finance Corp., the World Bank's private-sector affiliate, must be especially creative in keeping private investment on track.

"Third, bilateral partners must build on their promises to increase aid and make it more effective by reducing bureaucratic delays, speeding disbursements and better aligning programs with African priorities.

"Fourth, export credit agencies must use their resources to attack risk and other barriers to trade finance, such as liquidity issues.

"Fifth, all countries must resist protectionist pressures so that trade can be the critical engine for restoring global growth."

Ms. Johnson-Sirleaf is correct in assuming that "trade can be the critical engine for restoring global growth"; which brings us back to the Schumpeter quote cited at the beginning of this blog. I think Schumpeter was wrong. Capitalism will survive and it will help bring many emerging market countries out of poverty if they are willing to rid themselves of corruption and dependence on aid. Some countries simply have too few resources to ever be anything but wards of the international community -- but they are not great in number. I remain optimistic that good investments can be made in emerging market economies and that those investments will make a huge difference in the lives of millions now living in poverty.

Buying the Farm

In my post Food and Water Shortages in the Middle East, I cited an article that reported "several oil-rich nations, including Saudi Arabia, have started searching for farmland in fertile but politically unstable countries like Pakistan and Sudan, with the goal of growing crops to be shipped home." I cautioned that such a strategy was risky. "In times of shortage," I wrote, "it may prove difficult to get food out of countries like Pakistan even if it has been bought and paid for." In a more recent post [Time Magazine's Small World], I focused on a Time Magazine section that discussed ideas that the magazine believes are changing the world "right now." The seventh idea on the list was about countries like Saudi Arabia buying farmland in other countries. Below is how I addressed the idea in that post.

"7. The Rent-A-Country" [Krista Mahr] -- Rent-a-country sounds a lot like neo-colonialism -- so why is it a world changing idea? The epithet may be flippant, but the idea is profound. The concept is not about exploitation, but symbiosis. It grew out of last year's food crisis. "Countries like Saudi Arabia, Kuwait, Qatar and South Korea — well-off states without enough good land or water to feed their people — started to look outside their borders." ... The concept is not without controversy. Food security is an important issue for every single individual on the planet. In times of shortage, people are wary about having foreigners owning local land and crops. Mahr concludes: 'In countries where governments can't afford — or don't prioritize — significant domestic agricultural investment, foreign money has the power to deliver better roads, irrigation, technology and training. "One thousand times we say yes on private and public agricultural investment, but done in a certain way," says Jean-Philippe Audinet, acting director of the policy division at the U.N.'s International Fund for Agricultural Development. "It's very important not to look negatively at this trend. We have to try to look at the win-win." After all, is there a choice? Some of these deals are probably doomed to fall under the ax of the global credit crunch, if they haven't already. But for land-poor countries, the underlying problem of relying heavily on imports will remain. Encouraging a new generation of deals to come out of the diplomatic closet may be the best chance we have to make sure that people on both ends of the bargain end up with food on their plate.'"

Despite the UN's plea "not to look negatively at this trend," The Economist asserts that countries should "be wary of the results" ["Cornering foreign fields," 23 May 2009 print issue]. How could one magazine see the issue as a positive development and the other see it as a negative one? Below is how The Economist describes what is happening.

"Over the past two years, as much as 20m hectares of farmland—an area as big as France’s sprawling farmland and worth $20 billion-30 billion—has been quietly handed over to capital-exporting countries such as Saudi Arabia, Kuwait and China. They buy or lease millions of acres, grow staple crops or biofuels on it, and ship them home. The countries doing the selling are some of the world’s poorest and least stable ones: Sudan, Ethiopia, Congo, Pakistan. Usually, when foreigners show up in these places, it is with aid, pity and lectures (or, in one instance, arrest warrants for war crimes). It must make a nice change to find their farms, so often sources of failure and famine, objects of commercial interest instead. Yet while governments celebrate these investments, the rest of the world might reasonably ask why, if the deals are so good, one of the biggest of them helped cause the overthrow of the government that signed it—the one in Madagascar. Will this new scramble for Africa and Asia really reduce malnutrition, as its supporters say? Or are critics right that these are 'land grabs', 'neocolonialist' rip-offs, different from 19th-century colonialism only because they involve different land-grabbers and enrich different local elites?"

Those are certainly legitimate questions. If proponents of agricultural public/private partnerships can't answer them, the world has a right to be skeptical. But I agree with the assertion of the UN's Jean-Philippe Audinet, we should be looking for win-win scenarios. Even The Economist agrees that "it would be graceless to write off in advance foreign investment in some of the most miserable places on earth." The magazine even agrees that there are tremendous up sides if win-win scenarios can be found.

"The potential benefits of new seeds, drip-feed irrigation and farm credit are vast. Most other things seem to have failed African agriculture—domestic investment, foreign aid, international loans—so it is worth trying something new. Bear in mind, too, that worldwide economic efficiency will rise if (as is happening) Saudi Arabia abandons mind-bogglingly expensive wheat farms in the desert and buys up land in east Africa."

Still, the magazine admits to a nagging unease about the deals -- primarily because most of the deals are shrouded in secrecy. A lack of transparency is generally a warning sign of corruption and poor governance. When I present Enterra Solutions' Development-in-a-Box™ framework to leaders of developing nations, I stress that sustainable development requires openness and transparency. As The Economist notes, "Secrecy makes it impossible to know whether farms are really getting more efficient or whether the deals are done mainly to line politicians’ pockets." Another concern the magazine has is that many of the deals are not public/private partnerships but government-to-government deals.

"This raises awkward questions. Foreign investment helps countries not only by applying new technology but also by reorganising the way people work and by keeping an eye on costs. Few governments do this well, corrupt ones least of all. One of the biggest problems of large-scale commercial farming in poor countries is that well-connected farmers find it more profitable to seek special favours than to farm. These deals may exacerbate that problem. Worse, the impetus for many of them has not been profit-seeking by those who want to turn around failing farms. Rather, it has been alarm at rising food prices and export bans. Protectionism, not efficiency, has been the driving force. It would be better to liberalise food markets and boost trade than encourage further land grabs."

The final concern expressed by the magazine is that the current round of deals is being made at greatly discounted prices.

"There are serious doubts about whether countries acquiring land are paying the true cost of it. Host governments usually claim the farmland they offer is vacant, state-owned property. That is often untrue. It may well support smallholders who have farmed it for generations. They have no title, only customary rights. Deals that push them off their land or override customary rights cannot be justified. International bodies, such as the African Union, are drawing up codes of conduct to limit such abuses. They are sorely needed."

If the international community wants to help the poor, the article asserts, it should push for "freer trade and stronger property rights." Despite all of its concerns, The Economist concludes there is some room for optimism. "If the deals eventually raised yields, spread technology and created jobs," it says, "that would at least be some cause for celebration." In an accompanying article ["Outsourcing's third wave"], The Economist goes into detail about where land is being acquired and by whom. The attached image accompanies that story.

This latter article concludes that the only way to achieve a win-win scenario is to adopt an enforceable code of conduct.

"Joachim von Braun, the head of IFPRI [International Food Policy Research Institute], argues that the best way to resolve the conflicts and create 'a win-win' is for foreign investors to sign a code of conduct to improve the terms of the deals for locals. Various international bodies have been working on their versions of such a code, including the African Union, which is due to ratify one at a summit in July. Good practice would mean respecting customary rights; sharing benefits among locals (ie, not just bringing in your own workers), increasing transparency (current deals are shrouded in secrecy) and abiding by national trade policies (which means not exporting if the host country is suffering a famine). These sound well and good. But Sudan and Ethiopia have famines now: should they be declining to sign land deals altogether? Many of the worst abuses are committed by the foreign investors’ local partners: will they be restrained by some international code? There are plenty of reasons for scepticism about these deals. If they manage to reverse the long decline of farming in poor countries, they will have justified themselves. But like any big farming venture, they will take years to reveal their full impact. For the moment, the right response is to defer judgment and keep a watchful, hopeful but wary eye on their progress."

Exploitation is never sustainable. Rich, but agriculturally challenged, countries need a sustainable solution to their food security challenges. Poor countries need foreign direct investment to help them achieve sustainable development. Working to find a win-win solution that benefits people in both countries is the only ethical and sustainable course to follow.

Behold the Baobab

Africans consider the baobab tree a miracle of nature. Botanically, the baobab tree is from the genus Adansonia, which contains eight species of trees (six native to Madagascar, one native to mainland Africa, and one native to Australia). The trees vary in size but some are enormous. The largest known specimen is found in South Africa. It has a circumference of 47 meters (150 ft) and an average diameter of 15 meters (49 ft). Some species grow as tall as 30 meters (100 ft). The trees also live for a long time. One source claims, "Many still standing today have certainly been around since the birth of Christ; others for far longer." The exact age of baobab trees is difficult to determine because the tree does not produce annual growth rings. The wood itself is too fibrous for structural use but the bark is shredded into strands of fiber for use as rope, baskets, nets, snares and cloth. The baobab is often called the "upside down tree" because its branches look similar to a root system and normally sit atop the truck. As the attached pictures show, however, baobab trees can take many forms and shapes. So why would a corporate blog that deals with development, resilience, connectivity, and innovation concern itself with a tree? The answer is that the world is just discovering the tree and it may become a valuable natural resource for some African countries.

The baobab is considered miraculous because it has so many uses ["What Will Happen When the Baobab Goes Global?" by Dawn Starin, New York Times, 25 May 2009]. Starin writes:

"In Africa, the baobab tree is steeped in mystique and surrounded by superstition. Many people believe that its spirit protects the community around it, and its tangible properties certainly nourish those who live near it. Parts of the tree are used to make rope and fishing line; to feed goats, sheep and cows; and to provide shelter, food and medicine."

Baobabs can survive in harsh climates because they store water inside their swollen trunks (in amounts up to 120,000 liters (32,000 U.S. gallons)). The leaves are commonly consumed as a leaf vegetable throughout mainland African. The fruit is also extremely nutritious. The nutritional and medicinal characteristics of the baobab are attracting the attention of agricultural and pharmaceutical corporations. Starin asserts that these characteristics could make the baobab tree the next "super food." She continues:

"The tree’s white, powdery fruit is rich in antioxidants, potassium and phosphorus, and has six times as much vitamin C as oranges and twice as much calcium as milk. The leaves are an excellent source of iron, potassium, magnesium, manganese, molybdenum and phosphorus, and the seeds are packed with protein."

Starin wonders, however, whether the baobab will prove to be a blessing or curse for the countries that grow it.

"The baobab has never been a plantation tree; it grows wild in arid regions. ... Presently people harvest only what they need and maybe a bit more to sell at local markets. If it becomes an international commodity, the baobab probably would need to be planted as a crop, even though arable soil is limited. The open land where local people now freely harvest wild baobab could be developed by agribusinesses into plantations, or else precious forests or farmland used to grow everyday staple crops could be turned over to the baobab export industry. Although local people would probably find jobs on such farms, their ability to harvest or purchase the baobab themselves would be limited. They wouldn’t be able to pay as much as London dealers could. This means that some Africans could lose a source of household wealth, an important part of their diet and an essential pharmaceutical resource. These possibilities — not to mention the threat of corruption, poor wages and genetic modification leading to a loss of the tree’s biodiversity — are not random predictions. "

Starin is not necessarily against progress. She understands that people scrabbling out a living can and must do better, but she believes that development should take into account local concerns and customs. I share some of her concerns. As I've noted before, corruption undermines almost any development program. That's why anti-corruption efforts are part of Enterra Solutions' Development-in-a-Box™ framework for helping countries pursue sustainable development. Starin continues:

"Africa is no stranger to the overexploitation of its natural resources. But the solution isn’t necessarily to cut the baobab off from international markets. Regulations could be put in place to protect the tree, its environment and the people who depend on it — and still allow for profitable production. The coffee trade provides a model. It’s clear that many consumers are willing to pay more for fairly traded coffee — which costs enough to provide the growers a decent wage for their labor. This bottom-up pricing should be applied to the baobab market, even if it means European health nuts have to pay a lot for their smoothies. The baobab’s new popularity is exciting, but the European Union, the United States and African exporters should decide on regulations before the baobab is rushed to European and North American markets."

I support the kind of holistic approach recommended by Starin. The baobab tree is a unique resource that could provide countries that can profitably grow it a good basis for diversifying their economies -- at a minimum a profitable baobab industry could affect the agricultural, health care, and transportation sectors. For centuries, the baobab tree has played an important role in the economy and culture of Africa and it could play an even more important role in the future.

Capitalism and Inequality

Opponents of capitalism believe that the system is inherently flawed because it creates enormous inequalities in wealth. Back in March 2004, The Economist published an article that examined that belief ["More or less equal?"]. It wrote:

"Is the familiar claim that capitalism makes global inequality worse actually true?Unfortunately, this apparently straightforward question turns out to be harder to answer than one might suppose. There are three broad areas of difficulty. The first is measuring what people, especially the poorest people in developing countries, consume. The second is valuing consumption in a way that allows useful comparisons to be made across countries and over time. And the third, in effect, is settling on an appropriate basis of comparison. Which matters more, for instance: whether inequality is widening among nations, or whether inequality is widening among all the people of the world, regardless of which country they happen to live in? Judging any claim about global inequality is impossible without a clear understanding of how the researchers concerned have dealt with all three questions."

The article presented a panel of graphs that visually depicted global economic trends. The article concluded:

"Once you take account of the fact that China and India have performed so well since 1980, and especially since 1990, together with the fact that these two countries account for such a big share of all the world's poor, it is difficult to stay as pessimistic about global trends in poverty and inequality as the critics of global capitalism wish to be."

One expects The Economist to be pro-capitalism but the article readily admits that macro-measures don't tell us everything we need to know about poverty. It notes, for example, that the "World Bank attempts to measure 'consumption poverty', as opposed to 'income poverty'." The article also concluded that detractors who blame globalization for the ills of poor countries are ignoring simple logic.

"Can it be plausibly claimed that these countries [in sub-Saharan Africa] are the victims of globalisation? That would be an odd conclusion, given that sub-Saharan Africa's economies are so comparatively isolated from the rest of the world economy—by force of history, circumstance and, to a large extent, the policies of their own and other governments. Sub-Saharan Africa plainly suffers not from globalisation, but from lack of it. The focus of attention should be on how to extend the benefits of international economic linkages to the region."

Readers of this blog know that I agree with the conclusion that developing countries need more connectivity with the global economy not less. In a recent follow-up article with the same title, The Economist reports that inequality gap appears to be shrinking ["More or less equal?" 4 April 2009 print issue]. Five years ago the magazine argued: "Would ... worsening of inequality entitle one to conclude that India and China had taken a wrong turn these past 20 years? Of course not. Look at Africa to understand that there are worse things than inequality." In the latest article, the magazine notes just how unequal things have become in America.

"Between 1947 and 1979 the top 0.1% of American earners were, on average, paid 20 times as much as the bottom 90%, according to the Economic Policy Institute, a think-tank in Washington, DC; by 2006 the ratio had grown to 77. In 1979, 34.2% of all capital gains went to the top 1% of recipients; by 2005 the figure was 65.3%. All this happened during a period when American workers’ median real incomes stagnated (though the notional value of any health insurance would have risen steeply)."

Many people blame stagnant wages on globalization and, the article admits, globalization has played a role -- not just the role that people think.

"Many people would point to globalisation, in particular the opening up of the Indian and Chinese markets that vastly increased the global labour force, putting downward pressure on unskilled wages. But academic studies have not found this to be a big factor in explaining the level of wages for the unskilled in recent years. Globalisation may, however, explain some of the changes at the very top of the scale. The emergence of a global market for talent in areas such as banking, the law and investment may explain why the top 0.1% have been so well rewarded."

The fact that the rich got richer bothers a lot of people and The Economist details some of the arguments that have been used to justify the value of economic inequality.

"In the 1970s it was argued that high taxes had reduced incentives and thus economic growth. Entrepreneurs had to be motivated to build businesses and create jobs. But extensive study by economists has found little correlation, in either direction, between inequality and economic growth rates across countries. One argument advanced in America is that wide income disparities might encourage more people to want to go to college, thus creating a better-educated workforce. But Lawrence Mishel of the Economic Policy Institute points out that several societies that are more egalitarian than America have higher college enrolment rates. There might also be an argument in favour of wealth disparities if social mobility was high and the sons and daughters of office cleaners could fairly easily rise to become chief executives. But America and Britain, which follow the Anglo-Saxon model, have the highest intergenerational correlations between the social status of fathers and sons; the lowest are found in egalitarian Norway and Denmark. Things are even worse for ethnic minorities; a black American born in the bottom quintile of the population (by income) has a 42% chance of staying there as an adult, compared with 17% for a white person. As a result, talent is being neglected. Of American children with the highest test scores in eighth grade, only 29% of those from low-income families ended up going to college, compared with 74% of those from high-income families. Since the better-off can afford to keep their children in higher education and the poor cannot, breaking out of the cycle is hard."

The trickle-down theory touted by some economic conservatives simply hasn't proven correct. It would be hard to argue against the fact that wealthy investors provide the capital for entrepreneurial activities that create jobs and stimulate the economy; but The Economist is making a larger point -- breaking out of the poverty cycle is difficult. Wealth not only affects educational opportunities it affects health.

"The gap between the life expectancy of the top and bottom 10% respectively rose from 2.8 years to 4.5 between 1980 and 2000. That does not meet the definition of a fair society by John Rawls, a 20th-century philosopher, who described it as one in which a new entrant would be happy to be born even though he did not know his social position ahead of time."

The article notes that gap between rich and poor is starting to shrink (mainly because of bad economic times not because the poor are becoming better off). It also makes the odd claim that the poor will be relatively less affected by the recession because they have less to lose.

"Although [the poor] may lose their jobs and default on their loans, they will not be troubled by collapsing asset prices because they do not own assets. Edward Wolff of New York University points out that the proportion of American households owning some stocks (including mutual funds and 401k pension plans) went up from 32% in 1983 to 51% in 2001. But only 32% of the population owned more than $10,000-worth of stock, and many middle-class people are only modestly affected by falling asset prices. The richest 10% of the American population owned 85% of all stocks."

The bottom line is that the gap between rich and poor may be narrowing, but it's not for the right reasons. It would be foolhardy to pursue policies that take from the rich to give to the poor. Such schemes have never worked. What does work are policies that encourage the wealthy to invest in businesses that create good paying jobs and foster a stable, prosperous, and growing middle class. There will always be rich people and poor people, but the fewer poor people there are the better off society becomes. Both developed and developing countries face economic inequality challenges. I'm convinced they can be mitigated through free markets and global connectivity. That is the philosophy behind Enterra Solutions' Development-in-a-Box™ approach. Developing countries need foreign direct investment to promote sustainable growth. That investment comes from successful businesses and individuals (i.e., the well-to-do). In many ways, the debates about economic inequality are red herrings. The debates shouldn't be about wealth but about the moral and economic choices that the wealthy make.

Investing in Africa

I was recently contacted by Fabiane Dal-Ri from Baird’s Communications Management Consultants about a study her firm conducted in partnership with the Africa Business Initiative of the U.S. Chamber of Commerce concerning attitudes of American business leaders towards investing in Africa. The study interested me because Enterra Solutions has plans to move into the African market with its Development-in-a-Box™ offering. The study, entitled The Conversation Behind Closed Doors, is "an inside-the-boardroom survey of attitudes toward corporate investment in Africa among leading U.S. corporations. The information was gathered between January and November 2008 in a series of closed door interviews with senior officers of 30 American Fortune 100 corporations by senior associates of Baird's CMC." The topic is extremely important because, as I have consistently maintained, sustainable development doesn't take hold in a country until it can attract foreign direct investment. The study's Executive Summary provides this overview:

"U.S. executives point out that Africa is only one of many possible destinations that American corporations consider for investment. Investment is highly competitive, and many countries are vying to become the destination of choice for capital. That said, U.S. companies in some sectors, particularly technology, now regard Africa as the last frontier for growth. These companies believe that Africa, with its market of about 1 billion people, can no longer be ignored. Even with this interest, Africa faces tough competition and huge hurdles to attract U.S. investment. Globally, competition for American FDI is high. Countries from all regions showcase their advantages, align their offers to U.S. needs, clamor for attention, and invest in their own countries to attract additional investment. Consequently, U.S. corporations do not lack investment choices, and they rarely consider African nations. Further, news about Africa is mostly about chaos and unrest. Africa is not active or aggressive enough about attracting investment; the voices of the few countries that are making an effort get lost in the surrounding negative noise. Some African countries are making special efforts to assist foreign companies that invest. For example, Nigeria’s president regularly engages with the local leaders of foreign companies to help cut through bureaucratic tape. U.S. corporations need a strong and specific draw from Africa to make investment worthwhile. This can be the pull of a big market or a big source of critical raw materials or a belief that there is a competitive advantage to early entry into African markets. The survey data show that few of these pulls exist or are not sufficiently strong to be effective in the near term."

The news release announcing the availability of the report provides the following facts about Africa, in general, as well as specifics findings of the study:

• Africa is the world’s second largest and second most populous continent after Asia, covering 20% of the world’s total land area, and home to 14% of the world’s human population, yet Africa remains the world’s poorest and most underdeveloped continent

• Africa has not received its “fair share” of global Foreign Direct Investment (FDI) flows

• Since the early 1980s, Foreign Direct Investment (FDI) flows to Africa averaging only 2.2% of the global total, while Asia received no less than 17.3% of the total

• Corporate America is interested and watching Africa closely; they see pockets of great potential US Technology companies are most attracted to investing in Africa

• Overall, the business case for investing in Africa is less compelling than for its competitors

• To make itself more attractive for US investment, Africa should:

  • Invest in education, health and infrastructure
  • Ensure the rule of law and a business-friendly climate for all investing companies
  • Show it is serious about attracting foreign investment
  • Market itself as aggressively as other regions of the world
  • Demonstrate opportunity cost of not investing

• USA Inc. is more interested in Africa than before, because the African market appears increasingly attractive, but Africa has tough competition and high hurdles for US investment.

• Education is at the top of the US corporate wish list for Africa; “educate your people so that we can employ them"

• The African countries that hold most interest are South Africa and some countries in the North, like Egypt; there are also some pockets of interest in West Africa, most notably Ghana, Nigeria and to some extent Angola; while some in the South (Botswana and Mozambique) and East (Uganda and Kenya), are also being watched

The study's conclusions track well with my own assessment of the areas in Africa most ready to move forward as well as what they must do to look more attractive to potential investors. One thing not mentioned in Baird's CMC list is security. Security is the sine qua non for attracting foreign direct investment. As the news release notes, the study will eventually include two parts. This first part helps us "understand how US corporations view Africa as an investment destination and what their requirements are for investing in Africa on the same scale as their investments in the rest of the developing world." The second part will provide "the response of African political and government leaders to these private sector views." I like this format. It presents real world perceptions and then asks, "What are you going to do about it." Too often, political leaders ignore academic studies as ivory tower exercises. African leaders would be remiss to ignore a study that provides them with a confidential assessment of how their countries are viewed by the business leaders they are hoping to court as investment partners.

The release goes into a little more depth concerning the reasons that Africa remains a less attractive region than others for FDI. They include:

"Rule of law -- The rule of law does not prevail to the degree required to make Africa an attractive investment destination. This applies to corporate, societal, and criminal law.

Attraction -- While the enormous natural resources are an attraction, Africa does not offer a sufficiently large middle class of consumers or show consistent economic growth that could promise a future market. Most African countries are small and have poor markets, and there are barriers to regional markets--such as taxes and the freedom of movement of people and goods.

Risks versus rewards-- Given the currently perceived risks in Africa, the rewards have to be very high to make it worthwhile to invest. Presently, U.S. corporations say that there are very few visible promises of future returns high enough to justify significant interest in investing.

Supportive business framework--Transportation and communications infrastructure, trained or trainable human resources, and equitable trade and employment practices are insufficient to support corporate investment.

A welcoming environment-- African countries are not doing a sufficient job of providing education and health services to the potential workforce, which makes the potential hire-able local insufficient to support investment."

That list should be familiar to readers of this blog. I have repeatedly talked about pre-conditions necessary to attract FDI. If I were to highlight two factors that make many African countries unattractive they would be security and corruption. Those two factors alone can undermine all other efforts that might be made to make a country more attractive. Companies are not willing to risk the lives of their employees because an environment is unsafe; nor are they willing to waste scarce resources lining the pockets of corrupt bureaucrats. Participant quotes drawn from the study are particularly telling. On these two subjects, one participant said, "[Africa is] dangerous in terms of political and economic stability and dangerous also from a personal security point of view, whether it is related to criminality or diseases.”

The report looks to be a valuable addition to the literature of development. Whether it is read by the right people (i.e., African political leaders) and whether they do anything as a result remains to be seen. Since part two of the study will contain interviews and responses to part one of the study, one assumes that many African leaders will get a chance to read and digest the report. Since I have been working with the U.S. Chamber of Commerce in Iraq as co-chair of its Iraq Initiative and as co-chair of its Kurdistan Region of Iraq Investment Task Force, I know that the Chamber's leaders are not starry-eyed idealists who believe that the results of a single study will magically make things better in Africa. On the other hand, they are not the type of leaders who see a bad situation and avoid dealing with it. The study is a good first step towards helping African leaders understand that they need to take seriously the opinions of business leaders who could provide their countries with investment capital. Without such investments, African leaders will never be able to foster a sustainable middle class that can serve as the foundation of further development. If African leaders respond positively to the report's findings, they can help their countries move up on the World Bank's Doing Business Index. When they achieve scores as high as countries that do attract FDI, they will know that they are on the cusp of a brighter future.

Philanthropy and Development in Emerging Markets

Philanthropy and development are two subjects about which I often write. Both are difficult enterprises to maintain during economically hard times. Difficult times will pass, however, and when they do we need to be ready to push forward efforts aimed at improving the lives of those living at the bottom of the economic pyramid. In a book reviewed by Helen Waters, editor for BusinessWeek.com's Innovation and Design Channel, Jacqueline Novogratz "explains how the most well-intentioned aid efforts often fail, and the slow and steady approach works best" ["Philanthropy and Development in Emerging Markets," BusinessWeek, 2 March 2009]. Novogratz' book, entitled The Blue Sweater: Bridging the Gap Between Rich and Poor in an Interconnected World, provides, according to Waters, "valuable lessons in social entrepreneurship and philanthropy." Waters, however, also laments that Novogratz spends the last-third of the book making "a pitch for the author's nonprofit fund." Waters begins her review this way:

"There really is a blue sweater in Jacqueline Novogratz's book of the same name. It was a treasured piece of clothing she wore constantly from the minute she got it in middle school until a few years later, when some classmates commented on how snugly it fit the now-adolescent Novogratz. The teenager unceremoniously stuffed the well-worn garment into the nearest recycling bin, never to be seen again. Or so she thought. Years later, Novogratz saw her blue sweater again. This time the stretched, misshapen top—with her name tag still on the inside collar—was being worn by a young boy she spotted on a street in Kigali, Rwanda."

That sounds almost too fanciful to be true. But Novogratz insists that it actually happened. The sweater's journey from Alexandria, VA, to Kigali would probably make fascinating reading in and of itself, but Novogratz's book is not about the sweater's journey it's about how truly connected the world now is. That connectivity means that suffering at the bottom of the pyramid should matter to those at the top. Novogratz is chairman and chief executive of Acumen, a non-profit venture capital fund she founded in New York in 2001. A non-profit venture capital fund sounds like an oxymoron. Most VC firms are out to make big profits for the investors providing the capital. Novogratz would like to see the ventures Acumen backs also do well, but the profits are used to back further ventures. Before founding Acumen, Novogratz worked in the credit audit department at Chase Manhattan, then worked at the African Development Bank, and then worked at the Rockefeller Foundation. These jobs provided her with unique exposure to both the world of finance and the world of philanthropy. According BusinessWeek's snapshot of the company:

"Acumen Fund is a venture capital firm specializing in direct equity investments, debt, guarantees, quasi-equity, and lab investments. The firm seeks to invest in critical and affordable goods and services. It primarily invests in water, healthcare, energy, and housing. It prefers to invest in India, East and South Africa, and Pakistan. The firm typically invests between $0.3 million and $2 million in equity or debt with an exit period ranging from five to seven years. It seeks to invest in business models that can be effective in reaching the billions of poor without access to clean water, reliable health services, or formal housing options. The firm primarily invests in non-profit organizations, small and medium for-profit companies in need of capital, and larger companies that are starting specific business units to serve the poor. The firm typically holds minority stakes in equity investments and prefers a board seat in its portfolio companies. Acumen Fund was founded on April 1, 2001 and is based in New York, New York with additional offices in Hyderabad, India; Nairobi, Kenya; and Karachi, Pakistan."

To find out more about Acumen and how you can get involved go to http://www.acumenfund.org/. Back to the book. According to Waters, the book is "a pointed critique of conventional thinking about philanthropy and economic development in emerging markets." Novogratz "is no starry-eyed idealist," Waters writes. "Her stories of working with some of the world's poorest people back her case for a pragmatic, enterprise-based approach to solving poverty. And she is blunt in her analysis that the most well-intentioned aid efforts often fail." I was drawn to the book review because Enterra Solutions' Development-in-a-Box™ is also an "enterprise-based approach" -- just not a non-profit one. However, I agree with Novogratz that such an approach is much better than traditional aid programs because enterprises create jobs and jobs create a viable middle class and a viable middle class promotes a better quality of life and more open government. Waters notes that criticizing past approaches is "a delicate issue." And she's right.

"After all, kind-hearted people don't like to hear that they are perpetuating poverty, not relieving it. But too often, Novogratz writes, that's all that happens. Instead of focusing on passing out grants and donations, she argues that charities and philanthropists should be empowering local entrepreneurs to take risks and responsibility, like Acumen does. The poor should be able to borrow what they can, make investments on their own within a market context, and succeed or fail on their own."

The strongest message I deliver to leaders of developing countries is that they need to create the conditions that fosters entrepreneurship. There is an optimism -- a hope for a better future -- that spreads throughout a society when it is touched by the hands of successful entrepreneurs. "For Novogratz, success lies not in stacks of cash, but in maintaining a slow and steady approach to investment. She believes that building long-term value outweighs short-term gains." I couldn't agree more. The hardest part of such an approach is managing expectations. If those being helped can see the big picture and understand why success is not normally achieved overnight, then hard work and a steady hand can achieve sustainable development. Waters concludes her review this way:

"The lessons are compelling, but much of the power of The Blue Sweater comes from Novogratz herself. She's often entertaining, recounting the tale of an impromptu dance-off with women after her car broke down in a rainstorm. At the same time, she can be a brutal self-critic, particularly as she describes stepping away from her American upbringing to learn the culture and way of life in Africa. At times, her tales are upsetting. She tells of visiting post-genocide Rwanda in 1997, looking to track down the initial supporters of one of her first ventures, a microfinancing organization called Duterimbere. Her account about trekking to a remote jail to talk with one of the women, imprisoned for helping to instigate the genocide, is matter-of-fact and yet astonishingly personal. Her confusion at meeting Agnes, a woman who had worked so hard to elevate the lives of so many women and yet had also committed inhuman acts of atrocity, is palpable and unresolved. It's a reminder that people are complex and contradictory, and also that real people are at the heart of economic statistics. For Novogratz, that's the most important story of all."

Too often people think about business in terms of money, when they would be better off thinking about business in terms of people. If people are successful, then businesses will be successful. The more people who achieve success the better the business environment. Businesses create jobs and jobs provide livelihoods. Novogratz understands the personal dimension of business as well as business' pragmatic side. Aid is still essential for meeting some needs, especially in time of crisis; but development is all about creating jobs, which means supporting promising businesses. Supporting bad businesses is like drilling dry wells. Novogratz understands that a country's future rest in the establishment of successful businesses. That, too, is the goal of Development-in-a-Box™. At Enterra Solutions, expend a lot of thought and effort doing due diligence to find and promote businesses that have the best chance of succeeding in the circumstances in which they must operate. We also work with governments of developing nations to improve those circumstances. Done right, philanthropy and enterprise-based development are complementary, not conflicting, activities. Both have the same objective -- improve the lives of those living in poverty. Without philanthropy and social programs that establish base conditions that support a healthy business environment, enterprises can't thrive and investors can't be attracted. In an ideal world, philanthropists and governments till the fields and plant the seeds and entrepreneurs come along to help them reap the harvests and sustain the momentum needed to improve societies.

India's Three E's: Entrepreneurs, Economics, & Education

In a recent post about Indian entrepreneurs [Entrepreneurs in India], I focused on a number of entrepreneurial enterprises that are receiving international attention. Almost daily, Indian entrepreneurs continue to draw attention. An article in The Economist declares that "the rich world’s bloated health-care systems can learn from India’s entrepreneurs" ["Lessons from a frugal innovator," 18 April 2009 print issue]. The article begins in the operating room of an Indian hospital where a patient lies wide awake and chatting while his doctors open his chest and operate on his heart. This "beating heart -- awake surgery" is the brainchild of Dr. Vivek Jawali. Dr. Jawali informs readers that his innovative surgery was rejected (even ridiculed) by his Western colleagues; but the technique has proven cost and health effective. Because the "surgery causes little pain and does not require general anaesthesia or blood thinners, patients are back on their feet much faster than usual." In fact, it "has proved so safe and successful that medical tourists come to Bangalore from all over the world." Dr. Jawali believes that health care innovations are likely to continue to flow from developing countries because the needs are great, the resources are limited, and the culture is open.

"Poverty, geography and poor infrastructure mean that India faces perhaps the world’s heaviest disease burden, ranging from infectious diseases, the traditional scourge of the poor, to diseases of affluence such as diabetes and hypertension. The public sector has been overwhelmed, which is not surprising considering how little India’s government spends on health as a share of national income. Accordingly, nearly four-fifths of all health services are supplied by private firms and charities—a higher share than in any other big country. ... This has attracted a wave of investment from some of India’s biggest corporate groups, including Ranbaxy (the generic-drugs pioneer behind Fortis) and Reliance (one of India’s biggest conglomerates). The happy collision of need and greed has produced a cauldron of innovation, as Indian entrepreneurs have devised new business models. Some just set out to do things cheaply, but others are more radical, and have helped India leapfrog the rich world."

While entrepreneurs continue to do well in India, its general economy is being racked by the current recession. One of the biggest challenges is a lack of investment money. Unlike the health care sector that has continued to attract funding, most sectors are starving for capital ["India, Suddenly Starved for Investment," by Vikas Bajaj and Somini Sengupta, New York Times, 4 May 2009].

"Not long ago, Indian leaders confidently predicted this country would emerge largely unscathed from the global economic crisis. It is now becoming clear that that view was too optimistic. ... India’s phenomenal growth of the last five years was powered in large part by huge injections of cash and investment. Investment accounted for about 39 percent of the country’s gross domestic product in fiscal year 2008, up from 25 percent five years ago. At its peak, more than a third of investment came from abroad, according to Credit Suisse. But in the last three months of last year, foreign loans and direct investment fell by nearly a third, to their lowest level in more than two years."

The sectors affected most by the decline in foreign investment, report Bajaj and Sengupta, are real estate, manufacturing, and infrastructure. Although the economy is still growing, thanks to domestic consumerism (particularly in the countryside), India's economic growth rate has slipped to around 5.3 percent, the lowest in five years. Without continued flows of foreign direct investment, India's economy will have a difficult time heating up and that "will make it harder for the country to grow fast enough to pull hundreds of millions of people out of stifling poverty." The export sector in India has been hit particularly hard, "diamond polishing units and knitwear factories, for instance, are running at a fraction of their capacity." And unemployment, always a problem for the poor, has now started affecting the affluent. "Not so long ago, as a lot of money chased a small pool of skilled professionals, salaries skyrocketed. Now, it’s the other way around."

Part of the problem is that India's education system is not churning out students with the right skills ["In India, Educated but Unemployable Youths," by Rama Lakshmi, Washington Post, 4 May 2009]. Every year Indian colleges graduate 3.2 million students. However, only "25 percent of technical graduates and 15 percent of other graduates can be readily employed in the jobs that the recent boom has generated in the telecommunications, banking, retail, health care and information technology sectors." The article indicates that about 69 percent of India's unemployed workers are educated but lack the necessary skills to land a job. As bad as things are, they can get worse.

"The problem is compounded by demographic changes that experts say will greatly expand the country's working-age population in coming years. Today, about 54 percent of Indians are younger than 30. Census projections suggest that the proportion of Indians in the 15-to-64 age group will increase steadily, from 62.9 percent in 2006 to 68.4 percent in 2026. By 2020, the average age in India is expected to be 31, compared with 37 in China and 48 in Japan. Census reports say that India is entering the advantageous 'demographic dividend' phase just as China leaves it. In a report last year, however, the Finance Ministry said that if that growing workforce does not develop skills soon, the country could face 'a demographic nightmare': a surplus of educated people and a shortage of qualified workers as labor requirements continue to shift from agriculture to industry."

Even today some jobs are available but qualified candidates are not.

"Every year, India produces about 650,000 engineers. But Pratik Kumar, executive vice president for human resources at the information-technology and outsourcing giant Wipro, says his company considers fewer than a quarter of them employable. 'The biggest problem is the poor quality of teachers,' he said. 'The teaching profession is unable to attract good talent. It is often the last resort for people who could not make it elsewhere.' In the past three years, Wipro has created several funds to finance grants, research scholarships and sabbaticals for teachers in engineering schools. 'This is not philanthropy,' Kumar said. 'If we don't do this now, it will hinder the future growth of our industry.'"

In my discussions about Development-in-a-Box™, I always raise the issue of education and training. As Bajaj and Sengupta note in their article, companies are looking for workers that are both educated and skilled. Education and training programs must be tailored to jobs. If educated youth can't find jobs, they become a very disenchanted group with enough energy to cause tremendous social unrest. Such instability is a sure way to undermine sustainable development. India faces a unique cultural challenge because its upper, educated classes eschew the notion that they must acquire skills, not just an education. Skills, they believe, are something needed by the lower classes. The government, however, is embarking on a campaign to convince all young people that "skills" are the currency of globalization. They are the key to steady employment and a better life. There's a lesson here for every country in the world -- skilled workers continue to have value.

Fine African Coffee

When one hears the term "sub-Saharan Africa," the first things that normally jump into one's mind are poverty, corruption, and conflict. Probably the last thing that one thinks about is upscale food products. McDonald's demonstrated that reputations can change. Historically, McDonalds was a food chain known for its hamburgers and chicken nuggets. Recently, it boosted its reputation and its profits by serving upscale coffee. Sub-Saharan Africa is hoping that it can boost its reputation by producing gourmet coffee beans for global consumption. A California-based company, Peet's Coffee & Tea, is trying to help "develop a vibrant coffee industry in sub-Saharan Africa" ["Into Africa: Capitalism from the Ground Up," by Steve Hamm, BusinessWeek, 4 May 2009 print issue]. Peet's is partnering with TechnoServe, a Norwalk, Connecticut, non-profit organization, to further The Coffee Initiative, a program that receives funding from the Bill & Melinda Gates Foundation. The goal of the Initiative is "to double the income of poor coffee farmers in Kenya, Rwanda, Tanzania, and Uganda by linking their products with coffee lovers in the developed world." Hamm writes:

"TechnoServe helps farmers improve the cultivation, processing, and marketing of gourmet coffee. Peet's is working to develop a special blend of these coffees that will be sold online and in its 191 cafés starting this summer. Moayyad says the motivation is to nurture new sources of great coffee and help farmers. 'If they produce a high-quality product,' she says, 'we'll pay more for it.' The company, which recorded $284 million in sales last year, hopes its efforts in Africa will be a brand-burnisher, too."

The Coffee Initiative is part of the social enterprise movement that involves companies that want to make a profit while concomitantly doing good.

"Peet's initiative underscores the difficulties in getting them off the ground. In Rwanda, which has 450,000 family coffee farms, Peet's has had to contend with a frayed infrastructure, a shortage of money to pay for fertilizer, and suppliers who have little experience in dealing with quality control. 'You have to be willing to plant some seeds and wait a few years,' says Chief Executive Patrick J. O'Dea. The Rwanda project differs from the company's usual purchasing efforts in several respects. Instead of dealing with sophisticated suppliers, it's setting up shop in a war-ravaged nation that exported just $47 million worth of coffee last year. While U.S. companies have long bought food from poor countries, few have made it a stated goal to boost the economic fortunes of producers in those markets. If Peet's is going to make the positive impact of its coffee a key selling point, it has to make sure the impact is real. TechnoServe, which is working with other roasters such as Starbucks and Green Mountain Coffee Roasters, expects 5 million farmers and family members will eventually benefit from its program."

The Initiative uses many of the principles embodied in Enterra Solutions' Development-in-a-Box™ framework. It is based on standards (the coffee beans have to meet a certain level of quality) and it is taking a holistic view of the coffee industry (from planting the right seeds to getting the product efficiently to market). Farmers will benefit from the Initiative, but so will everyone who uses the infrastructure that is developed to support the coffee supply chain. Some studies have shown that for every job one creates in the agricultural sector, another job is created in a supporting sector (like transportation or food processing). That's important because jobs are needed to foster a middle class and a middle class is essential for ensuring sustainable economic growth. Without a stable middle class, no developing country can hope to diversify its economy. Hamm describes the "perilous journey" that Peet's Coffee & Tea has had to make in order to pursue its part of The Coffee Initiative.

"Doing business with African farmer cooperatives hasn't been easy. To start, there's no local market for coffee, as few Rwandans drink it. ... Some farmers had never tasted coffee and reacted as if they had bitten into a lemon [when they tried it]. He had to teach them the hallmarks of a top bean. ... Because of bad roads and delays at border crossings, it took 12 days for a truck with a container full of green coffee beans to travel 1,000 miles to the Kenyan port of Mombasa. The sea journey from Mombasa took nearly two months. Worse, when the shipment arrived in Oakland, Calif., in late February, a portion of the coffee was slightly damaged. ... Coffee companies have run into trouble in Africa in the past. Starbucks wrestled with Ethiopia over the use of the country's name on its products. But fair trade advocates say TechnoServe's partners are on the right track. 'It's good corporate citizenship, but it's also enlightened self-interest. They have to bring the farmers along so they have enough quality coffee,' says Seth Petchers, who ran a campaign against Starbucks for Oxfam International. For the efforts in Rwanda to pay off, Peet's needs to see more high-quality coffee produced. Last year's purchase amounted to just 8 metric tons of beans, a mere drop in its annual consumption of beans."

Profits can't be made when dealing with a small amount of product that takes nearly three months to travel thousands of miles to the manufacturer. More product means more jobs. More efficient supply lines mean better infrastructure. More jobs and better infrastructure result in a better quality of life as well as improved chances of attracting additional foreign direct investment. It's a virtuous cycle and it's the reason that the Bill & Melinda Gates Foundation is willing to fund the Initiative. The governments of the targeted nations must also do their part. Kenya, Rwanda, Tanzania, and Uganda aren't normally pointed to as examples of good governance -- although Rwanda has made some noted improvements (see my post entitled Update on Rwanda's Women). Economic growth requires close cooperation (even partnership) between the government and private sectors. The Coffee Initiative is just getting off the ground. It will take some years before we know whether its goal has been achieved. Who knows? In the future, you might just be waking up to coffee grown on the lush hillsides of Rwanda and be willing to pay a premium for it.

Business in Iran

I've noted before that, during my travels to Iraq, Iranian businessmen have approached me about doing business. I've explained to them the political realities of relations between the United States and Iran, but have assured them that should conditions ever improve I'd be happy to work with them. These Iranian businessmen are eager to do business and I've found them very open and friendly towards America. Most articles I read about Iran indicate that the positions of the people and the positions of the government vary greatly. An article in BusinessWeek reinforces these perceptions ["In Iran, Business Awaits a Thaw," by Stanley Reed, 4 May 2009 print issue]. It's no secret that the United States would like to see a new president elected in Iran. Mahmoud Ahmadinejad, Iran's current president, continues to embarrass Iran on the international stage (like he did at the UN Conference on Human Rights) and his continued presence represents a stumbling block to better relations between the U.S. and Iran. However, he still seems to have the support of the Supreme Leader Ali Khamenei and that may be enough to keep Ahmadinejad in office following presidential elections in June.

Ahmadinejad's probable opponent in that election will be former Prime Minister Mir Hossein Moussavi. Reed reports that Moussavi favors negotiations with the U.S. and, if elected, may be able to pursue discussions because the Supreme Leader has also indicated a willingness to talk. Reed writes:

"Most Iranian executives seem to be rooting for Moussavi. Although he is an old-guard leftist, businesspeople hope he would lead a reform-minded administration that could ease Iran's isolation. 'Ahmadinejad has done serious damage to Iran's reputation and the reputation of Iranian business,' says Mohammad Reza Behzadian, a former head of the Tehran Chamber of Commerce who runs Tondar Middle East, a trading company in Tehran."

A thawing of relations with the U.S. could herald great things for Iran because it is not your average developing country. Iran "has 66 million people, good schools, and a diversified industrial base—with a pent-up appetite for computers, planes, aircraft parts, and knowhow for the crucial oil and gas industry." Reed also reports that "many Iranians like the prospect of working with U.S. companies rather than the Europeans that have been the only game in recent years." That is certainly the impression I've taken away from my discussions with Iranian businessmen. As we all know, the 1979 revolution in Iran ousted a tight-fisted dictator but it also thrust Iran into the past and tore apart its social structure. Many of the gains made during the Shah's harsh reign were overturned. Reed reports, however, that progress is again being made. "Mobile telephones from other countries finally work," he writes, "and several private hotels have sprung up. Since the 1979 revolution, social life has never been more liberal. Boys and girls hold hands in public, women show some hair outside their scarves, and checkpoints where police once searched cars for alcohol have all but disappeared." Fear, however, has not altogether disappeared.

Then, of course, there is the nuclear issue and the April 18, 2009, "sentencing of Iranian-American journalist Roxana Saberi to eight years in prison on what seem to be trumped-up charges of spying for Washington." Reed understands that these are large challenges that must be successfully addressed before it is "business as usual" between the U.S. and Iran. "But," he claims, "there may be openings for cooperation and confidence-building on Afghanistan, where both Tehran and Washington deplore Taliban influence, and on Iraq, where Iran's help could ease a U.S. withdrawal." For more about the state of things in Iran, read my posts entitled Iran and the Bomb and Iran and the Future.

Iranian business people know that a thaw in relations with America would brighten their futures considerably. Reed continues:

"Facing pressure from Washington, major European banks have stopped doing business in the country. So Iranians must pay exorbitant rates for trade financing from second- and third-tier banks in Europe, the Middle East, and Asia. Some Iranians work around the restrictions by setting up subsidiaries in the United Arab Emirates and playing cat-and-mouse with American inspectors. But such solutions are expensive, adding billions of dollars to Iran's soaring import bill—$57 billion for the year that ended in March. ... Sanctions also restrict the development of Iran's vital energy reserves. Tehran wants to boost oil production capacity by 25%, to 5 million barrels a day, but with little foreign help and aging fields in rapid decline, it's tough even to maintain current output. That's one reason Iranian oil officials are quick to say they want American help."

American businesses would also benefit from thawing relations. Foreign direct investments in Iran are likely to be safer and yield higher returns than in other developing countries. Reed provides an example of a European company that has managed to do business in Iran.

"Even with sanctions in place, savvy foreigners have managed to make a mark in Iran—though it takes persistence. Renault, for instance, has a $200 million joint venture to build the Logan compact. But late payments from the Iranians and difficulties training enough suppliers to meet a requirement of 60% local content have slowed progress, Renault says. The venture, Renault Pars, has cut its output target for the Logan by 25%, to 150,000 cars per year."

Perhaps the most difficult challenge to manage once relations are (if ever) normalized between the U.S. and Iran will be rising expectations. Iranian citizens have waited three decades for things to get better and they are getting restless. They want a brighter future now and the full benefits of development simply don't accrue as quickly as people might like. If the thaw comes and expectations can be managed, I predict that Iran has very bright future indeed. That future could start with elections in June.