Enterra Insights

Pollution in Asia

Most people are aware that some Asian countries are suffering from serious environmental pollution. During the recent Beijing Olympics, some athletes were concerned about the onerous air quality in China's capital that often blots out the sun and how it would affect their performance. To try and reduce the pollution, the Chinese government forced some businesses to shut down during the games. Although people were concerned for the athletes and for the impressions that would be left with visitors, the larger concern is for those who must live day in and day out with that pollution. The kind of pall that hangs over many large Asia cities has been labeled a "brown cloud." A recent United Nations' study reports on the extent of pollution being faced in Asia ["U.N. Reports Pollution Threat in Asia," by Andrew Jacobs, New York Times, 13 November 2008].

"A noxious cocktail of soot, smog and toxic chemicals is blotting out the sun, fouling the lungs of millions of people and altering weather patterns in large parts of Asia, according to a report released Thursday by the United Nations. The byproduct of automobiles, slash-and-burn agriculture, cooking on dung or wood fires and coal-fired power plants, these plumes rise over southern Africa, the Amazon basin and North America. But they are most pronounced in Asia, where so-called atmospheric brown clouds are dramatically reducing sunlight in many Chinese cities and leading to decreased crop yields in swaths of rural India, say a team of more than a dozen scientists who have been studying the problem since 2002."

Not surprisingly, the report identified Beijing as one of the world’s most polluted cities because is is often "shrouded in a thick, throat-stinging haze that is the byproduct of heavy industry, coal-burning home heaters and the 3.5 million cars that clog the city’s roads." The problem, however, is widespread.

"The brownish haze, sometimes in a layer more than a mile thick and clearly visible from airplanes, stretches from the Arabian Peninsula to the Yellow Sea. In the spring, it sweeps past North and South Korea and Japan. Sometimes the cloud drifts as far east as California. The report identified 13 cities as brown-cloud hot spots, among them Bangkok, Cairo, New Delhi, Tehran and Seoul, South Korea."

Chinese leaders, of course, are well aware of Beijing's problems because they live there. Although they know something must be done, they slow to act both in Beijing and elsewhere.

"Last month, the government reintroduced some of the traffic restrictions that were imposed on Beijing during the Olympics; the rules forced private cars to stay off the road one day a week and sidelined 30 percent of government vehicles on any given day. Over all, officials say the new measures have removed 800,000 cars from the roads. According to the United Nations report, smog blocks from 10 percent to 25 percent of the sunlight that should be reaching the city’s streets. The report also singled out the southern city of Guangzhou, where soot and dust have dimmed natural light by 20 percent since the 1970s."

In what surely must be one of history's great ironies, researchers claim that brown clouds may "be temporarily offsetting some warming from the simultaneous buildup of greenhouse gases by reflecting solar energy away from the earth." They go so far as to claim that "similar plumes from industrialization of wealthy countries after World War II probably blunted global warming through the 1970s. Pollution laws largely removed that pall." Scientists are not saying that pollution is good or that we shouldn't worry about the brown clouds. The health costs of pollution can be staggering as can the clean-up costs; but the study concentrates on the environmental costs.

"Rain can cleanse the skies, but some of the black grime that falls to earth ends up on the surface of the Himalayan glaciers that are the source of water for billions of people in China, India and Pakistan. As a result, the glaciers that feed into the Yangtze, Ganges, Indus and Yellow Rivers are absorbing more sunlight and melting more rapidly, researchers say. According to the Chinese Academy of Sciences, these glaciers have shrunk by 5 percent since the 1950s and, at the current rate of retreat, could shrink by an additional 75 percent by 2050. 'We used to think of this brown cloud as a regional problem, but now we realize its impact is much greater,' said Veerabhadran Ramanathan, who led the United Nations scientific panel. 'When we see the smog one day and not the next, it just means it’s blown somewhere else.' Although the clouds’ overall impact is not entirely understood, Mr. Ramanathan, a professor of climate and ocean sciences at the University of California, San Diego, said they might be affecting precipitation in parts of India and Southeast Asia, where monsoon rainfall has been decreasing in recent decades, and central China, where devastating floods have become more frequent. He said that some studies suggested that the plumes of soot that blot out the sun have led to a 5 percent decline in the growth rate of rice harvests across Asia since the 1960s."

Jacobs concludes his article by briefly mentioning the effects that pollution can have on local populations.

"For those who breathe the toxic mix, the impact can be deadly. Henning Rodhe, a professor of chemical meteorology at Stockholm University, estimates that 340,000 people in China and India die each year from cardiovascular and respiratory diseases that can be traced to the emissions from coal-burning factories, diesel trucks and wood-burning stoves. 'The impacts on health alone is a reason to reduce these brown clouds,' he said."

One of the hopes of those in the development community is that emerging market countries will begin to see the light (literally) when they consider how to grow their economies. The ideal, many believe, is for emerging market countries to leapfrog old technologies and begin industries using state-of-art equipment and methods that are more environmentally friendly. Countries like China and India have argued that such a course of action is not possible because new technologies are too expensive. One of the benefits of Enterra Solutions' Development-in-a-Box™ approach is that it can be used to demonstrate to emerging market countries that adopting best practices and international standards are in its best interests both short- and long-term. In countries where people are considered cheap and equipment considered expensive, the long-term consequences to local populations are often overshadowed. That is one of the reasons that I encourage emerging market countries to invest their human capital. When they realize that their people are not cheap resources to be exploited by natural treasures to be protected, development can take a much different path. Development-in-a-Box was built on the premise that making avoidable mistakes is both foolish and costly. And there is no more foolish path than trading the long-term health of a nation for short-term economic gains when better alternatives exist.

One Asian country that has created technologies to deal with pollution is Japan. According to Blaine Harden, "Japan burns more garbage in the heart of its big cities than any developed country" ["Japan's Trash Technology Helps Deodorize Dumps in Tokyo," Washington Post, 18 November 2008]. Harden begins his article in Tokyo at the Toshima Incineration Plant.

"It doesn't smell like a dump. If it did, there are a quarter-million neighbors to complain about Tokyo's Toshima Incineration Plant, which devours 300 tons of garbage a day, turning it into electricity, hot water and a kind of recyclable sand. ... The Toshima plant is one of 21 factory-size incinerators that operate around the clock amid Tokyo's 12 million densely packed residents. Remarkably, this does not create a big stink, literally or politically. 'There is no smoke or odor coming from the incinerators,' said Hideki Kidohshi, a garbage analyst at the Japan Research Institute."

Because land is a precious resource in Japan, they have a long history of burning as well as burying waste. As a result, Japan faced its own pollution challenges in the past.

"All this burning raised dioxin levels in Japan to dangerously high levels in the 1990s, but technological advances have since corrected the problem. 'All in all, the dioxin issue has been conquered,' Kidohshi said. Besides not being smelly, smoky or deadly, Japan's urban incinerators are often not ugly. Indeed, many are architecturally significant and some are social hotspots. The renowned architect Yoshio Taniguchi, designer of the expanded Museum of Modern Art in New York, also designed Hiroshima's incineration plant, an eye-catching tourist attraction that the architect has called 'my museum of garbage.' Here in Tokyo, about 186,000 people a year frequent the Toshima Incineration Plant. These visitors, most of whom live in the neighborhood, come to swim and exercise in the plant's handsome and affordable fitness center. The center was added to the incinerator complex when it was built in the late 1990s to appease neighbors appalled by the prospect of millions of tons of garbage being burned in their back yard. Those neighbors now swim in a pool heated by burning garbage. They work out in rooms lighted by electricity generated from a steam-driven turbine linked to the furnace that burns the garbage. Surplus electricity, enough for 20,000 homes, is sold into the grid. The complex also has a health clinic for the elderly. Ash from the incinerator is melted into a sandy slag used in asphalt, bricks and concrete. All these outstanding achievements in incineration are the result of grim necessity -- and massive government spending."

There, of course, is the rub for emerging market countries who can't afford "massive government spending." The developed world needs to bring down the costs of technology so that emerging market countries can afford it and leapfrog the most dangerous and polluting stages of development. One way to that is to get more developed countries to adopt more environmentally friendly technologies and habits.

"Japan is small, mountainous and densely populated. Landfills near Tokyo and elsewhere are filling up fast, despite the relatively abstemious garbage-producing ways of the Japanese, who throw out half as much garbage per day as Americans do. Sorting trash is a serious civic responsibility here. In the eastern Japanese town of Kamikatsu, residents are required to compost all food waste and sort other garbage into 34 different bins for recycling. In Tokyo, the rules are less onerous but far from lax. Bottles and cans must be rinsed before being placed in containers for curbside pickup. A rubber hose cannot be tossed out until it is cut into pieces measuring less than 20 inches. Milk and juice containers must be flattened before discarding. Neighbors notice -- and often complain -- if someone ignores the rules. Lack of landfill space pushed Tokyo officials last year to expand the list of household trash that can legally be placed in the incinerator-bound "combustibles" bin that every householder keeps in the kitchen, along with bins for recyclables and non-combustibles. The garbage that can now be burned includes soiled plastic, plastic foam and rubber."

There is no doubt that the effort required to recycle waste material can be tedious and onerous. There is also no doubt that landfills are filling and waste streams will continue to grow as millions of more consumers are brought into the middle class as globalization helps lift them out of poverty. When recycling becomes a way of life and clean technologies help clear the skies, people will forget the burdens and appreciate the benefits. During the current international talks aimed at stimulating the global economy, the future should not be ransomed for the present.

Happy Thanksgiving 2008

Today in the United States is a day set aside for individuals and families to reflect on their blessings and give thanks. History.com provides the following short history of the so-called "first Thanksgiving" in America.

"In 1621, the Plymouth colonists and Wampanoag Indians shared an autumn harvest feast which is acknowledged today as one of the first Thanksgiving celebrations in the colonies. This harvest meal has become a symbol of cooperation and interaction between English colonists and Native Americans. Although this feast is considered by many to the very first Thanksgiving celebration, it was actually in keeping with a long tradition of celebrating the harvest and giving thanks for a successful bounty of crops. Native American groups throughout the Americas, including the Pueblo, Cherokee, Creek and many others organized harvest festivals, ceremonial dances, and other celebrations of thanks for centuries before the arrival of Europeans in North America. Historians have also recorded other ceremonies of thanks among European settlers in North America, including British colonists in Berkeley Plantation, Virginia. At this site near the Charles River in December of 1619, a group of British settlers led by Captain John Woodlief knelt in prayer and pledged 'Thanksgiving' to God for their healthy arrival after a long voyage across the Atlantic. This event has been acknowledged by some scholars and writers as the official first Thanksgiving among European settlers on record. Whether at Plymouth, Berkeley Plantation, or throughout the Americas, celebrations of thanks have held great meaning and importance over time. The legacy of thanks, and particularly of the feast, have survived the centuries as people throughout the United States gather family, friends, and enormous amounts of food for their yearly Thanksgiving meal."

Many cultures throughout history and around the globe have held (or hold) festivals celebrating the harvest and almost all of them are accompanied by a spirit of thanksgiving. This season will find many individuals and families struggling to find things for which to be grateful. The financial crisis has taken a serious toll on the blessings business. The irony of the situation is that this might be the most important time to have a grateful heart. One historian wrote:

"Prosperity has left its blessings. The table is laden with plenty. There is meat in the larder and grain in the storehouse. Because of these things, [we] imagine [we] are grateful, but such gratitude is the essence of selfishness. It is dependent upon exterior conditions. It finds its basis in circumstances. It draws its inspiration from clear skies and smooth sailing, and hence it is fitful and evanescent as the alterations of sunlight and shadow. If these conditions of personal comfort and prosperity are in themselves the ground of thankfulness, where in the hour of adversity shall we find the occasion for rejoicing? The record of the past has the graver side. There have been pain and losses and disappointments and bereavements and heartaches. Where in these things is there reason and ground for gratitude? Has the empty larder, the bare table, the desolate home, the vacant chair, the fresh mound in the cemetery, no place for thanksgiving? Ah, here is the point of stumbling with an earnest soul. We find in the bitter chill of adversity the true test of our gratitude and that is true gratitude which triumphing over conditions, merely physical and external, finds its ground of thankfulness in God himself. It is independent of circumstances. It goes beneath the surface of life, whether sad or joyous, and founds itself upon God."

Regardless of whether you have a belief in God, the underlying point remains profound. A gratitude attitude makes life a richer experience, even during dark times. A person with a gratitude attitude has a much better chance of pulling him- or herself out of adverse situations because they are more resilient. Whatever your personal circumstances, I hope you find something for which to be grateful. If you have a difficult time doing so, I recommend you go out and find someone to serve. In the service of others, we have our best chance of finding gratitude in our hearts. Happy Thanksgiving.

Twenty-first Century Capitalism

Denial is a word we hear a lot nowadays. Many alcoholics deny they have a drinking problem. Many substance abusers deny they are addicted to drugs. And many politicians and business leaders deny they had anything to do with the current financial crisis. Human nature hasn't changed too much since we began recording history. I'm sure some cavemen denied they were the ones that let that the mammoth get away. Human nature probably hasn't changed much when it comes to greed either. We all know that there are people who, given the chance, will rob the bank if it goes unguarded. Yet the same politicians who voted to deregulate many industries now seem amazed that greed and corruption crept into systems when no one seemed to be watching. America, in general, was in denial about its economy. With one of the globe's smallest savings rates and largest debts, the American economy was (and is) fueled by credit. We all hope to see better times, but the question is how to get there from here.

Nobel Prize-winning economist Paul Krugman, claims, "To pull us out of this downward spiral, the federal government will have to provide economic stimulus in the form of higher spending and greater aid to those in distress — and the stimulus plan won’t come soon enough or be strong enough unless politicians and economic officials are able to transcend several conventional prejudices." ["Depression Economics Returns," New York Times, 14 November 2008]. Those prejudices, he argues, include the fear of red ink, cautious policies, and fear of doing too much. Time magazine columnist Michael Kinsley put it this way, "The nearest thing to an actual plan seems to be something like this: stimulate first, to avert various short-term disasters, and then — at some signal from the Treasury Department — turn around and start saving like mad, to avert various long-term disasters. In other words, we need to get back our consumer confidence, and then lose it again." ["Let’s Have Another Cup of Coffee," New York Times, 14 November 2008].

Kinsley points out the irony of the current situation. We need to spend to get the economy back on its feet, but we need to save and live within our means in order to divert future economic disasters. Everyone seems to agree that these are not normal times; but, what are normal times? Steven Pearlstein argues that there won't be a return normalcy because a new normal needs to be created ["Toward a New International Capitalism," Washington Post, 14 November 2008].

"'This is a decisive moment for the global economy,' President Bush declared ... in New York as leaders from the 20 largest economies headed toward Washington for an emergency meeting on the unfolding global economic crisis. It's not only a decisive moment for the economy, but it's the most decisive moment for American-style capitalism since July 1944, when, after 22 days of negotiation at a remote lodge in the White Mountains of New Hampshire, leaders of 44 nations emerged with the blueprint for a new world financial order based on the principles of free markets, free trade and the free flow of capital. Although things have evolved considerably since that confab at Bretton Woods, the United States has remained the world's most successful economy, and the rest of the world has moved, by reason of its example and its prodding, toward an embrace of its economic model. Now that is about to change."

Everyone agrees that the current financial crisis began in the United States then spread like a cancer to the rest of the world. It will be difficult for the United States to lead the world out the crisis because its fiscal competency is vey much in question.

"As the president acknowledged in his remarks, ... the United States, which has gone from the world's largest creditor to its largest debtor, can no longer expect to dominate the institutions of international finance and will have to share power and influence with rapidly developing countries that generate more of the growth and have more of the world's capital. Just as significantly, the rest of the world -- if not a majority of Americans -- is now convinced that the raw, unregulated, laissez-faire capitalism most closely associated with the American model has serious flaws and does not reliably produce the best outcome. From the Latin American debt crisis of the 1980s to the Asian financial crisis of the 1990s to the Internet craze at the turn of the century to today's economic conflagration, the past 20 years have provided ample evidence that uncontrolled flows of private capital have created massive booms and busts that have overwhelmed the financial system and destabilized the global economy. The booms have misallocated capital, widened the gulf between rich and poor, and eroded the norms of behavior that had contributed to social and political harmony. The busts have brought financial hardship and ruin to innocent businesses and households and saddled governments with huge debts that will take generations to pay off."

President Bush's remarks, however, indicated that the U.S. will not abdicate its economic throne either willingly or graciously.

"As he sees it, the current crisis does not reflect any fundamental flaw in the American model but instead results from individual failures by lenders, borrowers, financial firms and regulators that can be minimized in the future, not through more regulation but through smarter regulation. And while he gives rhetorical support to the notion that international institutions may need to be updated and strengthened to deal with the crisis that might arise, he also makes clear that reform should not come at the expense of U.S. sovereignty or freedom of action."

Here is where Pearlstein begins making his argument that clinging to past could be fatal and that creating a new international capitalism must emerge.

"Up to a point, Bush's defensiveness is understandable, given the comforting belief in many countries that lax American regulation and Wall Street greed were the sole causes of their own economic misfortunes. Anyone with a passing acquaintance with the real estate bubbles in Ireland and Spain, the stock market bubbles in China and India, and the loose lending practices by banks in Iceland and Russia would appreciate how misguided that view is. But there is also no denying that American-style capitalism has been undermined by its own success. In its present incarnation, it rewards manipulation over innovation and speculation over genuine value creation, resulting in massive misallocations of capital and the accumulation of unheard-of wealth in the hands of money managers and top corporate executives who are more lucky than they are skilled."

Pearlstein's point is well taken. Real economic growth requires the creation of value as well as jobs. In the past, America's entrepreneurial spirit and innovative people are what created that value. We can do it again -- if we don't remain in denial. In fact, the world still looks to the United States for innovation. In a recent survey of venture capitalists completed by Deloitte, no other other country in the world even came close to being the world's leader in innovation (see the attached figure).

Pearlstein believes we need to allow the entrepreneurial spirit reflected in survey guide the U.S. out of its current financial morass.

"No longer is it the entrepreneurial capitalism of Google and Amazon and Nucor Steel that animates the American imagination -- it is the financial capitalism of Enron and Drexel Burnham Lambert, of Goldman Sachs and the Blackstone Group, of publicly traded real estate investment trusts and multibillion-dollar hedge funds. Here in the United States, they have sucked up a disproportionate share of talent and capital, distorted compensation systems, and helped to perpetuate the false notion that companies exist solely to enrich their investors and investment bankers. And now, through the marvels of global financial markets, they have spread their toxic culture and products to economies across the globe. As they arrive in Washington, the challenge for global leaders is to find a way to tame a financial system that has not only corrupted American-style capitalism but also brought unwelcome instability to the global economy. The flaw in the old 'Washington consensus' is that an unfettered flow of investment capital, particularly among countries with different currencies, is not the idea. While product and labor markets work remarkably well when they are left open and lightly-regulated, experience has now demonstrated that a different approach needs to be taken toward financial markets, which suffer from imperfect information, an abundance of moral hazard, and a tendency toward herd behavior and speculative excess."

Pearlstein surely recognizes that investors are needed to fuel the global economy and that they require (and deserve) a return on their investments. The point that should be stressed is that while equity investment is important, when it comes to development, direct investment is more important. It is the sudden withdrawal of equity investments that creates many of the challenges noted by Pearlstein. He concludes that a new international financial framework needs to be established.

"Creating a new architecture and regulatory framework for the global financial system is complicated and wonky and won't win anyone the next election. After the Asian financial crisis in 1998, there was a lot of brave talk about updating the old Bretton Woods institutions, but petty politics and an improving economy got in the way, and nothing was ever done. Perhaps this time, the prospect of another global depression will focus the minds of world leaders and lead them to create a new model of capitalism that everyone can live with."

The purpose of international financial institutions and the regulations by which they operate is to help dampen the global economy's volatility. The fact that the world is currently on a roller coaster ride indicates that current systems are working as desired. Under any system there will be ups and downs, but the greatest damage is done when wild swings can wipe out a country's middle class in a matter of weeks. If we are serious about helping reduce poverty around the world, we need to do everything possible to create a system that fosters growth and limits volatility. It's certainly a challenge worthy of the world's best minds.

Optimism and Isolation in Africa

Readers of this blog know that I'm a big proponent of connectivity. The Economist points out, however, that with world markets in turmoil, Africa "may benefit from its very isolation" ["Opportunity Knocks," 11 October 2008 print edition]. That may be true in the short term, but Africa's long-term hopes rest on connectivity. The article begins by noting that the African continent is one filled with ironies. Most of the news reported in the media is about African calamities; and yet, there is an optimism about the continent's future that remains pervasive.

"Take a snapshot of the main news stories around Africa. In Nigeria, its most populous country, the insurgency in the oil-producing Delta region grows fiercer by the day. Zimbabwe’s agony continues as President Robert Mugabe and the new prime minister, his opponent in the last election, Morgan Tsvangirai, fail to agree on the composition of a face-saving coalition government; meanwhile, the country’s official rate of inflation has topped 11m%, with the unofficial rate put at more than 531 billion%. The president of Sudan, Africa’s largest country, has officially been accused of genocide and war crimes by the International Criminal Court. In Somalia, the tragedy of a lawless and ungoverned country only gets worse. Even in South Africa, the continent’s biggest economy, political uncertainty has set in after the ousting of the former president, Thabo Mbeki, in a bitter political feud."

I had to double check to see if Zimbabwe's inflation rates were typographical errors. It's almost unimaginable. You can add to The Economist's sad list of stories the looming famine and food shortages in the Horn of Africa about which I wrote in a post entitled Famine in the Horn of Africa. Now for the good news.

"All this has been accompanied by a steady drumbeat of optimism about the continent, and confidence in its prospects. Despite the litany of problems, the 48 countries of sub-Saharan Africa (hereafter referred to as plain Africa) are, by several measures, enjoying a period of unparalleled economic success. And despite the turmoil in the world’s financial markets, international investors still think they can make money there."

The article notes that the turn-around began over decade ago.

"In 1990-94 annual GDP growth was a weak 0.9%; since then, growth has averaged closer to 5%. Before this autumn’s financial meltdown, the IMF was predicting GDP growth of 6.6% this year; now it is predicting only a slightly lower rate. Annual GDP growth per person was 1.1% in the late 1990s; from 2004 to 2006 it was around 4%. In 1990 47% of Africans lived in poverty; in 2004 41% did and, if present trends continue, only 37% will by 2015. Zimbabwe apart, most African countries have been bringing inflation down, even if the trend is now creeping up again, in line with the rest of the world. Many countries have been helped by better macro-economic management and big inflows of Western aid, investment and debt relief—as well as by more unquantifiable investments from Asia, particularly China, and the Middle East. The surplus petrodollars of the Gulf states have been flowing into east Africa. The IMF estimates that foreign investment and loans to Africa rose from $11 billion in 2000 to $53 billion in 2007. Much of this has stemmed from the commodities boom. Oil-producing countries such as Angola and Nigeria, and even war-torn Sudan, have supplied the soaring growth figures, and much of the foreign investment has gone into extractive industries. Moreover, there is a reasonable chance that Africa may survive the current world financial crisis less bruised and battered than some other parts of the world. The very factors that damaged the continent in the past may now be working in its favour."

Before examining why The Economist thinks that Africa's isolation may mitigate the impact of the current financial crisis, it must be pointed out that commodity prices are coming down. That means that economic reliance on "extractive industries" still makes many African nations captive to the volatility of the futures market. Back to the reasons why Africa's isolation may help in the current situation.

"Take the banking sector. Businessmen and budding entrepreneurs have always moaned about the excessive regulations and conservatism of African banks. Controls on foreign exchange often prevent them raising more money by investing in exciting financial instruments in the West. Foreign ownership of banks is unusually limited (to less than 5% in Nigeria and South Africa). Now, however, this very de-linkage from the Western financial system has turned out to Africa’s advantage. Its banks have almost no exposure to the subprime market causing such havoc elsewhere in the world. Benedicte Christensen, deputy director of the IMF’s African Department, says confidently that there is 'no systemic risk that we can see in any African country in terms of banking.' No one doubts that Africa will feel the effects of the crisis eventually. As world trade contracts, so will the demand for Africa’s oil and minerals, the main commodities behind its current boom. ... And the foreign capital that African countries have relied on so much for their development will be in shorter supply; in the West, investors will have a decidedly smaller appetite for risk. The supply of aid money, too, will probably decline. But African leaders hope that these effects will be softened by other factors."

The article highlights the fact that Africa remains rich in natural resources and, despite the current recession, those resources will be needed to feed economic growth in the future.

"China and the Gulf states have been fascinated for some time by Africa, and there is no reason why this should end. Indeed, Africa’s leaders still like to think of their continent as a gorgeous bride, with a glittering dowry of oil and minerals, to be courted by a swooning world. It is, after all, not just the Chinese who have been queuing to pay over the odds for those enticing minerals (copper, iron and cobalt) and hydrocarbons. Scarcely a month goes by without some country or group playing host to African leaders to win their favour, all copying the Chinese-African jamboree in Beijing in November 2006. Last December it was the turn of the European Union in Lisbon; in March the Indians held an African summit in Delhi; in May the Japanese laid on a welcome in Tokyo."

With most economists predicting that China will be the global economic engine of the future, it is no surprise that Chinese leaders are early movers into Africa. Other countries, the article reports, are nipping at China's heels.

"China is the most prominent of the new deal-makers, but in some African countries, including Kenya and Sudan, India is not far behind. Malaysia has been investing, too. And the rising ambitions of these eastern nations in Africa have spurred the Americans into action, anxious not to be outdone in a continent which they feel should be in their orbit. The United States wants to get as much as a quarter of its oil imports from Africa within a decade, to lessen its dependence on the Middle East. Though the Americans have been focusing on the Gulf of Guinea, particularly Nigeria, they are also heavily involved in Angola, which is likely to become Africa’s largest producer. America’s interest in Africa has also been revived by the administration’s 'war on terror'. It has been offering money and military deals to many governments, especially across the Sahara and in the Sahel (the fringe just south of the great desert), to combat the threat of militant Islamists. To benefit from this military and diplomatic windfall, several African countries have accepted the role of front-line states in America’s war. Ethiopia and Kenya, both sharing long borders with Somalia (where the Islamist threat is real), have gained in this way; so have Mali and Nigeria, where the threat is less apparent."

Some things haven't changed in Africa and they must if rosy predictions about the future are to come true. Foremost among the things that must change is corruption. Africa's riches must be used to help lift millions out of poverty and not just be used to line the pockets of the rich. Under any development scheme smart businessmen and entrepreneurs will make money. The good times won't last, however, if an African middle class capable of sustaining development fails to emerge. Prospects of that happening appear sketchy at the moment.

"The men who make the deals are enjoying a sweeter life than ever before; but for most people the riches have trickled down slowly, and sometimes not at all. Africa’s record of governance remains, on the whole, poor and its respect for human rights patchy. These are still the main reasons for the continent’s failure to march steadily towards prosperity. Because aggregate growth has depended hugely on the worldwide commodities boom of the past decade or so, the overall economic improvement also masks deep inequalities. A recent World Bank paper illustrates the difference in economic well-being between countries with minerals and oil and those without. Landlocked countries without resources grew by an annual average rate of just 3.6% from 1995 to 2006, whereas oil-exporting ones grew by 9.1%. Although some of the poorest countries did well in 2007 (Sierra Leone, for instance, grew by 11.6%) the base was low. Ethiopia grew by 6.2%, and has had more than seven years of peace, but it is still threatened by famine. And the 14 African countries that the World Bank classifies as 'fragile' have grown by only 2.5% a year over the past decade."

In many cases, the inequalities between rich and poor nations were determined by the creation of fake states whose borders were drawn by colonial powers without regard to historical ties between people. Redrawing borders and uniting states is a tricky and often bloody business. It also bucks recent trends that have seen more not fewer states established. How to deal with states whose fate was sealed by colonial mapmakers is one of the big challenges that will face the international community.

"A lot of hot private capital has been attracted to a very few countries, such as Nigeria, where fund managers have been impressed by reforms in the banking sector as well as by its healthier economic state. Mobile-telephone companies have been doing extremely well almost everywhere. The IMF says that a select group of countries—Botswana, Ghana, Kenya, Mozambique, Nigeria, Tanzania, Uganda and Zambia—are now stable enough to rank as emerging markets. But the World Bank paper is sceptical of claims that Africa’s economic fundamentals—savings, investment, productivity and export diversification—have improved enough in the good times to keep the recovery going when commodity prices fall. That scepticism will now be put to the test."

African countries must create jobs for their people. Job creation sits atop the priority list of most countries, but it is critical for countries with growing populations. Even though populations in some African countries have been ravaged by disease and warfare, populations in other places are exploding. The article continues by stressing that point.

"The bad news is that, even in some of Africa’s bigger and beefier countries, the benefits of growth have been balanced by soaring increases in population. In short, even the more successful countries have not managed to provide anything like enough formal jobs, above all for the young. So there are millions of frustrated, bored and angry young men in Africa’s burgeoning slums and shanty towns. With few prospects, they are ready to explode, as they have done ever more frequently in the past year or so. Take Kenya, which boasts east Africa’s wealthiest economy. In rich countries, the average woman has 1.6 children in her lifetime. In Kenya, she has nearly five. The population has grown sixfold since 1950, to 37m, with a bulge in the cohort of young men aged 15-24; most will be, at best, under-employed. All it needed was a spark, after the country’s rigged election on December 27th, to ignite a collective rage. Or look at Ethiopia, its neighbour. Here the population, now 85m, is growing by about 2m a year, one of Africa’s fastest rates. Despite recent economic successes (exporting flowers, for example), poverty remains endemic. Some reckon that 70% of young Ethiopians are jobless. In Nigeria, with 149m people, the problem is extreme. Many young men in the oil-rich Delta region have given up all hope of work. Instead they have joined an insurgency, kidnapping and stealing oil to earn a living."

For years analysts have asserted that one of the surest predictors of instability is a "youth bulge" in countries where unemployment is high. The old adage that claims "idle hands are the devil's tools" is not far from the mark. As the article claims, idle young men in countries with a history of violence make a toxic brew. For populations that have embraced the promise of democracy but whose expectations remain unfulfilled, frustration and anger are replacing hopes and dreams.

"This economic and political frustration is a lethal mix in what are supposed to be Africa’s more hopeful countries. It cuts across ethnic, tribal and religious lines. Crooked elections, as in Kenya, often ignite the violence. Young people, their expectations raised, believe that their votes will produce politicians who will address their grievances and bring some economic and social justice. As such hopes are repeatedly dashed, a youthful rage has built up across the continent. For countries that have no oil to export, high fuel and food prices have made matters worse. The high cost of staples has led to riots in nine African countries this year, including relatively peaceful ones, such as Senegal. It is also stoking inflation."

The article continues with a discussion about how the blessing of natural resources often turns into a curse. Sometimes known as the "curse of oil" (or as dubbed by The Economist, "Dutch disease"), the phenomenon results in increased corruption, tighter holds on power, and failure to invest national resources in a country's future [see my post Oil and Development].

"Despite—or perhaps because of—Nigeria’s massive oil wealth, several of the country’s civil institutions, together with human rights and the rule of law, have all withered in the past few years. In four of the five states of Nigeria’s Delta region, for example, accountability, openness and democracy seem to have diminished in proportion to the increase in oil money flowing into the states’ coffers. Elections have become long spells of organised thuggery. The former head of Nigeria’s anti-corruption commission, Nuhu Ribadu, has called Nigeria’s mode of government 'gangsterism'. Politicians, particularly at local level, form criminal syndicates to squeeze the public coffers dry. The more money is available, the more unscrupulous they become. When Mr Ribadu’s anti-corruption investigations got too near the top of government earlier this year, he was promptly relieved of his post. The same fate befell another anti-corruption chief, John Githongo, in another relatively rich country, Kenya, in 2005. Mr Githongo now concludes gloomily that a whole era, starting in the mid-1990s when African governments at least tried to take corruption seriously, is over."

If that is true and efforts to eliminate corruption are over, the international community should start writing Africa's eulogy. It means that foreign investors will become Brutuses who come to bury Africa not to praise it. Let's hope that Mr. Githongo is overly pessimistic. Anecdotal evidence, however, is not promising.

"In Sudan, another country awash with oil, the bonanza should once again have benefited a country that suffers from both poverty and drought. Instead, oil wealth has exacerbated existing tensions and grievances. Sharing out the most productive oilfields is a deadly source of tension between the Christian-animist south and the Muslim- and Arab-dominated government in the north. As a result, the long war between the south and north, which was ended by an ambitious peace accord only three years ago, is threatening to break out again. Botswana, in southern Africa, remains the only country that has managed its resource wealth (mainly diamonds) well. Raising the financial stakes in Africa often seems to have persuaded those who benefit most from the new riches to cling ever more tightly to power. There are, for sure, more elections than ever before. But heeding disagreeable election results is for wimps, judging by the attitude of Kenya’s Mwai Kibaki or Zimbabwe’s Mr Mugabe. Uganda’s president, Yoweri Museveni, has changed his country’s constitutions in order to hang on. Cameroon’s leader, Paul Biya, has shown a desire to follow this bad example, and has provoked riots as a result."

As mentioned earlier, one of the countries that has come courting African nations is China. Chinese leaders understand that they are in no position to use their economic influence to encourage those in power to give it up. In China, they are doing their best to maintain a single-party state. They are in a position, however, to encourage leaders to use the country's wealth to improve the quality of life for everyone and reduce corruption. The criticism against China is that they haven't even done that.

"China is welcomed for its much needed investment and its building of roads, pipelines and ports. But the Chinese may also be encouraging governments and politicians to ignore their people’s demands for more democracy and cleaner government. Kenya’s opposition was much irritated by an editorial in January in the People’s Daily, the official newspaper of the Chinese Communist Party: 'Western-style democratic theory is just not suited to African conditions. Rather, it carries with it the roots of disaster. Kenya’s election crisis is just one example.' Words like this seemed almost to approve Mr Kibaki’s disastrous rigging of the election."

As the heir-apparent to U.S. and European global leadership, China is going to find that its current attitude is going to make its leadership position much more difficult in the future. It is in China's best interests, as well as the best interests of everyone else, to help create an African economic environment that requires little outside economic or military intervention. The article concludes that not all of the news coming out of Africa is bad.

"Several of the African countries making the most promising strides are those with very few natural resources. Poor, landlocked Mali is combining slow but steady economic improvement with political stability. Mozambique, recovered from war and rich in minerals, is also progressing slowly in the right direction. Ghana, at independence in 1957 one of Africa’s richest countries per head of population but subsequently ruined by dictators and mismanagement, is also making a comeback. In December 2006 it floated a five-year bond for the first time. The issue was oversubscribed. Last year Ghana struck oil for the first time off its coast. But the Ghanaians, wiser after their descent from high hopes to kleptocracy, kept their celebrations muted and are now inviting the Norwegians in to advise them on how to exploit their windfall sensibly. Ghana’s elections, due in December, will provide a test of whether the country can avoid the violence and fraud that stalked the ballots in Kenya and Zimbabwe. The emphasis in these good-news countries is on boosting the private sector, reducing corruption and getting the politics right. Their efforts are allowing them to qualify for America’s Millennium Challenge Account, worth hundreds of millions of dollars in aid. Even though the underlying problems remain daunting, and even in the midst of the world financial crash, sub-Saharan Africa has a chance to build itself anew."

With most of the article providing a litany of challenges facing sub-Saharan Africa, it's almost surprising to see the article close on an upbeat note. The Economist is certainly correct when it claims "the underlying problems remain daunting." My colleague, Tom Barnett, and I created our Development-in-a-Box™ approach to address the challenges faced by emerging market countries. Even that approach, however, requires the cooperation of government leaders committed who are committed to improving the lives of their people and eliminating corruption.

Famine in the Horn of Africa

The Horn of Africa has known its share of tragedies (including the long-running civil conflict in Somalia and war between Ethiopia and Eritrea). Those tragedies, however, are manmade and preventable. They begin in the hearts of scheming and evil people and wreak havoc on innocent victims. The Horn has also suffered from its share of famine and hunger. Some this suffering has also been manmade, but mostly it has been the result of natural causes. The people living there have the misfortune of living in an area where raising enough food is difficult even the best of times. Right now they are living through the worst of times. An article in The Economist wonders if this isn't the tragedy of the decade ["The tragedy of the decade?" 01 November 2008 print edition]. In terms of sheer numbers, it could be if the past is prologue. The article recalls events in the area nearly a quarter of a century ago.

"One result of Ethiopia’s dreadful famine in 1984, when at least 1m people starved to death, was the invention of celebrity activism on behalf of the world’s most miserable. Band Aid, then Live Aid, then ever more sophisticated networking and the airing of films of starving children on television helped persuade rich countries’ governments to double aid to Africa as part of a wider set of promises to meet the UN’s eight Millennium Development Goals laid out in 2000, the first of which is to 'eradicate extreme poverty and hunger' by 2015. Despite progress in setting up early-warning systems, better procurement methods and the rapid delivery of nutrition in the form of foil packets of plumpy nut, the Horn of Africa has remained a hunger zone."

Should another million people die of starvation in the Horn of Africa would eclipse the death toll in Darfur (estimated between 200,000 and 400,000 people). If the numbers rise higher than that (which they are not expected to do), the death toll could approach the casualty figures suffered in the greatest tragedy of the past twenty years; namely, the conflict in the Democratic Republic of the Congo. Fighting there has resulted in the estimated deaths of nearly 5.4 million people -- and the fighting continues. The attached image (which accompanied the article) shows the area involved.

The number of "at risk" people in the Horn of Africa is staggering.

"The UN’s World Food Programme (WFP) says the present drought is the worst there since 1984. The International Committee of the Red Cross, which is usually slow to press the panic button, says it may be the tragedy of the decade. At least 17.5m people, the agencies reckon, may face starvation. The WFP is trying to feed 14m of them. High food prices, together with civil strife, the assassination of aid workers by jihadists, and piracy against food convoys sailing from Kenya to Somalia have combined with drought and desert to create a catastrophe. Some 12m of the hungry are in Ethiopia, 3m in Somalia, 2m in Kenya and Uganda, the rest in Eritrea and Djibouti."

The good news for at-risk populations is that the international community knows better how to deal with mass starvation than it did twenty years ago. The bad news is that in a period of recession and high food prices knowing what to do and being able to do it are two different things.

"Aid workers are getting better at stopping mass starvation. Fewer people will die than in 1984 or 1992, when Somalia was famine-stricken. But doctors at feeding clinics in affected areas say that children are already dying of illnesses linked to malnutrition, such as diarrhoea, heart failure, pneumonia and other infections. Survivors may be physically and mentally stunted, and ravaged by sores. Fighting in Ethiopia’s Ogaden region and across Somalia makes it more expensive to reach the hungry. The WFP says it needs an extra $572m to keep people alive until April. Falling oil prices may reduce transport costs, but not by much. A shortage in the region’s markets has forced the WFP to buy most of its food from distant South Africa. An extra worry is that the world’s financial turmoil may reduce remittances from the Horn’s vast number of émigrés, putting more people at risk of starvation. The African Union, based in Addis Ababa, says a famine would wreck the region’s prospects and worsen general instability. Fighting between desperate pastoralist groups has already increased."

None of this is good news for an area that has suffered for so long. The unfortunate truth is that the area shows little hope of breaking out of the vicious cycle that has kept it embroiled in conflict and tragedy for the past twenty years. It is likely that humanitarian relief efforts will be ongoing for years, while the development community sits hopelessly on the sidelines looking for opportunities to help the people to help themselves. There will be some bright spots in region (mainly in Kenya, Uganda and parts of Ethiopia) and efforts there should be supported. There will also remain some individual success stories. If there is any good news for the region, it is the fact that people there have shown remarkable resilience in the face of instability. What the area needs is long-term solutions for challenges they face and all of those solutions begin with security.

Global Trends 2025

Anyone vaguely familiar with what we in America call the "intelligence community" knows that it is resembles a garden salad -- a bunch of separate organizations tossed in a bowl. Calling it a "community" stretches a bit the definition of that word. The establishment of the Direction of National Intelligence was supposed to eliminate the barriers that for years had prevented information sharing among these various organizations. There has been noticeable improvement in information sharing, but there have also been calls for eliminating the DNI. This blog, however, is not about reorganizing the intelligence community; rather, it is about a report produced by one the organizations found our salad bowl -- the Global Trends 2025 report prepared by the National Intelligence Council (NIC).

Outside of the intelligence community the NIC is not as well known as the Central Intelligence Agency (CIA), the Defense Intelligence Agency (DIA), or National Security Agency (NSA). Yet the NIC plays a crucial role in helping the U.S. Government prepare for the future. The NIC is probably most famous for preparing National Intelligence Estimates, but it does more than that. Go to the NIC web site and you will find its mission statement:

"The National Intelligence Council (NIC) is the Intelligence Community's (IC's) center for midterm and long-term strategic thinking. Its primary functions are to:

• Support the DNI in his role as head of the Intelligence Community.
• Provide a focal point for policymakers to task the Intelligence Community to answer their questions.
• Reach out to nongovernment experts in academia and the private sector to broaden the Intelligence Community's perspective.
• Contribute to the Intelligence Community's effort to allocate its resources in response to policymakers' changing needs.
• Lead the Intelligence Community's effort to produce National Intelligence Estimates (NIEs) and other NIC products.

NIEs are the DNI's most authoritative written judgments concerning national security issues. They contain the coordinated judgments of the Intelligence Community regarding the likely course of future events. The NIC's goal is to provide policymakers with the best, unvarnished, and unbiased information—regardless of whether analytic judgments conform to US policy. National Intelligence Officers' (NIOs) primary functions are to:

• Advise the DNI.
• Interact regularly with senior intelligence consumers and support their current and longer-term needs.
• Produce top-quality estimative intelligence in a process that is efficient and responsive.
• Engage with outside experts to tap their knowledge and insights.
• Help assess the capabilities and needs of IC analytic producers.
• Promote collaboration among IC analytic producers on strategic warning, advanced analytic tools, and methodologies.
• Articulate substantive priorities to guide intelligence collection, evaluation, and procurement"

The most important words in that mission statement highlight the fact that members of the NIC are supposed to provide government leaders with the "best, unvarnished, and unbiased information" that they can. In other words, they are supposed to the honest brokers of the intelligence community. That role makes the NIC's Global Trends series of reports valuable tools for future planning. The fourth report in that series was just released. Although I haven't had the opportunity yet to read it, Peter Finn and Walter Pincus provide a brief overview of the report contains ["Report Sees Nuclear Arms, Scarce Resources as Seeds of Global Instability," Washington Post, 21 November 2008]. They write:

"The drive for dwindling resources, including energy and water, combined with the spread of nuclear weapons technology could make large swaths of the globe ripe for regional conflicts, some of them potentially devastating, according to a report released by the National Intelligence Council yesterday."

Now there's a gloomy way to start your morning. Don't blame the NIC for being pessimistic -- that's it job. The NIC wouldn't be much help to government leaders if they simply reported that everything looks bright and there's no need worry. As taxpayers and citizens, we want somebody who is both smart and trustworthy to stare into their crystal ball and tell us about things that could go wrong so that we can prepare to prevent them or mitigate their consequences. That's what being resilient is all about. It doesn't necessarily mean that members of the NIC are personally discouraged about how things are unfolding in the world.

"The report, Global Trends 2025, covers a range of strategic issues, including great-power rivalry, demographics, climate change, terrorism, nuclear proliferation, energy and natural resources. It makes for sometimes grim reading in imagining a world of weak states bristling with weapons of mass destruction and unable to cope with burgeoning populations without adequate water and food. 'Those states most susceptible to conflict are in a great arc of instability stretching from Sub-Saharan Africa through North Africa, into the Middle East, the Balkans, the Caucasus, and South and Central Asia, and parts of Southeast Asia,' the quadrennial report says. At the heart of its deepest pessimism is the Middle East, which it suggests could tip into a nuclear arms race if Iran goes ahead with such weapons. 'The prospect of a nuclear-armed Iran spawning a nuclear arms race in the greater Middle East will bring new security challenges to an already conflict-prone region, particularly in conjunction with the proliferation of long-range missile systems,' the report says. '... If nuclear weapons are used destructively in the next 15-20 years, the international system will be shocked as it experiences immediate humanitarian, economic, and political-military repercussions."

Of course, the current financial crisis might prove to the world that Middle Eastern countries are fiscally responsible partners in fostering the global economy and governments there could continue their march toward democracy. My point is that NIC staffers know that you hope for the best but prepare for the worse -- that's simply prudent. For that reason, good news is always tempered in the report.

"While the appeal of terrorist groups such as al-Qaeda is likely to wane dramatically between now and 2025, the lethality of violent extremists may increase because of their ability to access biological weapons or even nuclear devices, according to the report, which is designed to give policymakers a beyond-the-horizon view of where today's events may lead. It was produced by the intelligence council, the senior analytic body within the Office of the Director of National Intelligence."

The NIC makes it perfectly clear that the report is not predictive.

"As the report's authors note, none, some or all of this may come to pass. A 'what-if' for wonks, the report, the fourth of its kind, is an effort to stimulate the thinking of the incoming presidential administration, according to Thomas Fingar, the deputy director of national intelligence for analysis. 'It is not a prediction,' Fingar said. 'Nothing that we have identified in this report is determinative. Nothing in it is inevitable or immutable. These are trends and developments and drivers that are subject to policy intervention and manipulation.' In the case of the Middle East and other potentially unstable regions, the report posits that economic growth could become 'increasingly rooted and sustained.' In that scenario, Middle Eastern leaders would 'move forward with political reform that empowers moderate -- and probably Islamic -- political parties; work to settle regional conflicts; and implement security agreements that help prevent future instability.'"

Another way to look at the report is as an alternative futures exercise. I have stated before that I am a big believer in alternative future analysis. It is a great way to help government or business leaders break out of their normal operating paradigms and consider discontinuities rather than simply assume the present can be extrapolated into the future. Finn and Pincus continue their overview of the report noting that some of its content is more factual than speculative:

"Among the visible contours of the world in 2025 is a United States experiencing the relative decline of its economic and military power, driven both by the rise of new behemoths such as China and India and domestic constraints on its global leadership. The United States 'will have less power in a multipolar world than it has enjoyed for many decades,' according to the report's authors, who consulted policy- and opinion-makers in America and abroad over the past 12 months. '... We believe that U.S. interest and willingness to play a leadership role also may be more constrained as the economic, military, and opportunity costs of being the world's leader are reassessed by American voters.' The authors say, however, that foreign leaders, including in Beijing, will continue to view U.S. global engagement as essential -- as long as it is not driven by unilateralism. China is said to be 'poised to have more impact on the world over the next 20 years than any other country.' The study projects that by 2025, China will have the world's second-largest economy, behind the United States', and it 'will be a leading military power.' Among the other major powers, Russia has the potential to be richer and more powerful, but only if it expands and diversifies its resources-driven economy. And the authors think that countries such as Indonesia, Turkey and a possible post-clerical Iran could play dynamic roles in their neighborhoods."

For anyone who closely follows the news, none of those developments will seem at all startling. Neither will some of the report's longer-view analytical statements.

"Looking into the distance at countries that are of major interest today, the study projected that Afghanistan will remain an essentially tribally centered nation facing continual conflict. The future of Iraq does not look much better. The study sees internal ethnic, sectarian and tribal rivalries continuing, so that by 2025, 'the government in Baghdad could still be an object of competition among the various factions seeking foreign aid and pride of place, rather than a self-standing agent of political authority, legitimacy, and economic policy.' Pakistan is described as a 'wildcard,' with its northwestern territories remaining 'poorly governed' and cross-border activities continuing to cause instability in nearby areas of Afghanistan."

No real surprises there. The real surprise (and big disappointment) would be if government leaders used the report to prepare for the worse future without trying to attain the best one. Release of the report was deliberately timed to assist the new administration establish its policies and set its goals. Obama based his campaign and won the election on providing hope for the future and a brighter day for American citizens. Americans want him to be prudent but positive. As the NIC report notes, American "global engagement [is] essential -- as long as it is not driven by unilateralism." The president-elect has promised to repair damaged alliances and promote new friendships. He has indicated that he wants America to be a country where its moral strength is as respected as its military strength. Correctly used, the Global Trends 2025 report can show potholes in the road to a brighter future.

The New Silk Road

BusinessWeek magazine recently published an "Emerging Market Report" that claims "historic bonds between the Middle East and Asia are being revitalized in a torrent of trade and investment in energy, infrastructure, and manufacturing" ["The New Silk Road," 18 November 2008 print edition]. This should come as no surprise to anyone who has watched the development of the global economy. Even with oil prices hovering around $55/barrel, the national coffers of oil producing nations continue to fill and they are looking east to Asia (rather than to the West) for answers to the current recession. In effect, the article claims that the old silk road is being revitalized -- sort of. The article included the image below, which shows the old and new trade routes between the Middle East and Asia.

 

The links between Persian Gulf states and China are particularly strong since they involve trading natural resources for manufactured goods. But as the map shows, there are other connections as well.

"The Arab world and Asia have a legacy of trade ties dating back to caravans that transported textiles and spices across the desert on the so-called Silk Road and to Gulf traders that sailed the blue waters of the Indian Ocean in chunky ships known as dhows. Today a new Silk Road leads from the busy ports of Shanghai, Hong Kong, and Singapore to the Persian Gulf—and from sparkling airport lounges in Dubai and Riyadh back to Asia's bustling cities. The merchants on this new route are Arab investors looking for smart places to park their petrodollars and Asians seeking to lock up energy supplies and find markets for the goods churned out by their factories. Trade between the two regions has been expanding at a 30% annual clip. Since 2006, Asia has been the largest trading partner of the Gulf Cooperation Council, a group of six wealthy Arab countries, according to data compiled by Standard Chartered Bank. As of last year, Asia accounted for 55% of the GCC's total trade of $758 billion, the bank says. The mainstay of Gulf exports to Asia is oil, but some energy-intensive manufactured goods such as aluminum are also joining the mix. In return, China and Japan send to the Gulf products ranging from cars to computers while India and other Asian countries supply much of the food consumed in the Middle East. And while the scale of investment lags the trading ties, investors from the Gulf are buying stakes in everything from Asian banks and department stores to hotels and office buildings. Standard Chartered estimates that the Gulf countries invested $60 billion in Asia from 2002 to 2006."

As I noted in my post entitled State Capitalism and Sovereign-Wealth Funds, even in down times growing petrodollar funds need to find places in which to invest. With the greatest potential for growth found in emerging market countries, it's natural that such funds should look there for opportunities.

"It's easy to find evidence of the growing links. Delhi newspapers advertise homes built by Emaar Properties, a Dubai developer. Smaller companies from Algeria, Egypt, Morocco, and elsewhere have factories in China to make shoes, toys, and the like. And so many Middle Eastern traders visit the wholesale markets in the southern Chinese town of Yiwu that road signs are posted in Arabic as well as Chinese and English. 'Power is moving from West to East,' [says Khaled Al-Muhairy, a 36-year-old native of Abu Dhabi who set up his own asset management firm, Evolvence, in Delhi, India]. 'It is a huge opportunity.' The Asians are getting a foothold in the Middle East, too. China has plowed billions of dollars into North Africa's oil sector, especially in Sudan and Algeria. Along with the energy investment comes work for Chinese companies building roads, pipelines, and other infrastructure. Goods from Chinese appliance manufacturer Haier and electronics maker TCL are available across the Middle East. Indian engineering outfits Larsen & Toubro, Voltas, and others help out on real estate and industrial projects in the Arab world. And Malaysian developer MMC is working on a vast new city in Saudi Arabia. 'We are seeing serious investment flows from Asia to the Middle East, says Rachid Mohamed Rachid, Egypt's trade & industry minister."

The article goes on to explain why the silk road is being revitalized. One of the reasons, as noted above, is that each region has something the other wants -- so trade makes sense. Another reason is that Western markets are mosty saturated, which means that the best opportunities are going to be found in emerging markets. Another reason is that America and Europe have made many Arabs feel unwelcomed since the September 11, 2001, terrorist attacks.

"Many Arabs who might once have gone to the U.S. or Europe for education, medical care, or vacation are instead choosing Asia—and taking their business interests with them. 'All the traditional and fundamental links [with the West] are being replicated and taken over by Asia,' says Rachid."

The article admits that the current financial crisis is going to have a dampening effect on trade between the Middle East and Asia, but it predicts the overall trend of increased connectivity will continue.

"The global credit crunch will doubtless affect the trend. Stock markets across both regions have plummeted, slashing the value of investments. With oil prices down, Arab countries will have less money to invest; governments may use their cash to prop up domestic economies and possibly bail out banks and developers. But the West is suffering, too, so there's little reason to believe the economic integration of the Middle East and Asia won't continue."

One doesn't have to look too far into the distant pass, the article notes, to discover close ties between Gulf states and Asia. Those ties were weakened with when the West's post-Second World War economies started to thrive. "The oil boom led to closer ties with the U.S. and Europe," the article notes, "and most Arabs forgot about India, China, and the rest of Asia, preferring to invest in the West." It goes on to discuss one of the companies in the region with which Enterra Solution's works closely.

"[Tarek Sultan] is CEO of Agility, a Kuwaiti logistics and warehousing outfit with $6.2 billion in annual revenues. Agility has made a bundle supplying the U.S. military in Iraq. Now it's plowing nearly $2 billion into millions of feet of warehouse space and other trade infrastructure in Asia, building up a network of 70 offices and 20,000 employees in China and India. Agility even deployed a dozen trucks and 100 workers to handle dirty laundry for athletes at this summer's Beijing Olympics. 'Everybody knows about China and the U.S.,' says the 44-year-old Sultan. 'We are making investments in the trade that takes place within Asia.'"

Agility is one of the leaders in helping make connections both within and between emerging market countries. As the article points out, connections are being made everywhere.

"On the ground in the Gulf, connections with Asia are visible everywhere. Asian laborers are the muscle that builds skyscrapers, airports, and petrochemical plants. Asians also provide much of the brains and managerial talent at businesses ranging from investment banks to retailers, and people whose parents or grandparents originally came from the Indian subcontinent form the backbone of the middle class in Dubai and Abu Dhabi. The souks along the Creek, the salt inlet that was Dubai's original harbor, are dotted with hole-in-the-wall Hindu temples, and it's rare to spot anyone in Arab dress among the crowds piling into abras, the rough wooden water taxis that shuttle across the luminous green water."

The article goes on to make another important point -- connections must be in place before investments begin to flow. I am a proponent of connectivity because it enables so many good things to happen, including investment. I've stressed in my posts about Development-in-a-Box™ that development doesn't really progress until foreign direct investments are made in a developing country. The article stresses that investment flows have been small to date, but BusinessWeek expects that to change.

"So far, investment flows haven't kept up with trade ties, but that's likely to change. To date, only about 11% of foreign direct investment from the Gulf has gone to Asia. But by 2020 that could nearly double, to 20%, while the share of Middle Eastern money flowing West will fall to about half the total, from three-quarters today, consultancy McKinsey estimates. Even with lower prices for crude, the Gulf countries will have lots of financial firepower. If oil averages $50 per barrel, McKinsey figures, the Gulf will earn $4.7 trillion through 2020. Middle Eastern sovereign wealth funds are already pouring money into Asia. The largest—the Abu Dhabi Investment Authority—aims to have 8% to 12% of its estimated $500 billion-plus fund invested in emerging market stocks, with Asia a key destination. Other big investors include Dubai Financial Group and Dubai International Capital, controlled by the emirate's ruler. But a lot of recent investments in Asia have taken a whack. Dubai International Capital, for instance, bought 3% of India's ICICI bank for more than $700 million in July 2007. Since then, ICICI's shares have fallen 53%."

One of the challenges of doing business in emerging market countries is that the business environment in many of them is radically different than business environments found in most developed countries. As the article states, "For Asian and Middle Eastern investors, negotiating the written and unwritten rules of each others' business environments isn't easy." That is one of the reasons that we stress internationally-accepted standards and best practices as part of Development-in-a-Box. For their part, emerging market entrepreneurs are finding Arab investors and investment groups frustrating because they only want to invest in large projects. As Asian countries become more wealthy, Middle Eastern countries are trying to attract investment money back into the region -- especially the less well-off Middle Eastern countries.

"While oil-exporting nations want to lock up markets for their crude, Egypt and other Arab states are pushing Asian countries for investment that creates jobs. China's exports to Egypt have more than quadrupled since 2003, to $4.7 billion in 2007—roughly 18 times the value of Egyptian exports to China. The Egyptians want China to compensate by manufacturing in Egypt. 'We are trying to make Egypt a hub for China to export from,' says Ahmed El Sewedy, chief executive of Cairo-based El Sewedy Cables and head of the Egyptian-China Chamber of Commerce."

Serious trade imbalances remind many people in emerging market countries of the colonial period and they aren't willing to settle for that kind of relationship. This is not the first time the Chinese have been stung with criticism about trade imbalances and they are trying to placate at least some of the critics.

"Drive about an hour northeast of Cairo, and you'll see evidence that the Egyptian arm-twisting may be working. In a secluded stretch of desert near the mouth of the Suez Canal, TEDA—one of China's biggest development agencies, based in the northern port city of Tianjin—is carving out a manufacturing zone. The aim is to attract some 50 Chinese-owned factories that would employ 10,000 Egyptians and 1,000 Chinese. Seven companies are already operating in the area, including a Chinese/Egyptian venture that assembles oil drilling rigs and another that makes disposable garments for hospitals and restaurants. Liu Aimin, general manager of Egypt-TEDA Investment, the company that's developing the zone, ticks off Egypt's attractions for Chinese companies: cheap labor, trade agreements that ease entry of goods into the U.S., Europe, and Arab countries, and a location 'at the crossroads of Asia, Africa, and Europe, facing 1 billion customers.'"

The new silk road is likely to operate as long as the old one did. It's a virtual road that connects wealth, resources, and opportunities. Companies that want to get in front of the money are going to have to travel that road and the sooner they get on it the better.

State Capitalism and Sovereign-Wealth Funds

Back in September, just as the collapse of Lehman Brothers was triggering a full-blown financial crisis, The Economist wrote an article about "coming to grips with sovereign-wealth funds." ["The rise of state capitalism," 20 September 2008]. Sovereign-wealth funds are huge investment funds owned and controlled by governments -- most of them pumped up by petrodollars. The term "sovereign-wealth fund" has only been around a few years (it first gained widespread use in 2005). Sovereign-wealth funds are typically established when governments have budgetary surpluses and little or no international debt. Rather than let the money sit in a bank and earn small returns, the notion was to invest the money and obtain greater returns. Some countries may be rethinking such strategies given the current state of international stock markets; nevertheless sovereign-wealth funds are likely to remain permanent features of the financial landscape. Kuwait is normally credited with starting such funds. It established the Kuwait Investment Authority in 1953, nearly 40 years before the next largest fund, Norway's Petroleum Fund, was established in 1990. Norway established its fund to counter the effects of the eventual decline in oil income and to smooth the disrupting effects of highly fluctuating oil prices. Any country that accumulates wealth from selling commodities experiences similar budget volatility as commodity prices change.

Sovereign-wealth funds will remain viable since countries have longer investment horizons than most individuals. As a result, they should be able to ride out the current financial downturn and achieve long-term investment goals. The other reality is that oil producing nations will still have to do something with their petrodollars. Even at $30/barrel, Arab sovereign-wealth funds will continue to grow.

Not everyone living in countries with sovereign-wealth funds is happy that sovereign-wealth is invested outside the state. The Economist's article begins with a rant by a Chinese blogger who decries the fact that a $3 billion investment by the China Investment Corporation, a sovereign-wealth fund established by the Chinese government, had at the time the article was written already lost $500m. That number is likely to have increased during the intervening weeks. The China Investment Corporation had bought shares of Blackstone, an American private-equity firm, and Blackstone has not fared well since June 2007.

"The Chinese government’s policy of 'going out'—investing abroad through its companies and new sovereign-wealth funds instead of at home where it was needed—was about showing off to the world, wrote [blogger Wu Zhifeng]: 'Chinese companies started acquiring businesses here and there in the world so that many countries would shout that "the dragon is coming".' If some sovereign-wealth funds are unpopular at home, they are viewed with even more hostility in the rich world, where CIC and others have been splashing their cash lately. Such funds have provided several top Wall Street firms (as well as some of their European rivals) with large injections of cash in the past year—including Citigroup, which received $7.5 billion from the Abu Dhabi Investment Authority (ADIA). That probably saved a few of them from bankruptcy or a Bear Stearns-style forced sale, but it was controversial."

As credit has continued to tighten, however, some skeptics have come to view sovereign-wealth funds more favorably. Just as the U.S. Government's price of bailout for some banks involved gaining a share of the business, sovereign-wealth funds are in a position to bargain hard and get good deals in exchange for their money. Most of the funds are well-managed and are gaining influence.

"It is not just banks that have caught the sovereign-wealth funds’ eye. In July the Abu Dhabi Investment Company bought a 90% share in New York’s iconic Chrysler Building. Soon after that, Mubadala, another Abu Dhabi fund, announced that it intended to become one of GE’s ten biggest shareholders. Public criticism of sovereign-wealth funds has subsided a little as the crisis in the developed world’s financial markets has made people grateful for any money they can get. Yet in private there are plenty of worries about the growing size and power of sovereign-wealth funds."

To put it bluntly, people who worry are actually more concerned about the ethnicity of the governments that own the sovereign-wealth funds than they are about the investments themselves. Most of the funds are owned by countries in the Middle East. Investments from China's sovereign-wealth fund and Russia's foreign exchange reserve also raise eyebrows in the West -- especially in America. Where concerns about the investments themselves are the main issues, the issue is generally the fact that sovereign-wealth funds are giving governments stakes in private companies. This is a far cry from making such companies government-owned enterprises (it's the difference between capitalism and socialism).

"In an article in the Financial Times last year, Larry Summers, a former American treasury secretary, wrote that a 'signal event of the past quarter-century has been the sharp decline in the extent of direct state ownership of business as the private sector has taken ownership of what were once government-owned companies. Yet governments are now accumulating various kinds of stakes in what were once purely private companies through their cross-border investment activities.' Mr Summers called for a new policy: “Governments are very different from other economic actors. Their investments should be governed by rules designed with that reality very clearly in mind.”

The Economist is not sure that such concerns are justified, but it does admit that sovereign-wealth funds are becoming more important actors in the financial arena.

"The problem, if problem it be, may be just beginning. According to the US Treasury, sovereign-wealth funds are 'already large enough to be systemically significant'. But the McKinsey Global Institute in a recent report forecast a dramatic increase in the assets of sovereign-wealth funds over the next few years. It predicts that Asia’s sovereign assets, which at the end of 2007 stood at $4.6 trillion, will rise to at least $7.7 trillion by 2013 on conservative growth assumptions, and to as much as $12.2 trillion if economic growth continues at the fast pace of the past seven years. As for the sovereign-wealth funds of oil-rich states such as Russia, the United Arab Emirates and Saudi Arabia, much depends on what happens to the price of oil. McKinsey looked at the impact of several possible average oil prices over the next five years, all below what the stuff has been selling for in recent months. Even at $50 a barrel (remember?), the assets of these sovereign investors will rise to $8.9 trillion by 2013, from $4.6 trillion at the end of 2007."

With oil now hovering between $50 and $60/barrel, above McKinsey's conservative estimate, it is easy to see why sovereign-wealth funds are garnering increased attention. The Economist asks the big question.

"What are they going to do with the money? Will these funds become instruments of a 'new mercantilism', with the controlling government attempting 'to ensure that company-level behaviour results in country-level maximisation of economic, social and political benefits', as Ronald Gilson and Curtis Milhaupt suggest in a recent article in the Stanford Law Review? Will they be opportunistic, as Larry Summers fears? Will they be politically aggressive, as Russia has already shown itself with Gazprom (not, strictly speaking, a sovereign-wealth fund but certainly a well-endowed corporate arm of the state)? Or are the funds simply investors, looking for nothing more sinister than a decent return on their money? Earlier this year, Yousef al Otaiba, Abu Dhabi’s director of international affairs, in an open letter to America’s treasury secretary, said that 'it is important to be absolutely clear that the Abu Dhabi government has never and will never use its investment organisations or individual investments as a foreign-policy tool.' And as Messrs Gilson and Milhaupt note briefly in their article, despite fears that sovereign funds will use their investments to secure technology, gain access to natural resources or improve the competitive position of their domestic companies, 'no one can point to a reported incidence of such behaviour.' In fact, there is no such thing as an average sovereign-wealth fund."

The article points out that some sovereign-wealth funds have been around for decades, like the Kuwait Investment Authority (KIA), and others, like China's are fairly new. They also different greatly in the amount of money they control.

"The biggest is ADIA, which with assets of $625 billion is almost double the size of the next-biggest, Norway’s. Some, like the KIA, are essentially passive portfolio investors. Others are more active, resembling private-equity firms (Dubai International Capital) or even industrial holding companies (Singapore’s Temasek). Most of them are increasingly shifting their focus to equity-investing. Many of them also invest in hedge funds and private-equity firms. There are big differences, too, in their willingness to use professional managers and in their competence as investors. One reason why CIC bought its stake in Blackstone, and Mubadala its stake in Carlyle, may have been to tap the investment expertise of those firms. Another way of raising the quality of in-house staff is to appoint nationals who have gained qualifications abroad."

While the Middle Eastern sovereign-wealth funds are set up and managed to make money. The article point out that China and Russia may be horses of a different stripe.

"Russia and China may be exceptions, in that both their governments have been willing to use the companies they own to pursue political goals and might well try to do the same with their sovereign-wealth funds. If that starts to happen, they may need to be governed by different rules from those applying to funds that try to concentrate mainly on getting good investment returns."

Governments that are simply interested in making money have a difficult time understanding why their investments generate so much concern and criticism. Isn't investment and profit what capitalism is all about? The concerns arise primarily because most sovereign-wealth funds operate with little transparency. Criticism of sovereign-wealth funds generally fall into one of three categories:

• They are too influential. As sovereign-wealth funds grow in size and importance, so does their potential impact on various asset markets.
• They pose a security risk. Foreign investments by sovereign-wealth funds raise national security concerns because the purpose of the investment might be to secure control of strategically-important industries for political rather than financial gain.
• They are not well regulated. Sovereign-wealth funds are not nearly as homogeneous as central banks or public pension funds. They operate with little transparency and can be a potentially valuable tool for achieving certain national policy and macroeconomic goals.

Of course, sovereign-wealth fund owners and managers are stung by such criticisms.

"Many sovereign-wealth funds have been upset by the criticism they have received over their recent Wall Street investments. America’s treasury secretary, Hank Paulson, is understood to have spent a lot of time reassuring them, especially about the reaction to their investments in Wall Street, after Merrill Lynch, Morgan Stanley and others persuaded the funds to shore them up. 'They have lost money and then been subjected to complaints in Congress about the lack of transparency on their balance sheet or their agenda,' says the private-equity veteran. To try to reduce the criticism, the IMF has been working on guidelines for sovereign-wealth fund transparency. ... As things stand, transparency ranges from next to none to a lot. Again, some sovereign funds protest that they are being subjected to far tougher disclosure rules than many big domestic investors in developed countries. It will be no surprise if the IMF proposals are given a lukewarm reception and then largely ignored."

Some analysts point out that the West has little room to criticize sovereign-wealth funds and it needs only recall the "Asian Flu" financial crisis to know why.

'"There is a huge amount of hypocrisy about sovereign-wealth funds in the West,' says Richard Cookson, a global strategist at HSBC who keeps an eye on sovereign-wealth funds. 'When did the developed world ever not use its economic and political clout to buy assets on the cheap?' In the Asian crisis of the 1990s, American banks bought into several troubled Asian banks. When local politicians complained, America accused these countries of protectionism, says Mr Cookson. The real reason the developed world is now so upset, he suspects, is that the sovereign-wealth funds symbolise so clearly the shift in the balance of economic power to the emerging markets. Yet when emerging countries set up sovereign-wealth funds, with separate governance and a clear investment mandate, it is often a sign of them 'recognising that they got it wrong in the past, asking how to improve, and concluding that an endowment/portfolio approach is the best way,' says Chuck Bralver of the Centre for Emerging Market Economies at Tufts University. 'Leaving the Russians aside, they are mostly being highly professional.' Even the Chinese sovereign-wealth funds are expected to hire hundreds of professional investment managers, mainly from developed countries."

As I have written in several recent posts, emerging markets represent the future of the global economy. This may be a difficult change for Westerners to embrace but the sooner they do the better off they will be. Sovereign-wealth funds create a wrinkle in the international financial landscape that has not been encountered before and exactly how to deal with them remains uncertain. The fact is, the West may have little say in that matter.

"What is certain is that as sovereign-wealth funds grow, which they are bound to do, an increasing number of the world’s companies will end up at least partly in state ownership. And there is a possibility that the sovereign-wealth funds’ good behaviour is a Trojan-horse strategy which in time will give way to mercantilist interference. In practice, sovereign-wealth funds so far have given little cause for alarm. Their biggest downside may be that they lack the capacity to find a sensible home for all the money that is likely to be flooding in over the coming decades, and that much valuable capital will be squandered on ill-advised projects. 'I’m struck by how responsibly China and countries in the Middle East are behaving,' says Laura Tyson, who used to chair Bill Clinton’s Council of Economic Advisers and now teaches about emerging markets at Berkeley. The Gulf states are trying to use their wealth to generate 'higher living standards over the next 100 years, not squandering it on the high life like they did in the 1970s'. Despite much talk about their desire to switch to the euro or even make it the next reserve currency, 'they are not dumping the dollar, they are continuing to make long-term investments,' she points out. Indeed, bailing out the developed world’s banking system seems heroically generous of them. All of which, says Ms Tyson, 'underscores the extent to which emerging markets now recognise that their well-being depends on the stability of the international system.' Forms of state ownership will become more common, she concedes, 'but so what? The simple dichotomy between private and state-owned does not tell us very much at this point.' To be on the safe side, Messrs Gilson and Milhaupt propose that shares in American firms that are bought by sovereign-wealth funds should have their voting rights suspended until they are sold again. This would beef up existing arrangements that protect American firms from foreign ownership where national security is seen to be threatened. Without the voting rights, the sovereign investors could not interfere in the activities of the firms they buy, but if the suspension is only temporary, the funds would not suffer any financial penalties. This looks like an elegant solution, but it is not clear if it could be enforced. Moreover, it would make sense only if there really is reason to worry about the intentions of sovereign investors. If their intentions are good, the proposal would rob capitalists of their ability to play a value-creating role in the governance of the firms they invest in. ... Perhaps well-motivated, well-run sovereign-wealth funds with long-term investment horizons could help create a more effective system of corporate ownership than today’s often short-termist investors. Let’s hope so."

I'm encouraged by the fact the emerging market countries with sovereign-wealth funds are acting in a "heroically generous" way. I'm encouraged that they looking long-term and investing for a better a future -- a future they realize they can't achieve without a growing global economy. The West needs to come to the same realization and work with emerging market countries to create a future that benefits us all.

Building Up rather than Bailing Out

In my post Green Capitalism and the Map of Grand Challenges, I discussed proposals by individuals like New York Times' columnist Tom Friedman that the United States take advantage of the current financial crisis to build up a green economy. Friedman notes that the housing bubble is not the first to burst, but that that other bubbles have left us with infrastructure on which future prosperity could be built. He believes that building the infrastructure necessary to support a green economy would not only create jobs now but also good jobs in the future. And the infrastructure that would be built, he claims, would provide a firm foundation for future prosperity. Part of that infrastructure would include improved electrical grids that could support alternative sources of energy and the increased use of electric vehicles [see my post GE, Google, and Grids]. In that post, I discussed how GE and Google are lobbying for public/private partnerships to help strengthen America's electrical grid.

IBM's chief executive Sam Palmisano has now weighed in on the subject of building our way out of the current financial crisis ["I.B.M. Has Tech Answer for Woes of Economy," by Steve Lohr, New York Times, 6 November 2008]. Palmisano's plan is very much in line with proposals discussed in my earlier posts. Lohr writes:

"I.B.M.'s chief executive, Samuel J. Palmisano, is proposing a technology-fueled economic recovery plan that calls for public and private investment in more efficient systems for utility grids, traffic management, food distribution, water conservation and health care. Recent technology advances make this possible, and the need is apparent, Mr. Palmisano [said] in a speech he is ... to the Council on Foreign Relations in New York. Sixty-seven percent of electrical energy, for example, is lost because of inefficient power generation and grid management. Congested highways cost $78 billion a year in squandered working hours and gas burned."

"Going Green" is likely to be more about finding efficiencies and eliminating waste in our current system than it is in trying to reduce consumption or focusing strictly on the reduction of greenhouse gasses. That is why Palmisano believes we can build our way out of the current crisis. Of course, he plans on making money for IBM at the same time.

"Mr. Palmisano’s speech never mention[ed] I.B.M., but his proposal has a self-serving side. I.B.M. is increasingly playing the role of lead contractor in these so-called smart infrastructure projects around the world, from a traffic management network in Stockholm to electric grids in Texas."

To be fair, Palmisano is not alone in his assessment -- as my previous posts prove. Lohr agrees:

"Some economists and policy experts say similar projects are a good way to improve the long-term health of the economy, potentially providing a foundation for innovation and growth across a range of industries. Applying more computing intelligence to help transform fields like transportation, energy and health care will be 'critical to solving an array of pressing public problems,' said Robert Atkinson, president of the Information Technology and Innovation Foundation, a nonpartisan research group. 'The countries that take the lead in this area will be the nations that enact the best public-private partnerships,' said Mr. Atkinson."

I have weighed in before as a proponent of public/private partnerships. Such partnerships help ensure that government policies and private enterprises move in the same direction. The last thing a struggling economy needs is for government and business sectors to be working at cross purposes.

"In an interview, Mr. Palmisano compared today’s economic challenge, in broad strokes, with that faced by the United States as it struggled to emerge from the Depression or after World War II. In the 1930s, he said, the New Deal programs, among other things, brought electrical service to much of country — not only to rural homes, but also to factories, which no longer needed to build their own power plants, as many had previously. After World War II, Mr. Palmisano said, the government’s construction of a national highway system helped create larger markets for goods. 'We’re at a similar stage now in that these are difficult economic times,' he said. 'The right way through it is not to hunker down, but to step up and invest and improve our competitiveness.' In his speech, Mr. Palmisano points to the technology trends that are beginning to make his proposal possible and affordable. Items ranging from cars, appliances and packaged goods to roadways and utility wires, he says, are increasingly 'instrumented' with transistors, sensors and radio frequency ID, or RFID, tags, 'interconnected' over the Internet and 'intelligent' because of advanced software that communicates with vast supercomputing data centers. In energy, for example, computerized grids, thermostats and appliances can sense and communicate line failures or automatically turn off air-conditioners during peak load times to save money and fuel."

I discuss smart grids in the post about GE and Google proposals mentioned above. It's worth mentioning at this point, that the "vast supercomputing data centers" mentioned by Palmisano constitute the core of what has come to be called "cloud computing." For more on that subject, see my posts entitled The Coming Age of Cloud Computing, The Air is Getting Blurry with Clouds -- Computing that is, IBM Heads into the Clouds, and Google brings Cloud Computing to the Masses. Larry Ellison, CEO of Oracle, is not a believer in cloud computing. At a recent conference, he said, "Maybe I'm an idiot, but I have no idea what anyone is talking about. What is it? It's complete gibberish. It's insane." ["A Mostly Cloudy Computing Forecast," by Daniel Lyons, Washington Post, 4 November 2008]. His skepticism, however, is a topic for another time. When it comes to controlling the types of large grids discussed by Palmisano, massive computer power does make sense. Back to Lohr's article:

"I.B.M., to be sure, is one of many companies developing smarter grids, roads, food distribution and water conservation systems. In the technology sector, Microsoft, Cisco Systems, Hewlett-Packard, Oracle, SAP, Accenture and others are working on bringing computing intelligence to physical systems, Ted Schadler, an analyst at Forrester Research, said. But no other company, he said, yet has the breadth of hardware, software, services and research scientists to tackle these challenges. 'What seems different and noteworthy about the I.B.M. approach is its sweeping comprehensiveness and message,' said Rosabeth Moss Kanter, a professor at the Harvard Business School. 'Putting the pieces together under one inclusive and rather bold label can stimulate discussion and innovation.'"

With a new administration poised to take office, people are looking for the president-elect and other politicians to make good on their promises to help create jobs and support alternative sources of energy. Businessmen, like Palmisano, sense that this moment in history presents a unique opportunity to move in a new direction and they are using public forums to encourage politicians to get on the bandwagon with them. Good businessmen always see opportunities, even when others are embracing fear and caution. Obama was elected because he inspired the same kind of hope in the future that Reagan did in the 1980s. Palmisano, Friedman, and others are hoping that he seizes the moment and builds for the future.

The G-20 Summit

As most people are aware, President Bush hosted a meeting of the G20 this past weekend to deal with the current financial crisis. According to France's president, Bush was hesitant to call the meeting (perhaps because he is sensitive to his lame duck status). With the crisis deepening (today's headlines confirm that the Euro Zone and Japan are both in recession), he was finally persuaded. The summit of world leaders was aimed at establishing policies and courses of action that would prevent the crisis from deepening further and provide a roadmap to recovery. The G20 is a group that represents wealthy countries and major emerging economies. In previous posts, I've pointed out that the emerging markets are likely to play a critical (if not leading) role in any economic recovery [see, for example, Trust and Credit in Emerging Markets and Trade Financing]. President Bush apparently believes the same since he called a meeting of the G20 instead of the G8. He also made an even bolder political statement by his seating chart at a formal dinner he hosted last Friday night ["As Leaders Wrestle With Economy, Developing Nations Get Ringside Seats," by Sheryl Gay Stolberg, New York Times, 15 November 2008]. Stolberg reports:

"There, in the State Dining Room beneath a massive portrait of Abraham Lincoln, to Mr. Bush’s right was President Luiz Inácio Lula da Silva of Brazil, who has complained loudly that developing nations like his were being “infected with problems” not of their making. To Mr. Bush’s left sat a leader with a fat checkbook and the power that comes with it, President Hu Jintao of China. It was a startling illustration of the way the financial crisis, which originated on Wall Street and has spread around the globe, has remade the international economic world order. By insisting that developing nations be included in the summit meeting, President Bush gave fresh clout to their leaders, each of whom arrived in Washington with his or her own agenda."

Unfortunately, the summit was long on rhetoric and short on details. Nevertheless, there is a sense that the summit was the opening shot of a revolution that could result in a new global financial order -- the long-anticipated retooling of Bretton Woods institutions established following the Second World War. The leaders of the G20 nations issued an 11-page statement that spoke of broad principles. When it came to details, however, it left them "to be worked out by lower-level aides before another summit meeting in April." ["World Leaders Agree to Seek Major Reform," by Glenn Kessler and Anthony Faiola, Washington Post, 16 November 2008].

"Under the plans outlined by the leaders, countries such as China, Brazil and India would gain greater roles and responsibilities as part of a restructuring of the international financial system, while European leaders won a commitment to new regulations and controls on banks, rating agencies and exotic financial securities. The leaders also agreed that a dramatic failure of market oversight in 'some advanced countries' was among the root causes of the financial crisis, an implicit rebuke of the United States."

Leaders were keenly aware, of course, that in April the United States will have a new president and different team with whom to deal. President Nicholas Sarkozy trumpeted that Europe achieved everything it desired from the summit.

"The leaders agreed to set up a new regulatory body, 'a college of supervisors,' to examine the books of major financial institutions that operate across national borders, so regulators could begin to have a more complete picture of banks' operations. They demanded greater scrutiny of hedge funds and the completion of a clearinghouse system to help standardize and limit risk on some of the opaque and exotic financial derivatives that helped bring down Wall Street's investment banks. Leaders also agreed to submit their countries' financial systems to regular, vigorous reviews by the International Monetary Fund -- assessments that some countries, including the United States, had long resisted. And they urged new constraints on the pay schemes at financial firms that 'reward excessive short-term returns or risk-taking.'

It would seem that developing countries also achieved part of their agenda; namely, a greater role in international dealings.

"During the talks, developing countries demanded a greater role in elite financial institutions, and the conference's communique called for the immediate expansion of the Financial Stability Forum to a 'broader membership of emerging economies.' The Swiss-based organization brings together finance ministry officials and central bankers, but while it includes Singapore and Hong Kong, China is not yet a member. In what one diplomat said was a contentious debate, Brazil and China demanded that they should be represented on the FSF. The communique also said that, over time, the IMF and other global institutions 'must be comprehensively reformed so that they can more adequately reflect changing economic weights in the world economy.'"

Robert Hutchings, a diplomat in residence at Princeton University's Woodrow Wilson School and former chairman of the U.S. National Intelligence Council, wrote an op-ed piece in the Washington Post in which he called for even bolder action ["A Global Grand Bargain," 17 November 2008. He writes:

"The world is on the cusp of the most profound shift in global power and influence in a century. Managing this quiet revolution calls for nothing short of a new international system, with a radical revision of existing institutions and patterns of doing business. It is a time for thinking big."

Hutchings believes that primarily addressing short-term challenges is also short-sighted.

"The G-20 summit was a long-overdue initiative, but it did not go far enough. The summit made modest progress in addressing the immediate crisis, but it hardly touched the harder challenges of institutional reform. The 'action plan' announced on Saturday was mostly and predictably a vague set of broad goals. The summit failed for two principal reasons. First, the mechanisms do not exist, at the IMF or elsewhere, to regulate governmental financial institutions, much less non- or quasi-governmental institutions such as China's sovereign wealth funds. Second, leaders of influential countries such as China and India made clear their disinterest in participating in global institutions that are dominated by the Western powers. Why should China and India pay attention to an IMF in which their combined voting weight is just over 5 percent and which is always led by a European (with the World Bank always led by an American)? The immediate challenge of creating a 'Bretton Woods II' might begin with the Europeans and Americans voluntarily relinquishing their cozy agreement to reserve the top IMF and World Bank jobs for themselves and proposing a revision of the voting weights at both institutions to give the rising economic powers a greater stake and role (and to oblige them to pay higher dues as well). This would clear the way for a strengthening of IMF roles in gathering and disseminating financial information, developing enforceable standards and codes for banks and sovereign wealth funds, and enhancing surveillance of financial systems -- internationally and in individual countries -- in conjunction with central banks. To give this new system more political clout, the G-20 itself should be given a stronger mandate and role to complement this enhanced IMF."

As readers of this blog know, I'm a supporter of global standards. I've built Enterra Solutions' Development-in-a-Box™ around the idea that international standards and best practices are the best way for emerging market countries to join the global economy and build trust where none has previously existed. Hutchings says that even this, however, does not go far enough. He writes:

"This does not go far enough, though. It is not just the global financial mechanisms but also the institutions governing trade, energy, the environment, development assistance and security that need to be overhauled. ... How to begin? As Dwight Eisenhower advised, if a problem cannot be solved, enlarge it. Tackling these problems piecemeal or in isolation won't do it. The solution lies in a 'global grand bargain' -- a set of loosely linked trade-offs whereby the United States and Europe give a bit on the Doha trade round and induce Brazil and India to follow suit, China takes economically difficult steps to reduce carbon emissions because it sees progress in other areas, and Russia sees its international role strengthened and therefore undertakes to act as a reliable energy provider and promoter of nuclear nonproliferation. Early breakthroughs may be possible in some areas, such as a deal on climate change that brings in China and India and creation of a global fund to begin weaning us from fossil fuels. But this new system is not the work of a few months. It is not a single negotiated settlement, a single treaty or a single institution but, rather, a flexible set of reciprocal concessions among a dozen or so key countries that would evolve step by step. Just as the post-World War II order took the better part of a decade to put in place, so too will the new order evolve over the course of years."

Hutchings believes the timing is right for a global grand bargain because conditions call for it, a change in the American presidency is imminent, and global power is shifting eastward. He concludes:

"It is precisely in the area of creating a new international order that the [Obama] administration should show boldness and imagination. The time to act is at the beginning, when the president's power and support is at its high point. Obama should articulate a vision that can cut through entrenched positions, internationally as well as domestically, and allow him to take initiatives that would come to fruition later in his term."

Although it may appear that world leaders merely punted the search for solutions to pressing challenges into next year, they understand that any solution must involve the United States and trying to negotiate while the U.S. in is the midst of major political transition simply won't work. With emerging market countries now realizing that their influence and voice in international affairs is increasing, they too can take the next few months to figure out how they can become part of the solution rather than a part of the problem. They have long complained about sitting on sidelines not being heard -- perhaps it's time to hear what they have to say. If they simply want to redress old grievances, they will have lost a precious opportunity to demonstrate real leadership at time when leadership is desperately needed.