Enterprise Resilience Management Blog

Globalization and Economic Stability

In two previous posts, I examined articles that discussed two different aspects of globalization: capital flows [Financial Globalization] and the agricultural sector [Globalization, Food, and Resilience]. The post about financial globalization was about studies that question whether the free flow of capital (one of the three legs that prop up the globalization stool) is really good for developing countries. Those raising the questions note that "when investment opportunities are scarce, capital inflows simply displace domestic savings and encourage consumption." They also note that countries that tie their currencies to another currency (like the dollar) inevitably track the economic gains or woes of the economy to which their money is pegged. The rapid devaluation of the dollar has had a significant negative effect on many such economies. Their point was that dumb policies (like a lack of regulation in critical economic sectors) as well as poor savings and spending habits can generate ripple effects throughout the global economy -- especially when the economy that causes the perturbation is as large as the United States.

In the post about the agricultural sector, Anthony Faiola of the Washington Post examined why globalization hadn't made agricultural products more widely available around the globe and kept down the prices of food. One of the reasons, of course, is that there is no free flow of agricultural products as a result of food subsidies and hoarding. The point of these posts was to show that globalization is not the culprit that causes bad things to happen. Bad things happen when people do dumb things. Globalization takes the rap when those same people go looking for a scapegoat. Washington Post columnist Robert J. Samuelson examines the current global economy and wonders why globalization hasn't helped stabilize it ["A Baffling Global Economy," 16 July 2008]. He writes:

"We've been having the wrong discussion about globalization. For years, we've argued over whether this or that industry and its workers might suffer from imports and whether the social costs were worth the economic gains from foreign products, technologies and investments. By and large, the answer has been yes. But the harder questions, I think, lie elsewhere. Is an increasingly interconnected world economy basically stable? Or does it generate periodic crises that harm everyone and spawn international conflict?"

Those are excellent questions. Just as sound is transmitted faster through a solid substance than through the air, bad economic effects spread faster through the international economy the denser the economic connections. On the other hand, benefits spread faster as well. As a result, stability becomes more important with each new economy that joins the global economy. Samuelson continues:

"These questions go to the core of a great puzzle: the yawning gap between the U.S. economy's actual performance (poor, but not horrific) and mass psychology (almost horrific). June's unemployment rate of 5.5 percent, though up from 4.4 percent in early 2007, barely exceeds the average of 5.4 percent since 1990. Contrast that with consumer confidence, as measured by the Reuters-University of Michigan survey. It's at the lowest point since 1952 with two exceptions (April and May 1980). Granted, the present U.S. economic slowdown -- maybe already a recession -- stems mostly from familiar domestic causes, dominated by the burst housing 'bubble.' The Bush administration's rescue of Fannie Mae and Freddie Mac, the struggling government-sponsored housing enterprises, is the latest reminder. Still, global factors, notably high oil and food prices, have aggravated the slump. The line between what's local and what's global seems increasingly blurred, and there is a general anxiety that we are in the grip of mysterious worldwide forces."

I suspect the rest of the world would argue that the global economy is in the grip of bad choices made in America -- not so mysterious at all. Samuelson doesn't really address that point. Instead, he goes on to examine whether fingers can or should be pointed at the usual suspect -- globalization.

"The good that globalization has done is hard to dispute. Trade-driven economic growth and technology transfer have alleviated much human misery. If present economic trends continue (a big "if"), the worldwide middle class will expand by 2 billion by 2030, estimates a Goldman Sachs study. (Goldman's definition of middle class: people with incomes from $6,000 to $30,000.) In the United States, imports and foreign competition have raised incomes by 10 percent since World War II, some studies suggest. Job losses, though real, are often exaggerated. But a disorderly global economy could reverse these advances. By disorderly I mean an economy plagued by financial crises, interruptions of crucial supplies (oil, obviously), trade wars or violent business cycles. This is globalization's Achilles' heel. Connections among countries have deepened and become more contradictory. Take oil producers. On one hand, high oil prices hurt advanced countries. But on the other, oil countries have an interest in keeping advanced countries prosperous, because that's where much surplus oil wealth is invested."

Samuelson goes on to note that the current situation involves the greatest redistribution of wealth in the world's history.

"Vast global flows of money threaten unintended side effects. Foreigners own more than $1 trillion of debt issued or guaranteed by Fannie Mae and Freddie Mac, reports economist Harm Bandholz of UniCredit. In the past six years, he notes, foreigners have purchased $5.7 trillion of U.S. stocks and bonds. Bandholz says the inflow of money cut U.S. interest rates by 0.75 percentage points. So: Surplus savings from Asia and the Middle East, funneled into U.S. financial markets, may have abetted the 'subprime' mortgage crisis by encouraging sloppy American credit practices. Too much money chased too few good investment opportunities."

That is basically the argument put forth in the post about financial globalization noted above. The solution, of course, is common sense investing. There are many such investments around the world, especially in emerging market countries -- and they could use the funds. Unfortunately, they don't have the cachet of an investment in the U.S. The problem, as Samuelson points out, is that when people lose money investing in the U.S. the negative consequences can be severe.

"A loss of confidence in U.S. financial markets could be calamitous; that was one reason for the rescue of Fannie and Freddie. But just possibly, we're at a crucial -- and desirable -- turning point. For several decades, the U.S. economy has been the world's economic locomotive. Americans borrowed and shopped; the U.S. trade deficit ballooned to $759 billion in 2006, stimulating exports from other countries. The trouble is that this pattern of growth could not continue indefinitely, because it required that Americans raise their debt burdens indefinitely. Now, China and other emerging markets may be moving beyond export-led growth. Unfortunately, that shift could abort, if high inflation (8 percent in China and India) derails domestic expansion."

America needs to retool its economy. There will be some short-term pain, but if it emerges from the transformation with a higher savings rate, lower per capita debt rate, and jobs being created in new economic sectors, the pain will soon pass. Samuelson, however, writes that those who must instigate this transformation seem to be lost at sea.

"Today's global economy baffles experts -- corporate executives, bankers, economists -- as much as it puzzles ordinary people. Countries are growing economically more interdependent and politically more nationalistic. This is a combustible combination. The old global economy had few power centers (the United States, Europe, Japan), was defined mainly by trade and was committed to the dollar as the central currency. Its major countries shared democratic values and alliances. Today's global economy has many power centers (including China, Saudi Arabia and Russia), is also defined by finance and is exploring currency alternatives to the dollar. Major trading nations now lack common political values and alliances."

One had to be deaf, blind, and dumb not to have understood that America's consumer economy would eventually run out of steam if it continued to be fueled by credit. Fortunately, the new centers of power hold so many petro-dollars and so much U.S. debt that they have a vested interest in helping ensure that the U.S. economy doesn't collapse. Clearly, the U.S. can use the help. That's where globalization plays a role.

"It is no more possible to undo globalization than it was possible, in the 19th century, to undo the Industrial Revolution. But our understanding of international markets, shaped by impersonal economic forces and explicit political decisions, is poor. Countries try to maximize their advantages rather than make the system work for everyone. Considering how much could go wrong, the record is so far remarkably favorable. Alas, that's no guarantee for the future."

Samuelson hit the nail on the head when he implied that the answer to the current financial downturn is making the system work for everyone. Unfortunately, U.S. politicians on both sides of the congressional aisle are appealing to base nationalism in their attempts to get elected. This "America first" mindset will ultimately result in an "America last" outcome. America's fate rests in cooperating and collaborating with the rest of the world. The sooner this is understood, the sooner solutions for many of the challenges raised by Samuelson can be addressed.

Colombia Embraces Globalization

If you haven't paid particularly close attention to events in Colombia over the past few years, you might be surprised about the current state of things there. Colombia is probably most famous over the past 50 years as being at the heart of the global cocaine trade and for the infamous Medellin drug cartel headed by Pablo Escobar. That has all changed according to Anthony Faiola ["Sustaining the Medellin Miracle," Washington Post, 11 July 2008]. Faiola writes:

"This labyrinthine metropolis [Medellin] transformed over the course of a decade from a battlefield of drug lords, paramilitaries and leftist guerrillas into one of the safest, most dynamic cities in Latin America. Visionary inner-city renewal projects and a push to take back the lawless hillside slums by force deserve credit, but many here hail an unsung hero in Medellin's urban miracle -- globalization."

Many Americans may think that the most important recent export from Medellin is hunky professional golfer Camilo Villegas, but they would be wrong.

"Exports surged in the 1990s as the United States granted temporary trade preferences to Colombia, allowing many of its products to enter the world's largest market duty-free. They really took off after 2002, when Washington expanded that agreement to include Colombia's all-important textile sector. Humming assembly lines making Ralph Lauren socks and Levi's jeans sprang up across this picturesque Andean valley, creating tens of thousands of jobs and turning Medellin into a model of the curative power of liberalized trade."

Faiola reports that the "curative power of liberalized trade" is not a "cure all" and does not continue to work without effort and constant adaptation. In a previous post [Looking for Jobs that Last], I focused on an article that described the challenges faced by Slovakia, a country that experienced an economic miracle similar that being described by Faiola in Colombia. Slovakia found out that as globalization continues to bring millions out of poverty it also increases global competition and changes the competitive landscape. Colombia, according to Faiola, is now learning that same lesson.

"The renaissance of a city ... is entering a period of uncertainty that illustrates just how fragile such gains can be. The city's export industry has begun to slip backward, officials here say. It happens as Colombia and many developing nations are struggling to maintain their edge in the increasingly competitive world of global trade. Inside the three sprawling factories of Crystal, a major textile maker here, the workforce doubled to 11,000 between 2001 to 2006 as the company's U.S. sales surged. But following several local apparel makers, it has eliminated hundreds of jobs as contracts have dried up over the past 18 months. The weakening dollar, which has shed almost 40 percent of its value against the Colombian peso in two years, has made it even harder to compete with cheaper production costs in China, where officials in Beijing are managing the exchange rate, cushioning the dollar's fall to help Chinese exporters. Since 2005, Colombia's textile and apparel exports to the United States dived 30.8 percent while China's soared by 44.3 percent. Colombia is also up against a resurgent global backlash to free trade -- including in the United States, the country that had spent the past two decades cajoling Latin America to open its markets."

A free trade agreement between the U.S. and Colombia, which would make the current trade preferences permanent while allowing most U.S. products to enter Colombia duty-free, is being held up in Congress (as well as being caught up in presidential politics). Nevertheless, Colombia has not been soured by globalization.

"Colombia remains a vocal proponent of free trade at a time when the loudest voices in the region are against it. In neighboring Venezuela, Colombia's second-largest trading partner, President Hugo Chavez is shifting the country toward socialism, nationalizing industries and barring the doors to free trade. He has signaled Venezuela's intent to pull out of a regional trading bloc that includes Colombia and has sharply reduced quotas on Colombian-made cars. In recent months, that decision has forced Sofasa, a leading automaker in Medellin, to reduce shifts and lay off 600 workers. Companies say doubts about Colombia's future trading relationship with the United States have been a factor in a recent flow of jobs from Medellin into Central America, where a bloc of nations sealed a free trade agreement with the United States in 2006."

It is almost unimaginable that the United States, a country that led the free world in its struggle to preserve democracy and free markets during the Cold War, is now expressing doubts about the benefits of the market economy. With a potentially new ideological battle brewing in South America, it may be time for the U.S. to remember the dark days of the Cold War when our relationships with Latin America included supporting tyrants with large sums of money and weapons. Chavez's policies are already starting to lose their attraction in Venezuela. He has even publicly called on FARC revolutionaries fighting the Colombian government (a group he has supported both vocally and monetarily) to reconsider its fight. Helping Colombia demonstrate the value of globalization and free markets could ensure that ideological conflicts in Latin America are minimized in the future. Such an outcome is surely in America's best interests. With economic conditions in the U.S. sliding in the wrong direction, however, it may be difficult to see the light at the end of the tunnel. Faiola provides a little history lesson on how Colombia got to where it is.

"On the eastern outskirts of Medellin, the emerald foothills of the Andes give way to acres of blinding color. Expansive greenhouses filled with blooming purple pompons, yellow chrysanthemums and white lilies carpet the dark earth. This is how Colombia's export revolution began -- with flowers. In 1991, with Medellin's ghettos convulsing in cocaine wars and leftist guerrillas infiltrating the city, the U.S. government extended a lifeline to Colombia and other Andean countries plagued by drug violence. It granted them renewable 'trade preferences,' providing local manufacturers the right to sell their wares in the United States without paying tariffs. It gave Colombian flower exporters the competitive edge they needed to dominate the U.S. market. Today, Colombian flowers make up roughly 90 percent of all those sold in the United States. Here, it created jobs -- jobs that some analysts argue are the kind that U.S. workers should be willing to give up in the era of globalization. These labor intensive and minimum wage jobs in the United States are often filled by undocumented immigrants, but in this region, they provide a lifeline for rural people. Many of the U.S. companies in California and Texas that once grew flowers adapted and evolved into suppliers and distributors of flowers grown here, where a single stem can be planted, irrigated, trimmed, cut and packaged for about $1."

As I noted in the post about Slovakia, countries that want to benefit from globalization must reconcile themselves to the reality that it fragments supply chains and sends jobs in all directions. U.S. floral companies that transformed themselves from being growers into suppliers and distributors understood the process and prospered as a result. In almost every sector, companies that will survive globalization are those that understand how to get in front of the money associated with supply chains. As those supply chains evolve, so must companies.

The jobs created in Medellin provided people a way out of poverty as well as a stake in the future. Cooperating with the government the people were able to regain control of their city. At one time, Medellin's streets seemed to flow with blood. Now they are safer and quieter than the streets of Washington, D.C. The transformation required both security and development. Faiola continues:

"A combination of factors produced that change. President Alvaro Uribe, Medellin's native son, came to power in 2002, shifting from Andres Pastrana's policy of dialogue to one of force. The Colombian military and local police stormed the most violent barrios of Medellin in armored vehicles and helicopters. In other neighborhoods, calm came as the drug gang headed by the notorious paramilitary leader Diego Fernando Murillo finally overpowered its rivals. Murillo was extradited to the United States with 12 other paramilitary chiefs in May. Around the same time, Sergio Fajardo, a mathematician with Bee Gees hair, became Medellin's mayor and launched his own campaign to renew the city. He rolled out social programs while building schools, police stations and 'library parks' celebrated for their architecture. Two cable cars systems were constructed, linking some of Medellin's toughest and most isolated slums with the city's expanding metro system. If those efforts became the bricks of Medellin's house of change, globalization was the mortar that helped keep them together, officials say."

I have long argued that security and development must go hand-in-hand for progress to be made. Medellin provides an excellent case study about how that can be done. The next challenge for Medellin and other successful emerging market regions is how to hold on to the gains they have made.

"Some of those gains [in Medellin] are slipping away. Over the past two years, Ralph Lauren closed a regional office in Medellin and one major jeans factory shut its doors, dismissing 2,500 workers. Crystal has shed 1,000 jobs -- or 10 percent of its workforce. Other textile makers have been forced to do the same, with the industry losing an estimated 10,000 jobs in total. As in many developing countries with manufacturing-based export industries, one huge problem is China. Colombia's average textile wage of $1.42 an hour is about double similar wages in China. Many here argue that the United States and Europe must pressure China more to revalue its currency, something Beijing has resisted. They are also pressing for a formal free trade agreement with the United States. An agreement would make permanent the duty-free access for most Colombian exports to the United States , while also granting U.S. products reciprocal status in Colombia t for the first time. The current preference agreement is subject to regular reviews and renewals by Congress. A vote in March approved those preferences through December, when a new vote will be required to extend them. The uncertainty, officials here say, is costing jobs and money. ... Although strongly backed by the Bush administration, an a free-trade pact with Colombia -- as well as other pending agreements with South Korea and Panama -- have been blocked by Democrats. Some are calling for a review of all future free trade agreements to assess their impact on U.S. workers."

Hopefully, cooler and wiser heads will prevail in Washington. America's best interests rely on a world that is both stable and growing economically. Colombian leaders have become true believers in free markets and keeping them in the fold is important both economically and for security reasons.

Reviving U.S. Manufacturing

In a recent post entitled "Development-in-a-Box™ at Home in America," I focused on an op-ed piece by Thomas Friedman. In that piece, he chided U.S. politicians for not embracing policies that fostered the "next great global industry — renewable energy and clean power." Their lack of vision and action, he lamented, meant that America was not taking advantage of an opportunity clearly ready to be exploited. In another New York Times' op-ed piece, former Democratic senator and presidential candidate Gary Hart called on his party's candidate, Barack Obama, to use the campaign to outline a new chapter for American politics ["America’s Next Chapter," 25 June 2008]. Hart argues that new political chapters are, historically, written about every three decades and that the time is ripe for a new one.

"Henry Adams believed that 'a period of about 12 years measured the beat of the pendulum' during the era of the founders. Schlesinger, borrowing from his historian father, estimated that the swings between eras of public action and those of private interest were nearer to 30 years. What matters more than the length of the cycles is that these swings, between what [Arthur] Schlesinger called periods of reform and periods of consolidation, clearly occur. If we somewhat arbitrarily fix the age of Franklin D. Roosevelt as 1932 to 1968 and the era of Ronald Reagan as 1968 to 2008, a new cycle of American political history — a cycle of reform — is due."

Hart, of course, hopes that his party's nominee wins the White House and implements a new era of reform. Never one to shy away from expressing his opinions Hart goes on to tell Obama what he believes are the themes that must form the basis of this new era.

"No individual can entirely determine the architecture of a historical cycle. But much of the next one will be defined by how we grapple with a host of new realities, ones that reach beyond jihadist terrorism. They include globalized markets; the expansion of the information revolution into places like China; the emergence of new world powers including India and China; climate deterioration; failing states; the changing nature of war; mass migrations; the proliferation of weapons of mass destruction; viral pandemics; and many more. Senator Obama's attempt to introduce the next American cycle should include, at minimum, three elements. National security requires a new, expanded, post-cold-war definition. America must transition from a consumer economy to a producing one. And the moral obligations of our stewardship of the planet must become paramount."

I was struck when I read that "America must transition from a consumer economy to a producing one." Hart doesn't make what he means entirely clear, but it sounds like he wants the U.S. to start manufacturing more things and stop buying them from overseas. One could argue, of course, that in the information age a service economy (as opposed to a manufacturing economy) does "produce" value. Nevertheless, I suspect Hart was referring to generating new manufacturing jobs -- some of which, I assume, would be in the renewable energy and clean power sector supported by Friedman. Hart's vision raises another question, however: Can the U.S. recapture its manufacturing base? Pete Engardio, writing in BusinessWeek, asks just such a question ["Can the U.S. Bring Jobs Back from China?" 30 June 2008 print edition]. His answer is "maybe." But he warns, "American industry may not be ready to seize the opportunity" even when it presents itself. He begins his article with the story of a New England battery developer who couldn't find a U.S. company to produce her batteries.

"Christina Lampe-Onnerud has a long-lasting, fast-charging battery for notebook computers that she believes will revolutionize the industry. Her company, Boston-Power, would like to make the batteries in the U.S., which she says is feasible despite high American wages. But Lampe-Onnerud has had trouble finding anyone in the U.S. even to make a prototype, let alone manufacture the battery in bulk. China, by contrast, is home to more than 200 battery manufacturers. On visits to the mainland, Lampe-Onnerud toured dozens of factories with ample staff and laboratories, and none wanted the millions of dollars up front that one contract manufacturer in the U.S. had demanded. She recalls a negotiating session last year that started at 9 a.m. and ended with a midnight dinner. Despite parting with 30 unresolved questions, 'at 9:00 the next morning, the entire management team was there with pressed white shirts and a PowerPoint presentation addressing every issue,' she says. 'That's how badly they wanted the business.' In six months, Boston-Power was ramping up production in a 400-worker factory in Shenzhen."

In the post I mentioned at the beginning of this blog, I indicated that I had observed the same thing about U.S. businesses and workers. They seem to have lost their competitive edge, especially when dealing with emerging economies. I argued that America needs to reinvigorate the culture of hard work and ambition that made it great in the first place. As Lampe-Onnerud found, there are plenty of people elsewhere in the world who still have those qualities and use them to their advantage. Engardio explains why this is a good time to consider increasing U.S. manufacturing.

"The economics of global trade are starting to tilt back in favor of the U.S. to a degree unseen in a generation. Since 2002 the dollar has plunged by 30% against major world currencies and is falling against the yuan. Wages in China are rising 10% to 15% a year. And spiking oil prices are driving up shipping rates. The cost of sending a 40-foot container from Shanghai to San Diego has soared by 150%, to $5,500, since 2000. If oil hits $200 a barrel, that could reach $10,000, projects Toronto financial-services firm CIBC World Markets. But as the experience of Boston-Power and countless companies like it shows, the map of global commerce can't be redrawn overnight. American factories and supplier networks in many industries have withered in the era of globalization, so it will take lots of time and capital before the U.S. can become a big player again. In electronics, for instance, there has been a mass migration of component makers to China in the past decade. Ditto for suppliers to Midwest heavy-equipment makers and North Carolina's furniture industry."

Engardio isn't naive enough to believe that the U.S. can recapture all of the manufacturing jobs that have gone elsewhere. He writes:

"The bulk of goods made in China—clothing, toys, small appliances, and the like—probably won't be coming back, because they require abundant cheap labor. If anything, their manufacture will go to other low-wage nations in Asia or Latin America. And in industries from machinery to motorbikes, China's productivity gains nearly offset rising wages and fuel prices."

So where does Engardio see opportunities?

"In areas where the U.S. is at the forefront of innovation—renewable energy, nano materials, solid-state lighting—the U.S. must compete with Asian and European nations willing to lavish entrepreneurs with start-up capital, cash grants, and cheap loans. Similar help may be needed to persuade U.S. companies to build capacity. The global industrial landscape certainly appears to be in the early stages of a realignment. The euro's breathtaking rise against the dollar has spurred European makers of cars, steel, aircraft, and more to shift production to the U.S. Now the soaring cost of fuel is making it pricier to send goods across the Pacific. Consider Japan's steel industry, which depends on imported iron ore and coal to create high-end metal for Japanese automakers in the U.S. In 2003 it cost $15 to ship a ton of iron ore costing $30 from Brazil to Japan. By last fall, while the ore had jumped to $80 per ton, shipping costs had risen to $90. Shipping of raw materials now accounts for 13% of the price of rolled steel used in car bodies, estimates CLSA Asia-Pacific Markets. The finished steel must then be sent to factories in the U.S., pumping up the price even further. Rising costs are starting to eat into what American managers fearfully call the China Price, the once-formidable 40% to 50% cost advantage enjoyed by Chinese manufacturers—and demanded by customers."

In another post [Looking for Jobs that Last], I wrote: "Countries that want to benefit from globalization must reconcile themselves to the reality that it fragments supply chains and sends jobs in all directions. As my colleague Tom Barnett puts it, 'Globalization integrates trade by disintegrating production chains and dispersing them across economies.' ... The fact is that the vast majority of global trade involves multinational corporations. If you want to get in front of that money you had better embrace them. Why? Not only are multinationals involved in the bulk of global trade, but half of that trade is intra-network trade -- meaning trade within industry sectors or within the multinational companies themselves. ... Understanding the supply chain is critical for understanding what types of job will last." Engardio is basically making the same point. As transportation costs rise, supply chain routes are likely to change and that provides companies with new opportunities.

"Examples of production shifts abound. Chinese steel exports to America are down 20% in the past year, notes CIBC, while U.S. steel output has jumped 10% despite the slowdown in construction. Big electronics manufacturers are expanding assembly of high-end telecommunications, computer, and medical equipment in Mexico and some parts of the U.S. for greater proximity to corporate buyers."

Engardio reports, however, that many U.S. industrial sectors have downsized so dramatically that they cannot easily gear back up for increased production.

"Look behind these examples, though, and obstacles to a broad manufacturing migration become clear. Iron castings maker Donsco, on the banks of the Susquehanna River in eastern Pennsylvania, illustrates the dilemma. In recent years, Donsco has laid off hundreds of workers as customers shifted production of gear boxes, oil rig parts, and much more to Chinese competitors. Now, Donsco says it's flooded with order inquiries from U.S.-based clients. 'All of a sudden our customers are saying, Whoops, it's cheaper to buy in our backyard,' says Donsco Chairman Art Mann Sr. While Donsco managed to keep its doors open, many of its U.S. rivals shut down, so there's now a shortage of capacity."

Engardio goes on to report that industries like Donsco are not rushing to increase capacity because the costs are high and so are the risks. The story, he writes, is same in industry after industry -- furniture, lighting fixtures, heavy equipment, and so on. The risks are high because increased capacity doesn't guarantee clients. Companies that have spent millions to move production to China and elsewhere aren't eager to spend millions more relocating back to the U.S. For its part, the Chinese are working hard to keep manufacturing jobs they have attracted.

"How has China been able to keep its edge in the face of soaring costs? One factor that's widely overlooked is rising productivity. For the past decade, U.S. manufacturing productivity growth has averaged 4.8%. That's impressive for an industrialized nation, and bodes well for U.S. industry when the economy recovers. But productivity at medium and large Chinese manufacturers—the backbone of country's export boom—has averaged nearly 19% over the same period, says Bart van Ark, chief economist at the Conference Board, a business research group. While American manufacturers have been tightening their belts, producers in China have been plowing money into bigger and more advanced facilities that are ahead of their U.S. counterparts. Douglas Bartlett, chairman of Bartlett Manufacturing, a Cary (Ill.) maker of high-end circuit boards used in defense and medical systems, doesn't see a big reversal in store. A decade ago the U.S. accounted for one-third of global circuit-board output. Today that's down to 10%, with China making 80%. Chinese boards are still 40% to 50% cheaper than the ones Bartlett makes in the U.S., in part because producers there have superior technology."

That is why any increase in U.S. manufacturing jobs is likely to come in emerging economic sectors rather than in more traditional sectors. Engardio concludes:

"The new cost equation likely will influence many decisions about where to locate production in the future. America remains the world's biggest manufacturer, after all, because it's still the largest market for everything from drugs and packaged foods to high-end medical equipment. The U.S. may have as good a chance as anyone of being a strong player in nascent industries, whether next-generation wind turbines, medical devices with nano-scale sensors, or electric cars. The challenge will be to persuade reluctant venture capitalists and corporations to invest again in modern U.S. production facilities."

He believes that government agencies can also play a role by providing seed capital to promising startups and by building industrial parks with low-cost facilities and services that rival those found in China. Friedman called that "nation-building at home" and I referred to it as Development-in-a-Box™ at home. Whatever you call it, America needs to build world-class facilities to support emerging economic sectors as well as reinvigorate the pioneer spirit that made American workers the most productive in the world.

Creating a Sustainable Future

Nearly two decades ago, MIT professor Peter Senge wrote a best-selling business book that introduced the notion of "learning organizations." [The Fifth Discipline, New York: Doubleday, 1990]. "As he describes it, a learning organization is one in which 'people continually expand their capacity to create the results they truly desire, where new and expansive patterns of thinking are nurtured, where collective aspiration is set free, and where people are continually learning to see the whole together.' Such organizations tend to be more flexible, adaptive, and productive—critical qualities in a time of rapid change." ["Peter Senge's Necessary Revolution," BusinessWeek online, 11 June 2008]  Almost every entrepreneur wants to create a company whose environment fosters innovation, its employees are self-motivated, and everyone understands and works toward a common goal. It's not as easy as it sounds, but it is critical for success. Senge has now directed his attention and intellect toward broader collaborative enterprises and has published the results in his new book The Necessary Revolution: How Individuals and Organizations Are Working Together to Create a Sustainable World (New York: Doubleday, 2008). According to the BusinessWeek article:

"Senge and his co-authors grapple with the daunting environmental problems we face, and highlight innovative steps taken by individuals and corporations, often in partnership with global organizations such as Oxfam, toward a more sustainable world."

The article, which is primarily excerpts from an interview with Senge, introduces Senge's reflections by noting how his first book relates to the second.

"It may seem surprising that an expert in management and organizational change is focusing on sustainability, but there is a strong connection to Senge's work. In his earlier book, he laid out an approach to management that combines systems thinking, collaboration, and team learning. ... In The Necessary Revolution, Senge applies the same thinking to a system bigger and more complex than the organization: global society. The book is a call to arms, an argument to business leaders that they must rethink their approach to the environment or, as one executive told Senge, 'we won't have businesses worth being in in 20 years.' But the authors don't linger on the problems, focusing instead on the stories and insights of successful innovators, on creative solutions, and on practical approaches to meeting these challenges."

As noted above, the bulk of the article consists of excerpts of an interview with Senge conducted by Jessie Scanlon in Senge's office. The interview was focused on "the critical role that business will play in the coming revolution, the visionary leaders at companies such as Nike and Costco, and the future of the corporation." The first question was why he titled the book The Necessary Revolution. Senge replied:

"I don't really like the word 'necessary' because it makes it seem we have no choice. On the one hand, we don't. There's only so much water in the world. There's only so much topsoil. There's only one atmosphere, so there's only so much CO2 that can be stuffed into the atmosphere. But real change occurs when people make choices. We're not going to get out of the predicament that we're in by a lot of teeny incremental things. It's going to take bold ideas. The word 'revolution' was meant to be in the spirit of the Industrial Revolution. Not a political revolution because this absolutely has to be a nonpartisan issue. The future doesn't belong to one party or another."

I have been arguing for some time that in order for industrial age organizations to transform into information age globally integrated enterprises they are going to have to shed industrial age thinking and structures. Senge similarly argues that the many industrial age beliefs are going to have to be abandoned. He explains:

"One industrial age belief is that GDP or GNP is a measure of progress. I don't care if you're the President of China or the U.S., if your country doesn't grow, you're in trouble. But we all know that beyond a certain level of material need, further material acquisition doesn't make people happier. So you have a society predicated on the idea that you have to keep growing materially, and yet nobody actually believes it."

Scanlon also asked Senge if he had discovered any patterns about the kinds of people that are leading the charge in the "necessary revolution." He indicated he had.

"The first is obvious: People have to be passionate. These are innovators in a fundamental sense, and innovators innovate because there is something that they are passionate about. Second, they all in different ways were able to step back and see a bigger picture. This is a huge challenge for people in companies, because so many companies are dominated by short-term perspective and because lots of people in key positions simply aren't very good or don't care very much about the bigger picture. Watch how the decisions are made. Are they thinking of the value of the company 10 years after they retire, or are they thinking about the value of their stock options this year? The other two things we focused on are the ability to connect with lots of people and collaborate across boundaries—you could call it high levels of relational intelligence. The final element that we saw again and again is a shift [in strategy] away from 'we've got to stop doing x, y, or z' and all the negativism that tends to pervade these issues."

For those familiar with studies about innovation, all of this should sound familiar. Most innovators are motivated by ideas more than profits. Seeing their ideas implemented is what keeps their fires stoked -- sometimes to the point of personal exhaustion. Senge's point about seeing the big picture is also well known. Every good book on innovation or change management stresses the importance of vision and how to communicate that vision to others so that it permeates the entire organization. Sometimes that process is called alignment. Next Senge talks about connectivity and collaboration -- generating what Frans Johansson calls the "Medici Effect." Finally, he talks about attitude. Entrepreneurs and innovators are, by nature, optimistic people. It is that sense of optimism that attracts both capital and people to their causes. A company filled with skeptical or negative people will never find a vision large enough to position it properly for the future.

Scanlon asked Senge how else companies must change beyond being able to practice what Peter Schwartz calls "the art of the long view"? He responded:

"You go to any MBA program, and you will be taught the theory of the firm, that the purpose of the firm is the maximization of return on invested capital. I always thought this was a kind of lunacy. A well-managed business will have a high return on invested capital. But that's a consequence. It's not a way to manage a business. I remember a great quote of Peter Drucker. He said: 'Profit for a company is like oxygen for a person. If you don't have enough of it, you're out of the game. But if you think your life is about breathing, you're really missing something.' The purpose [of an enterprise] is never making money. And I think a lot of the best innovators inside big companies, the reason they succeed is that they really understand the theory of their business."

Although that sounds a bit confusing -- i.e., understanding the differences between "economic theory of the firm" with the "theory of business" -- Senge provides an example of what he means.

"Costco is about long-term, reliable, quality supply. It's the key to the business. When the woman who got the Food Lab work embedded in Costco first started talking about the predicament of farmers, people were a little suspicious. They thought the predicament of farmers is a big problem in the world. That's why there are charities, and that's why we give money to charities. They couldn't see the connection to their business until she got them to see that they wouldn't have long-term quality supply if farming communities were destroyed. So she connected the issue to the theory of their business—but not the economic theory of the firm. Well-managed businesses could not possibly have gotten where they are believing this [economic theory of the firm] nonsense."

The excerpted interview concludes with responses to three quick questions: Where are we in the revolution? What role can governments play? and, Are businesses inherently more global?

"[In answer to the first question,] we're pretty much in the beginning. I can certainly say that from the 10 years since we organized this network, the people who joined were small bands of radicals in their companies, even if they were senior. But in virtually all of those companies, those people aren't radicals anymore. There are wild cards obviously: major economic decline. Innovation requires resources to invest, and you can see many companies pulling back and going into an intense protective mode in a major extended period of financial distress. [As for the second question concerning governments,] if you are realistic about how our present society works, the economic clout—and a lot of the political clout, frankly—is in the business sector. And it's the locus of innovation. But you've got to build these networks. I think Paul Hawken's recent book, Blessed Unrest: How the Largest Movement in the World Came into Being and Why No One Saw It Coming (Viking Press, 2007) was on the money. The growth of the civil society is historic, and in some ways it's a response to the inability of government to deal with these kind of issues. Governments, especially democratic ones, are short-term and nationalistic. These problems are long-term and global. [Finally, in response to the question about the global nature of businesses,] yes, they're global, and because they're global they've begun to build partnerships across their value chains. But I don't think business is sufficient. We're going to see a lot of partnerships, as companies partner with global organizations like the World Wildlife Fund and Oxfam and, eventually, with governments."

In other posts, I've referred to some of the points Senge made -- particularly the importance of connectivity. Be it connectivity within a globally integrated enterprise or between communities of practice (Senge's last point). Almost every economist will tell you that national economic policies don't carry the same weight they used to because so much of the economy is interconnected globally. Still, governments must play a role in helping develop solutions to global challenges. Trying to isolate one's nation from such problems only exacerbates the situation and demonstrates a lack of leadership unworthy of the trust placed in governments by their citizens. Senge's point, I believe, is that the connected citizenry of the world are not going to allow the inaction of governments to stop their attempts to address growing challenges. The fact that they feel empowered to do something is one of the characteristics of the information age.

Senge's book, which is co-authored by Bryan Smith, Nina Kruschwitz, Joe Laur, and Sara Schley, is divided into seven parts: Endings, New Beginnings; The Future is Now; Getting Started; Seeing Systems; Collaborating Across Boundaries; From Problem Solving to Creating; and, The Future. Within those sections are intriguing sub-section titles like: New Thinking, New Choices; Never Doubt What One Person and a Small of Co-Conspirators Can Do; Risks and Opportunities: The Business Rationale for Sustainability; The Tragedy and Opportunity of the Commons; The Imperative to Collaborate; Innovation Inspired by Living Systems; and The Future of Us. The book should be a good read and I wouldn't be a bit surprised if it doesn't inspire a post or two in the future.

Development-in-a-Box™ at Home in America

In a recent op-ed piece, New York Times' columnist Thomas Friedman insisted that the next U.S. president needs to focus on "nation-building at home" ["Anxious in America," 29 June 2008]. Friedman laments the fact that America's economic situation is so bad that it will undoubtedly become U.S. voters' most important concern during the rest of the campaign season. He predicted:

"[Both John McCain and Barack Obama] will be looking for a financial wizard as their running mates to help them steer America out of what could become a serious economic tailspin. I do not believe nation-building in Iraq is going to be the issue come November — whether things get better there or worse. If they get better, we'll ignore Iraq more; if they get worse, the next president will be under pressure to get out quicker. I think nation-building in America is going to be the issue."

So what exactly does Friedman mean when he talks about "nation-building in America"? I think he means that America needs to rediscover it entrepreneurial spirit and recapture some of the values that helped make it the world's greatest economy. I firmly agree with that. In fact, at Enterra Solutions we are daily wrestling with those issues as we attempt to greatly scale our organization and look for employees who are competitive with the best the world has to offer in significant volume (more on this later). Freidman continues:

"Up to now, the economic crisis we've been in has been largely a credit crisis in the capital markets, while consumer spending has kept reasonably steady, as have manufacturing and exports. But with banks still reluctant to lend even to healthy businesses, fuel and food prices soaring and home prices declining, this is starting to affect consumers, shrinking their wallets and crimping spending. Unemployment is already creeping up and manufacturing creeping down. ... My fellow Americans: We are a country in debt and in decline — not terminal, not irreversible, but in decline. Our political system seems incapable of producing long-range answers to big problems or big opportunities. We are the ones who need a better-functioning democracy — more than the Iraqis and Afghans. We are the ones in need of nation-building. It is our political system that is not working."

Friedman decries the current divisiveness in U.S. politics that has both sides more inclined to fight than compromise.

"I continue to be appalled at the gap between what is clearly going to be the next great global industry — renewable energy and clean power — and the inability of Congress and the administration to put in place the bold policies we need to ensure that America leads that industry. 'America and its political leaders, after two decades of failing to come together to solve big problems, seem to have lost faith in their ability to do so,' Wall Street Journal columnist Gerald Seib noted last week. 'A political system that expects failure doesn't try very hard to produce anything else.' We used to try harder and do better. After Sputnik, we came together as a nation and responded with a technology, infrastructure and education surge, notes Robert Hormats, vice chairman of Goldman Sachs International. After the 1973 oil crisis, we came together and made dramatic improvements in energy efficiency. After Social Security became imperiled in the early 1980s, we came together and fixed it for that moment. 'But today,' added Hormats, 'the political system seems incapable of producing a critical mass to support any kind of serious long-term reform.'"

Obviously, Friedman isn't so naive as to believe that the U.S. is going to recapture manufacturing jobs that have moved to low cost countries. What he is calling for are policies that will help the U.S. become a center of excellence in emerging economic sectors. The manufacturing jobs in those areas, however, will require a renewal of America's culture of hard work as well as rediscovery of the grand art of political compromise. I have argued several times in the past for new and bold leadership -- the kind of leadership capable of inspiring the nation (and the rest of the world) with a vision worthy of garnering support. Great visions are based on hope not fear. Friedman and others believe that the current crop of politicians have learned how to fight and forgotten how to hope.

The hope, determinism and confidence of post-World War II America was able to put a man on the moon less than a decade after President John F. Kennedy laid out that challenge. Those characteristics now appear dormant within America -– paved over by layers of complacency, materialism and credit card debt. We have to awaken the vital, competitive and innovative spirit that past immigrant and middle classes once instilled in the United States. The concept that one generation stands on the shoulders of the previous generation needs a 21^st century re-launch. This is the only way to make the current generation better off than the last. The question is whether the current political class can lead the nation through this kind of renaissance.

America is not the only country that needs this jolt. Many countries in the developed world could use it. In my travels throughout the Middle East, I routinely come across business leaders who still embrace those qualities of hard work, thrift, and ambition -- unfortunately, many of them lead businesses headquartered in other emerging market countries. In a recent post [Doing Business in Iraq], I referenced a USA Today article that noted most of the foreign businesses taking advantage of opportunities in Iraq were not American. In blogging about that same article, my partner Tom Barnett wrote:

"Paul Brinkley, head of the Pentagon office who talked Enterra into entering Iraq, is quoted as saying 'It's ironic' that the firms rushing into Iraq to take advantage are not American. Actually, it's not ironic whatsoever. Check out the countries described in the piece: Romania, Lebanon, China, Russia, Turkey, France, Germany. None sent troops, but all showed up for the peace. 'Come as you are' meets 'come when you want.' Iraqi foreign minister says: 'They take risks. No pain, no gain.' And before you freak on the war-peace divide, realize that 95 percent of our troops die after 'mission accomplished' and 85-plus percent since the end of the 'lost year.' These countries were our unacknowledged partners all along. You can either be shocked by that or realize that making it our war to run doesn't translate into making it our peace to exploit."

I titled this post "Development-in-a-Box™ at Home in America" to connect with Friedman's idea that we need to conduct nation-building at home as well as highlight the fact that America, too, needs to ensure that it builds the future on best practices and global standards. That is the only way that U.S. companies will once again demonstrate the kind of competitive edge that they will need to compete in emerging markets -- the markets that hold the greatest promise of growth in the future. By focusing on competing in new market sectors, America can remain a world leader, but it must invest wisely in new infrastructure, improved education and training, and technologies that will make it more responsive to the global economy. That is why I believe that Development-in-a-Box™ needs to be rolled out both in the U.S. and overseas in emerging countries. It is imperative to have both because, if we are effective in providing an effective On-Ramp to the Global Economic Grid for the 2-3 billion new consumers, quasi-capitalist, quasi-democratic peoples in the emerging world, we can give peace and stability a chance of flourishing overseas and then the U.S. can spend more of its treasure on development at home rather than on warfare abroad.

I'm a bit more sanguine than Friedman that America can respond to this challenge. A Philadelphia Inquirer story that spotlighted my company [Enterra Solutions Provides Technology to Iraq], discussed the fact that it is entrepreneurs who are taking advantage of emerging market opportunities.

"Hundreds of foreign companies are now doing business in Iraq. Enterra has two Pentagon contracts. One is to establish a call center that will handle incoming and outgoing calls for products from Iraqi manufacturers. The other is to set up a business-to-business trading portal, or Web site, for Iraqi manufacturers, similar to Amazon.com Inc. or eBay Inc. The call center and Iraqi business portal are expected to be operational in about six weeks. Enterra partnered with Iraq and Western firms to do the work, including Korek Telecom in Kurdistan. A Kuwait-based firm, Agility Logistics, will handle supply-chain logistics to get goods shipped out of Iraq. 'We created a business model that will address the nation-state-building portion of war in the 21st century,' said DeAngelis, Enterra's founder and chief executive officer."

Unfortunately, as noted above, most of those foreign companies are not American. I'm working with the U.S. Chamber of Commerce to change that. I recently joined the Chamber's activities in Iraq as Co-chair of its Iraq Initiative and Co-chair of its Kurdistan Region of Iraq Investment Taskforce. Those roles have exposed me to some of the companies that "get it." As they succeed in emerging markets, they should provide a role model for other U.S. companies who will either change with the times or die like the dinosaurs. Friedman concludes his op-ed piece this way:

"Digging out of this hole is what the next election has to be about and is going to be about — even if it is interrupted by a terrorist attack or an outbreak of war or peace in Iraq. We need nation-building at home, and we cannot wait another year to get started. Vote for the candidate who you think will do that best. Nothing else matters."

Friedman understands that politicians and governments have less influence over global economics than they did in the past. But he also knows that politicians still have tremendous influence on establishing the tone and direction for the future. A leader with vision and charisma can instill hope to replace fear. In an op-ed piece that I wrote for the Philadelphia Inquirer ["A New Global Framework," 6 December 2006], I wrote:

"What we need is a new framework for an entirely different era, a vision like that provided by the Wise Men - Dean Acheson, George Kennan and others - in the late 1940s. These leaders promulgated a governing framework for dealing with the postwar "third wave" of globalization, one that led to the development of institutions (the United Nations, the World Bank, etc.) and concepts (such as mutually assured destruction) that helped establish and maintain global stability for more than 50 years. That framework and those institutions, however, no longer address today's global environment. Today, few organizations - and this includes everything from companies to nation-states - understand how to align themselves with the times. No governing framework exists to help organizations array their resources properly. As the fourth wave of globalization unfolds, new Wise People have not yet stepped forward to create a next-generation grand ordering set of principles. Instead, today's leaders are trying to adapt old concepts and institutions to emerging challenges -- which is why Western liberal democratic principles seem to be in retreat on so many fronts. ... The future will bring new challenges, both natural and man-made. We'll know an appropriate framework is in place when both corporations and governments can respond successfully to these and other stressors created by globalization, rapid technological change, terrorism, natural disasters, and other 21st-century challenges."

Hope is the clarion call needed to re-instill the kind of values that made America great in the first place. People immigrated to America with nothing but hope in their pockets and they managed to build a great nation. We've gotten lazy as we've wallowed in our success. We have assumed that the good times would always roll and that we could continue to live large without working hard and remaining innovative. We need leaders who can make the clarion call and motivate a new generation to greatness. On that point, Friedman is right, "nothing else matters."

Looking for Jobs that Last

As the U.S. moves into the height of its presidential campaign season, the economy has taken center stage. Stones have been thrown at the North America Free Trade Agreement (NAFTA) because detractors claim it has cost good American jobs. The U.S. is not the only country lamenting the loss of jobs. Even nations once considered to be low-cost countries and, therefore, attractive for foreign investors, have found that it is hard to remain "low cost" enough ["The dark side of globalisation," The Economist, 31 May 2008, print edition]. For example, The Economist looks at what has happened in Slovakia over the past decade.

"A decade ago, Samorin—a small town in western Slovakia, on the banks of the river Danube—was one of many good places in which to watch the effect of globalisation on central Europe. The town was full of cheap, experienced workers in need of jobs, with unemployment at 20%. Foreign investors duly arrived, notably Samsonite, an American luggage-maker, which set up a factory there in 1997. The town’s location helped, near a four-way border where Slovakia, Hungary, Austria and the Czech Republic meet in a cat’s cradle of big roads and railway lines. There are scores of similar towns across the region that attracted jobs from higher-cost, more highly regulated labour markets farther west."

It's hard to find better conditions for an economic boom -- skilled workers, good infrastructure, and low costs. Of course, workers in countries that lost jobs weren't happy.

"Workers, trade unions and politicians in old Europe mourned each factory moving east. But, as a European Commission official explains off the record, such shifts were fully expected: offshoring 'was the whole idea of enlargement'. The process, though wrenching to some, made the European Union as a whole more competitive and spread the benefits of global trade to every corner of Europe."

Unfortunately for Slovakia, that is not where the story ends.

"So far, so familiar. But things have moved on in Samorin. Even though new investment and jobs are still arriving in Slovakia, and proximity still counts, this river town has already lost a factory to offshoring. Samsonite closed its plant in 2006, shedding all 350 staff and shifting production to China."

So what's happening? There are obviously lessons to be learned.

"Like its neighbours, Slovakia has seen wages rising fast as new jobs arrived and many of its own people headed west. In most of the new member countries, unemployment rates are lower than at any time since early 2000. But rising labour costs are only part of a more complicated story. Slovakia is still cheaper than the Czech Republic. In Samorin, unskilled workers might earn 12,000-15,000 crowns (€380-480) a month. Labour costs have risen faster in other new EU members too. In overheating Latvia, pay in the fourth quarter of 2007 was 30% up on a year earlier. Samorin is a witness to the way that globalisation is fragmenting as supply chains break into ever smaller parts, sending jobs in all directions. The European Restructuring Monitor (ERM), an EU outfit that tracks globalisation, has analysed about two dozen cases of offshoring from new members of the EU, often involving complex moves. In one example, a German lighting company shed 400 jobs in Slovenia and sent the manufacturing end jobs back to Germany. In another, a Hong Kong-owned textile-maker shut up shop in Latvia, citing a 'lack of workforce' in the region, and shifted production to Macedonia and Vietnam."

Countries that want to benefit from globalization must reconcile themselves to the reality that it fragments supply chains and sends jobs in all directions. As my colleague Tom Barnett puts it, "Globalization integrates trade by disintegrating production chains and dispersing them across economies." Slovakia apparently understands this phenomenon and accepts it.

"Slovakia is currently a European cheerleader for open markets and free trade. In a Pew Global Opinion survey last year, Slovaks were more enthusiastic than Americans, Swedes or Britons about multinational companies, with 72% agreeing that big foreign companies were good for their country, a European record (55% of French respondents thought foreign firms were bad for them, setting a record in the opposite direction)."

The fact is that the vast majority of global trade involves multinational corporations. If you want to get in front of that money you had better embrace them. Why? Not only are multinationals involved in the bulk of global trade, but half of that trade is intra-network trade -- meaning trade within industry sectors or within the multinational companies themselves. That is really what cost Samorin its Samonsite factory.

"Labour costs were higher than in Asia, but location trumped cost advantage. The factory’s role was to manage peak demand for the highest-priced products. What killed [the] plant was the effect of higher labour costs on suppliers, who one by one moved to Asia. By the end, the factory was having to fly in materials to fill urgent orders at great expense."

Understanding the supply chain is critical for understanding what types of job will last. China is likely to suffer a similar fate to Slovakia if parts manufacturing ever shifts to Africa. The Economist notes that demographics is also playing a role in Slovakia (as it is in the rest of Europe).

"Alarmingly, the idea has taken hold across central and eastern Europe that the most pressing crisis is a shortage of people. Every day, newspapers report plans to ship in Vietnamese textile-workers, Ukrainian road-builders or Moldovan waiters to fill vacancies. There may well be some immigration, but it will not be the cure-all some seem to expect. ... Small, mundane changes would help. In some countries workers who have taken early retirement would lose their pensions if they went back to work. Bulgaria has no laws covering temporary work. [One] factory in Samorin, ... has started recruiting toolmakers and other specialist workers from eastern Slovakia. But he notes that once he has persuaded skilled workers to uproot themselves and move 300-400km westward, some of them will keep going to Britain or Ireland to earn two or three times more. Everything is becoming more mobile, making life more complicated. But many central and eastern European workers remember the days when they were not free to move. They are a tough, flexible bunch and do not think the world will stop for them. The EU is lucky to have them."

Eastern European workers may be tough, but it will be their flexibility that helps them create jobs that will last. They've already learned a difficult lesson about global supply chains. The fact that they are more receptive to multinational corporations should help them find a nice fit for the future.

Poverty and Progress in Peru

When one thinks about emerging market tigers around the world, I imagine that Peru is not the first country that pops into one's mind. Peru, according to The Economist, is South America's fastest growing economy. While that is good news for a country that has been mired in poverty, the bad news is that economic progress is not spreading evenly throughout the country ["Poverty amid progress," The Economist, 10 May 2008 print edition].

"[Lima, Peru's capital,] is the visible face of a boom that has made Peru South America's fastest-growing economy. That performance owes much to record prices for mineral exports. But newer export products, from designer cotton T-shirts to mangoes and artichokes, are also flourishing. As well as trade, private investment, growing at 20% a year, and domestic consumption are driving the economy forward at an accelerating pace (in the year to February, GDP grew by 9.2%). Thanks to high world prices for food and fuel, inflation has spiked to 5.5%, having been low for years. Nevertheless, the growth looks to be built on solid foundations. The national savings rate has risen to 24% of GDP, high by regional standards, and the government last year posted a fiscal surplus of 3% of GDP. A free-trade agreement with the United States is about to come into effect. In recognition of such achievements, Peru's debt was awarded an investment-grade credit rating last month by Fitch, a ratings agency."

The United States wishes it were in such good financial condition. It, too, faces increasing inflationary pressures, but the U.S. has a much slower rate of growth and Americans save at a rate below 14%. As I noted at the beginning, however, not everyone in Peru is feeling the impact of the country's economic boom.

"Despite the growth, poverty has fallen only slowly. And many Peruvians are disgruntled. ... There are several reasons for the relatively slow fall in poverty. Although the number of formal-sector jobs is expanding at 9% a year, many Peruvians still labour in the informal sector of unregistered businesses, where productivity is low. Wages for the unskilled have been slow to rise."

We have witnessed uneven economic progress in other emerging countries, like China and India. These, however, are large countries and some geographical differences should be expected. China, after all, covers some 3,646,448 square miles and is home to about 1.3 billion people. Peru, on the other hand, covers 496,226 square miles (less than 14% of China's size) and is home to about 28 million people (roughly 2% of China's population). The fact is that geography nevertheless plays a large role in how economic development spreads, even in a small country like Peru. The Economist reports:

"The capital, the Pacific coastal strip and most of the north of the country are all thriving. The problem is the southern Andean region, where poverty reaches 70% of the population. Helped by tourism, mining and microcredit some Andean cities, such as Cajamarca, Cusco, Huaraz and Huancayo, are prospering. The big divorce is with the surrounding, often mountainous, countryside, where many Andean Indians remain trapped in subsistence farming on small plots. Whereas 60% of the labour force in Lima are waged workers, only 27% are in Apurímac, notes Efraín González, an economist at Lima's Catholic University. These unwaged people are often more or less cut off from the market economy. And it is market connections that make economic growth 'trickle down' to the poor, points out Richard Webb, a social researcher and former central-bank governor. Enabling that to happen is thus a job for public policy. Better roads, education and social policy are all needed."

As my colleague Tom Barnett and I have been preaching for some time, people need to be connected in order to take advantage of the economic benefits associated with globalization. It comes as no suprise that those "more or less cut off from the market economy" continue to struggle. Although Peru's government recognizes that they must improve infrastructure and social policy to help its citizens break poverty's grip, The Economist reports that knowing something must be done and actually doing it are two different things.

"With the help of the World Bank, the government has drawn up a new anti-poverty strategy which focuses on trying to end the malnutrition that affects 30% of Peruvian children, most of them in the southern Andes. It has ramped up social spending while trying to target it more closely on the poorest areas. But Ivan Hidalgo, the official in charge, accepts that a lack of good managers, especially in local governments, is hindering this effort. ... Similarly, money for public investment in roads or to help farmers lies unspent at all levels of government, partly because of fears of corruption. In another paradox, Peru has created 'a culture of fiscal propriety' whose side-effect is that officials are ignoring a social emergency in the Andes, says Mr Webb. Tackling this effectively means reforming the education and health ministries as well as local government. [The] government has made some effort to improve the performance of teachers, but has otherwise done little. 'It's a government that insists on investment and not on reforms,' says Julio Cotler, a sociologist at Lima's Institute of Peruvian Studies."

Another way of looking at the situation in Peru is that while money has begun to flow the capacity to spend that money wisely has not. Most organizations involved in development work understand that building indigenous capacities is critical to the success of sustainable development. It makes no sense to invest money in a place that has no capacity to handle the money. Capacity-building is one of the basic philosophical tenets behind Enterra Solutions' Development-in-a-Box™ approach. The Economist article concludes that changes are coming slowly to Peru and warns that they must continue (probably at a faster pace) lest the unfulfilled expectations of those being left behind creates such anger that it results in growing unrest that unravels the gains that have been made.

"The economic boom is going hand in hand with a deeper cultural change. In the 1970s and 1980s, Peru was a collectivist country: first a military government nationalised much of the economy and then Mr García, in his first term, took over a chunk more, egged on by a powerful left-wing opposition. Since then Peru has undergone a 'capitalist revolution', as Jaime de Althaus, a liberal journalist, argues in a recent book. This revolution is based not just on big mining companies, but on thousands of small-scale farmers on the coast, who broke up their state co-operatives into commercial plots, and on small businessmen in the shanty towns, who are exporting everything from clothes to electrical components. When leftists complain the capitalism is 'savage' they sometimes have a point: while some companies post record profits, many Peruvians work long hours for low wages with few labour rights. Away from Lima and the north coast, which have embraced globalisation, many Peruvians cling to nationalist and statist attitudes, says Alfredo Torres of Ipsos-Apoyo. Unless the politicians do a better job of defending the capitalist revolution and spreading its benefits, it will be threatened by the rancour of those who feel left out."

Socialist generally attempt to redistribute wealth in ways that are more likely to create dependencies than foster development. Good jobs with decent pay are what most emerging market countries need. Those jobs are generally found in societies that have healthy and educated populations and that are connected by good critical infrastructure to each other and the rest of the world. That is why economic and social capacities must develop simultaneously. Given a chance to succeed, most people will.

IBM and Global Voluntary Service

A New York Times article a couple of months ago detailed an innovative IBM program that sends some of its most promising employees overseas to provide pro bono services in developing countries ["Volunteering Abroad to Climb at I.B.M.," by Claudia H. Deutsch, 26 March 2008]. Deutsch writes:

"In July, a team of 8 to 10 I.B.M. employees will travel to Ghana to help tiny businesses make their operations more professional. Another team will help entrepreneurs seek microloans in Turkey, while yet another will create training programs on information technology in Vietnam. The projects, which were devised by I.B.M.'s citizenship group and are being coordinated through nonprofit organizations, have all the trappings of corporate philanthropy. But that is not why they were created, or how they are being used. 'This is a management development exercise for high-potential people at I.B.M.,' said Randy MacDonald, senior vice president for human resources."

Although IBM certainly must be credited for its altruism, IBM also understands the program can be good for the company's bottom line -- eventually.

"I.B.M.’s program, which it calls the Corporate Service Corps, stands out on several counts. It uses the volunteer ethos to bring together employees who might otherwise never meet, even as it gives I.B.M. a high profile in countries where it does not yet have a significant presence. 'I.B.M. doesn't have a big footprint in a lot of these places,' said Kevin B. Thompson, the senior program manager in corporate citizenship who is running the Service Corps project. 'And their experiences will be a lot more useful than research that says, say, that the Internet has a 12.7 percent penetration rate.' Management experts say I.B.M. is onto something."

Management gurus interviewed by Deutsch claim the return on investment for this kind of skills development program is quite high.

"'As a development tool, this is a four-for-one,' said Allan R. Cohen, dean of the Olin Graduate School at Babson College, near Boston. 'It's stretching to work in another culture, to work in a nonprofit where the measurement of accomplishment isn't clear, to take a sabbatical from your everyday routine and to learn to accomplish things when you can’t just bark orders.' Indeed, Paul Ingram, a management professor at the Columbia Business School, is planning a similar program for this fall, in which executives attending the school's Senior Executive Program will work with nonprofit groups in New York. Because 80 percent of the students are not from the United States, the New York location is outside their comfort zone. 'The fact that you are an excellent programmer or salesman, or can lead a project in your own area and culture, doesn't mean you can be a great leader outside of your technical or cultural expertise,' he said."

One of the things that the article doesn't state, but that is implied, is that the talent level and skills of the people running the non-governmental organization programs is high enough that even IBM's best and brightest can learn something from them. People don't go to work for NGOs to get rich. They receive personal rewards in other ways; although they certainly deserve to make a decent living by helping others. Unfortunately, they often fail to receive the recognition and thanks they deserve. Back to the IBM program.

"[IBM] views the Service Corps as a way to learn how well employees work with strangers, in strange lands, on unfamiliar projects. And it plans to use that knowledge to customize further development programs for the participants. Clearly, the Service Corps concept sits well with the I.B.M. employees. More than 5,500 of them, from more than 50 countries, applied for the program. I.B.M. narrowed the pool to those who had been designated as fast-trackers, who had familiarity with volunteerism and who submitted the best short essays on how participation would help them develop as leaders. The applications of those that passed that first cut were sent to the heads of I.B.M.'s eight geographic regions, who chose which of their employees to send. The final list comprises 100 people from 33 countries, who will form 12 teams that will be deployed to projects in Romania, Turkey, Vietnam, the Philippines, Ghana and Tanzania. I.B.M. said it would select another 100 before the end of the year and have a total of 600 participants over the next three years. The first projects will not begin until July, but the team members are expected to immediately begin studying the countries they will visit and their cultures. They will also begin interacting with one another, possibly through a virtual venue, similar to Second Life, that I.B.M. will set up. Each team will have electronic 'facilitators,' executives who are well versed in the countries they will visit and the types of businesses they will be advising. After their four-week trips, the participants will go through two months of intensive debriefing to discuss what they learned about leadership — and about the countries they visited."

To support a program like this, a company needs the kind of resources that an IBM has available. Smaller companies could not afford either the expense of the program or to lose the services of valuable employees for an extended period of time. Nevertheless, IBM deserves credit for supporting the program. Other companies with sufficient resources would do well to watch how the program unfolds.

Farmers and Forests

With grain prices rising as steeply as oil prices, farmers around the world are hoping to cash in while commodities are selling high. One of the world's breadbasket countries, Brazil, is also home to the world's greatest atmosphere scrubber and oxygen producer -- its rain forests. The temptation to clear more land for farming directly conflicts with the desire to save the rain forests. It's a conundrum that has farmers and environmentalists squaring off and the farmers appear to be winning ["Brazil's Answer to Global Hunger," by Joshua Schneyer, BusinessWeek, 2 June 2008 print edition]. Schneyer reports:

"Food and forest have long been at odds in Brazil's Amazon. While environmentalists have pushed for preservation of the lush rain forest, soy farmers have sought to fell trees and grow ever more beans. Now, with global grain prices skyrocketing, the farmers may be gaining the upper hand. On May 13, Environment Minister Marina Silva resigned, saying her efforts to protect the forest were losing traction. 'For some time I've had difficulties advancing environmental policies,' she said in a resignation letter."

In a recent post [Turning the World Upside Down], I focused on a column by Roger Cohen that pointed out how resource-rich Brazil is becoming a global economic powerhouse in a number of areas (oil, mining, and agriculture among them). Schneyer's article looks primarily at Brazil's agricultural sector.

"In recent years, Brazil has become the world's pantry. It's the top exporter of soy, sugar, orange juice, coffee, beef, and poultry, and it's a growing producer of corn and rice. Last year it exported $58 billion in farm products, including $11 billion worth of soy. But an increasing share of that bounty comes from areas that were once rain forest or savannah, and many farmers believe that expanding production—and profits—will require clearing even more land."

The attached image (which accompanied Schneyer's article) demonstrates how dramatically Brazil's soybean exports have risen. Aligned against big agriculture and economic realities, it was difficult for Environment Minister Marina Silva to argue successfully that the rain forests meant more to Brazil's (and the world's) future than the urgent need for food.

"Silva had earned a reputation as a staunch defender of the Amazon. A native of the region, she helped polish President Luiz Inácio Lula da Silva's eco-friendly image by levying stiff fines on farmers and ranchers who cut too many trees. In recent years, her efforts paid off in slowing rates of deforestation, but in January new satellite images showed a sharp increase. Silva cracked the whip, placing 1,400 farms and ranches on a blacklist that barred them from getting bank financing. That drew fierce opposition from farmers who contended that they were being unfairly targeted. 'A billion people around the world are going hungry,' says Antonio Galvan, head of the Rural Union in Sinop, a soybean boom town on the southern edge of the rain forest. 'Ask them if they want Brazil to stop expanding its farms.' Among Silva's adversaries was Blairo Maggi, governor of the western state of Mato Grosso and one of the world's biggest soy farmers. At an April meeting of governors, Maggi displayed photos shot by his state's environmental officials that seemed to show forest in areas that Silva had said were cut. In some cases, he contended, 'newly cleared' areas had been legally logged many years ago. Others, he said, had been consumed by natural fires or ravaged by insects. More than 70% of blacklisted farms were exonerated, and Lula clipped Silva's wings, putting another official in charge of planning in the Amazon."

The man who now has the rain forest portfolio believes the answer lies in converting ranch land to cultivation; thus, avoiding the need to clear more land and concomitantly eliminating the methane gas produced by animals that once grazed there. Schneyer continues:

"That job has fallen to Roberto Mangabeira Unger, Brazil's strategic affairs minister and a professor on leave from Harvard Law School. On May 8 he was appointed to oversee a new initiative: expand nature reserves in the Amazon while also developing the region with highways and railroads to create economic opportunities without cutting down trees. By converting ranch land to cultivation, he says, Brazil could double farming without touching a tree. 'We reject the idea that in order to develop we need to destroy the Amazon,' Unger says."

I suspect if that if he wants to return to Harvard without facing resistance from environmental protesters he will try desperately to make his plan work.

"It'll be hard, though, to keep farmers from pushing deeper into the forest. Cost of land on the Amazon frontier can run just 15% the price of prime agricultural acreage in the developed Southeast. As oil prices have sharply boosted the cost of trucking grain 1,000-plus miles to Atlantic ports, soy producers are eyeing land that's closer to Amazon River shipping routes. And perhaps most important, farmers often regard the forest as little more than farmland awaiting development. 'Around here it's nearly a natural law,' says Nilfo Wandscheer, a small farmer in Mato Grosso. 'Wherever a combine can go, soybeans will grow.'"

Schneyer's article makes a good point. Not only must a country be able to grow food it must be able to get it to market. That's why I continue to stress the importance of taking a holistic look at a country's economy. You can't simply focus on developing one sector and end up with the desired results. There aren't really very many regions of the world that can be labeled as breadbaskets. The attached image shows areas that are net exporters and net importers of grain (click to enlarge). Only North and South America, the former Soviet bloc, and Oceania are net exporters -- and severe droughts in Australia have threatened to remove Oceania from that list. Brazilian farmers understand the economics of the current situation and, like oil companies, want to take advantage of favorable conditions. What they must realize, however, is that the rain forests they seem willing to destroy are also climate engines. The favorable growing conditions enjoyed by Brazilian farmers could change if the rain forests disappear. It's a balancing act that the world is watching and conundrum that must be overcome by the Brazilians themselves.

Some environmentalists believe that the best way to protect the forests are to collaborate with farmers rather than fight with them. Monte Reel, writing in the Washington Post, reported on these efforts ["Applying Capitalism to Protect Dwindling Brazilian Forestland," 25 April 2008]. He writes:

"The world's soaring demand for beef and grains has turned this frontier into a ripe business opportunity, even as the forest has paid the price. But what if global capitalism actually valued standing forest? Could these same farmers and ranchers -- for years considered by many environmentalists as the lowest links in a chain of destruction -- actually become frontline protectors of the Amazon? The idea has been so energetically embraced in many parts of Brazil that the fundamental character of the environmental movement along the Amazon's most vulnerable edge has changed. Instead of being considered obstacles to conservation, farmers and ranchers are being wooed by many environmentalists as potential partners."

Environmentalists are utilizing a number of tactics to apply leverage on farmers to cooperate.

"In the state of Mato Grosso, where Brazil's agriculture industry is strongest, nonprofit organizations are teaming with banks to create loans that favor environmentally friendly farms. Industry coalitions are meeting with farmers to try to draft certification systems for 'responsible' soy and beef. Pilot projects are testing carbon-trading systems that offer money for ranchers with forested land. ... It can be a tough sell, because current real estate values show trees as obstacles to prosperity: An acre of standing forest costs about $175 here, while the same acre cleared for plantation sells for about $1,215."

The most promising effort involves carbon trading schemes.

"The going rate paid to emit one ton of carbon dioxide is between $5 and $10 in most markets, according to Greg Fishbein, director of conservation finance for the Nature Conservancy. If effective mechanisms -- such as databases measuring the amount of carbon stored in a property -- are established, that might be enough to make it profitable for these ranchers. According to studies, each acre of forest can store about 200 tons of carbon dioxide. Nepstad said that if the farmers of Mato Grosso could sell credits for between $3 and $5 per ton of carbon, they would have little incentive to clear more land."

Brazilian farmers are listening to environmentalists but remain skeptical. The potential profits from carbon trading can't beat the high prices they are receiving from bumper crops. Whether farmers are eventually secured as partners depends in large measure on the world agreeing on a carbon trading scheme that would make preserving forests a "capital" idea.

Turning the World Upside Down

My work with Development-in-a-Box™, as well as my frequent trips overseas, has given me an appreciation for the developing world that one can only gain by personal experience. New York Times columnist Roger Cohen, who also travels extensively, believes it is time to see the world as the topsy turvy place that globalization has made it ["The World Is Upside Down," 2 June 2008]. He writes:

"For a while the world was flat. Now it's upside down. To understand it, invert your thinking. See the developed world as depending on the developing world, rather than the other way round. Understand that two-thirds of global economic growth last year came from emerging countries, whose economies will expand about 6.7 percent in 2008, against 1.3 percent for the United States, Japan and euro zone states."

The "world was flat" reference, of course, is a friendly dig at co-New York Times' columnist Tom Friedman's book The World is Flat. I suspect that Friedman still believes the world is relatively flat and that Cohen's argument only makes the point that it is getting flatter. Cohen argues that the steep rise in oil and other commodity prices adversely affects both rich and poor nations; but, it also means that one of the greatest re-distribution of wealth in history is taking place.

"The sharp rise in prices for energy, commodities, metals and minerals produced mainly in the developing world explains part of this shift. That has created the balance of payments surpluses fueling dollar-dripping sovereign wealth funds in the gulf and East Asia. They amuse themselves picking up a stake in BP here, a chunk of Morgan Stanley there, and why not a sliver of Total."

Writing from Brazil, Cohen compares western economies with dinosaurs of the past -- once great beasts that ruled the land only to be wiped out as the environment changed.

"We of the developed-world Paleolithic species are fair game for the upstarts now, our predator role exhausted. The U.S. and Europe may one day need all the charity they can get. To place this inversion in focus, it helps to be in Brazil, where winter (so to speak) arrives with the Northern Hemisphere summer, and economic optimism, as exuberant as the vegetation, increases at the same brisk clip as U.S. foreclosures. Huge offshore oil finds, a sugarcane ethanol boom, vast reserves of unused arable land, mineral wealth and abundant fresh water contribute to Brazilian buoyancy. But natural resources are only part of the story. As in China and India, an expanding internal market is bolstering growth. So is increasing corporate sophistication and global ambition."

Last November I wrote a post that discussed Brazil's new-found oil reserves [Brazil's Oil Discovery]. Cohen indicates that the state-owned oil company that controls those reserves is only one of the Brazilian companies with a bright future.