Common Sense Economics

"Common Sense Economics" subtitled "What Everyone Should Know About Wealth and Prosperity," an economics textbook contains a wealth of information about the major sources of economic progress and the role of government.

More details on http://www.commonsenseeconomics.com/

Linked: The New Science of Networks

Linked: The New Science of Networks by Albert-László Barabási is one of my all time favorite. I have read it twice.

Here is an excellent review by a fellow blogger.

Reviewed by Pravin Shankar

Complex networks are being touted as the next scientific revolution of the new millenium. Led by a spate of sparkling discoveries by Prof. Barabási and his team of researchers at University of Notre Dame, the study of complex networks has seen a tremendous rise in interest among biologists, physicists, computer scientists, economists and sociologists alike. The study of networks is no longer being seen as restricted to computer science. Instead, it has percolated into a vast array of seemingly unrelated disciplines of science.This paradigm shift has been brought about by means of the discovery that many diverse systems in nature can be described as complex networks which are actually very similar to each other. Behind most complex systems there exists an intricate network consisting of innumerous nodes connected to each other by links. Understanding this network is a crucial prerequisite to understanding all of these systems.This research has had a rather long incubation period, during which time networks were believed to be fundamentally random. The random model introduced by Erdös and Rényi was long thought of as the basis of all complex networks. That theory postulates that nodes in a network randomly link to each other. However real networks, like the internet, the cellular network and the social network, all have special nodes, called hubs or connectors, which are connected to most other nodes in the network. The random model failed to describe the existence of these hubs. The breakthrough was brought about, in the very recent past, by Barabási, who discovered that the World Wide Web was in fact a scale-free network following power law distribution of nodes vs. degree. This was followed by a spate of discoveries by scientists from various other fields. Independent discoveries concluded the realization that a similar scale-free topology exists in the genetic network of living organisms, the social network of people and their social links, the economic network of business organizations, and many other networks like that of scientific citations, terrorist networks, and viral networks.Barabási has presented a vast amount of information in the most palatable of forms, leaving out the mathematical details and avoiding scientific jargons of any form. The text is abundantly interspersed with anecdotes and stories, for example, the “seven bridges” problem of Konigsberg which inspired the legendary mathematician Leonhard Euler to create the first graph and lay the foundation for modern graph theory. Many seemingly unlikely analogies are drawn primarily to pique reader interest, for example, between the Denial-of-Service attack on Yahoo and the spread of Christianity by St. Paul in the first century AD, or between Bose-Einstein condensation and the fitness-model. Explanations based on network theory are offered for several recent phenomena of great relevance, for example, the terror attack on the World Trade Center by the terrorist networks and the spread of sexually transmitted diseases like AIDS across the sexual network.In the words of the author, the book “has a simple aim, to get you to think networks.” Towards that end, it provides the reader with an exhilarating foray into the fascinating world of complex networks and is bound to spark off many more amazing discoveries heralding a new scientific revolution

Economic Policy - Thoughts for Today and Tomorrow

The Ludwig von Mises Institute website is one of my favorites.

www.mises.org

During my usual browsing I came across this document. I paste it here for my own future reference.

www.mises.org/etexts/ecopol.asp

Port Louis - Then and Now

Much has changed on the Port Louis skyline. See for yourself.




Wikipedia has a limited content on Mauritius. Here is the link.

http://en.wikipedia.org/wiki/Mauritius

Why building new roads doesn't ease congestion

Wondering why it takes over an hour to get into Port Louis from anywhere in the country. I wrote my views in an article in the local press sometime back. Here is much more from an interesting source.

http://bicycleuniverse.info/transpo/roadbuilding-futility.html

Himesh Reshammiya

Himesh Reshammiya, India's 1st and No.1 Rockstar ( some people think so) is singing in Mauritius today and tomorrow. It seems that both shows have been sold-out.

Himesh apprears to be a forward looking bloke. He has his own website.

http://www.himesh-reshammiya.com/

Impressed. Enjoy the show...

Henry George and the Single Tax Theory

I stumbled upon Henry George very recently. He is most famous for the single tax theory that claimed that the renting of land and real estate produced an unearned increase in land values that profited a few individuals (landlords) rather than the majority of the people (tenants).

Henry George proposed a single federal tax based on land ownership believing a single tax would discourage speculation and encourage equal opportunity.

Here is an entire school dedicated to Henry George's teaching.

http://www.henrygeorgeschool.org

Posting Pictures directly on the Blog

This is what I was waiting for... ability to include pictures in the blog post at the click of a mouse.



Here is one beautiful picture. My daughter Chinmayi.

Cranberries

I first heard of cranberries from the Atkins Diet manual. Here is some information on their antioxidant and other properties.

Antioxidant Powerhouses

Cranberries are a rich source of antioxidants, according to the Cranberry Institute, a trade association for cranberry growers. In a study funded by the Institute it was found that:
"Cranberries contained the most antioxidant phenols compared to 19 commonly eaten fruits

Read on

http://healing.about.com/od/recipes/a/cranberries.htm

Triumph of the Commons - The case of the Silicon Valley

I have spent a good deal of time exploring the Silicon Valley phenomenon out of personal interest. Here is one such article that I found interesting.

It is available on the HBS Working Knowledge site under the title ' Gurus in the Garage'

http://hbswk.hbs.edu/item/1864.html


Why do so many wanna-be entrepreneurs like Scott Rozic, founder and CEO of XMarkstheSpot, head for Silicon Valley? The reason may seem as obvious as why Willie Sutton robbed banks—because that's where the money is. But it's really more complicated than that.
Biologist Garrett Hardin coined the phrase "tragedy of the commons" to describe a system in which people acting rationally and in their own self-interest destroy the very resources they all share for their livelihood. His original example was of colonial farmers. Adding sheep to a flock grazing on the town commons made sense for the individual but eventually brought ruin to all. The culture of Silicon Valley turns that system on its head. The bank of expertise in Silicon Valley represents a triumph of the commons: resources are extracted and replenished in a self-regulating and efficient manner that promotes cooperation and growth. That triumph can be attributed to the Valley's distinctive geography, history, and culture.
Why the triumph
Viewing the valley from the flight approach to San Francisco International, one is struck by how small the region is. As Venture Law Group's Craig Johnson notes, Silicon Valley "is like any gas that is compressed; it gets hotter." Its tribes overlap socially and professionally based on work discipline (software engineers, for example), organizational affiliation (Hewlett-Packard), or background (Stanford MBAs or South Asian immigrants). The most skillful players do not have to travel far to make deals, change jobs, or find professional partners. John Doerr of Kleiner Perkins is fond of saying that the Valley is a place where you can change your job without changing your parking spot.
Shared values also bind longtime Silicon Valley natives. The personal convictions of the Valley's remarkable innovators, who created not just a company but an industry, still echo through the community. Bill Hewlett and David Packard influenced the older generation directly; many of them were early employees. Through this old guard, collegiality and high standards for performance are being carried down to next-generation entrepreneurs.
Helping former employees is part of that legacy and culture. Senior mentor capitalists describe how Bill Hewlett encouraged them when they left HP and how HP engineers encouraged entrepreneurship generally. Former IntelliCorp CEO K. C. Branscomb tries to help people who have worked for her. "I will call venture capitalists for them. There are probably a half-dozen little companies founded by former employees that I have helped get funded." Mike Homer, former general manager of Netscape's Netcenter, expresses a similar sentiment: "I'm a pretty loyal guy to people I've worked for and who've worked for me. If somebody comes to me and wants this kind of help, I may not be the one to provide it in all cases, but I'm going to figure out how to get them the resources they need."
How the commons works
Mentor capitalists in the Valley function as an informal, close-knit guild. Today's employee may be tomorrow's boss; today's competitor, tomorrow's partner or acquisition. If you're an experienced, reputable member of the guild, you're entitled to draw from the common fund of expertise. Often, the exchanges aren't direct, one-to-one transactions. Bread cast upon the water returns in another form at another time from other people. "You can see it coming back to you," Johnson explains. "Like with Grassroots [his own recent start-up], I thought, who could help me on this project? The fact that I can call busy, successful people whom I don't know personally and have them return my calls—I think is a recognition that it's not just me, that it is just the etiquette of the game."
One doesn't become a guild member without credentials. The best-known mentor capitalists started businesses themselves or held senior positions in one of the Valley's garage-to-giant start-ups such as Netscape or Oracle. But having failed once or twice along the way does not disqualify them. In fact, the scars are proof of valor—provided one has at least as many booms as busts on the ledger sheet. Says Kleiner Perkins's Vinod Khosla of a prominent mentor, "People like him have earned the right to advise entrepreneurs. They are qualified to do it, they've done it right, they've done it wrong, and they know the difference." It is understood, therefore, that when you join the guild, you enter as a master craftsman, not as an apprentice.
Guild members depend on one another to prequalify potential entrepreneurs. Every hour that a guild member spends reviewing an investment risk represents a deposit in the bank. "I could take all the raw data with all the entrepreneurs who approach me and do my own filtering, and so could the venture capitalists. But it's an enormously time-intensive process. We've all learned that we can use each other as filters, and there's an unofficial ranking of filters in the Valley that people constantly have in their minds," Johnson says. Foundation Capital's Mike Schuh underscores the value of mentor capitalists as filters: "Of the hundreds of things that I look at every week, if it's got one of those [mentor's] names on it, I don't even bother reading further. I just make the appointment."
Mentoring Styles
The mentor capitalists we interviewed share one habit: they refuse to make decisions for the entrepreneurs. Otherwise, their teaching methods vary tremendously.
Learning by Doing When Michael Chiarello, founder and CEO of NapaStyle, was developing the idea for his "media-driven Internet company," reflecting the casual but cultured lifestyle of California's Napa Valley, his coach Fern Mandelbaum, cofounder of toy maker Skyline, questioned whether other Americans shared his concept of Napa. "I thought, 'Come on, Fern, I will tell you what it means.' And she said, 'I believe you, Michael, I really do, but see if America believes you. Every position you take has to be defendable.'" So Chiarello, at Mandelbaum's suggestion, did market research. "Five of us sent out an e-mail questionnaire to ten of our friends, asking what Napa means to them. We asked them to send it to ten of their friends. We went out to a good section of America for a grassroots response to what Napa means."
Socratic Learning Scott Rozic, founder and CEO of XMarkstheSpot, recalls the tough questions that former CFO of Silicon Graphics Stan Meresman asked him: "'So, Scott, what's the one-liner, in two sentences or less — what does the company do?' Then you give the pitch and then he plays back, 'That's not compelling, let's make that compelling.' Or the playback would be, 'What is your competitive advantage, given the fact that....' And then he would identify two companies that sound like they would do the same thing, and he'd ask, 'What is the magic of XMarkstheSpot? Because there are so many companies out there, and everybody has funding. There is something magical about your company, but how do you distill that? '"
Stories with a Moral During an ActivePhoto board meeting, cofounder Sebastian Turullols was reporting on the young company's free cash and how to invest it. Former 3Com CEO Bill Krause responded with a cautionary tale: "Many years before, a CFO wanted to invest his company's cash in a high-yield, high-risk instrument. A senior board member told him, 'No one will remember the extra 1½% you made. But they will remember your losing $10 million.'"
Rules of Thumb Virtually every team we interviewed had the rule of "focus, focus, focus" instilled — or hammered — into them. However, mentors also knew when and when not to apply the rule. Fred Gibbons, founder and former CEO of Software Publishing, suggested that the ActivePhoto team members violate the rule when they needed to explore more than one market — but he cautioned them to experiment in no more than two.
Specific Directives Ken Coleman, an executive vice president at Silicon Graphics and mentor to many entrepreneurs, describes how he responded to a manager who wanted to fire a salesperson. The customer loved the guy, but he wasn't working out internally. "Here's the desired result — to remove this person but with a positive result. First, sleep on it. Be thoughtful about it. Get advice. Can you create a good exit strategy for this person? Create a win-win situation? Maybe the customer will hire him."
Learning by Observing Sanjeev Malaney, CEO of Media Tel (now MediaLinq) says that he "learned through osmosis" from mentor Rich Zalisk, who came in as the interim president. For example, Zalisk held a two-day planning session focused on the next year's objectives. Malaney learned from watching how Zalisk got "team members on the same page," working through priorities and budgets. "I learned a lot about how to facilitate and how to manage disputes."

The power of productivity

The McKinsey Quarterly is an excellent source of leading management thinking. Subscription is free and so is most of the content.

Here is another article that came my way ...via the regular email link.

Poor countries should put their consumers first.
William W. Lewis

After the Second World War, a vast array of international and national institutions—the United Nations, the World Bank, the International Monetary Fund, and a host of nongovernment and government aid organizations—was created to better the lot of the world's poor. Conventional wisdom came to hold that improvements in infrastructure, technology, capital markets, education, and health care would eliminate the stark distinctions between rich and poor nations.1 Fifty years and billions of dollars later, this wisdom has proved wrong.
At the beginning of the 1990s, the Soviet Union's fall precipitated a new conventional wisdom. This "Washington consensus" focused heavily on macroeconomic policies, such as flexible exchange rates, low inflation, and government solvency, while also embracing microeconomic elements—for instance, price decontrol, privatization, and good corporate governance and market regulation. Market reform swept through the world, including countries as diverse as Argentina, Brazil, India, Mexico, New Zealand, Poland, and Russia. Most were thought to be doing virtually everything needed to spark rapid growth.
But once again the results were disappointing. By the end of the 1990s, most of these countries' growth rates had returned to levels so low that the profile of the global economic landscape wasn't changing at all. Today more than 80 percent of the world's people still get by on less than a quarter of the average income in rich countries, much as they did 50 years ago.
Even worse, only a handful of countries, having moved out of dire poverty into the middle ground, enjoy a real prospect of joining the rich ones (Exhibit 1). This failure is worrisome because it means that today's poor countries will probably be poor 20 years from now. Economic development is a slow process. Even if poor countries grew at the extraordinary rate of 7 percent a year, it would take them 50 years to catch up. At current rates, it would take them a couple of centuries—if they ever did. As the tenacity of oppressive regimes and the rise in terrorism in these poor countries amply demonstrate, this gap between rich and poor is a major threat to global stability.
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Conventional solutions have failed because they don't address the real causes of persistent poverty. The Washington consensus, like the 50 years of development economics before it, is grounded in an analysis of economies at the aggregate level. But that's like trying to learn about the physical universe by using only the telescopes of astronomy; most real understanding in physics has actually come from studying the interaction of the tiniest particles in the universe. In economics, it is necessary to understand why individual companies operate as they do, since they are the ultimate sources of growth and job creation. Most economists can't afford the time and resources needed to look, in detail, at the way an entire country's economy works. They rely instead on broad national data sets and complex econometric tools that yield qualified answers at best.
At the McKinsey Global Institute (MGI) we have had, since 1990, the luxury of studying the dynamics and evolution of a representative group of industries in 13 countries: Australia, Brazil, France, Germany, India, Japan, the Netherlands, Poland, Russia, South Korea, Sweden, the United Kingdom, and the United States. In each, we analyzed the performance of 6 to 13 industries and compared it with the performance of the same industries in a handful of other countries. Our work is thus based on detailed studies of individual businesses, from state-of-the-art auto plants to black-market street vendors. It builds an understanding of the economy from the ground up, not the top down—a grassroots rather than a bird's-eye view.
This research has produced a new and unexpected understanding of the persistence of income disparities among nations. Economic progress depends on increasing productivity, which depends on undistorted competition. When government policies limit competition, even unintentionally, more efficient companies can't replace less efficient ones. Economic growth slows and nations remain poor.
It's productivity
GDP per capita is widely regarded as the best single measure of economic well-being.2 That measure is simply labor productivity (how many goods and services a given number of workers can produce) multiplied by the proportion of the population that works. This proportion varies around the world—though, interestingly, not by much.
Economists must understand how individual companies—the sources of job growth—function
Productivity, however, varies enormously and explains virtually all of the differences in GDP per capita (Exhibit 2). Thus, to understand what makes countries rich or poor, you must understand what causes productivity to be higher or lower. This understanding is best achieved by evaluating the performance of individual industries, since a country's productivity is the average of productivity in each industry, weighted by its size. Such a micro approach reveals the important fact that the productivity of industries also varies widely from country to country.
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This approach yields two crucial insights. First, to understand why some countries are mired in poverty, it is necessary to look beyond broad macroeconomic policies, such as interest rates and budget deficits, and also consider the myriad zoning laws, investment regulations, tariffs, and tax codes that hold back the productivity of industries and thus a nation's prosperity. Of course, macroeconomic stability is necessary. MGI's studies of Brazil, India, and Russia show that without it companies concentrate on making money by exploiting the instability rather than by raising their productivity. Yet a stable economy alone isn't enough to make countries prosper and grow: Japan has had a stable economy for decades but has suffered from ten years of stagnation.
The second insight is the realization that the income level of a country is determined, above all, by the productivity of its largest industries. High productivity in the unglamorous "old-economy" sectors—retailing, wholesaling, construction—is most important, since more people work in them. The fabled high-tech enclaves and financial markets are less so. MGI's study of rapid US productivity growth in the 1990s found that it was caused by just six industries, including retailing and wholesaling, not by the vaunted "new economy."3 IT investments played a modest role. In India, the fast-growing IT industry has yet to raise the living standards of more than a minuscule part of the population.
Differences in productivity also explain the persistence of disparities in wealth among rich nations. Twenty-five years ago, the economies of the United States, Europe, and Japan were generally expected to converge because technology, capital, and business practices flowed freely among them and their workforces were healthy and well educated.
In fact, significant disparities of wealth remain even among rich countries. Despite Japan's world-class automotive and consumer electronics industries, for example, its average per capita income4 is about 30 percent below the US average. Japan has followed a path different from that of the United States and Europe (Exhibit 3): economic growth during the past 30 years has been generated more by massive increases in the number of hours worked and the amount of capital equipment used than by an increase in the productivity of the workforce. South Korea has followed a similar path. But there is a limit to the number of hours that can be worked, and massive inputs of capital that don't earn an economic return eventually lead to diminished growth. Since 1990, Japan's real per capita income has barely grown. South Korea's tiger economy is running out of steam as well.
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Barking up the wrong tree
Many economists still attribute differences in the productivity of countries to differences in their labor and capital markets. These economists therefore believe that big investments in education and health and generous development loans and grants are the keys to economic growth. MGI's research, however, found that these factors explain few, if any, differences in economic performance.
Consider education. In the early 1990s, Germany and Japan seemed to be passing the United States in economic performance. One of the principal reasons cited was the poor education of the US workforce. Since then, Japan's carmakers have built US factories that achieve 95 percent of the productivity these companies enjoy at home. Whatever the faults of the US education system, on-the-job training clearly compensates for them.
This truth holds for poor countries as well. Some of Brazil's private retail banks are as efficient as any in the world. South Korea's POSCO (formerly Pohang Iron & Steel) may have the highest productivity of any integrated steel producer. Carrefour operates with nearly the same efficiency in emerging markets and in Europe. Poor education systems haven't hindered these companies. If illiterate Mexican immigrants can reach world-class productivity levels building apartment houses in Houston, illiterate Brazilian workers can do so in São Paulo.
Similarly, MGI found that a lack of capital to finance investment isn't the main constraint on growth in poor economies. If local businesses organized and managed themselves as the world's best companies do, they would unleash rapid productivity growth. About 20 percent of India's people work in companies that are structured somewhat like those in the developed world, but their average labor productivity is only 15 percent of what their US counterparts achieve. MGI calculated that these companies could increase their productivity to about 40 percent of the US average without any additional capital investment,5 just by reorganizing the way they conduct work. In 1983, the high-performing Japanese auto company Suzuki Motor invested in a joint venture to make cars in India. Suzuki, which had operational control, built plants like the ones in Japan, organized the work as it is organized in Japan, and trained employees to work as they do in Japan. As a result, the productivity of these facilities is 55 percent of the US auto industry average.
Poor nations don’t have to wait to build school systems and educate a whole generation of workers
Poor countries thus don't have to wait until they build bigger and better school systems and educate a whole generation of workers. Nor do they need to wait for more development aid from rich countries. If local businesses followed the proven approaches for organizing production and managing a workforce, poor countries could grow much faster than most people realize. Domestic savers and foreign investors hungry for good returns would also supply these countries with plenty of capital for new investments.
Competition is the key
If differences in labor and capital markets don't matter, what does? In each of 13 country studies, MGI found that the primary answer was the nature of competition in product markets.
Competition is the mechanism that helps more productive and efficient companies expand and take market share from less productive ones, which then go out of business or become more efficient. Either way, consumers benefit as companies offer better goods at lower prices, and this may in turn unleash a burst of new demand.
But government policies sometimes stand in the way of competition and prevent innovation from spreading. Such policies might exclude potential competitors, such as start-ups or foreign companies, or might favor particular classes of companies, such as mom-and-pop retailers. Often, policies (zoning laws, for example) have unintended consequences for business. When they do, competition is less intense and inefficient companies aren't pressured to change. Productivity growth is slower and countries remain poor.
The Washington consensus of the 1990s profoundly underestimated the importance of a level playing field for competition. Over and over again, MGI found industries in which more productive innovators were excluded and less productive companies favored. In much of Europe, for instance, zoning laws prevent large retailers from expanding as fast as they could and therefore from replacing less efficient small retailers. Because retailing is one of the largest sectors in most economies, it has important ramifications for a nation's standard of living. For instance, Tesco, the United Kingdom's largest food retailer, has failed to obtain planning permission to build a modern supermarket on the site of a derelict hospital—broken windows and all—near central London because the building is over 100 years old. The result of such failures is lower productivity for the UK economy and higher food prices for consumers.
In Japan, a combination of zoning laws, tax policies, and government subsidies has allowed the smallest, most inefficient retailers to thrive. Today they account for slightly over half of all retailing employment, compared with less than 20 percent in the United States. In one small shop in central Tokyo, I have seen the same hat sit unsold on a store shelf gathering dust for the past 15 years. Every time I'm in Tokyo, I check to see if the hat is still there. It is. The proprietors don't have to sell it to stay in business, since they get subsidized loans. Their shop sits on some of the world's most valuable land, so they know their estate will repay the loans.
Even the United States isn't immune to policies that limit competition. The 2002 steel tariffs, which have since been declared illegal by the World Trade Organization and withdrawn, protected US steel producers from lower-cost foreign competitors. The recent increase in US agricultural subsidies does the same.
Poor countries, however, have adopted much more severe market-distorting measures. After the Soviet Union's fall, a flurry of new business activity took place in Russia. It was assumed that more productive companies would replace the unproductive Soviet ones and that Russia would rapidly become rich. But MGI found that the new Russian companies were no more productive than their Soviet predecessors. Why? More productive companies either tried to enter the market and failed or didn't bother to try. For instance, Carrefour, perhaps the best international retailer, concluded that it couldn't make money in Russia. Like virtually all multinationals, Carrefour pays taxes. The competitors it would face in Russia—the open-air markets—don't and thus have a decisive tax advantage. Before the ruble crashed in 1998, open-air markets also sold smuggled or counterfeited goods at prices Carrefour couldn't match.
A similar situation exists in Brazil. About 50 percent of its workers aren't registered with the government. Although many of these people are poor and wouldn't be taxed heavily, the total revenue forgone is substantial because of the number of workers involved. As a result, Brazil must collect twice as much in profit, employment, value-added, and sales taxes from corporations as the United States does to finance its government.6 When taxes are included, it costs more productive companies as much to do business as it costs less productive, informal ones, which don't pay taxes. Modern, productive enterprises can't easily take market share from their unproductive counterparts, and the economy's natural evolution is stymied.
Meanwhile, in India the government has directly limited competition by insisting that several hundred consumer goods can be manufactured only in small-scale plants. As a result, Indian consumers pay higher prices than they should, and India, unlike China, hasn't become a global center of low-cost manufacturing. (China actually exports to India.) Moreover, in housing construction, competition among developers and construction firms is based not on cost and productivity advantages but on gaining control of scarce parcels of land with clear ownership titles. Over 90 percent of land titles in India are subject to dispute, and nobody is going to invest in land someone else might claim.
Your javascript is turned off. Javascript is required to view exhibits.
If poor countries eliminated the policies that distort competition, they could grow rapidly. India's government, for instance, abandoned many of the limits on foreign investment in the country's automotive industry during the early 1990s. Subsequently, prices fell, demand for cars exploded, and output nearly quadrupled (Exhibit 4).

The barriers to growth
The main obstacles to economic growth in poor countries are the many policies that distort competition. Why are they so pervasive?
For one thing, most people favor the social objectives that inspire high minimum wages, small-business subsidies, and other business policies. They may not be aware of the unintended adverse consequences that create major barriers to growth. Instead of attempting to achieve social objectives by limiting competition, countries should allow fair competition and thereby generate more national income, which can then be redistributed through taxes and government subsidies for the desperately poor.
Countries follow bad policies, above all, because they benefit powerful or well-connected people
Even more important, countries have bad policies because they benefit certain people. In rich countries, special interests generally aren't allowed to have their way so much that they can significantly undermine the common good. Most poor countries lack these limits. Moscow's government officials, for instance, allocate housing contracts to their cronies in the old Soviet construction companies. As a political favor to small companies that can't pay their bills, local governments in Russia prevent energy companies from cutting off their power. India's domestic retailers are wholly protected from foreign direct investment by global best-practice retailers.
In poor countries today, every domestic firm is a potential special interest that stands to lose from more competition. These unproductive firms' workers often think, mistakenly, that they too stand to lose. Certainly, the prospect of finding new work in an economy where most jobs pay near-subsistence wages is frightening. But to have healthy economies, countries must allow unsuccessful owners and managers to fail so that more productive ones can take their place. In that healthier economy, workers will find a better job market.
Think consumer
Undoubtedly, dismantling barriers to economic growth is difficult. Some firms must be allowed to go out of business, thus forcing workers to find new jobs. Industries must be opened to foreign competition, and the enforcement of tax codes and other regulations must be strengthened. And governments must stand up to special interests.
How can countries muster the political will to do all these things? The answer lies in focusing on consumers, not producers. Many people think that production itself creates economic value—an idea that sometimes makes governments protect businesses regardless of their performance. This approach is mistaken. Such people and governments fail to understand the link between production and consumption. Goods have value only if consumers want them. Otherwise sheer production does little to raise standards of living.
Most poor countries are far from having a consumption mind-set. Their governments and leaders, like those of the former Soviet Union, focus instead on output. A consumption mind-set requires some notion of individual rights, including the right to buy what you want from anybody who wishes to sell it to you. Consumers want to patronize companies that offer better products and services or lower prices. Those are the companies that survive if competition is equal. Thus, consumer interests are served when competition isn't distorted.
If policy makers in poor countries—and the many development experts who advise them—can accept this overlooked fact, those countries could unleash rapid growth. Only then will the shape of the global economic landscape begin to change for the better.
About the Authors
Bill Lewis, a McKinsey alumnus, was the founding director of the McKinsey Global Institute. This article was adapted from chapter 1 of his new book, The Power of Productivity: Wealth, Poverty, and the Threat to Global Stability (Chicago: University of Chicago Press, 2004).
Notes
1 For more on the failure of development economics, see William Easterly, The Elusive Quest for Growth: Economists' Adventures and Misadventures in the Tropics, Cambridge, Massachusetts: MIT Press, 2002.
2 Some people argue that indicators of health, life expectancy, and social well-being are just as important, if not more so. But men and women the world over want more than a subsistence living, and that is why millions of them emigrate from poor countries to rich ones, even doing so illegally and risking their lives in the attempt. The Soviet Union achieved military power but ultimately collapsed because it didn't provide enough consumer goods.
3 See William W. Lewis, Vincent Palmade, Baudouin Regout, and Allen P. Webb, "What's right with the US economy," The McKinsey Quarterly, 2002 Number 1, pp. 30–40.
4 Measured at purchasing power parity, not current exchange rates. PPP compares standards of living in different countries more accurately because it measures the amount of goods and services different currencies can command in their home markets.
5 Because of low labor rates, the lack of automation would prevent them from matching US productivity.
6Brazil's bloated government contributes to the high tax burden and thus is an obstacle to growth. It currently spends 39 percent of the nation's GDP, compared with 37 percent in the United States. Back in 1913, when the United States had the same per capita income Brazil has now, the US government spent only 8 percent of the country's GDP.

What is the business of business?

Like many other people, I have often thought along these lines.

What is the business of business?

Ian Davis
2005 Number 3
The great, long-running debate about business's role in society is currently caught between two contrasting, and tired, ideological positions. On one side of the current debate are those who argue that, to borrow Milton Friedman's phrase, "the business of business is business." This belief, most established in Anglo-Saxon economies, implies that social issues are peripheral to the challenges of corporate management. The sole legitimate purpose of business is to create shareholder value. On the other side are the proponents of corporate social responsibility, a rapidly growing, rather fuzzy movement encompassing companies that claim that they already practice the principles of CSR and skeptical advocacy groups arguing that they must go further in mitigating their social impact. As other regions of the world—parts of continental Europe, for example—move toward the Anglo-Saxon shareholder value model, the debate between these points of view has increasingly taken on global significance.
Both perspectives obscure, in different ways, the significance of social issues to business success. They also unhelpfully caricature the contribution of business to social welfare. It is time for CEOs of big companies to recast this debate and recapture the intellectual and moral high ground from their critics.
Large companies must build social issues into strategy in a way that reflects their actual business importance. Such companies need to articulate their social contribution and to define their ultimate purpose in a way that is more subtle than "the business of business is business" and less defensive than most current CSR approaches. It can help to view the relationship between big business and society as an implicit social contract—Rousseau adapted to the corporate world, you might say. This contract has obligations, opportunities, and advantages for both sides.
To explain the basis for such an approach, it may help first to pinpoint the limitations of the two current ideological poles. Start with "the business of business is business." The issue here is not primarily legal: in many countries, such as Germany, companies have a legal obligation to stakeholders, and even in the United States the legal primacy of shareholders is open to very broad interpretation.
The problem with the "business of business is business" mind-set is rather that it can obscure two important realities. The first is that social issues are not so much tangential to the business of business as fundamental to it. From a defensive point of view, companies that ignore public sentiment make themselves vulnerable to attack. Social pressures can also serve as early indicators of factors essential to corporate profitability: for example, the regulations and public-policy environment in which companies must operate, the appetite of consumers for certain goods above others, and the motivation of employees—and their willingness to be hired in the first place.
Companies that treat social issues as either irritating distractions or simply unjustified vehicles for attacks on business are turning a blind eye to impending forces that have the potential to alter the strategic future in fundamental ways. Although the effects of social pressures on these forces may not be immediate, that is not a reason for companies to delay preparing for or tackling them. Even from a strict shareholder perspective, most stock market value—typically, more than 80 percent in US and Western European public markets—depends on expectations of corporate cash flows beyond the next three years.
Examples abound of the long-term business impact of social issues. That impact is growing fast. In the pharmaceutical sector, the past decade's storm of social pressures—stemming from issues such as public perceptions of excessive prices charged for HIV/AIDS drugs in developing countries—are now translating into a general (and sometimes seemingly indiscriminate) toughening of the regulatory environment. In the food and restaurant sector, meanwhile, the long-escalating debate about obesity is now resulting in calls for further controls on the marketing of unhealthy foods. In the case of big financial institutions, concerns about conflicts of interest and the mis-selling of products have recently led to changes in core business practices and industry structure. For some big retailers, public and planning resistance to new stores is constraining growth opportunities. And all this is to say nothing of the way social and political pressures have reshaped and redefined the tobacco and the oil and mining industries, among others, over the decades.
In all such cases, billions of dollars of shareholder value have been put at stake as a result of social issues that ultimately feed into the fundamental drivers of corporate performance. In many instances, a "business of business is business" outlook has blinded companies to outcomes, or to shifts in the implicit social contract, that often could have been anticipated.
Just as important, these outcomes have not just posed risks to companies but also generated value creation opportunities: in the case of the pharmaceutical sector, for example, the growing market for generic drugs; in the case of fast-food restaurants, providing healthier meals; and in the case of the energy industry, meeting fast-growing demand (as well as regulatory pressure) for cleaner fuels such as natural gas. Social pressures often indicate the existence of unmet social needs or consumer preferences. Businesses can gain advantage by spotting and supplying these before their competitors do.
Paradoxically, therefore, the language of shareholder value may in this respect hinder companies from maximizing their shareholder value. Practiced as an unthinking mantra, "the business of business is business" can lead managers to focus excessively on improving the short-term performance of their businesses, thus neglecting important longer-term opportunities and issues, including societal pressures, the trust of customers, and investments in innovation and other growth prospects.
The second point that the "business of business is business" outlook obscures for many companies—the need to address questions about their ethics and legitimacy—is related to the first. For reasons of integrity and enlightened self-interest, big companies need to tackle such issues, with both words and actions. It is neither sufficient nor wise to say that it is for governments to set laws and for companies simply to operate within them. Nor is it enough simply to point out that many criticisms of businesses are unmerited or that those throwing the mud ought also to examine their own practices and social responsibility. Irrespective of whether the criticisms are valid, their cumulative effect can shape the strategic context for companies. It is imperative that businesses seek to lead rather than merely react to these debates.
Moreover, in certain parts of the world—particularly some poor developing countries—the rule of law and basic public services are notable by their absence. This reality can render the "business of business is business" mind-set positively unhelpful as a guide for corporate action. If companies operating in such an environment focus too narrowly on ill-defined local legislation or shy away from broad debates about their alleged behavior, they are likely to face mounting criticism over their activities as well as a greater risk of becoming embroiled in local political tensions.
Is CSR the answer? If only it were. The point is not to criticize the many laudable CSR initiatives undertaken by individual companies or to dispute the obvious need for businesses (as for any other social entity) to act responsibly. It is rather to examine the broad prescriptions proposed by groups and activists involved with CSR. These prescriptions commonly include stakeholder dialogue, social and environmental reports, and corporate policies on ethical issues. This approach is too limited, too defensive, and too disconnected from corporate strategy.
The defensive posture of CSR springs from its origins. Its popularity as a set of corporate tactics was driven, in large part, by a series of anticorporate campaigns in the late 1990s. These campaigns were in turn given impetus by the antiglobalization protests mounted around the same time. Since then, companies have been drawn to CSR by nice-sounding if vague notions such as the "triple bottom line": the idea that companies can simultaneously serve social and environmental goals as well as earn profits. Companies have seen CSR as a way to avoid nongovernmental-organization (NGO) and reputational flak and to mitigate the rougher edges and consequences of capitalism.
Developing countries must rethink how to attract and regulate investment. See "The truth about foreign direct investment in emerging markets."
This defensiveness starts the argument on the wrong foot—certainly as far as business leaders should be concerned. Big business provides huge and critical contributions to modern society. These are insufficiently articulated, acknowledged, or understood. Among them are productivity gains, innovation and research, employment, large-scale investments, human-capital development, and organization. All of them are, and will be, essential for future national and global economic welfare. Big business also supplies investment vehicles that are likely to be central to the provision of pensions in the aging countries of the Organisation for Economic Co-operation and Development (OECD). In developing countries, meanwhile, the entry of multinational companies through foreign direct investment has often contributed critical capital, technology, skills, and other poverty-reducing economic spillovers. It is no coincidence that developing countries place such emphasis on attracting big business and the investment it can bring to their economies.
CSR is limited as an agenda for corporate action because it fails to capture the potential importance of social issues for corporate strategy. Admittedly, companies undertaking a stakeholder dialogue with NGOs will be more aware, in advance, of potential issues. But tracking NGO opinion is only part of the process of understanding the range of social pressures that can ultimately affect core business drivers such as regulations and consumption patterns.
An obvious next step for companies, having understood the possible evolution of these broad social pressures, is to map long-term options and responses. This process clearly needs to be rooted in the development of strategy. Yet typical CSR initiatives—a new ethical policy here, for example, or a glossy sustainability report there—are often tangential to it. It is perfectly possible for a company to follow many prescriptions of CSR and still be caught short by seismic shifts in the socially driven business environment. One of the compounding problems is the fact that many companies have chosen to root their CSR functions too narrowly, within their public- or corporate-affairs departments. Although such departments play an important tactical role, they are often geared toward rebutting criticism and tend to operate at a distance from strategic decision making within the company.
A contract has two sides, and business must acknowledge that in return for the ability to function, it is subject to rules and constraints
In the limitations of both CSR and of the "business of business is business" thinking lie the outlines of a new approach—as relevant for Chinese, German, and Indian companies as for US and British ones. Three main strands stand out. The first is a helpfully simple prescription: businesses should introduce explicit processes to make sure that social issues and emerging social forces are discussed at the highest levels as part of overall strategic planning. This point means that executives must educate and engage their boards of directors. It also means that they need to develop broad metrics or summaries that usefully describe the relevant issues, in much the same way that most companies analyze customer trends today. The risk that stakeholders—including governments, consumer groups, lawyers, and the media—will mobilize around particular issues can be roughly estimated by studying the known agendas and interests of these parties. For example, the likelihood that the obesity debate would rebound on food companies was partly predictable from the growing expenditures of governments on obesity-related health problems, the inevitable media focus on the issue, plus the interest of some lawyers in finding fresh corporate targets for litigation. By the time businesses seriously engaged with the question, they were in a defensive posture, merely struggling to catch up with the public debate. In the future, companies will need to be much better at understanding and anticipating such issues.
Both the second and third strands of the new approach reflect the idea that there is an implicit contract between big business and society or indeed between whole economic sectors and society—the contract that is the subject of this article. Detractors have often successfully portrayed the contract as a one-way bargain that benefits business at society's expense. The reality is much more complex. The activities undertaken by business have clearly brought social benefits as well as costs. Similarly, however, there are two sides to a contract, and business must acknowledge that in return for the ability to function, it is subject to rules and constraints. At times, the contract can come under obvious strain. The recent backlash against big business in the United States can be seen as society seeking to shift the terms of the contract as a result of popular perceptions that business has abused its power. Similarly, in Germany at present, business is struggling to defend itself against charges that its contract with society is fundamentally unbalanced.
The second strand requires companies not just to understand their individual contracts but also to manage those contracts actively. To do so, companies can choose from a range of potential tactics, such as more transparent reporting, shifts in R&D or asset reorganization to capture expected future opportunities or to shed perceived liabilities, changes in approaches to regulation, and, at an industry level, the development and deployment of voluntary standards of behavior.
Some companies and sectors are already experimenting with such approaches. Nonetheless, there is scope for much more activity, provided it is aligned with corporate strategic goals. Reshaping conduct on an industry-wide and increasingly global basis may be particularly important, given that the perceived misdeeds of one company can rebound on its sector as a whole.
An important point to remember is that companies, depending on their circumstances, will have quite different tactical responses, so off-the-shelf or simply nice-sounding solutions may not always be appropriate. Transparency offers a good example. It is easy, but wrong, to say that there can never be enough of it. What might be good for a pharmaceutical company trying to restore the consumers' trust could be damaging for a hedge fund manager. A voluntary code of practice for a retailer naturally would be very different from that of a copper-mining company.
This observation leads me to the third strand of the new approach for business leaders: they need to shape the debate on social issues much more consciously by establishing ever higher (but appropriate) standards of integrity and transparency within their own companies and by becoming much more actively involved in external debates (such as those in the media) on issues that shape the social context of business.
A starting point may be for CEOs to articulate publicly the purpose of business in terms less dry than shareholder value, although that should continue to be seen as the critical measure of business success. However, it may be more accurate, more motivating—and indeed more beneficial to shareholder value over the long term—to describe the ultimate purpose of business as the efficient provision of goods and services that society wants.
This is a hugely valuable, even noble, purpose. It is the basis of the contract between business and society and the basis of most people's real interactions with business. CEOs could point out that profits are not an end in themselves but a signal from society that a company is succeeding in its mission of providing something people want—and doing so in a way that uses resources efficiently relative to other possible uses. From this perspective, the creation of shareholder value or profits is the measure, and the reward, of success in delivering to society the goods and services we desire, which is the more fundamental business objective. The measures and rewards reflect the predominant values of the relevant society.
CEOs could point out that profits are not an end in themselves but a signal from society that a company is providing things people want
By moving away from a rigid focus on the term shareholder value, big business can also make clear to broad audiences that it understands the trade-offs inherent in its social contract. The debate between business and society is essentially one about how to manage (and reach agreement on) those trade-offs. What might this point mean specifically? There is no shortage of big social issues today that directly affect many big businesses and require new debate. These issues include ensuring that aid organizations and trade regimes successfully promote the development of Africa and other poor regions, whose economic liftoff would present a major potential boon to global markets as well as to international security; promoting a more sophisticated and sensitive approach, by both companies and governments, to balancing the societal risks and rewards from new technologies; spearheading dialogue on the health care and pension challenges in many developed countries; and supporting efforts to resolve regional conflicts.
Obviously, the relevant issue must be matched to the specific business. Some companies and business organizations have taken strong public stances on these and similar issues. But in general, high-level, concerted corporate activism is more notable by its absence. Business leaders shouldn't fear taking a more forward role advocating the idea of a contract between business and society. Public receptiveness to active business leadership on issues such as these may be a lot greater than some might be inclined to think. Despite the poor image and bad press of big business in recent times, polls suggest that people retain a belief in its ability to provide a positive contribution to society.
More than two centuries ago, Rousseau's social contract helped to seed the idea among political leaders that they must serve the public good, lest their own legitimacy be threatened. The CEOs of today's big corporations should take the opportunity to restate and reinforce their own social contracts in order to help secure, for the long term, the invested billions of their shareholders.
About the Authors
Ian Davis is the worldwide managing director of McKinsey & Company. This article was originally published as "The biggest contract" in the May 26, 2005, issue of the Economist. Copyright © The Economist Newspaper Limited, London, 2005. All rights reserved. Reprinted by permission.

Interesting quote - Russel

"The whole problem with the world is that fools and fanatics are always so certain of themselves, and wiser people so full of doubts."

Bertrand Russell

Budget bickering

The latest in a series of articles that I regularly write for national dailies - Le Express and Le Mauricien.

Article publié le Mercredi 20 septembre 2006.

From governments, people expect many things. Not just peace and security, but also, good roads and gardens, interesting jobs and subsidized commodities. Some demand housing, clothing, food, medicine, education and childcare. At the same time, most do not want to pay taxes. This strange public expectation of good jobs, subsidized commodities, free transport and advanced medical care without the willingness to pay for it, is rooted in the immediate years following Independence, when a form of socio-economic makeover began – effectively directed by the State. Through licensing new businesses to making education free, a set of people saw their fortunes bloom with active state support while most benefited from the welfare policies hitherto unavailable. A new class was born. Not surprisingly, such state intervention also engendered a culture of scrounging. It created special groups based on community, caste, color and cultural differences, each competing for the state munificence. The political masters doled out favors wherever they could; elsewhere they made people do with empty promises. The demonstration effect was profound. Free lunching and economic scrounging lasted a long three and half decades on the back of a business boom ensconced in protection and trade preferences that filled government coffers. For a short while, the country also became the tiger of the Indian Ocean attracting global acclaim. The World Bank wrote profusely on the Mauritian Miracle and politicians basked in glory. Some deserved it. Most simply took credit. The comfort of the warm water slowly killed the frog. This is the essence of the boiled frog parable. For the Mauritian economy, the alarm bells of its unsustainablity started ringing in the mid-nineties, yet essential reforms were conveniently postponed by successive governments. Deficit rose in the wake of increased public spending and lower tax collection. The water was never scalding hot and the frog never jumped out. It simply boiled. Most of the revenue from successful economic activity that filled the state coffers which in turn allowed it to bankroll inefficient state activity and crony public enterprises has dwindled. That leaves the government with a mounting bill that it cannot pay anymore. A local famous economist thinks that Rama Sithanen’s theory of triple shocks is unfounded. He also thinks Mauritius can do without the proposed reforms. Strangely he also advises the government. Such diverse opinion is healthy, yet it only indicates that Mauritius is still not psychologically and intellectually prepared for the big bang reforms that Rama Sithanen introduced in the last budget. For some people water istill warm and the frog is comfortable. Our four distinguished guests from the World Bank, who recently came to tell their country’s tale of transformation amidst adversity, had an important advice – big bang reforms require unequivocal support. In their own cases the government, opposition, trade unions, industry, general population and the media all stood together to fight their own downfall and they won Such unity in the Mauritian context is currently missing. Should the situation deteriorate further before the need for unity is felt? Rama Sithanen’s budget contains measures to improve investment climate, attract more FDI, eliminate red-tapism and increase employment opportunities. All this is unquestionably right. He is also right to tax people who exploit common goods for private comfort such as the pleasure of dwellings on the limited shoreline. Yet he cannot tax businesses that generate employment and still collect monies to pay for the public welfare. Reforms are painful. “There is nothing more difficult to carry out, not more doubtful of success, nor more dangerous to handle, than to initiate a new order of things,” said Dr Manmohan Singh, the Indian Prime Minister during a recent parliamentary debate. Dr Manmohan Singh introduced extensive economic reforms in India some 15 years ago as a Finance Minister, amidst unprecedented opposition. These reforms are widely recognized today as the key to India’s rapid economic growth. “The reformer,’’ said Dr Manmohan Singh quoting from Machiavelli’s The Prince, ‘’has enemies in all those who profit by the old order, and only lukewarm defenders in all those who would profit from the new order”. No wonder Rama Sithanen’s own men in the government and some of his political advisors oppose his budget in private. This is sad. Look deeply. Rama Sithanen’s reforms are comprehensive and address the larger socio-economic context. Why are they unpopular? Or. Are they simply misunderstood? Let us ask one straight question. With provisions for targeted subsidies that protect the vulnerable groups on one end and lower taxes for the corporate world on the other, who should be exactly complaining about the budget? Is it the same class of people, with their acquired rights and need for political munificence that the State created in the post Independence period? For a majority of the people, the grumble is two fold – the rising inflation and tax on their property investments including bank deposits. It is neither bread nor the removal of subsidies on rice and flour or the campement tax, as is popularly made out to be. This class of people is educated, earns a decent living, works hard, pays taxes, buys property for investment and keeps their undeclared money in the bank. They also want freebees wherever possible and strike a hard bargain with the State in return for their votes. They are vociferous, make opinions, speak to the media, write columns and religiously cast their vote at the polling booth. In sum, they have become powerful since Independence. They also decide and change governments when they are angry. Is their response to the current budget irrational? Why do they not see the impending dangers, the budget’s advantages in the long run and the absolute need for reforms right now? Prof John T Scholz , a political scientist, conducted various experiments to understand people’s response to paying taxes especially when they are increased. He concluded that people are more willing (less unhappy) to pay taxes to the government when they think that their tax is being spent wisely and in transparence. If they are called upon to make sacrifices they would expect the government to reciprocate. In times of distress they look for strong signals and stronger public leadership. While they turn a blind eye during prosperous times, they start questioning every single move and demand explanation during crisis. They use the press and the opposition to demand reciprocity. ‘Ultimatums Game’, perhaps the most important experiment in behavioral economics demonstrates that individuals would punish their opponents for bad behavior even if they hurt themselves in the process. This is a clear deviation from the rational man theory of economic textbooks; however that is how, sometime, human behavior manifests itself. Simply put, individuals wish to punish politicians who drive themselves around in expensive cars bought from public funds, demanding more sacrifices and… more tax. They also hate government action that take away their deemed rights without a clear demonstration of reciprocity. For insight, look no further than the case of free bread in schools. The children of most people, who participated in the protests, do not eat that bread. Their mothers give them an extensive preparation of three course meals. Why should their parents protest? Admittedly the cause lies far away from the bread that their children do not even eat. Yet it becomes a rallying point against the budget. Rama Sithanen’s wonderful budget truly needs wider support and less opposition. It also needs stronger communication starting with government’s own behavior, politicians’ body language and personal conduct. Common man would then hopefully decide to respond.

On Beer - The Buffalo Theory

A herd of buffalo can only move as fast as the slowest buffalo.And when the herd is hunted , it is the lowest and the weakest ones at the back that are killed first.This natural selection is good for the herd as a whole, because the general speed and health of the whole group keeps improving by the regular killings of the weakest members.In much the same way , the human brain can only operate as fast as the slowest brain cells. We know excessive intake of alcohol kills brain cells .But naturally, it attacks the slowest and weakest brain cells first. In this way, regular consumption of beer eliminates the weaker brain cells , making the brain a faster and more efficient machine and that is why we feel smarter after a few beers.

courtesy: baljinder

Another Attempt

This is my sixth serious attempt at a blogging. The first one lasted almost a year and the last one...a day.

I must however admit that I know the reasons for failure of my previous attempts. My interests are numerous and I set up a seperate blog for each of my interests; business, information technology, education, politics, society, India, Mauritius, personal writing, not-for-profit etc.

Not surprisingly I lost track of each one of them. I hope to retrieve useful and interesting pieces of writing ( personal and borrowed) from my lost blogs and post them on this one.

More as we go on.