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The September 2 edition of The New York Times carried a front-page article by columnist and Nobel Laureate Paul Krugman, about “how did economists get it so wrong?”. The article was the ‘most read’, #1, according to www.nyt.com. 
But — in what way did economists get it wrong? In two ways. One, they failed to foresee the global financial and economic collapse that began in 2007, and accelerated almost exactly a year ago, when Lehman Brothers collapsed;  and two, after the collapse, they had no clue, and absolutely no consensus, on what to do about it. Politicians and leaders like President Obama had to improvise, and made many many errors in their ‘stimulus packages’ and ‘bailout packages’. Seven Nobel Laureates were asked what to do, and, as the Bible says, “ran off in seven different directions”.

What was the problem? Krugman says: Economists abandoned Keynesian thinking, which denies that people are always rational, capital markets are always efficient, and free open unregulated markets always are optimal. It is time they returned to Keynes, he recommends.

So here’s what I think economists have to do. First, they have to face up to the inconvenient reality that financial markets fall far short of perfection, that they are subject to extraordinary delusions and the madness of crowds. Second, they have to admit — and this will be very hard for the people who giggled and whispered over Keynes — that Keynesian economics remains the best framework we have for making sense of recessions and depressions. Third, they’ll have to do their best to incorporate the realities of finance into macroeconomics.

I have a different view.

I am writing this in a hotel room in Nottingham, UK, where we have brought some 31 Israeli high-tech managers from five companies, on a best-practices (and ‘next-practices’) benchmarking trip, to London, Derby, Birmingham, and Manchester. This is the 37th such trip for TIM and its managers. The goal: Visit great companies, and learn from great leaders how they manage, then adopt and adapt what they tell us. We are visiting LandRover, Rolls Royce, British Petroleum, British Telecom, British Airways, Manchester United football team, and others. We are in the 3rd day of our 6-day trip and have learned enormously already.

Economists failed, because they sat in their offices and crunched numbers rather than spent their time in the field observing real people, real companies and real markets. If they had,  if they had seen what is truly going on, in housing, sub prime mortgages, derivatives, options, etc., they would not have been as sanguine. They might have built theories that hold water. 

So economists: how did economics go wrong? By seeking truth in the wrong place (under the lamp-post, goes the tale,  instead of in the dark corners where economists dropped the coin, or the ball…). Seek truth in the real world. Leave your office. Do your research on site, where the economy unfolds. THEN return home and recount what you saw, and build your theories based on it.

“Elegance”, MIT economist and Nobel Laureate Paul Samuelson has said, “is for tailors”. Economics’ elegant mathematical theories were beautiful and useless. Let’s deal instead with the messy real world, and try to understand it. I admit that I am an economist. I share my discipline’s faults. I believed the numbers told the story. They don’t. In fact, they often lie. I discovered this only after beginning to teach managers and hence to understand their world, the real world of economics and business. 

We at TIM are happy to lead a benchmarking tour for economists who wish to seek truth the right way — in reality.

Recently Bank of Israel Governor Stanley Fisher became the first Western central banker to raise interest rates. Central Bank rates in most Western nations range from 0.25 to 1 or 2%, after banks drastically slashed rates to battle the global recession. Most of these banks are for now maintaining rates at their low levels.

But could they have reduced rates even further? Is it possible, for instance, to set a negative interest rate? In other words: I borrow $100, and at the end of the year, pay back only $99?

Of course, this has happened in the past, when real interest rates (the nominal or actual rate less inflation) were negative, because inflation exceeded nominal rates. But, can nominal rates be negative?

Writing in the Financial Times, Wolfgang Munchau points out that “the zero lower bound [of interest rates] is one of the great myths of monetary economics”. Last week, he notes, the Swedish Riksbank set a small negative deposit rate. I recalled, in reading his piece, that decades ago the Euroyen interest rate (the rate of interest paid on yen deposits held in European banks) was negative, when Japanese interest rates were about zero, mainly because banks did not want to hold such deposits and set negative rates to discourage them.

Should this be done? Can it? asks Munchau.

The answer to both is, yes. 

We teach managers to examine every single fundamental assumption inherent in their business designs. Governments and central banks should do the same, in these turbulent times. What are we assuming, they should ask, that may be wrong.

Apparently, the assumption that interest rates must be above zero is one of them.

The crisis was too short.

I have a sinking feeling when I read reports that the global recession is over. It’s not that I love unemployment, poverty, or crisis. It’s just that none of the fundamental illnesses that afflict our global markets have been cured or even addressed. A great many people who caused the crisis are eager to go back to business as usual, and will thus create sooner or later the next financial collapse. 

What are these fundamental issues?

1. The U.S. dollar. There are too many of them, flooding the world, and you cannot run a global trading and financial system on a weak currency. America’s deficit this year is a staggering $1.58 trillion, even after optimistic revisions.   The world needs a stable currency. We had it, in the 19th C., under the gold standard. The “dollar standard” began in its life in 1944, under the premise, “the dollar is as good as gold”. And indeed it was, then. But in 1971-3, when the link between gold and the dollar was broken, the seeds of the current crisis were sown. We need a world central bank and a global currency. Had the crisis been deeper and more serious, perhaps we might have gotten one. Now, we won’t.

2. Capital flows. Enormous sums of ‘hot money’ race from country to country, seeking short-term profits. This is now expedited by super-high-frequency trading, in which computer algorithms running on supercomputers drive trading that occurs many times a second. This high-frequency trading could bring the next crisis, as indeed it did in 1987, when computer programs that drove both spot and future trading caused a feedback loop that crashed the US stock market by 20% in a day (on Oct. 19). 

3. Self-interest. Countries are still driven by selfishness and self-interest.Yet to make the global system stable and sustainable, we need intense cooperation and collaboration among countries. There is no sign of this. Each country pursues its own interest. When America’s interest calls for lower interest rates, the Fed cuts rates, even if global conditions need higher rates. America’s Fed cannot both be America’s central bank and the world’s central bank.  There is no effective body in which coordinated integrated global policies are set. Perhaps, had the crisis been deeper, such a body might have been born, as the United Nations was born out of the depths of World War II.

A great many other issues remain to be repaired, but will not be. Human memory is very short. As the media reassure everyone that “it’s over”, our behavior will return to that of the bad old days — until the next crash. And as a result, it will likely be a lot worse.

The world’s central bankers are meeting in Jackson Hole, Wyoming, and are congratulating themselves on saving the world and on greeting the burgeoning global recovery, as France and Japan record positive GDP growth and America records less-than-expected GDP decline.

Beware. The crisis is not over yet, not by a long shot. Call this the ‘cry of the party pooper economist’ if you wish. But it ain’t over until the fat deficit sags. Here is my argument.

GDP rises when imports fall by more than exports. And imports in America fell rapidly, giving GDP a boost. GDP rises by governments pump demand into the economy. And governments in America, Japan and Europe have been doing this desperately. America’s $1.2 trillion deficit is enormous. 

Now, it follows that when imports in one country fall, exports in other countries also decline, because world imports equal world exports. Exports were the powerful engine of global growth during the 1995-2007 boom. It is not good news that imports have fallen, because it implies that the growth engine, exports, also is sputtering. 

Nor is it good news that government demand has injected metamphetamine into the US and European economies. At some point, governments will need to find an ‘exit strategy’ for their fiscal stimulus plans, as government debt balloons alarmingly and as creditors refuse to lend any more. Just as metamphetamine (“speed”) addicts suffer withdrawal, so do economies when governments cut spending. And eventually they have to.

It is quite possible we will see weak sputtering recoveries that turn into new, mild recessions at the end of 2010. Companies should at least make this one of the scenarios that they seriously consider.

So, congratulations,  Ben Bernanke. You’ve managed to persuade your President, Barak Obama, to reappoint you as FOMC Chair. But plan on at least another year or two of long worried nights in your office on “H” St. in Washington. Your plans to play your saxophone again may have to be deferred.

Is your value proposition authentic?

• For years, Intel sold its microprocessors on the basis of Mhz (megahertz, or speed), even though the vast majority of PC users needed only a small fraction of the Pentium’s Mhz. The value proposition was: more Mhz is better. For the most part this was not true.

•  For years, digital camera producers have sold cameras on the basis of megapixels — the equivalent of megahertz.    

More megapixels is better. This too is false.

Writing in the New York Times*, camera expert David Pogue notes:

For years now, the world’s camera companies have been taking the public for a ride. They’ve taught us to believe that what makes one camera better than another is the number of megapixels it has — when, in fact, the number of tiny colored dots making up a photo has very little to do with its color, clarity or even detail.  

How can a value proposition that lacks authenticity — or, more bluntly, a value proposition that is utterly false — survive for so many years? It’s a mystery. Or, perhaps a conspiracy — a kind of industry paradigm that all players find it convenient to adopt. 

Sooner or later, though, as Shakespeare observed in The Merchant of Venice,  “the truth will come out”.   

Slowly, though, the truth is getting out. Recently (at long last), camera companies have begun diverting their research efforts from “how to get more megapixels” to “how to get better photos.” They’re working on things that really do matter in a consumer camera, like sensor size, stabilization — and fixing low-light photography.

Sony and Canon have now each brought out digital cameras that have new value propositions — customer benefits that really do matter. They take great pictures in very low light — something ordinary digital cameras cannot do, megapixels or not. 

Earlier, Intel radically changed its business model, shifting from selling megapixels to selling longer battery life (with its Centrino chipset), so that we could “unwire our world”. It was a risky gamble, but in general paid off, because it was authentic. We consumers do like to unwire our world, do enjoy longer battery life through smaller cooler microprocessors, and really don’t care that much for Mhz. The Centrino concept and design originated in Israel.
 
An important management issue is illustrated here. Ask yourself these questions:
•  What technical parameter or parameters drive my value proposition?
•  How do these technical parameters translate into clear simple value creation and customer benefits?
•  Is this value proposition authentic, or synthetic?
•  If synthetic, how can I alter our value proposition, to link it more closely with true customer benefits, and how can I achieve competitive advantage by doing so?
 
Intel did it. Now Sony and Canon are trying. So  should you. Start with your customer. Ask what the customer really wants and needs. Translate that into a  technical parameter. Seek enabling technology, and when you achieve it,  communicate the benefits to your customers clearly and simply — and authentically.

* David Pogue. Low light becomes a highlight. New York Times, Aug. 19, 2009.

A flood of press reports has announced the end of the global recession, as economies in Germany and France show GDP growth for 2Q 2009, and the world’s largest economy, U.S., shows the 2nd Q GDP quarter-to-quarter decline was only 1 percent (compare with minus 6.4 percent in Q1). 

These reports are highly misleading. They prove that global managers must go well beyond reading these reports and ‘crunch’ the numbers themselves. A quick trip to the U.S. Bureau of Economic analysis website (www.bea.gov) reveals the composition of America’s GDP decline. The numbers (see below) show the recession is definitely not over.

The data reveal the following:
•  Neither business investment nor personal consumption has achieved positive growth, nor have exports
•  By far the biggest contributor to US economic growth was the decline in imports; this boosts GDP, because imports are deducted from GDP. Imports continued to decline sharply in Q2, because people spend less when they are jobless and impoverished. 
•  The much-touted fiscal stimulus package, which has spilled over $1 trillion into the US economy and created enormous deficits and debt burdens, contributed only 1.1 percent to US GDP growth, and in Q4 2008 and Q1 2009 actually caused GDP to decline. The vaunted ‘cash for clunkers’ program, in which Americans are paid thousands of dollars for trading in old cars to buy new ones, is hard to detect in the numbers. Motor vehicle sales caused GDP to decline in Q2.
•  Inventories continue to decline, meaning that companies are still selling off inventories instead of producing new goods, which reduces GDP. And they still have much more to sell.

To simplify: America’s GDP is falling more slowly mainly because people are too poor and too pessimistic to buy imports. Is that great news? This cannot fuel a recovery, because as is well known, America sent most of its production off-shore, so substituting local production for imports requires bringing home its offshore factories (back-sourcing) — a process that has barely begun.
———————-
United States:   Quarter-to-Quarter % Change in GDP 
                                            2008 Q4                 2009  Q1               2009  Q2
GDP                                  -5.4 %                      – 6.4 %                     -1.0 %
Of which:
Personal consumption        -2.2                          + 0.4                         – 0.9
Gross business investment   -3.9                           – 9.0                          – 2.6
Government consumption   +0.2                          -0.5                          + 1.1
Exports                                  – 2.7                           -4.0                          – 0.8
Imports                                  +3.2                         +6.7                          + 2.2
———————–

A close inspection of French and German data will reveal, I believe, that those countries too are far from out of the woods.

Once economics was known as Political Economy; economics departments called themselves Department of Political Economy. Textbooks were titled Introduction to Political Economy. Then over a century ago economics became “Economic Science”. It was all downhill from then on. The result: as yesterday’s Financial Times noted, “There can be little doubt. The science of macroeconomics is in deep trouble. The best and the brightest in the field fight over the most basic problems.”

Recently in Singapore Deputy Secretary of the Ministry of Foreign Affairs Bilahari Kausikan gave a 30-minute overview of global geopolitics in the wake of the global crisis to a group of MBA students at Nanyang Business School. *He stressed how closely linked geopolitics and economics are. Here is a brief summary:

“Economics drives geopolitical change. We learned this in 1997, in the Asian crisis. Experts have been premature in saying that we now live in a multipolar age. U.S. power is still far ahead of any other country in the world. The lesson of the last eight years is not the decline in US power, as many have said. But rather: the Bush Administration learned how hard it is to translate power into influence. The current global financial crisis compounds the difficulties. This, notwithstanding the immense popularity of President Obama — he will experience difficulty, as Bush did, in translating American power into change and influence in the world. The crisis is punishing the American model of capitalism. So, we do not have a multipolar world, but the U.S. needs to act as if it were multipolar. This is not new. In the Cold War, we had a multipolar world. The Cold War was a time of relative stability, because nations had to join one club or the other, in view of the threat to them. Today there is no reason to ‘join’, and so nations pursue their own self-interest. 

There is no alternative model to a U.S.-led globalization. Autarky never succeeds. There may be disillusionment with globalization. But it is not going to go away. There is no alternative. Technologies that have enabled, facilitated and created globalization (e.g. the Web) will not be unlearned. They will not go away. 

The world needs to be led. But by whom? There is no leader at present except the U.S. There is disillusionment, protectionism, international tension, even conflict. But — who will stimulate global demand, to lead us out of the recession? It can only be the U.S. There will be no global recovery unless and until the U.S. economy recovers.

Europe? The EU is internally focused. They seek to protect their own way of life, and have internal problems in integrating the EU nations. China? Not yet ready for global leadership. Russia: a 3rd World economy, based solely on oil and gas, underinvesting in everything, including in oil and gas (because to invest in them would require intervention by American companies, which Russia does not want at any cost). India, too, has internal problems. Japan is the 2nd largest economy in the world, but also has found it very hard to translate economic power into global influence. The Japanese economy has underperformed economically.

China’s relative position has improved. There is talk of a G2, a bipolar world. A new model! This is premature. Neither the U.S. nor China seek this model. The U.S. interest is to preserve the status quo. China too has the same interest. To do otherwise would be to create competition between the U.S. and China, and conflict. Neither seek this, at the moment. 

In the long view, 10-20 years, U.S. – China relations are the key. But — if not G2, then what? We still need globalization. An axiom says: recognizing the problem does not necessarily mean we will find the solution. The world needs globalization. Globalization needs leadership. International bodies do not ‘fill the bill’. They are collections of sovereign states pursuing vested interests. So change will come slowly.

A curiosity: Why are the heads of the World Bank and IMF always, respectively an American (Robert Zoellick) and a European (Dominique Strauss-Kahn)? Why? 

We are in transition from the old system to a new one. Transitions are always painful. They require leadership. For 200 years we have had a Western-dominated system, based on the nation state, a Western invention. The East has had to adapt to Western modalities. Only a handful of countries in the East have made this adaptation successfully. China is one. Simply saying that the West has grown, and Asia declined, is far too simplistic. 

This is a period of greater flux and change, and countries will have to adapt to it. Change is and will be rapid and unpredictable. Countries will have to be nimble! And they will have to participate in a relentless global marathon race. 

One fact is key. U.S.-China relationships will be the most important, for many years. The key issue will be how to rebalance global saving and consumption. How to rebalance a situation where one country did the consumption (U.S.) and another (China) did the saving. 

A curious fact: one shoe factory in China can make one pair of shoes for every person on the face of the earth. There are some 1.2 billion people in China. Even if China shifts to domestic demand, this huge shoe factory will not have nearly enough demand for its output.

Will the U.S. change its behavior temporarily, toward saving more? Permanently? No one knows. In the short to medium term, 5 – 10 years, the world will have greater volatility and greater unpredictability. It will be a less governable world. Everything will be suboptimal. The solutions to problems will require collective globalization.  Climate change. Nuclear proliferation. There is need of leadership, which is sadly lacking. 

The unique nature of our global system, implies that transformation (which must happen) causes conflict, and in the past it has resulted from confict — often World War. Today, we have no such war, yet must create transformation. This has never happened before in history. There is much domestic disfunctionality. Most systems are becoming more pluralistic. National consensus has become more complicated. Electorates are more impatient with politicians, and impatient with public servants. This further reinforces the political volatility.

China and India went to war in 1962. After that, they ignored one another. They are now beginning to cooperate.    The European model is not applicable to Asia. Asia is diverse and multipolar. There will be ‘variable geometry’ in Asia.  Many different organizations, which will overlap, and to which some countries will belong, but not all. And indeed, globalization is a misnomer — a large part of the world is not part of the global system and has not benefited from it. 

The current need for transformative change is unprecedented. It will create instability and volatility in geopolitics.  There are major implications for global managers.   ”
________
* Mr Bilahari Kausikan graduated with a Bachelor of Social  Science degree in Political Science from the National University of Singapore in  1976. He obtained a Master of Arts degree in Political Science from Columbia University in 1980. Mr Kausikan first joined the Civil Service in 1981 as a Foreign Service Officer in the Ministry of Foreign Affairs.  He was absorbed into the  Administrative Service in 1983. He served in various appointments in the Ministry before he was appointed Singapore’s Ambassador to  Russia from 1994 to 1995 and Permanent Representative to the United  Nations in New York from 1995 to 1998. Mr Kausikan has been Deputy Secretary in the Ministry of Foreign Affairs since April 1998.

Isaac Newton formulated his Law of Universal Gravitation some 322 years ago, in 1687. According to French philosopher Voltaire, who first recounted (or invented?) the story, Newton sat under an apple tree in 1665, was bonked on the head by a falling apple − and presto! His theory of gravity!

Centuries later, along came the State of Israel − and utterly disproved Newton’s law. Israel’s economy defies gravity in at least two astonishing ways —  in real estate prices and in war and peace (the ability to defend herself,  at great expense,  while maintaining a viable economy).

According to Frank Knight, a company that tracks real estate prices globally, real estate prices have declined almost universally in the countries that it follows. The declines ranged from 18 percent in the U.S. to about 5 percent in France and Germany. In the global recession, people simply are not buying houses and companies are not buying or renting commercial real estate. 

A major exception is Israel. In the first quarter of 2009, housing prices in Israel rose by 12 percent, leading virtually every country. Even India, whose economy has fared relatively well in the downturn, saw housing prices rise only by 5 percent. 

Why do housing prices in Israel defy gravity? Apparently Israelis believe houses are a good store of value in the long term, and divert their cash into housing when capital markets slump. Moreover, conservative Israeli banks did not engage in risky adventures that later led to collapse of the mortgage market and foreclosures.

A second gravity-defying area is that of war and peace. The Global Peace Index (GPI) measures the rank of 144 countries in terms of both domestic and internal conflict, based on  23 indicators of peace, both outside borders and within them. The three main dimensions are: domestic and international conflict, safety and security in society and militarization. For every rise of 10 places on the GPI ladder, GDP climbs by $3000 on average. (The most peaceful country in the world is New Zealand, followed by Denmark, Norway, Iceland and Austria).  

Where is Israel? At the very bottom, just behind Sudan, just ahead of Somalia, Afghanistan and Iraq. #141!  What an awful ‘club’ to be a member of. (Note:  Somalia has had no government at all for 20 years). Surrounded by hostile nations, confronting Iran, Syria, the Palestinians (especially, Hamas), Israel spends 7.3  percent of its GDP on defense. 

According to the GPI data, and its GPI ranking,  Israel’s GDP should, by my calculation, be minus  $10,000. Yet in fact it is about $28,000– light years ahead of the failed nations of Somalia and Afghanistan. The gravity of war has failed to pull Israel down. 

Recently, with a group of friends over breakfast, we took turns saying what each thought was typically most Israeli.  I said, what was most Israeli was living in this incredibly beautiful, vibrant resilient country, battling terrorists with one hand and writing world-class software with the other, surmounting the fanatical hatred of 1.5 billion Moslems, all the while giving its citizens a high and growing standard of living, while people complain hourly about how awful it is and how bad its leaders are.   

Israel defies gravity. May it continue to do so forever.

IMD Professor Stéphane Garelli  has provided us with valuable food for thought, by creating a “Competitiveness Roadmap 2009-50”, available from the IMD world competitiveness yearbook website, listing 50 global issues and trends, plotted in X,Y space, where X is the time horizon, up to 2050, and Y is the impact, from LOW to HIGH*.     

Below: A few of the 50 trends, chosen for their potential for generating innovative business ideas:

1. US budget deficit reaches abysmal proportions – The US budget deficit in 2009 is expected to attain a staggering $1750 billion. This represents a deterioration of some $2000bn since President Clinton left the White House 10 years ago and posted a surplus of $236 billion.

2. The recession is worldwide – The OECD countries expect a contraction of their economies by 4.3% in 2009. Such a deep recession also affects the emerging economies: the past decade of growth was not sufficient to create a large buffer of internal demand to compensate for the drop in exports.

3. Unemployment becomes massive – 25 million people lose their jobs in the OECD region and the average jobless rate hits 10%. Globally, the International Labor Organization articulates a fi gure of 50 million additional unemployed.

4. Interest rates are at a record low – While in the US rates approach zero, the rest of the world also experiences their lowest rates in decades. Deflation is feared, forcing central banks to introduce new policies such as quantitative easing.

6. High volatility of currencies – The currency markets experience considerable volatility. The dollar remains more unstable than the Euro. The latter, however, has been weakened by its exposure to the difficulties of Central European economies. Denmark, Sweden, the Baltic States and maybe Iceland consider joining the Euro… The Pound continues to decline.

7. Global debt explodes – The US national debt now surpasses $11.2 trillion and increases by $3.7 billion a day! Budget deficits in most advanced nations are going to exceed 5% of the GDP. In 2009, the borrowing requirements of the US will be $2500 billion and $1000 billion for Europe. Central Europe is said to have some $1300 billion of debt towards foreign banks. Who is going to pay for this debt? For the first time, governments worry that some bond issues may not be subscribed.

8. Protectionism on the rise – In industrial nations, public opinion and governments are increasingly sensitive to the loss of economic power to emerging nations and the destruction of jobs at home. Possible protectionist measures focus on “buy national” incentives, environmental protection, corporate governance, social protection and intellectual property.

9. New regulations for world financial markets – A fundamental overhaul of the regulatory environment takes place with the objective of laying down new rules for the supervision of financial activities and to consolidate competences among various institutions. Globally, the Basel Committee on Banking Supervision and the Financial Stability Forum
are responsible for defi ning new standards and practices. Implementation remains at a national level.

12. Emerging powers stack up currency reserves – Emerging powers are accumulating foreign currency reserves at impressive rates: Number one is China with $2005 billion, followed by Japan $1031 billion, Russia $435 billion, Taiwan $292 billion, India $254 billion, Brazil $208 billion and Korea $201 billion. As a consequence, money is not necessarily flowing back to the US or Europe, as in the past.

13. The South goes shopping – Sovereign funds become major players in world finance and acquire more industrial companies from the West. They also become a major source of financing for infrastructure projects and for the development of local companies in their own countries. Global brands from China, India, the Gulf region and Russia hit international markets – it is not a cozy world anymore!

14. The recession ends at different times – Recessions come in four shapes: V- a steep but short slowdown, W – or so called double-dip, U – a longer weakening of the economy and L – a prolonged decline. The US expects a U, Europe fears an L, just as Japan, China and the emerging economies count on a V.

15. Household savings on the rise – For the first time in decades, households are more cautious about their spending and re-connect to the notion of “saving for rainy days”. In industrialized nations, the willingness to spend more is targeted to technological innovation, clean-tech or inelastic expenditure such as food, health or wellness. In emerging economies, the attitude toward spending is more moderate and dependent on increased purchasing power.

22. New attractiveness for the Gulf region and Africa – There are $800bn of infrastructure projects under completion in the Gulf region while Africa is becoming attractive again thanks to energy and commodity investments. More than 800 Chinese companies operate in Africa. The population of Africa will reach 1.9bn in 2050!

24. More managers needed everywhere – More managers are required in emerging powers. India, China, Russia, Brazil and the Gulf region increasingly focus on management and the creation of business schools, beyond science and engineering education. Strategy, fi nance and marketing skills are now priorities for ensuring the continuous expansion of local enterprises in a global environment.

29. Labor cost differences shrink – The difference in labor costs around the world is drastically reduced as nations develop. A range from 1 to 20 today is reduced to 1 to 5 as purchasing power around the world converges.

30. Productivity is harmonized worldwide – Productivity is harmonized around world operations as companies become truly global and widely diffuse the same technology and processes throughout the markets where their assets are located. The value chain is managed at the global level. The nationality of companies matters less and less.

31. Corporate taxes converge – Nations, which have competed fiercely in lowering their tax rates to attract enterprises, are developing an international consensus that establishes common and agreed-upon practices for the taxation of companies, no matter where they operate. The bandwidth of corporate tax rates is signifi cantly reduced.

35. From collective to individual value systems – The value system of society in Asia gradually evolves from one based on collective values (such as hard work and national pride) to one based on individual values (such as work-life balance), much closer to the US and European value systems.

36. A new business model for the poor – A new business model emerges for the very poor of the world (such as in Africa or the Indian subcontinent). Products are manufactured and sold at a fraction of the price charged elsewhere, and with minimal functionalities. Examples: the $10 phone, $100 PC or $2500 motor vehicle (e.g. Tata in India) and of course micro-credit.

41. In Western industrial nations, some people reject mobility – Although communications and travel are more pervasive, a part of the population rejects excessive mobility and rediscovers the attractiveness of a local environment. Younger professionals reject promotions or relocation of responsibilities when they are too disruptive to their private lives. Congestion in cities, airports and most transportation systems takes away the attractiveness of mobility.

46. Low demography hits Europe, Japan and Russia – The low demography in Europe, Japan and Russia takes its toll on the dynamism of the economy. In 2050, Europe will count 628 million people, having shrunk by more than 100 million in 50 years. Could more lenient immigration policies compensate for this decline, especially for skilled
labor?

47. Life expectancy increases, expenses also – Life expectancy increases dramatically to well over 85 years old in many industrialized nations. The burden on the health system becomes greater, also due to the early systematic screening of the population for illnesses.

48. Atomization of the value system in the West – The value system in Western societies becomes “atomized”. A common purpose in the population is replaced by a multilayer society where many different value systems cohabit, each of them appealing to a specifi c part of the population.

49. Climate change affects economic resources – Climate change forces the re-allocation of economic resources. Food and water become scarcer in some regions, while new crops become available in more northerly regions. The prices of basic commodities are totally altered. The “environment cost” becomes part of the economic scenario, and is thus included in statistics such as the GDP.

50. Pandemic risks occur more frequently – As the world becomes more open, transport more pervasive and logistics more efficient, epidemics spill more easily from one continent to another. Pandemics are permanently monitored by international organizations, and companies tighten up their health and safety procedures.

____
*Stéphane Garelli, “The Competitiveness Roadmap, 2009-50”, IMD, Lausanne, 2009.

Plus ça change, the French say — the more things change, the more they stay the same. Or, as Yogi Berra put it, it’s that old déjà vu all over again.

The global financial crisis of 2007-9 has reminded us again of the vulnerability of world capital markets and of the persistent recurrence of financial crises throughout history. Moreover these crises are incredibly similar, in their broad outlines.

In 1907, in the so-called Bankers’ Panic, the following events occurred:

* The New York Stock Exchange fell by 50 percent, compared to its peak in the previous year, 1906. (World stock prices fell by exactly the same percentage from their peak, in 10 months, in 2008-9).

* The panic occurred after a ‘greed is good’ market manipulation – a failed attempt to corner the market in the shares of United Copper, not dissimilar to the shady sub-prime mortgage and credit default swap manipulations that led to the 2007-9 collapse.

* The 1907 panic created a liquidity crisis as banks stopped lending and borrowers lost faith in banks — just as in 2007-9.

* There were numerous bank failures in 1907, just as in 2007-9.

* The 1907 collapse was preceded by an inflationary bubble, just as in 1995-2007.

* The 1907 financial crisis was accompanied by a real crisis — a deep recession.

* There were emergency bailouts, involving brokerages as key players (similar to the collapse of Lehman Brothers on Sept. 16, 2008). A big brokerage firm borrowed heavily using its stock in Tennessee Coal & Iron as collateral; when those shares collapsed, a bailout was organized, with J.P. Morgan’s U.S. Steel Company taking over the failing TC&I — shades of 2008-9 and the bailout of AIG. Bear Stearns and GM. J.P. Morgan was the reigning hero. Were it not for his pledging huge sums of his own money in bailouts, and forcing his wealthy banker friends to do the same, the collapse would have been much worse. Ironically, in 2008, J.P. Morgan bailed out Bear Stearns!

* Here is a key difference between 1907 and 2007: while key CEO’s, chairmen and senior managers continued their ‘greed is good’, ‘you owe me obscene salaries’, policies, in 2007-9, tycoons like J.P. Morgan bet their wealth on helping markets recover their trust and sanity, in 1907.

* The crisis led to soul-searching and a total revamping of government regulation of credit markets, including the creation of the Federal Reserve System, America’s central bank.

Here, the jury is still out. Will the 2007-9 crisis lead to major reforms in how America regulates its banks and financial services sector, as it did in 1907? Or will the thinking be like the Silicon Valley bumper sticker: “Lord — please, give me another bubble”.

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*This blog is based in part on Robert F. Bruner and Sean D. Carr, The Panic of 1907: Lessons Learned from the Market’s Perfect Storm (Wiley, New York, 2007). With perfect timing, the authors published their book about the perfect storm right at the onset of the 2007 financial crisis. The term “perfect storm” (meaning, a series of improbable events all occurred at the same time) has been used widely to describe 2007-9.