Opinion

Chrystia Freeland

Why emerging market countries have an edge

Chrystia Freeland
Oct 29, 2010 13:29 UTC

Tony Hsieh and Sanjay Madan wrote the program to create LinkExchange over a weekend. Before the following weekend, they had more than a dozen websites participating in their ad-sharing network. Over the next several weeks they worked frantically on the project. They refined their business in real time, learning—quickly!—from their mistakes. Less than a year later, the Harvard grads were offered $1 million (U.S.) for the company. Less than a year after that, they sold it for $265 million.

That was 1996. Since then, this story of development on the run has become commonplace. Hacker culture is now part of the broader culture: “beta test” is in the dictionary, and we accept innovative, albeit imperfect, beta releases even from multibillion-dollar global behemoths such as Google. We’re prepared to accept flaws because the tech revolution is progressing so quickly that it is usually better to be fast, and possibly wrong, than to try to be perfect and end up being slow. By the time your flawless product is released, it will likely be obsolete.

Technologists aren’t the only people operating in a rapidly changing, uncertain environment. Thanks both to the tech revolution and to globalization, that is true of all of us, including our governments. But, as Nobel-Prize winning economist Michael Spence argued at a private equity conference in Quebec City this week, emerging-market governments seem to be better at dealing with an unpredictable, volatile world than Western ones. They are like Silicon Valley entrepreneurs—willing to act swiftly, even if it means making mistakes. Leaders in the West are more like Detroit, reluctant to make bold moves until it is too late.

Part of the problem is the way we judge various types of mistakes. Spence argues that we make two types of mistakes—implementing a bad idea, and failing to act on a good one. If you are religiously minded, you could think of these as sins of commission and sins of omission. In stable times, sins of commission are probably worse. If your industry isn’t changing very much or if your country’s economy and the world economy are on an even keel, launching an expensive new product or government program that fails is probably more damaging than missing out on a great opportunity.

But in times of radical change, making a mistake is less risky than doing nothing at all. Spence thinks that emerging-market leaders understand this better than Western ones do, and he cited the examples of China’s fast and big stimulus program after the financial crisis and the Indian government’s willingness to act to burst asset bubbles.

Lessons from Beijing

Chrystia Freeland
Oct 27, 2010 14:52 UTC

Following her chat with Glenn Hutchins at the Quebec City Conference about how globalization is changing corporate strategy, Chrystia interviewed NYU Economics Professor A. Michael Spence about how globalization is bringing about structural change in the world’s leading economies.

Spence, a 2001 winner of the Nobel Prize, chairs the Commission on Growth and Development, a multilateral effort to determine the practical conditions developing nations need to implement in order to achieve high growth. Given his expertise in emerging markets, it comes as no surprise that he thinks their future is bright. Spence was impressed with emerging markets’, especially China’s, brisk comeback following the capital flight and collapse in world trade that resulted from the financial crisis, and he thought they would be able to sustain their current growth rates:

American policymakers — and other Nobel Prize winners – are far less impressed with China’s resurgence, which they view as the result of the malevolent Chinese policy of keeping the yuan undervalued. Spence, however, argued that a one-off revaluation of the sort Washington demands will not only be bad for China, since it will destabilize most of the country’s export-oriented businesses. But it would also be bad for the global economy, since China is the engine for growth in large parts of the world. Instead, he said, China should focus on finding a way to make necessary structural changes while sustaining growth:

The world’s new crucible

Chrystia Freeland
Oct 26, 2010 21:13 UTC

The theme of this year’s Quebec City Conference, a gathering of some of the world’s pre-eminent private-equity investors and venture capitalists, is innovation and globalization. Chrystia was in attendance earlier this morning and interviewed one of the event’s keynote speakers: Glenn Hutchins, co-founder of Silver Lake Partners, a $14 billion private-equity firm that focuses on the technology sector.

Hutchins’ remarks focused on the shift of economic power from the U.S. to China. He noted that as long as China grows much faster than the United States, multinational corporations will shift more of their business there. But his other insight was that for the first time businesses are tailoring products to the Chinese consumer rather than just selling the Chinese products developed for American consumers:

It used to be that to be a global company you had to forge your business model in the crucible of competition in North America–potentially Europe, but usually North America–where you define your business model, define your product set, define your customers, and then once you were successful there took it outside the world and essentially sold the same products and services to a strata of groups and people around the world who can consume it.  Today what you’re seeing is companies that are growing up–we talked a little earlier about Huawei being a very good example, but there are many, many others–whose business models are being forged in the crucible of competition in the emerging markets.

The Mumbai consensus

Chrystia Freeland
Oct 22, 2010 14:14 UTC

They call economics the dismal science, but Larry Summers, one of its pre-eminent public practitioners, is anything but dull. That penchant for intellectual controversy means he hasn’t always won popularity contests, but he is unfailingly stimulating, as he proved in a speech in India last week, when he hit on one of the biggest issues in the world economy today, and coined a snappy catch-phrase to describe it: the “Mumbai Consensus”.

The Mumbai Consensus, Summers said, is “people-centric.” He contrasted it both with the Washington Consensus, the U.S.-led, free-markets-and-democracy formula that seemed to have conquered the world after 1989, and with the Beijing Consensus, China’s state capitalist approach that today is winning fans in emerging markets and in some developed ones.

Summers thinks the real model to watch is India’s, the world’s largest democracy. Partly because of its political system, India’s economic rise has been powered as much by the voracity of its domestic consumers as it has by the country’s push into foreign markets. That’s a sharp contrast with China, where the focus has been on working for the rest of the world, while the Chinese people, who are poorer on average than those of Albania or Jamaica, nonetheless save more than half of their GDP.

Chinese authoritarianism does not guarantee prosperity

Chrystia Freeland
Oct 21, 2010 20:01 UTC

On a recent trip to Hong Kong Chrystia recorded a podcast for the American Chamber of Commerce in China, about an op-ed she published in the Washington Post this summer that critiqued China’s economic system of state capitalism.  Chrystia, invoking a recent speech from Mike McFaul of the National Security Council, tells the Chamber that while the Chinese system succeeded in raising the country out of the lowest rungs of poverty, there is no historical evidence that suggests it can turn China into a rich nation:

My argument, and as it turns out quite independently, Mike’s argument, was we have to be really careful about thinking that authoritarian regimes are better at modernization, and one reason why we have to be careful is there is some historical evidence that says that authoritarian regimes can be quite good at the early stages of modernization.  They can be pretty good at that brute force moment when you’re dragging and economy out of being an agrarian society into industrialization.  What we haven’t seen yet—and as we look across the world, across histories—we haven’t yet seen that an authoritarian state is able to move an economy to the next level, and in fact what we’ve seen is that even in those countries where an authoritarian state successfully led an industrialization effort, as the country got richer and the economic transformation that needed to be achieved was more complex, what you actually have had happening is democratization.  There are some Asian countries that are a really good example of that.  I think South Korea is perhaps the best one.  […]  What we don’t have evidence of is that the state capitalist model… works in a really rich country.  All the countries that are really rich are democracies.

Chrystia also elaborates on a topic she touched on in her original op-ed, namely economic historian Joel Mokyr’s thesis that the same centralized, authoritarian decision-making process which foreigners marvel at today actually caused China to miss out on the Industrial Revolution centuries ago:

Bread and circuses—but real issues, too

Chrystia Freeland
Oct 15, 2010 14:03 UTC

As the U.S. mid-term elections approach, it is easy to despair about the quality of this country’s political debate. Christine O’Donnell, the surprise Tea Party-backed Republican candidate for the Senate seat in Delaware, has captured the nation’s attention with her opposition to masturbation and a campaign ad in which she assures voters that she is neither a witch nor a graduate of Yale University. Here in New York, Buffalo businessman Carl Paladino, running for the governor’s office, has made his contribution to the carnival atmosphere by discussing his rival’s “prowess” and urging reporters to investigate whether he was a faithful husband.

Part of my job at the moment is appearing as a commentator on other people’s TV shows. Viewed from the green room or the studio, America’s political discourse can look particularly grim. I sometimes find myself in the role of finger-wagging, middle-aged scold calling for a discussion of global financial imbalances, rather than the latest juicy scandal or mockable example of political foot-in-mouth disease. TV producers, I’m afraid, find this schoolmarmish persona as unappealing as my kids do — and given the juicy alternatives available it is hard for me to blame them.

But the campaign trail has always been as much about providing a circus as it is about bread and butter issues. And, dipping just below the froth of the cable sound bites and the blogosphere, I’ve realized this campaign is actually revealing a country that is struggling seriously and passionately to come to grips with the very big issues it faces.

Inflation is inevitable counters Wolfensohn

Chrystia Freeland
Oct 12, 2010 23:08 UTC

While Laura Tyson thinks America has no intention to inflate away its debt, former World Bank President Jim Wolfensohn said in an interview today he believes inflation and a devaluation of the dollar are “inevitable”:

Countries that get into heavy debt find that other countries realize that their currency isn’t as valuable as it was because they owe so much money. So the currency devalues. As it devalues, you have an inflation. And it is my judgment that that is likely to be a very important element in how we unwind this whole issue of debt to income levels in the United States.

Wolfensohn has a similarly gloomy outlook for Africa, a continent whose development he championed during his tenure at the World Bank. African institutions and governance are less efficient and effective than their counterparts in India and China, he says, and growth will suffer as a result:

‘We can’t inflate our way to prosperity’

Chrystia Freeland
Oct 12, 2010 18:43 UTC

“There is no other policy tool available [besides quantitative easing],”‘ Laura Tyson, a former chairwoman of the Council of Economic Advisors, said at this morning’s Reuters/YouTube live debate on how to fix the economy. Tyson argues that additional Fed purchases of long-term bonds is the most viable way to energize the U.S. economy since a new fiscal stimulus bill is unlikely to pass Congress:

She appears alongside Glenn Hubbard, another former CEA chairman, who maintains the Fed will spend another $1 trillion to lower rates by 20 basis points. “We can’t inflate our way to prosperity,” he said.

Tyson disagrees and thinks the risk to inflation is low. She admits we have to convince the rest of the world that the U.S. has no intention to inflate away its debt.

Live Event: Can we fix the economy?

Chrystia Freeland
Oct 11, 2010 19:28 UTC

Reuters Global Editor-at-Large Chrystia Freeland teams up with YouTube to bring you the first-ever live debate between two of the most influential economists of the past decade, and possibly the next:

Laura Tyson and Glenn Hubbard

Live coverage begins Tuesday, October 12 at 8am ET.

To participate in and watch the live debate: Conflicting Visions: Fixing the Global Economy

Plugging into the age of uncertainty

Chrystia Freeland
Oct 7, 2010 22:14 UTC

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For most of the past century, the big global narrative has been the clash of rival paradigms: Nazism versus liberal democracy, communism versus free market democracy, and, more recently, fundamentalist Islamic states versus the secular, democratic west. When the cold war ended, Francis Fukuyama predicted that this clash of paradigms would end. He was right, but not for the reason he thought.

The battle of rival ideologies has ended not because, as Fukuyama foresaw, the triumph of capitalist democracy has been universally acclaimed. Instead, it is because all of us have realized we face a new challenge — how to thrive in the high tech, global economy — and no one country or single ideology is yet certain of getting this exactly right.

This isn’t the cold war, or the clash of civilizations, or even the end of history — it is the age of uncertainty, as the entire world struggles to understand and keep up with the biggest economic transformation since the industrial revolution.

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