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True Globalization Must Rest On Shared Values

By Paolo von Schirach –

WASHINGTON – The globalization we know has been driven primarily by the explosion of new cross border business opportunities created by truly disruptive technological innovation. Almost overnight, broadband internet (enabled by a robust global network of fiber optic cables) created a new, zero-cost modality to communicate and share enormous amount of data across the globe.

Moving goods became easy

When it came to transporting physical goods, the standardization of shipping technologies –same containers, same container ships, same container handling facilities used by all trading nations– accompanied by super efficient IT systems for managing and tracking millions of items in real time, made all this possible. Add to the mix huge infrastructure modernization (new rail freight lines, new highways, new airports, new ports) in major new industrial countries like China and we see the contours of the enabling environment for globalization.

Complex international supply chains that in most cases optimized results while reducing costs came to life. Combined with the outsourcing of labor intensive production from the US, Europe and Japan to low labor cost countries, they further contributed to the optimization of production, higher profits for many corporations, and lower prices for millions of Western consumers.

Not just about technology

We know all that. But here is the problem. Globalization should not be only about the successful adoption of new technologies that greatly facilitate cross border economic activities. Globalized business activities should take place within a global environment in which all the players sincerely adhere to the same rules, inspired by the same shared values.

And here is the problem. We do not have a robust rules based global environment in which norms are clearly and genuinely embraced by all participants, and serious penalties are imposed on rules-breakers by an impartial authority.

The World Trade Organization, WTO, may constitute an embryo of such an authority; but it is not the real thing. The WTO does not even come near to having anything close to the investigative and enforcement powers of a national government overseeing domestic commerce norms.

China not playing by the rules

There is no point here in repeating the long litany of complaints against Chinese behavior when it comes to international trade and investments. But it is worth noting that, for whatever reasons, the Western Nations that created the basic architecture of a rules based free trade system, while fully aware of Chinese non-compliance, for decades gave China a pass.

May be it was just wishful-thinking. However, for some reasons, after China entered the WTO, (December 11, 2001), most Western leaders concluded that China had turned a page. The leaders in Beijing were essentially done with the old command economy. They were eager to shed its legacy, while embracing Western style free trade, with all its rules. While China might take its time to fully become “one of us”, many observers had concluded that it was just a matter of time.

It did not happen

Well, now there is a growing consensus that that benign assessment had been not just premature, but flat wrong. Yes, there might have been a time, especially during the 1990s, in which genuine reformists within China had tried to articulate a new agenda aimed at turning the country into something close to a free market economy.

However, the elevation to supreme and now absolute power of President Xi Jingpin in 2012 finally convinced even the most optimistic analysts that this benign transformation within China, which would include its genuine acceptance of the Western rules based system it entered in 2001, is simply not going to happen. On the contrary, the signals from Beijing are that China has the ambition to create a new China-centric world order in which regional powers and others would follow a Chinese inspired and led international trade system. If we take these plans seriously, then we realize that the problem is not that China wants to be a stronger competitor within the existing system. China wants to create a new and improved system fashioned according to Chinese principles and “sell” it to the world as a better alternative to what the West created over time, after the end of WWII.

Be that as it may, and whatever your take on grandiose Chinese mega-projects like Belt and Road, it is clear that most of our benign assumptions regarding a Chinese progressive and indeed, inevitable, “conversion” to free market capitalism were out of place.

What’s next?

This being the case, what’s next? What should come next in the West is a genuine effort, hopefully led by an enlightened American Government, aimed at strengthening ties, at all levels, among all the capitalistic democracies, (The EU, Canada, Japan Australia, New Zealand and South Korea should be on top of this list), and other countries clearly willing to work within a rules based, free market international order.

This should not be about some kind of “Cold War 2.0” with China. But it should be about being inspired by the principle that, at least in general, it is better to do business with countries that share your values.

By refocusing its efforts, at the same time the West would send a powerful yet very simple message to China. The world operates according to principles of fairness, compliance, reciprocity and transparency. If China were genuinely willing to play by these rules, then they are welcome. There would be no issues. But the burden is on Beijing to show, through actual performance over time, its genuine commitment to the rules based system it seemed to have embraced about 20 years ago when it joined the WTO. Until then, the Western approach to trade and investments with China should be inspired by utmost caution and prudence. Assuming that “they are just like us” is a bad starting point. They are not like us.

Western principles

In the Western world the assumption used to be that more widespread prosperity is the outcome of innovation and increased levels of economic activity. In turn, innovation, enterprise and trade are made possible by the existence of political and economic freedoms protected and upheld by freely elected governments via the enforcement of sensible rules aimed at protecting the integrity, fairness and transparency of all economic activities.

I strongly believe that it is about time to forcefully reaffirm these principles, both domestically and in all matters related to international trade and investments. And there is no better way to do so than by establishing win-win international trade agreements with like minded partners, based on fairness, true reciprocity and therefore mutual advantages.

Do business with like minded people

A few years ago (beginning in 2013), there was a great deal of talk of a major US-European Union Free Trade Agreement, known as The Transatlantic Trade and Investment Partnership (T-TIP) that would greatly incentivize economic, trade and investment relations between the two sides of the Atlantic. Here is how the website of USTR (United States Trade Representative) described it:

The Transatlantic Trade and Investment Partnership (T-TIP) is an ambitious, comprehensive, and high-standard trade and investment agreement being negotiated between the United States and the European Union (EU). T-TIP will help unlock opportunity for American families, workers, businesses, farmers and ranchers through increased access to European markets for Made-in-America goods and services. This will help to promote U.S. international competitiveness, jobs and growth.

The U.S. and EU economies are two of the most modern, most developed, and most committed to high standards of consumer protection in the world.  T-TIP aims to bolster that already strong relationship in a way that will help boost economic growth and add to the more than 13 million American and EU jobs already supported by transatlantic trade and investment. T-TIP will be a cutting edge agreement aimed at providing greater compatibility and transparency in trade and investment regulation, while maintaining high levels of health, safety, and environmental protection. T-TIP presents an extraordinary opportunity to strengthen the bond between vital strategic and economic partners. [Bold added]

As you can see, the US Government at the time believed that this agreement would be extremely beneficial for both the US and the European Union. It also affirmed that enhanced economic ties would “strengthen the bond between vital strategic and economic partners.” Negotiations began during the Obama administration, but then it all fizzled after the elections of 2016, because of President Trump’s lack of interest in any new international trade agreements.

It is still possible to negotiate free trade with Europe

Well, assuming a relatively quick end to the current coronavirus global emergency, and a new US administration sincerely interested in both affirming and strengthening a rules based global commerce regime, a good place to start would be an ambitious plan to harmonize the myriad of rules that create de facto impediments to the free flow of goods –and especially services– between the US and the EU. If you consider that the US and the EU together represent the majority of world trade, the impact of a truly liberalized regime for trade and investments between these two giants would be revolutionary, with significant, world wide benefits.

Show the vitality of the Western world and its values

Western Europe and the United States are the two historic pillars of Western Civilization. While some believe that the West is well on its way to inevitable decline, there is no law of physics that establishes this.

An invigorated transatlantic trade and investment regime would act as a powerful tonic. It would open up new opportunities in the US and in Europe. It would strengthen ties among like minded societies. It would spur new joint ventures and mutually advantageous cross pollinations, while opening new avenues for cooperation at multiple levels.

But, more than anything else, a successful agreement that creates real value for all the stakeholders would show that like minded governments, inspired by the same or at least very similar values, can and will cooperate for the benefit of their societies.

Given the enormous amount of technical issues involved, this goal of a Transatlantic Free Trade Area may be very difficult to reach. But it is doable. The benefits, on both sides of the Atlantic, will be immense. And this agreement would be a powerful example of values-driven globalization.

Paolo von Schirach is the Editor of the Schirach Report He is also the President of the Global Policy Institute, a Washington DC think tank, and Chair of Political Sciencand International Relations at Bay Atlantic University, also in Washington, DC.




The Economic Damage Of Coronavirus

By Paolo von Schirach

WASHINGTON – The spreading coronavirus epidemic has already created an enormous challenge for the global economy. This epidemic is caused by an unknown new virus for which human beings have no immunity. For this reason, while this illness is very similar to a seasonal flu, its mortality rate is significantly higher. Hence the global scare.

Widespread restrictions

To date, there are no medical remedies for this new illness. Lacking other remedies, the countermeasures, beginning in China, (where it all started), have focused on lockdowns, quarantines and interruption of travel to and from the regions and countries affected. The goal is to slow down the spreading of the disease. Still, while this may be a sensible prevention policy from a public health standpoint, the economic impact has been devastating. Large parts of the Chinese economy have essentially been frozen by all these restrictions.

Frozen economy in China

Think about it. Lockdown affecting tens of millions of workers means that factories and offices are closed, workers do not work, goods are not produced, orders are not filled. Restaurants and hotels are empty, airlines cannot fly.

This prolonged work stoppage will amount to catastrophic economic losses for China, whose economy –let us keep in mind– was already rather anemic prior to this crisis, in some measure due to the negative impact of the tariffs war with the US.

Economic contagion

And this is not just affecting China. The reality of globalization means that we already have widespread economic contagion, even in countries only mildly affected (so far) by this new disease. Indeed, while relatively unscathed by the epidemic, the US is already suffering economically.

And this why. All US multinationals, and other smaller companies, depend on complex (and, it turns out, very vulnerable) supply chains centered in Asia. As the Chinese economy freezes, many US companies do not get their products delivered, and/or do not get critical parts and components for products assembled in the US. This is costly, and it negatively affected production schedules.

Sectors already affected

Beyond that, certain sectors of the US economy, such as leisure and business travel, hotels and airlines are already affected in a major way due to all the travel restrictions imposed by the authorities.

Furthermore, we can expect that the US oil industry will suffer devastating losses. With industrial production down in Asia, global oil demand collapsed and so did benchmark oil prices. The large and expanding (thanks to shale drilling) US oil industry supports dozens of medium sized companies and tens of thousands of high paying jobs. Many of these jobs are now in jeopardy. If the oil prices slump continues, expect major losses and bankruptcies in the US oil patch.

Additional contagion

The fact that new points of contagion have exploded in South Korea, Japan, Italy and Iran worries markets even more. These developments lead all experts to conclude that the coronavirus epidemic is now out of China, and it cannot be contained. Therefore, we should expect more countermeasures in the shape of travel restrictions and lockdown, and consequently additional harm to the global economy. Hence the financial markets panic and the deep losses experienced by Wall Street (the worst since 2008) in the last few days.

The road ahead

If we could have the reassurance that these extreme “Coronavirus Containment Measures”, while severe, were only temporary, then the world economy could adjust, absorb this hit, and get ready to restart soonest.

But the problem is that we do not know how long this epidemic will last. And this allows for the worst scenarios to proliferate. After the 2008 financial crisis exploded, the panic was caused by lack of knowledge regarding the extent of the financial shortfalls. How big were the losses for the banking sector? How many mortgage companies would go under? Who would be capable of surviving? The market panic was largely due to lack of reliable data.

However, the massive liquidity injection by the US Fed into the US economy, combined with massive rate cuts, helped to reassure the markets; and they gradually re-established confidence in the system. After those beneficial interventions, climbing back to normality was certainly painful; but everybody agreed that it was doable.

How long will this last?

In this coronavirus case, there is no clear end game. The health experts have no reassuring answers for this medical emergency. Lacking a cure, keeping infected individuals and areas isolated and blocking altogether travel and events where large numbers of people congregate seems a sensible way to slow down or contain the spread of this virus. The problem is that these prevention measures cause enormous economic losses, as the recent developments in China, South Korea, Japan and Italy clearly indicate.

More contagion, more restrictions

Should the epidemic spread from Italy to the rest of Europe in major way, and from Europe to other parts of the world, assuming similar restrictive policies adopted by additional countries, the economic damage caused by widespread freezing of production and world commerce would be incalculable.

For instance, in Iran, a severely under resourced country, the epidemic most probably cannot be contained. Will the virus travel from there to Central Asia, the Middle East and Africa? Scary scenario; but not impossible.

Without
some good news, such as new data showing a global contagion slowdown and/or the
announcement of a cure or vaccine that could be quickly administered, it is
difficult to see how markets can stabilize and go back to normal.

Last but not least, should the epidemic spread to the US in a major way, (it is already here), all bets are off. If America stops, the world stops.

Paolo von Schirach is the Editor of the Schirach Report He is also the President of the Global Policy Institute, a Washington DC think tank, and Chair of Political Science and International Relations at Bay Atlantic University, also in Washington, DC.




Amazon Will Spend $ 700 Million To Retrain Its Workers

WASHINGTON –
Amazon, the global e-commerce giant, just announced that it is planning to
spend $ 700 million over the next 6 years to retrain about one third of its
630,000 workers (about 275,000 of these are in the US). This is an almost
monumental undertaking. But this is not about philanthropy. This initiative is clearly
motivated by corporate self-interest.

Need to stay ahead

Indeed, looking ahead it is clear that Amazon, a major user/developer of the ultra- sophisticated ICT systems absolutely vital for the management of the millions of daily shipments that represent the core of its colossal e-commerce empire, MUST have the state-of-the-art technical tools. In order to retain its global leadership ranking in e-commerce, this giant must have the best of everything –and that includes top of the line engineers, ICT specialists, warehouse managers and also line workers who understand and can successfully interact with more and more complex and sophisticated equipment.

Amazon fully
realizes that the technologies that will inevitably affect all its systems and
operations and therefore its ability to beat the competition on price, speed
and overall quality of service, are being updated/transformed/disrupted
practically on a daily basis. And this means that the skills of an average
manager or worker at any one its warehouses or distribution centers, while
adequate today, will likely be behind the curve tomorrow. Hence the need to
invest –massively—in the retraining of Amazon’s work force.

Just the beginning

All this
looks smart, forward looking, and anticipatory. Still, we should understand
that this Amazon announcement is barely the beginning of an economy-wide
complex and mostly uncertain process that will have to be extended to almost the
entirety of the US and global work force, unless today’s global leaders –whatever
the sector they operate in– accept that they will be inevitably overtaken by
new companies whose workers and managers will be in full command of tomorrow’s
technologies.

A hypercompetitive global economy

Today and tomorrow being part of the global economy means and will mean accepting the challenge of operating in a hyper-competitive, turbo-charged global market place. Only the super smart and technology savvy corporations will have a shot at the top ranks.

Competition is an old concept. But the speed of this never ending race is a new phenomenon. And this race will require the adoption of a new psychology on the part of all participants. Everybody, from ultra-paid CEOs down to programmers and factory floor workers will have to embrace a culture of continuous change and constant disruption as the new normal.

Disruption is not new

Let me clarify this. Obviously, technological change and the disruptions that it causes are not new. If we go back to the history of the industrial revolution that began in Great Britain in the early 19th Century, it is mostly a history of disruption, sometimes very dramatic disruption, that caused dislocation and pain before the positive effects in terms of new jobs replacing old ones, higher productivity, better wages and lower cost of improved and more varied goods could be felt by society.

So, nothing new here.
Schumpeter’s definition of capitalism as a process of “creative disruption”,
keenly accurate decades ago, still applies today. Except for one thing: Speed.
And this is clearly a double-edged sword.

Speed is good and bad

Of course, today’s ability to innovate at a rapid clip, with the attendant ability to move quickly from concepts and prototypes to commercially viable applications ready for the market, is a major advantage.

All users, from companies to governments to the average consumer can avail themselves of the latest in technology, software, electronics, pharmaceutical products, banking services, and more, with obvious advantages in terms of greater efficiency, lower cost and improved quality of life.

That said, everybody has to know that retaining a technological edge is not an option. It is a “must have”. Mastery of the most up to date tech is absolutely essential for those companies that want to retain a top ranking or aim to have a decent shot at joining the top ranks in the never ending global competitiveness race.

No exceptions

Let’s be clear. There are no shortcuts. There is no way to stay on top unless you have full command of a powerful innovation/commercialization engine. If you don’t because you fell behind, or because you never got there (think about scores of poor, under resourced struggling countries), then you do not have a chance. You are in the dust, looking at the others forging ahead.

And this brings me back to Amazon and its bold announcement of its large work force retraining program. This one and other similar programs already adopted or soon to be adopted by other companies, if well structured, will have a positive impact on the company and its profits, on the employees themselves, and on millions of customers. Assuming that many other companies will follow Amazon’s lead, hundreds of thousands of workers, may be millions, will learn new skills and most probably will become employable in more challenging jobs that require a higher degree of ICT knowledge and technical sophistication.

Life time learning

But the real issue and challenge here is that for this approach to work as intended, training and retraining must become part of a “life time learning” culture and approach to employment. This culture must be understood and embraced by all or most workers –not just at Amazon, but everywhere.

And here is the thing. All this sounds good. But in reality it is hard, really hard. Human beings are of course intelligent and generally flexible, adaptable and capable of learning new things. However, for millennia, with very few exceptions, (craftsmen, artists, scientists, and very few inventors), a person’s occupation consisted in doing again and again (until they retired) what they learnt as a young person, And this applied even to the few who went to school and/or apprenticeship programs. Even after the onset of the industrial revolution, the new factory workers usually learnt and practiced a few, relatively simple manual tasks. Their jobs were about repeating the same operation again and again.

Change was slow

At a different level, the disruptive changes brought about by industrialization took a long time before they could be felt by the broader society. Even after the introduction of major innovations, the old ways survived for a long time.

For instance, the invention of the automobile more than a century ago did not mean that overnight all professions and crafts focused on horses (horse breeding, stable boys, blacksmiths, saddle and stage coach makers), disappeared. It took many decades for the car to affirm itself as the default, cost-effective modality for individual transportation on a large scale. It took Henry Ford, the assembly line, and the Model T for cars to be mass produced and finally become affordable. And even that radical transformation took decades. In other words, change, even very disruptive change, used to take a long time. And this long time frame allowed for some kind of transition and adaptation from the old to the new.

A different world

Today, we are literally in a different world. In certain sectors, including most ICT or IT related fields, the notion of the rapid obsolescence of even the most sophisticated innovation is a given. Focus on R & D and related high levels of funding must be a priority at all times. Even a major breakthrough –think of the first Apple iPhone— soon enough is copied, mass produced and eventually commoditized, while an eager public public waits for the next breakthrough.

All this is exciting. But it is also very problematic for the millions and millions of workers who have to embrace this life learning philosophy, unless they want to be left behind because they lack the skills of tomorrow.

It is great that a behemoth like Amazon, with more than 630,000 employees worldwide, has the resources, the vision and the internal organization to launch such an ambitious, multi-year retraining program.

Supply chains

But what about everybody else? What about medium sized tech companies in Malaysia, Vietnam, Mexico or Romania? Most of them today do reasonably well as suppliers and vendors to bigger companies. But what if the big company tomorrow needs a completely different set of parts or software? Can the medium size vendors quickly adapt, absorb the new technologies and deliver according to exacting specifications? Inevitably some will not be up to the task.

Efficient production is now based on ever more complex global supply chains. However, for this model to work smoothly everybody has to deliver their product or service according to a plan that will inevitably include the latest innovations. What is some key links of the chain falter because the workers in supplier X do not fully understand what they are supposed to do? This would cause delays or interruptions. And this upsets everything.

The new task of education

My last point is about the mediocre to poor quality of public education, in the US, but also other countries. This absolutely vital life learning approach has to be embedded in young people’s minds from a very early age, so that it becomes a good habit, and not a burden. But I am not sure that we are doing this today. May be this is happening in some elite, top schools. But not in your average American or European public school.

So, here we can see a huge disconnect between the pressing needs of corporations for adaptable workers eager to learn new things on a daily basis and a public education system usually based on imparting some discreet knowledge to students, giving them the misleading impression that this will be enough for their future professional life.

Well, it is
not enough. Hence the need to retool education, both in terms of its content
and in terms of the broader message given to young people: “Remember that school is just stage one of your life learning process
and obligations. If you do not embrace this constant learning approach wholeheartedly,
you will be left behind”.      




Will NAFTA Be Fixed?

WASHINGTON – It is not a bad idea to look at ways to improve NAFTA, the Free Trade Agreement linking Canada, the U.S.A. and Mexico that came into force in 1994. Back then, we had a different world. The Internet was just beginning to blossom; the on line giant Amazon did not exist, and Apple’s future was uncertain. Energy production and possible new cross border investments within North America did not even remotely resemble what we have now. Think of the incredible shale oil and gas revolution in the U.S., large scale oil extracted in Canada from oil sands in Alberta, and then exported to the United States, and the recent liberalization of the energy sector decided upon by Mexico, simply because they are shipped from Mexico.

Make it better?

What is not entirely clear at this early stage in the process is the spirit animating the American negotiators. As a presidential candidate, Donald Trump argued that NAFTA is a horrible arrangement that hurt the U.S. economy and workers, a key item within a long list of fatally flawed trade agreements.

So here is the question. Is the goal here to improve NAFTA or to try to kill it? We shall soon find out.

Key issues 

Among the many issues that will be addressed by the U.S., Mexican and Canadian negotiators, “rules of origin”, “dispute resolution” and “government procurement” stand out.

Rules of origin

In order to qualify for the NAFTA free trade preference, (this means no customs duties within the free trade area), goods coming into the United States –say from Mexico– must qualify as “made in Mexico”. For example, they cannot be sneakers or T-shirts made in China, exported to Mexico and then re-exported tariff free to the U.S.A., pretending that they are made in Mexico.

However, in this global economy sustained by global supply chains, how does one establish clear rules aimed at determining the origin of complex products? Think for a moment of automobiles assembled in Mexico. Almost by definition they contain many foreign made parts –parts not originating from other NAFTA countries.

Well, here is the question. What is the limit of foreign (non NAFTA) made components (in terms of value of the components, and in terms of overall percentage of parts) beyond which the car assembled in Mexico no longer qualifies as “originating in Mexico” and therefore not qualifying for the NAFTA preference?

How strict?

How high do you set the bar? Is a car with 30% non NAFTA components still qualifying for tariff-free NAFTA status? Or can the NAFTA negotiators be more lenient and set the bar at 40%? This is a big deal.

More or less stringent rules of origin will affect established trade relations with a global web of suppliers. No wonder the Japanese are following the NAFTA renegotiation issue very closely. The Japanese brands assemble cars in Mexico. Ostensibly those cars are “made in Mexico” and so they can be exported to America customs free, as they benefit from the NAFTA trade preference.

Components made in Japan 

But here is the thing. Everybody knows that these cars contain a large amount of components made in Japan. If adopted by the three partners, more stringent NAFTA rules of origin will inevitably disrupt established supply chains created by the Japanese brands to export components that end up in cars that until today met the minimum NAFTA origin criteria to be considered as “made in Mexico”.

So, here is the issue that will affect the negotiations. America wants much stricter rules of origin, because it does not want what the U.S. considers to be essentially Japanese cars, disguised as “made in Mexico”, to come into the USA tariff free, (because of the NAFTA preference),

Can a compromise be reached regarding what percentage of a finished product must be made of components made in Mexico, Canada or the U.S.A. in order to give this product “NAFTA origin”?

Dispute resolution provisions

The Americans also do not like the “dispute resolution” mechanism included in the original NAFTA Treaty. many in the U.S. look at it as a binding arbitration process which amounts to an infringement of US sovereignty. Americans do not like to be bound by a process whereby non-U.S. judicial bodies decide the outcome of trade disputes. The other two NAFTA countries would like to preserve it this dispute resolution mechanism. Is compromise possible?

Public procurement

Public procurement is another sticky issue. The three countries would like to have free and equal access to public procurement bids (thin of government contracts which may include IT services, or infrastructure projects) put out by their NAFTA partners. Except when they do not.

Especially with President Trump pushing for an “America First” general approach on all trade and non trade issues, when it comes to public procurement, Washington wants to privilege U.S. companies through “Buy American” policies.

And this would include all or most government contracts. This is obviously against the spirit of wide open procurement with a bidding process open to all firms within NAFTA.

Uncertain outcome 

In the final analysis, all these are very complex and technical issues –on a good day. If the parties are willing to compromise, there is an opportunity to improve NAFTA.

But if there is a negative bias against NAFTA, it is relatively  easy to tear apart this free trade area linking the 3 economies of North America.

 

 

 




Fight Inequality With Improved Public Education

WASHINGTON – In the course of a popular national radio show, an important journalist declared that “the Big Issue” that Americans will have to contend with in 2016 is how to reduce “inequality” through public policy measures. The respected quarterly journal Foreign Affairs agrees, and it goes one step further. The cover story of its current issue is “Inequality“. And inside one can read several articles focusing on inequality from every possible angle: global, regional and domestic. 

Ideological parochialism

This is really amazing. This is the triumph of ideological parochialism over reality. The very term “inequality” assumes that there is a preordained, presumably mandatory level of equality that we are all supposed to comply with. Veering away from the golden middle is unjust, unethical, and immoral. In fact it should probably be illegal.

This is profoundly wrong and terribly misleading. There is no such thing as a “proper balance” between rich and poor, between the income of those at the top and those at the bottom of any society. There is no formula that can correctly assess when someone has “enough” and when enough gets to be “too much”, or “too little” for that matter. These are all political notions, based on personal ideological preferences and biases. There is no healthy “natural equilibrium” that we should all strive for and then comply with.

And, more to the point, “inequality” is not a problem to be solved. It is instead a symptom: the result of complex dynamics that go well beyond the simplistic notion of an unfair allocation of national wealth.

Real inequality 

Of course, we can talk ad nauseam about specific cases in which inequality was or is the direct result of a political set up. In the Soviet Union only party elites had access to education, good jobs and perks. In today’s China, notwithstanding a vibrant private sector, the Communist Party senior leaders enjoy immense advantages that cannot even be dreamed about by the average citizen. In apartheid South Africa only Whites could aspire to have anything. In other societies small elites by mixing force, intimidation and cunning (Cuba, Venezuela, Burma, Saudi Arabia are good examples) have managed to control almost everything, while the majority of the people is left with crumbs.

But these are extreme examples of politically or ideologically sanctioned inequality. This is not the rule in most Western countries, and certainly not in America. In the West laws apply to everybody, while discrimination is forbidden. We have open markets in which everybody can compete. Besides, there is accountability, transparency, an independent judiciary, and social mobility. Inequality does indeed exist; but in most cases not because someone gamed the system.

People feel squeezed

That said, I am not surprised that “inequality” is getting so much attention right now in America and in Europe. Most people in western countries are squeezed. While some segments of society, most of them made out of  people working in the financial or high-tech sectors, are doing extremely well, most of the others are not. This builds resentments and a great deal of conspiracy theories in which many villains are featured.

The illusion of “social justice” 

But here is the thing. While it is legitimate to question what value if any is added by people and companies who charge enormous fees for manipulating existing wealth without creating anything new, it is silly to believe that if their excessive wealth were taken away from them and redistributed through taxation, welfare programs, or other public policy mechanisms, we would all be better off. The fact is that this is a dangerous illusion. Redistribution is a social justice policy with temporary and very modest results. It is “feel good” stuff that will not even begin to attack the roots of inequality.

The point is that the growing inequality we are experiencing in America is largely the effect of other problems. It is the byproduct of systemic changes mostly beyond our control. Which is to say that it is wrong to believe that you are not doing so well only because someone else (more powerful and more influential) gamed the system and got all the goodies.

Millions of new Asian workers changed the global labor market dynamics

Here is the story. For the past 20 years, the American middle class (a broad definition that includes factory workers with generous union wages and other perks) has been hammered by the ill effects of globalization.

All of as sudden, (beginning circa 1990), an enormous addition to the global work force, mostly due to literally hundreds of millions of better educated Asians willing and able to perform many jobs at a fraction of what it costs in America, meant the loss of millions of manufacturing jobs in the US (we call this “outsourcing”) and the squeezing of wages for those lucky enough to retain their employment.

Technology eliminated jobs 

At the same time, rapid technological progress also hurt the old middle and lower middle class. Robots replaced and will keep replacing people in factories, while most routine white-collar office functions are and will be increasingly performed by intelligent machines.

Those who do well 

In very simple terms, this means that in this new world those who design, produce, manage and service the high-tech machines, the value chains and supply chains connected to them, and the software on which they run are doing well, while all the others are not. If you are a lead engineer at Boeing or Intel you are fine. You work for a market leader with state of the art technology and a global presence. If you work at the local small tool and die factory, you are on shaky ground. You do not make anything unique, and Chinese competitors are coming in with cheaper products. 

Disappearing jobs 

The grim reality is that if today you are working in any sector that is challenged by better robotics or new IT applications your job is in jeopardy. You are probably only one step away from unemployment. This being the case, you have no bargaining power with your employer. You are lucky to have a job. Forget about wage increases or additional benefits.

And so you, along with millions of others, have the sinking feeling to be stuck in a dead end job, or falling behind; while few people at the top of market leaders are doing very well.

Some are doing well 

Indeed, those who started or invested in high-tech companies that fuel this enormous technological and economic transformation make millions or even billions, while the shrinking old work force has only known jobs losses and wage stagnation for the past 20 or 30 years.

In addition, it is clear that only those who have a good or superior command of the new technologies and how they relate to the unfolding “knowledge economy” have an opportunity to do well, or very well. Their skills are in high demand.

At the opposite end, a factory floor worker is a small, fungible cog that can be replaced or eliminated at a moment’s notice. Same thing for an accountant who performs back office repetitive functions.

Negative global trends 

While this is not the entire story, it is clear that increased inequality in advanced western countries is mostly due to the negative effects of globalization and rapid technological change that resulted in automation. There is unfortunately an overabundance of “old-fashioned” semi skilled or skilled labor, while robots reduced the number of necessary factory jobs. Furthermore, those who do not have the education to climb up to the next skills level in this more complex environment are stuck or, much worse, they fall behind.

This being the case, politicians who point at inequality as the big issue to be resolved by taxing the rich a lot more are deceiving themselves and the voters. Inequality is mostly the result of these global trends that cannot be stopped, let alone reversed.

Well, then what can we do? How can we reverse the impoverishment of the working class and what used to be a large and thriving middle class? There is no easy answer.

Focus on quality public education 

Still, as a minimum, we must address the quality and focus of American public education. It is obvious that in a high-tech world only those who master the new technologies will thrive.

Leaving aside for the moment the adult population, let’s think of the next generation and its prospects. If you are an inner city minority kid attending today a mediocre or bad public school, your chances of “making it” in this ultra competitive economy are practically zero.

If you are not fully literate, let alone skilled in computers, and IT and therefore capable to manage sophisticated equipment, you cannot aspire to get any of the good jobs. You are condemned to compete –you and millions of others– for low skills, low pay jobs in basic services. Yes, you can become a janitor, a landscape worker, a store clerk, a bus boy or a waiter. But even assuming that you are lucky and get one of these jobs, there is no chance that they will become rungs on your upward mobility ladder. You have no ladder.

Since you have no higher education, no high-tech skills, and no chance to go to college in order to acquire engineering, business or management skills, you are stuck.

Better education, less inequality 

So, at the very minimum our society should seriously work to drastically improve the quality of public education. Sadly, in this ultra-competitive global economy in which only the well-educated have a chance the seeds of future, stubborn inequality are planted in bad schools serving poor children.

Demanding a mandatory higher minimum wage is a silly feel-good remedy. Uneducated people are paid little because they add little value. By creating politically mandated higher wages we improve their conditions only by a little, while hurting some low margin businesses that can survive only because of low labor costs.

New sectors? 

All right, is that all? No, for sure there is more. It is quite possible that new technologies will open up new sectors and possibly new employment opportunities. Which sectors? I have no idea. At some point politicians were talking about millions and millions of new jobs to be created by the green economy. Well, this has not happened, yet.

High-tech jobs only for skilled workers 

Still, whatever the new economic sectors that will be generated by scientific and technological progress, it is obvious that only those who have the appropriate math and science education and the additional high-tech skills that will enable them to manage complex machinery and programs will have a seat at the table.

Yes, these highly competent individuals will have jobs and promotion opportunities. And they will make a lot more money.

But all the others will not.

Not a conspiracy 

Politicians who argue today that growing inequality is a moral outrage and obviously the outcome of a rigged game are delusional. In truth, the game is occasionally rigged. Yes, some sectors of the economy get preferential treatment. Some corporations should not get subsidies and should pay more taxes.

But this global technological and workforce tsunami has not been concocted in Washington by a few clever lobbyists. This is the product of globalization and of the current direction of technological progress.

Give tools 

Instead of promising to fight inequality by taxing the rich, political leaders should work to give to as many people as possible, especially young people moving their first steps into society, the best intellectual tools to compete in this new world.

Good or excellent public education (including re-training for adults) will not provide a complete remedy against inequality. But for sure without it we shall make no progress. Uneducated people cannot compete. They will remain poor and marginalized.

 




Walking in Lusaka

LUSAKA (Zambia) – I was walking in a nice area, with beautiful Jacaranda trees, now almost in full bloom, lining the streets. In this part of Lusaka you can find some of the best hotels, plus the local offices of many international organizations. The Word Bank is here, plus the International Monetary Fund, The International Finance Corporation, and the African Development Bank.

These days, one glitch is represented by frequent power cuts, due to limited production capacity caused by a persistent drought. (Zambia depends in a significant way on hydro power generation. Low water levels in the dams mean less electricity production).

As I got to a busy intersection, I realized that the traffic lights were not working, most likely
due to a power cut. This presented a real problem. Even without a functioning traffic light, cars were zipping by at high speed.

I looked around and saw a young woman in the same predicament. She was also reviewing the situation. I concluded that it would be wise to follow her lead. “She is local”, I thought. “She understands the traffic, and how drivers react to pedestrians crossing the street”. Sure enough, during a short lull in the incoming traffic, the young lady started crossing. And I followed her.

When we safely got to the other side, I looked at her and I commented that I was lucky to have had the opportunity to follow her. In reply, she said something polite.

But then, in a simple and direct way she said to me: “You know, you are the very first white person I have ever talked to in my life”. “Really?”, I commented in disbelief. “And what do you do? What is your name?”, I asked. “I work as a marketing specialist for a firm in the Cairo Road. My name is Mary”.

Mary spoke clearly, in a nice way, in very good English. I was a little confused. “How is it possible that she never interacted with any white foreigners?”, I reflected.  There are several Europeans, Americans and Asians in Lusaka. Some actually live here, some come for business, or tourism. Others work in Lusaka as diplomats, or aid workers.

Well, may be an explanation is that “globalization” is still work in progress. Below a rather thin veneer of increased connectivity, we –Africans, Europeans, American, Asians– are not yet part of “One World”. There are plenty of interactions, of course. But we have not reached critical mass.

No doubt, the process is unfolding; but we are not there yet. Well, I just hope that we can move faster.

And I am sure that as the level and quality of international connections improves open-minded people like Mary will see that this process creates new and interesting opportunities.




In Mexico Large Gap Between Developed and Under Developed Regions

WASHINGTON – I recently wrote about the absurd news item regarding 2.3 million applicants for 368 entry level civil service jobs in Uttar Pradesh, a very populous and very poor Indian state.

Grotesque gap 

The grotesque gap between the number of low skills and low pay jobs and the avalanche of applications, many of them made by people with university degrees, is illustrative of enduring lack of opportunity and gigantic backwardness in a country often cited as an example of success in the struggle against under development.

Yes, India has many important companies, some of them quite competitive in the global market place, (Tata, Reliance, Wipro, and Infosys, among others). But the grim reality is that there are still hundreds of millions who struggle, trapped in perpetual poverty. And part of the reason lies in antiquated institutions and absurdly complicated bureaucratic rules and overlapping jurisdictions that suffocate business and prevent development.

What about Mexico? 

Well, what about Mexico, another promising middle-income developing country? If we use the same yardstick of number of applications per job opening, Mexico is doing a lot better, but not great.

The Economist reports, (Of cars and carts, September 19, 2015), that German automaker Audi is recruiting workers for a brand new plant that will be built in San Jose Chiapa, in the state of Puebla. So far, the company received about 100,000 applications for 3,800 jobs.

Obviously this shows that there are many more jobs seekers than available openings. Even though the gap is not as monstrous as in the Indian case, it is still way too large. Far too many Mexicans need decent jobs.

Not taking off 

But why is it so? Why is it that Mexico, notwithstanding its significant progress and the advantages created by free trade agreements with the United States (NAFTA) and many other countries, cannot “take off”, as a country?

There are many theories, but one seems to dominate. The main reason is that millions of Mexicans are still prisoners of an outmoded, traditional, and very conservative mind set. Small companies born in the informal sector do not want to graduate to the formal economy in which, along with tax obligations, they would also gain access to commercial credit and other tools that would favor expansion.

For ever informal, for ever small

They prefer to stay informal and small. And this means that they will never be part of the globalized economy. At best, they are and will continue to be small domestic players. As The Economist story reports, there is plenty of anecdotal evidence that illustrates this mind set. For instance, the windfall of a successful business transaction usually is spent on a big fiesta, as opposed to having any plans for reinvesting profits in the purchase of new equipment and hiring more workers.

Two societies 

The picture that we get is of two very distinct societies. There are the “globalized” Mexicans who have a good education and are plugged into the international economy and trade. They do well. They are and stay up to date. They understand business strategies, along with the need to plan and invest in modernization.

And then, next to them but a universe apart, millions of others who are not connected to this world. These Mexicans do not know and do not understand modernity and its dynamics, in large part because they lack the education that would allow them to access it.

Hard work is not enough

And so here is the broader lesson to be drawn from this story about Mexico and its sharp contrasts. Economic success today is only in part the result of hard work. It is mostly about smart work. It is about having or not having a real understanding of where you and your enterprise are situated within a country now plugged into the global economy. It is about understanding technologies and markets, about optimizing the use of capital, and about choosing the most cost-effective tools.

And there is more. In order to thrive, you need to be situated within a modern eco-system. You need modern infrastructure, reliable logistics and –most important of all– rule of law.

Islands of modernity 

If the eco-system exists, but only in patches here and there like in Mexico, then you will have islands of impressive modernity surrounded by an ocean of backwardness.

100,000 applicants for 3,800 factory jobs in the state of Puebla is a symptom of this enduring gap.




Italy’s Bad Growth Numbers Described As Good

WASHINGTON – When drastically reduced expectations become the “New Normal” lousy economic numbers in Western countries become acceptable, and miserable growth is actually cause for celebration. Here is an example. I watched via the internet a recorded staff meeting at La Repubblica, one of Italy’s most prestigious newspapers.

Good news 

When it came to discussing economic issues, the journalist in charge was happy to report good news to his colleagues. Indeed, in the second quarter of 2015 the Italian economy grew a bit more than expected. Therefore it is likely that the projected 0.7% GDP growth for 2015 will be achieved. (Never mind that part of this pitiful growth is due to public investments, while private sector investments actually declined).

The broader context

Got that? On track for 0.7% growth –may be. And this is the stellar Italian economic achievement coming after 3 straight years of recession. More broadly, please note that Italy’s GDP is stuck at the pre-2008 recession levels. And do not forget the staggering 12.5% unemployment rate, (with peaks of 40% when it comes to jobless young people in the South). Add to this the perennial cancer of organized crime (Mafia, Camorra, and N’drangheta are just the best known “brands”) that has successfully expanded from its native south to the rest of the country.

But –hey– we are on track for 0.7% GDP growth. That’s great news!

Focus Economics take

Well, if you want a real analysis, here is how Focus Economics describes Italy’s economy:

“Italy suffers from political instability, economic stagnation and lack of structural reforms. Prior to the 2008 financial crisis, the country was already idling in low gear. In fact, Italy grew an average of 1.2% between 2001 and 2007. The global crisis had a deteriorating effect on the already fragile Italian economy. In 2009, the economy suffered a hefty 5.5% contraction—the strongest GDP drop in decades. Since then, Italy has shown no clear trend of recovery. In fact, in 2012 and 2013 the economy recorded contractions of 2.4% and 1.8% respectively”. 

“Going forward, the Italian economy faces a number of important challenges, one of which is unemployment. The unemployment rate has increased constantly in the last seven years. In 2013, it reached 12.5%, which is the highest level on record. The stubbornly high unemployment rate highlights the weaknesses of the Italian labor market and growing global competition. Another challenge is presented by the difficult status of the country’s public finances. In 2013, Italy was the second biggest debtor in the Eurozone and the fifth largest worldwide”. 

The real picture 

So, here is the real picture: highest unemployment on record, high debt, years of recession, lack of global competitiveness and now feeble growth. This is the “real story” regarding the Italian economy.

But for those who cover day-to-day events for a respectable newspaper a projected 0.7% GDP growth, after 3 years of recession, is good news.

Once again, welcome to the “New Normal” of low standards and zero expectations.

 




US Hit By Global Slow Down

WASHINGTON – Will US stocks recover? Or are they headed even lower? The optimists tell us that Wall Street panicked in the last few days. Forget about China. The fundamentals of the US economy are solid. There is no reason to liquidate stocks. Therefore:“Be smart. Buy the dip!”

Over valued stocks 

This is almost unbelievable. We all know that US stocks are over valued because of an unprecedented stretch of zero interest rates decreed years ago, at the time of the financial crisis, by the US Federal Reserve. As traditional savings accounts became non viable, most people went into stocks, therefore inflating valuations. We know that. Besides, we also know that many major companies, instead of investing in additional capacity, have been busy buying their own stocks. Obviously this provided extra support. However, it is clear that IBM and others cannot inflate their share price for ever by propping up their stocks in this way.

Modest GDP growth 

More broadly, there is an obvious disconnect between modest US GDP growth (about 2% a year) and stellar stocks valuations. And this modest growth is not going to improve. The Congressional Budget Office (CBO) just revised down its own optimistic projections for 2015. According to the CBO, the US economy will not grow at 2.9%. Most likely the rate is going to be only 2%. Well, that is 30% less than estimated only a few months ago. So, no improvements.

All this should be enough to tell us that a major stock market correction was indeed in order. In fact, whatever the daily gyrations, probably we are not quite done with that.

China: worse than you think 

That said, if we look at the global economy, there is reason to be even more pessimistic. First of all, the China story. Well, it looks that it is much worse than it appears. For starters, for the first time major business media are openly saying what many have been suspecting all along. The Chinese authorities falsify their growth statistics. China says that it is growing at 7% a year. Well, make that 5%, or even less, according to many analysts. This is no mere detail. This tells us that China’s problems are most likely bigger and deeper.

And since most of China’s growth comes from fixed investments, especially in construction, a major slow down of this gigantic engine has and will have an enormous negative ripple effect across the global economy.

Excess capacity 

Consider this. In the 1990s China steel production was about 100 million tons a year. Today it is 1.1 billion tons! However, because of the slow down, this capacity represents double its current demand. That’s more than  500 million tons over capacity!

And what is the effect of this rise and fall of production on world iron ore prices? Iron ore used to be $ 30 a ton in 2008. Thanks to China’s demand, it went up to $ 200 a ton. Now it is down to $ 100.

This means that major producers made huge investments to increase their capacity, counting on continuing Chinese demand. Well, now they are in big trouble. BHP Billiton, a world mining giant, just announced its worst results in 12 years. Profits are down 86% .

End of the BRICS

So, thanks to China, commodity prices are down, way down, hurting many producers across the globe. To make matters worse, commodities happen to be abundant in poorly managed emerging countries. So, falling economic fortunes have to be added to garden variety mismanagement, incompetence, corruption, and political crises.

Mix this nasty brew and you see that all the famed BRICS are out of luck, (India is probably the only partial exception). China aside, Brazil is in very poor shape, while there are mass protest against President Dilma Rousseff. Under performing South Africa just announced a GDP contraction. Russia has been hit by the double blow of low oil prices, and economic sanctions due to the Ukraine crisis.

Dismal prospects almost everywhere 

You want more? Abenomics failed in Japan. The economy is anemic at best, and there is no plan to diminish the burden of a monumental public debt. Saudi Arabia will run huge deficits because of lost revenue due to low oil prices. Turkey is in political turmoil, while its economy is sputtering.

Almost the entire Arab World is in chaos, with civil war in Libya, ISIL in Iraq, and self-destruction in Syria. Europe is barely treading water. Its southern periphery is and will continue to be in bad shape. France is doing poorly. Coming into the Western Hemisphere, Canada is also suffering because of low oil prices.

US to be affected by the global economy 

Given this rather uninspiring world scenario, the idea that the US will continue to do well because of our “good fundamentals” is just crazy. First of all, our fundamentals are rather weak. Secondly, we live and operate in a global economy.

Because of its insane investments binge, China used to drive growth. Now it is dragging a good portion of the world economy down. And there are no other locomotives of comparable size.

The idea that America can keep chugging along all by itself, even if at a modest rate, while the rest of the world is losing speed or worse is a complete fantasy.




Asia’s Slowdown Will Affect America’s Growth

WASHINGTON – Can America count on buoyant global demand to drive more US exports, and therefore more sustained growth at home? Not really. Here is an item from the WSJ, (April 22, 2015): “Growth across Asia is slowing despite rate cuts as consumers and businesses focus on repaying heavy debts”.

Yes, you got it. Led by China, Asia until yesterday was touted as the world’s economy locomotive. But it seems that the Asians are also maxed out: too much debt impedes more investments and more consumption.

Indeed, another related headline is about Ford motor company trying to keep its market share of the once exploding Chinese automotive market while facing the headwinds of slower demand for new cars. Sure enough, the Chinese car market is still growing. But it has lost altitude. Forget about 16% rates of growth. Therefore Ford and GM are facing fewer sales in China.

Tough times for America

What does all this mean for America? It means that our unimpressive recovery (2.4%) may soon come to an end. US domestic demand is not growing, in part due to high levels of consumer debt that inhibit more purchases, and in part due to income stagnation.

If we add to this uninspiring scenario an Asian economic slowdown, it is really hard to see where the new growth will be coming from.

Tough times ahead.