1

Financial Aid To The Ukraine? Great Idea But Huge Costs

By Paolo von Schirach

March 10, 2014

WASHINGTON – A few days ago, I argued in a related piece that it is hard to believe how Ukraine can be considered by either Russia or the West as a coveted prize in this emerging new version of an East-West confrontation. The country is vast, (almost the size of Texas), and it is home of a fairly large population, (somewhere around 45 million). Other than that, however, Ukraine is a real mess. It is poorly organized, very corrupt and essentially broke. Indeed, just to get things back together, we are talking about a $35 billion bill. I assume that includes all the unpaid natural gas bills that Ukraine owes Russia’s Gazprom.

Save the Ukraine?

And yet, notwithstanding this economic train wreck, now the talk is about the (semi-broke) West bravely stepping up to the plate in order to “save” Ukraine. Indeed, if I understand correctly the still hazy plans articulated by US Secretary of State John Kerry and some European policy-makers, we are in for a lot more than just an emergency financial rescue operation.

We are talking about a long-term commitment to turn the Ukraine around.

We are talking a major, multi-year assistance package, (including money, tools, technical expertise), aimed at helping the new leaders of the courageous Maidan demonstrators in planning and then implementing major reforms. The goal is nothing less than a reborn Ukraine that would prove to the world (and of course to its Russian neighbors) that a messed up, post-Soviet Republic can become a viable, modern country by adopting best practices when it comes to ensuring basic freedoms via good governance and the adoption of sound economic management. In a nutshell: if we are serious about this, we are talking years and years of sustained work, and tens of billions of dollars.

This is going to be expensive

Turning the Ukraine around is of course a great idea. The problem is that, even assuming good will and not too much negative Russian interference, (you can count on Moscow’s attempts at sabotaging pro-Western policies), this is going to be difficult and very, very costly.

Therefore, Western leaders should make this very clear. For instance, I am not sure that US voters, worried about unemployment, stagnant wages and massive student loans debt burdening millions of young workers are that keen on pouring billions of dollars into the Ukraine mess.

Let’s try

That said, I do hope that America and Europe, with the support of the IMF and others, will try this. If the Ukraine succeeds, if it becomes like Poland, a former Communist country that successfully embraced Western values, this would strengthen Europe and America. Furthermore, it would show the world that our model works. Yes, a well-functioning democracy is the foundation for sustainable prosperity.

Nation building? Again?

Look, I realize that here in the US any undertaking that even remotely resembles “nation building” evokes the truly bad experiences of Afghanistan and Iraq. And for very good reasons. Lacking judgment and even elementary common sense, the Bush administration and to a lesser extent the Obama administration poured tax payers’ money into costly and generally ill-advised development assistance projects aimed at these two countries. The US “Grand Strategy” at the time of the Bush administration was to crush dangerous tyrants and autocrats, have free elections so that the people would finally have a say, and then help the new, democratically elected policy-makers rebuild their countries following the tried and tested Western model. And so, thanks to America, there would be genuine freedoms, market economies, no more corruption, gender equality –and a lot more. Yes, people would vote, children would get immunizations, girls would go to school. A New World.

Nice and noble ideas. But it could not be done. Not because the aims were bad, but because there was a gigantic disconnect between the lofty goals on one side and the relatively small resources allocated, plus the (almost insane)  belief that much could be done in a relatively short period of time on the other.

It could not be done

Simply put, you cannot have gigantic social and economic transformations –premised on new values being genuinely embraced by millions– in a matter of a few years. At the time of the US military occupation in 2001, Afghanistan was a semi-destroyed country with almost no viable economic activities. Thanks to the Taliban, it lived virtually in the Middle Ages. It was disconnected from the rest of world.

The very fact that some people in Washington embraced the notion of  a turbo-charged modernization program as a viable proposition is baffling. And that approach, mind you, was developed before the rebirth of the Taliban-led insurgency made everything a lot more difficult.

Ukraine is different

Well, if we fast forward to today’s Ukraine with the still fresh memories of the Afghan and Iraqi failures in our minds, the idea of starting  all over along the same path looks really unpalatable. And for very good reasons.

The huge difference, though, is that the Ukraine, while in truly bad shape, is a semi-modern country. It has educated people and some of the building blocks to make things work. Therefore we can assume that our chances of success would be a lot higher. And, again, let’s keep in mind that helping to build a viable society in a vast country at Europe’s immediate periphery in the long-term would help peace and stability in the Continent.

Uncertain mission, but worth pursuing

That said, if America and Europe are serious about this undertaking, we are talking about tens of billions of dollars over a number of years. Beyond the immediate financial crunch, the Ukraine will need investments and help to modernize its industries, its infrastructure, its governance, its education systems, and what not. And, let’s not forget that this noble attempt may fail. If the country will not abandon its deeply rooted culture of corruption nothing much can be done.

Still, even keeping in mind the lessons of Afghanistan and Iraq, and the uncertainties embedded in any undertaking of this magnitude, the Ukraine is a far better place. And the stakes for the West are arguably much higher.

Vladimir Putin’s dream is to bring major pieces of the old Soviet Union back into the fold. But he has nothing good to offer. Beyond oil and gas, Russia is not a leader in anything. Whereas Europe and America can offer a new path to democracy and prosperity (via investments, technology transfers and trade) to the Ukrainian people.

And ultimately it is in our own self-interest to demonstrate that our values and our systems really work. This is the best lesson that we can offer to all the people who suffer under autocratic regimes, in Russia and elsewhere:

Democracy is the right choice, and it is really good for you.




Matteo Renzi To Lead Italy Out Of The Swamp Of Terminal Decline?

By Paolo von Schirach

February 13, 2014

WASHINGTON – And so Italy is getting a new Prime Minister. Matteo Renzi, head of the Partito Democratico, will replace the incumbent, Enrico Letta, also of the same party, because now, as party leader, he believes that it is up to him to lead the nation as well.

Party Leader and now Prime Minister

In principle this sounds reasonable. Matteo Renzi went through an open and transparent primary process within the Partito Democratico just a few months ago (December 2013) from which he emerged as the clear winner, outdistancing other contenders by a large margin. Indeed, he got an impressive 67.6% of the votes cast.

Given Italian political practice, it is entirely reasonable that the triumphant leader of the biggest party within a ruling coalition would also aspire to become the Prime Minister. With some grumbling, Enrico Letta recognized this reality by resigning. And so, the boss of his party gets the top job, (even though he was not elected by the nation, but only by his fellow party members). Fair enough.

Modest chances of success

That said, the notion that an energetic, good-looking new party leader –Matteo Renzi– now Prime Minister, will engineer the radical transformation Italy badly needs is not just a dream, it is a laughable proposition. And this is not about Renzi’s leadership and vision. He may have it. This is about Italy.

Sadly, the country is semi-comatose. It takes a heroic level of optimism to believe that a clear-headed young leader –assuming Renzi is all this– will get the country out of the swamp, rekindle innovation, investments and enterprise and re-generate hope and enthusiasm.

Terminal decline

Italy has been losing ground for about 10 years. The global recession simply made things worse. The national debt is now at 133% of GDP. Its unemployment rate is at 12%. Youth unemployment is at 40%. Most alarmingly, the best and the brightest leave, or have already left the country, seeking better opportunities elsewhere.

Beyond fashion, wine, olive oil and Ferrari luxury vehicles, Italy has no leadership position in anything. No major players in high-tech and electronics, only a second or third tier player in aerospace. Worst of all, Italian companies do not invest much in R&D, nor are there any significant public sector funds allocated to this critical area. And, please, do not forget organized crime: Mafia, Camorra and ‘Ndrangheta being just the best known branches. Finally, in case this is not enough, Italy is one of the most corrupt countries in the western world, with dismal positions in the universally respected Doing Business rankings compiled each year by the World Bank.

Fertility crisis

Beyond that, consider the fertility rate collapse, (1.4 children per woman). This well consolidated trend indicates that Italy will soon be a geriatric ward. Lots of old people who get pensions and medical care, with very few active people supporting them.

You want more? Tens of thousands of desperate illegal immigrants land in Italy every year, coming mostly from the poor Maghreb and sub-Saharan Africa. And, with due respect, these are not the equivalent of the bright, highly educated PhD. holders coming to America from India and China who then create successful start-ups in Silicon Valley.

How can anyone do well trying to run Italy?

Newly minted Prime Minister Matteo Renzi may have vision, and he may turn out to be a passionate national leader. I wish him well. But at least on the basis of what we know, there is no reason for enthusiasm. Please note that, keeping up with a well established, if pernicious, Italian political tradition, Renzi is another full-time political operative.

In plain language: he never run anything in the real world. He never had a real private sector job. He rose fast from local politician to national leader. But this is all within a political party. This is not about his ability to run anything in the hard world of industry, competition and globalization. His current job is Mayor of Florence, a second or third tier Italian city of 370,000 people who stopped producing anything interesting about 500 years ago. Yes, it has been a long time since the days of Michelangelo.

Party functionary

So, who is Matteo Renzi? A party functionary who got to the top leadership because he is a good politician, at least within the context of his own party. Does this mean that he understands modern capitalism, supply chains, the role of IT, competitiveness and globalization? And what about the urgent need to drastically reform gigantic entitlements, invest in education and strategies to attract precious foreign investments?

Does he get all this? Do the people around him get all this? I hope he does. I hope they do. But I doubt it.

Mission Impossible

Look, governing a large post-industrial democracy is very difficult, even when things are going well. Trying to get Italy out of its historic decline will take more than speeches and bold slogans. It will take a credible, sustainable action plan that has the long-term and sincere buy-in of most key constituencies: capital, labor, the now dispirited young, public servants, retirees.

I wish Matteo Renzi best of luck. I mean it sincerely. But this is “Mission Impossible”.




New York State Run Out Of Ideas, It Does Not Know How To Promote Itself

WASHINGTON – New York, once upon a time the symbol of American economic might and creativity, run out of ideas. Or at least this applies to the people in charge of promoting New York State as a place for doing business.

Tax holiday state

On TV business channels, (Bloomberg, CNBC), these days you are bound to watch an often repeated TV ad supposedly promoting New York State as a great place for corporations. And what is the pitch? A rather poor one.

You learn that New York State is open for business. If you have a good idea and want to develop it, you should go to New York State, because there you will get a nice tax holiday. Yes, if you bring your business to us  –New York promoters tell you– you’ll pay no taxes for 10 ten years, or something like that. Give or take a few embellishments, this is pretty much it: “No taxes or very low taxes for new businesses coming to New York State”. This is really dry, unimaginative and very poor.

New business seeks a vibrant environment

Of course taxes are a big deal. And any business person will listen when you promise an extended tax holiday. But while this is true, it also true that business people, especially young entrepreneurs in tech sectors, are drawn to dynamic, vibrant environments where there is plenty of talent, research facilities, a cultural life, state of the art telecommunications infrastructure, and world-class, competitive logistics.

None of this is mentioned in the TV ad promoting New York State. It is only about low taxes. Nothing about local talent, human capital, innovation, dynamism, discoveries, enterprise. Here is the legendary “Empire State” version 2014: a “tax holiday” spot. That’s it. Not such an interesting place, really.

The allure of Oklahoma

Compare this with TV ads promoting Oklahoma as a tourist destination. The State is described as a unique blend of old and new. Nature and enterprise. The American West. Culture and fine dining. And the greetings are delivered by an attractive Native American woman who says hello in her own native language.

Now, that’s interesting, alluring and  intriguing.




If Solar Power Became Affordable, Developing Countries Would Be Transformed

WASHINGTON – When it comes to electric power generation and distribution, in developed countries we are used to this basic model. Large power plants produce electricity. From these sites, relying on a complex network of power lines, electricity is delivered to customers, be it industrial plants, offices or individual homes. The fuel used for generation can be coal, gas, nuclear or hydro. More recently we have developed wind, solar and biomass.

A new model

Well, in the not so distant future, this complex architecture founded on several large sources of generation from which transmission lines deliver electricity to the end users may become obsolete. A The Wall Street Journal story opens a window on a possible and completely different future, a future that can soon become reality, assuming that technologies keep improving  and costs keep going down.

Simply stated, soon enough we shall be able to have our own miniature power plant at home, no longer relying on electricity coming to us through a grid, care of the local utility company. We are clearly not there yet. But we may get there soon, probably sooner than we think.

Miniature solar power plants in your own home

In America we have plenty of power generation. Going forward, the new shale gas boom guarantees that there will be plenty of gas-fired power plants. Still, at the same time, solar power generation, while still relying on subsidies and tax breaks, is becoming more efficient, its cost are going down.

According to industry and many experts, we will soon get to a point in which it will be cheaper for individual users to install their own domestic solar power plant (based on solar panels that generate electricity) rather than pay a monthly bill to the utility.

A revolution

When we get to that tipping point, this will signal the beginning of a revolution that will have a number of large and important consequences. The first one will be the growth of the solar panels industry and of all the services associated with it. The second one will be that individual households as well as industrial plants, office complexes and commercial centers will be energy independent. The third one will be that most of the complex national and regional regulations that have been created to manage power generation and distribution will essentially become obsolete. The fourth one will be the death of the large power plants, along with the death of all the industries that support them: think of coal mining, storage and transportation, for instance.

More broadly, locally produced affordable power will improve basic economic conditions. Households will no longer have to pay electricity bills that include the cost of maintaining an expensive grid. Overall, affordable energy will be a boost for many energy intensive industries.

Biggest impact in developing countries

But, while this technological innovation will radically change the economies of developed countries, the biggest transformation will occur in emerging markets. Indeed, tens of thousands of rural communities in Africa, India and elsewhere that currently have no electricity will no longer have to wait for governments to invest in power generation and transmission so that electricity will come to them. They will be able to  produce their own, on site, without any recurring fuel costs. This will be a real revolution. Sunlight is free.

No development without power

It is a painful reality that without power these villages are essentially cut off from any meaningful economic progress. If you think about it, there is no hope for real development without electricity. Not much is possible without it. At dark, almost everything has to stop. People cannot read at night. Besides, medical facilities cannot store medications. Shops cannot refrigerate food. You cannot have workshops or small factories. Power tools cannot be used. And forget about basic amenities like street lights, cinemas, bars and restaurants.

But if, indeed, on the basis of the experience in more developed countries, local communities in emerging economies will be able to install affordable solar power generation on site, electricity would create an incredibly important short cut to development.

Right now the key obstacle for any plan to bring power to emerging countries, especially to isolated, off grid communities within them, is the large capital cost of building power plants, plus the cost of fuel, and the  high cost of constructing transmission lines.

Well, if truly cost-effective solar power can be deployed at the village level, no need to focus on huge investments in large-scale power generation and distribution.

Hundreds of millions will step into modernity

Look, I am not even remotely suggesting that all this is happening right now. But it looks as if it is just beginning to happen. As technology keeps getting better and costs keep going down, it should become realistic to think of business models that will allow scaling up affordable renewable energy solutions for the hundreds of millions of Indians who have no power. Likewise, even city dwellers in Pakistan, Nigeria or Zambia who are used to frequent power cuts due to unreliable supplies will have a chance to break off from the grid and finally have their own uninterrupted power supply.

It is impossible to have basic development without the support of reliable and affordable electricity. Until now not much has been done to create adequate electricity generation in many poor countries because of the very high cost of this effort.

If new solar technologies will radically change the model, while bringing down cost for individual users, then a huge barrier to development will also come down.

And life will change for hundreds of millions around the planet.




Washington DC Mayor Vincent Gray Vetoed “Walmart Bill”

By Paolo von Schirach

September 13, 2013

WASHINGTON – Washington DC Mayor Vincent Gray vetoed the “Walmart Bill” passed by the City Council with an 8 to 5 vote, calling it a “job-killer” and a “bill that will deal a huge blow to economic development”. Pretty strong language. The ostensibly noble intent of the bill is to guarantee a “living wage” of at leat $ 12.50 for all workers in the retail sector. In reality this bill specifically targets Walmart, as it excludes unionized chains that already operate in DC. The retail giant, (the largest in the world), is planning to open 6 centers in the District of Colombia. Three of them are under construction, and three more are on the drawing boards. Walmart already indicated that, if this bill becomes law, it will scale down or cancel altogether its plans for entering the DC market.

Higher wages kill jobs?

The laudable goal of a higher minimum wage is of course to improve the living conditions of the working poor. It is true that there are millions of Americans who have a job but have a hard time making ends meet because of very low-income. Still, as Mayor Gray argued in his veto letter to the City Council, by making it a lot more costly for new retailers to operate in the Distric of Columbia, the outcome of this law will be losing Walmart altogether. 

The retailer will build stores elsewhere. And so, the net effect of legislation that would like to improve living standards for the working poor will be to kill new job opportunities altogether. If Walmart cancels its DC expansion plans, there will be no new jobs, whatever the minimum wage mandated by law. Besides, the city would lose tax revenue, while residents in poor neighborhoods would lose the chance to benefit from Walmart’s abundant offerings at comparatively low prices.

DC needs more jobs

Mayor Gray wrote in his letter to the City Council that Washington DC needs all the new jobs it can get. In the long run, it may be a good idea to progressively raise the minimum wage, currently at $ 8.25, for all workers. But to target large retailers by forcing them to pay higher wages (while exempting others) is the best way to convince them to go elsewhere; a net loss for the city in terms of employment, tax revenue and new shopping opportunities for chronically under served poor neighborhoods. 

Sustain this veto

The proponents of this bill would need an additional vote in the City Council to override Mayor Gray’s veto. For the sake of low-income DC residents, let’s hope that they will not get it. Low-income jobs are not a great prospect. But no new jobs and no affordable shopping for thousand of residents is an even worse one.

Let’s be clear, Walmart is not a charity. But its stores will improve quality of life in poor DC neighborhoods.




Elon Musk, Tesla Motors’ Founder, Came to America Because He Believed That This Country Would Offer Opportunity

By Paolo von Schirach

Related story:

http://schirachreport.com/index.php/2013/08/07/electric-cars-are-not-selling-well-but-quality-will-improve-for-heavy-trucks-though-the-future-fuel-is-natural-gas-not-electricity/

August 12, 2013

WASHINGTON – I wrote recently that it is going to be a while before electric vehicle (EV) maker Tesla Motors and others like it will be able to radically transform the US automotive industry. (See link above to related story). Indeed, while Tesla’s model S is doing very well, it is on track to sell at most 21,000 vehicles this year. This is obviously very good for a company that sells very expensive, high performance EVs; but it is hardly transformative.

The value of new ideas

Still, having said that, it is really important to reflect on the incredible value of entrepreneurs like Elon Musk, Tesla’s founder. What needs to be stressed here is that Musk is a true, modern trail blazer. Musk ventured into practically virgin territory with what appeared to most analysts a really crazy idea: making a high performance, high price, sporty EV. Remember that many years ago when Musk got started people thought that EVs should be designed for young or middle aged tree-huggers, people focused on saving the planet. Whereas Musk focused on an entirely different market: quality conscious wealthy people interested in a brand new experience: a high performance (and consequently high price) EV.

Well, this is beginning to work. Of course, when it comes to market expansion, much will depend on Tesla’s ability to roll out equally interesting but much more affordable electric cars. We shall see.

Enterprise is our future

But this is not the point today. The point today is to celebrate Elon Musk and many others like him. These are the people willing to take huge chances in order to see if they can indeed push the envelope. It is obvious that when it comes to innovation many “Grand Ideas” are destined to fail. But some will not. And the record shows how, failures notwithstanding, many determined entrepreneurs will keep going at it. May be on their second or third try they will come up with something really important.

Focus on stagnant sectors

And we should be grateful for all these efforts. Indeed, it is mostly because of people like Musk that America can keep its position as technology leader. In a recent TV appearance Musk  indicated that innovators should really focus on sectors that have been stagnant, sectors that no longer deliver any special value. Real entrepreneurs should really look at ways in which they can introduce disruptive innovation that will cause a real paradigm shift. He talked for instance about the “Hyperloop”. This is really science fiction stuff. A totally new idea for an ultra fast inter city transportation system that is light years ahead of even the best super fast trains that still rely on tracks and locomotives, however advanced.

The “Hyperloop” is on the drawing boards, and most likely it will not happen any time soon. Still, this is just an example of Musk’s ability to think big and think boldly, even when some of his ideas may invite jokes.

Once again, many “Bold Ideas” that promise huge technological transformation will be failures. Sometimes costly failures. But it does not matter. Hopefully, those who tried and failed will not be discouraged. They will learn from their  lessons and try something else.

Policy makers have to keep America’s unique pro-business environment

That said, US policy makers must realize that they need to put in place every possible incentive for innovators. Indeed, for America to keep its coveted position as the world’s premiere “Innovation Hub”, it needs to attract people like Elon Musk who are willing to think big and take big chances. To this end, we need to do our best to reaffirm America’s credentials as the best place for true innovators. Do keep in mind that Tesla’s Elon Musk was born in South Africa. He came to America because he thought that the US would be an ideal home base. If people around the world stop believing this, if we lose this edge, the smart innovators will go somewhere else. 

 




Cost Competitive Solar Power? Coming Soon, But Not Here Yet

By Paolo von Schirach

August 9, 2013

WASHINGTON – The FT published a big spread on solar power, (A rising power, August 9, 2013), accompanied by this intriguing subtitle: “Plunging prices are finally making solar power competitive with conventional sources of energy…” Now, if it were really so, this would be the announcement of a major breakthrough, both technological and economic. This would mean that finally a key component of the renewable energy sector can actually make it on its own, without mandates, rebates or other subsidies, that is.

Mostly subsidized

Well, reading the long article was rather disappointing. True enough, the cost of solar panels has gone down, in fact it has plummeted in the last decade –by 80% in the last five years alone. This is truly remarkable. And certainly, in specific markets where there is a lot of sun and high electricity prices, solar power is becoming a viable alternative. But while this may be the case here and there, it is not true worldwide. Most of the installed solar power in place today is there only thanks to subsidies or mandates.

In fact, the very same FT story tells us that only 0.1% of total solar installations are unsubsidized. So what happened to the headline of solar power having finally become competitive? Well, we are moving in that direction; but we are not quite there, yet.

Solar technology will improve

Look, solar technology has improved and I have confidence that it will keep getting better. Costs have come down rapidly. And soon enough we shall get to a point in which people will place inexpensive solar panels  on their roofs in order to generate their own low-cost electricity, because it is the smart thing to do. I am looking forward to this new era.

But we are not quite there yet. For the moment, amidst overcapacity, bankruptcies, industry consolidation, Chinese dumping, murky regulations, political pressures and what not, renewable energy is still not capable of making it on its own.




Nelson Mandela, A Revered Leader, Left No Successors

By Paolo von Schirach

June 10, 2013

WASHINGTON – 94 year old Nelson Mandela, the symbol of anti-apartheid resistance, and the first elected President of the new, post 1994 South Africa, is in the hospital seriously ill. He has been in poor health for quite a while and he seems to have slipped into some form of senile dementia. All this is sad; but in a way inevitable. Mandela is a very old man, and he suffers from the consequences of ailments contracted during his long time in prison.

South Africa’s decline

Equally sad, but not at all inevitable, is South Africa’s steady decline as a country. Whatever the injustices and the open exploitation of the old apartheid regime, South Africa used to be by far Africa’s leading economy. In many ways it is still is. But the country has been doing poorly.

In large part this has to do with the unimaginative, often incompetent and unfortunately corrupt African National Congress national and local leaders. Nelson Mandela is an exceptional man. He was the ideal President for a remarkably smooth transition from White minority rule to Black majority rule. Mandela was inspiring, dignified, generous and not at all resentful regarding his oppressors. He tried to inspire all of South Africa’s citizens so that they would build together a successful, vibrant multi-racial democracy. 

Mediocre successors

But when he left the scene, ANC party functionaries took over. They are mediocre and quite often incapable. The net result of poor leadership is sluggish growth. And this means that the enormous gap between rich and poor is not going to get filled. Indeed, in order to fulfill government promises of expanded social services and greater economic opportunity for the poor, South Africa would need a growth rate well above 5% per year.

Well, GDP growth has been quite sluggish recently, around 2%. First quarter growth in 2013 has been a dismal 0.9%. 

And why the poor performance? Many reasons, including high labor costs, militant labor unions that frighten investors, energy shortages, a mostly illiterate population that cannot be employed in skilled jobs, and too much corruption.

Sadly, Nelson Mandela, himself a great leader, left no successors.




Lower Taxes May Help Attract New Investors – But Much, Much More Is Needed

By Paolo von Schirach

May 1, 2013

WASHINGTON – The FT has a rather prominent story on how the state of New Mexico in the US plans to attract new investors via lowering corporate taxes. The article quotes Susana Martinez, the recently elected Republican Governor, speaking passionately about the need to be competitive, because investors, you know, do have choices. They can go anywhere else in the world. So, lowering tax burdens for corporation looks like a good idea.

Lower taxes get you in the game

Sure. A great idea. But, let me ask: “That’s it?” Is a lower corporate tax rate the essence of New Mexico’s investment  promotion strategy? If this is indeed the case, I suggest that policy makers study the issue a lot more. Of course competitive tax rates do matter. If any state has punitive taxation, investors will look elsewhere. But the point here is that lower taxes at best may get you in the game because, guess what, everybody else is doing the same thing. Only states or countries that know nothing about investment promotion strategies will keep high corporate taxes. But, once you have lowered your taxes, then you have to see how everything else compares with what competitors may be able to offer. And the list of important items is as long as it is critical.

The broader investment climate

First of all, investors want qualified manpower and the reassurance that the state has the good schools and universities that will produce it.  If the potential investor is a high tech company, decision-makers scouting for locations want to see good or superior universities, with state of the art R&D facilities. Investors want to see, in place, a network of potential high quality suppliers and vendors. Investors want to see modern, cost effective infrastructure and logistics. They want to see how their supply chain will be positively affected by moving or adding operations in that particular state.

And, yes, they want to know about quality of life. They want good schools for their kids, recreation opportunities, low crime levels, affordable real estate, culture, nice weather and state of the art communication networks. 

Yes, they want all that. Of course, they will not find all of it in any given location. But they will chose the place that has the best mix. New Mexico does have impressive federal laboratories (think of Los Alamos) working on cutting edge energy issues and other high tech sectors. That’s an important advantage. Still, New Mexico is a rather poor state, with mediocre to bad public schools; while it has more than its share of minorities who do not speak much English. It is not centrally located. It offers no special logistics infrastructure.

The idea that lowering corporate tax rates will –by itself– trigger an avalanche of new investments into New Mexico, (or anywhere else for that matter), is rather naive. In fact, quite silly.




South African Mining Sector In Serious Trouble, Country’s Economy Downsized – Says Zambian Mining Executive

By Paolo von Schirach

February 24, 2013

LUSAKA, Zambia – As Africa is moving forward, South Africa, the Continent’s historic economic power house, seems to be falling behind, having lost its ability to modernize. The huge South African mining industry, the country’s main economic driver, is in trouble. Plenty of  recent stories about violent labor unrest, in a few instances punctuated by violence and excessive use of force by the police. Many striking miners have been killed in these demonstrations that evoked the atmosphere of the worst days of apartheid. 

South Africa is in trouble

Here is how a competitor sees South Africa. This is what Adam Little, an executive with First Quantum Minerals, FQM, a mining conglomerate operating in Zambia, a smaller country north of South Africa, said in an interview published in the January/February 2013 issue of Zambian Traveller:

 

Q. What do you say about the labour related problems facing the mining sector in South Africa?

A. We believe that the South African mining industry is in a different position to the Zambian mining industry, and we sincerely believe that there is no need for the type of tragic confrontation that we have recently seen in South Africa.

South Africa has completely missed the last two mining booms, due largely to the problems associated with labour force relations and also to the uncertainty of ownership raised by talks of nationalization.

The effect of this on the entire South African economy has been catastrophic, which has seen the country decline from a position where it contributed 40% of Africa’s total GDP to less than 20% in just 18 years. [bold added]

As a result all South Africans are now poorer than they were a decade ago. In the meantime other African countries, Zambia included, with more balanced [business-labour] relationships have enjoyed the boom times with a material rise in living standards across most of the continent.”

 Bad policies, no growth

Of course, a mining company operating in a different African country may have a vested interest in exaggerating South Africa’s precarious conditions. But it is true that labor issues are a big problem, while it is also true that there has been open speculation about nationalizations concerning the South African mining and banking sectors. And it is also a fact that the South African economy is not growing much, this way making it impossible for the  ANC government led by president Jacob Zuma to raise the revenue necessary to finance its very ambitious social agenda.

Bottom line: bad economic policies and troubled labor relations yield little or no new wealth. As a result, few if any new schools and hospitals built.