The Great Debate UK

from The Great Debate:

How the Industrial Revolution created modern debt

This is an excerpt from Paper Promises: Debt, Money and the New World Order, published this week by PublicAffairs.

Consumers have always borrowed money from friends, neighbors and relatives. Merchants would not exist without credit; the habit of making debts on a “slate” in the local butcher or greengrocer was still common in the middle of the twentieth century. But the local merchant would normally offer credit only to a known, local customer; serial defaulters, or those deemed to be untrustworthy, would be refused business. In David Copperfield, Mr. Micawber’s failure to repay merchants required him to cadge off his friends.

But the modern idea of widespread consumer credit (in the form of national lenders, credit cards, etc.) really dates to the Industrial Age. A peasant’s income is unlikely to grow over the long term; at best, it will be highly variable, with bumper harvests in good years giving the peasant sufficient income to pay off debt incurred in bad years. But two or three bad harvests in a row could be ruinous.

This point illustrates a wider truth. The granting of a loan requires both the creditor and the debtor to be confident that the latter’s income will grow sufficiently to repay the debt. Think of a retailer that sells a washing machine, or television, in installments. Clearly the customer does not have the money now; otherwise he or she would pay upfront. Moreover, the overall bill, including interest, will be greater than the cash price. So the debtor must be confident that he will stay in employment to pay the larger sum. In addition, he or she will probably be confident that their future income will rise so as to offset the additional interest. A growing economy makes that calculation all the more likely. The Industrial Revolution changed the pattern of human civilization. It allowed economic growth to expand at a much faster rate than ever seen before. This was probably down to the use of carbon-based fuels (wood, coal and, eventually, oil) to power technologies to replace human and animal labor. This resulted in a substantial increase in productivity.

Think of an economy as a business with inputs and outputs. An agrarian economy is often dubbed a subsistence economy; it takes all the energy of the workers (and their livestock) to produce the food necessary to live. A bull may plow a field, and reduce the effort of the farmer, but it takes a lot of land to feed the bull. The economy (business) does not produce a profit. Carbon-fuelled machines transform the situation. Initially, man naturally exploited those fuels that were easiest to reach; chopping down trees, getting coal nearest the surface and so on. So the output, in terms of goods and energy produced, was much greater than the effort put in.

The movement of people from the land to the new industrial cities also required an agrarian revolution. Those remaining on the land had now to produce a surplus, enough to feed the industrial workers as well as themselves. Fortunately, this happened, thanks to the consolidation of smallholdings, new farm machinery, crop rotation and a host of other small reforms. In turn, these improvements allowed the population to grow.

So we now had economic growth and population growth. The next stage emerged as workers gathered in factories. Initially, the conditions were terrible – long hours, low pay (albeit better than a farm laborer’s income) and non-existent safety standards. In the crowded towns, sanitation was poor, disease spread quickly and life expectancy was severely restricted. But factories made a big difference in that they grouped workers together and made it easier for them to organize in their own interest. That was very difficult for geographically dispersed agricultural workers. Steadily over the nineteenth century, trade unions grew in membership and workers flexed their muscles through strikes. Governments started to recognize their power and buy them off. Bismarck, a hard-headed pragmatist, introduced old-age pensions in Germany as a way of recruiting worker support for the Hohenzollern monarchy.

Hypocrisy piled on humbug

The row over bankers‘ pay and honours has presented the depressing spectacle of British public life at its nadir, with hypocrisy piled on humbug.

On the one hand, we hear bankers and their apologists arguing that their rewards are required to keep them from running off to sunnier climes, which prompts a number of questions. First, when bankers claim that they have to be paid a fortune in recognition of the size of the organizations they run, we may well ask: how many banks of this scale are there in the world today? How many are so hungry for skills like those of Britain’s bank bosses that they are willing and able to offer these sorts of rewards?

Three or four, maybe, at most – after all, several of the world’s largest banks are now owned by the Chinese Government, so they are unlikely to want a British boss any time soon, and the others do actually have a full management complement anyway. By definition, the number of vacancies at this level is extremely limited, so the danger of an exodus of top British bankers is much exaggerated.

In any case, does it really matter?

After all, even before the crash, there was quite a lot of sniping at high City payoffs and we were told at the time that the outrageous salaries and bonuses were needed to secure the services of people like (Sir) Fred Goodwin et al – and since then we have had ample opportunity to assess the true value of their high-price expertise.

Is it really being suggested now that the banks collapsed because pre-crisis pay rates were insufficient to attract competent CEO’s?

Or is the argument that, if they had paid less astronomic salaries, the banks would have lost even more money than they actually did in 2008-9?

from Paul Smalera:

Facebook.coop

Facebook shouldn't pay its users. Its users should pay to own Facebook.

“Facebook was not originally created to be a company,” founder Mark Zuckerberg wrote in his letter to investors announcing the IPO of his already hugely successful and profitable company. “It was built to accomplish a social mission — to make the world more open and connected.”

Facebook has succeeded wildly, despite internal admonitions that its “journey” is only 1 percent finished. Journalists have latched onto Zuckerberg’s statement that Facebook wants to “rewire” the way the world works. In a world of thousands of self-anointed “social media experts,” only Zuckerberg can claim to have basically invented what the world thinks of as social media. He has etched himself into the timeline of human innovation.

Pity then, that Zuckerberg hasn’t turned his talents or attention toward Facebook’s financial underpinnings. After all, an IPO? How ho-hum can he get? If Mark really wants to accomplish his social mission with Facebook, he should share the company’s ownership with the people who helped him create it. Not just his Harvard contemporaries. Not just the programmers. Not even just the venture capitalists.

I’m talking about us. All of us. The users. Facebook should be a user-owned, user-managed company, run for the benefit of users. For the Facebook, by the Facebook. The company should be a cooperative.

Before I explain further, let me lay out the case in four simple points:

from The Great Debate:

The next emerging market: A billion women

You would never dream of not investing in India. You would never dream of not investing in China. So why wouldn’t you invest in women? That question was posed by Beth Brooke of Ernst & Young at the launch on Wednesday of a campaign called The Third Billion that aims to empower women as a means to drive economic growth. The campaign is based on the notion that there are a billion women not participating in the global economy who should be.

“Every country, every company in the world is looking for growth wherever they can find it,” Brooke said at a panel discussion (which I moderated) at Thomson Reuters headquarters in New York. “Where is the growth coming from? It’s coming from the emerging markets … We historically think of those emerging markets as India and China and many others. But it is clear that women are an emerging market.”

DeAnne Aguirre, senior vice-president at Booz & Company, said the concept of the “Third Billion” comes from the notion that if China and India each represent 1 billion emerging participants in the global marketplace, then a third billion is made up of women around the world whose economic lives have been “stunted, underleveraged or suppressed.”

The figure is based on a Booz & Company analysis of International Labor Organization data on women in the global workforce that showed some 860 million women were excluded for one reason or another, a number forecast to rise to 1 billion in the next decade. (Many of those women are in India and China, of course, so there is overlap with the first and second billions.)

La Pietra Coalition, the global alliance behind the campaign, has identified five factors that contribute to keeping women from playing a more productive role: access to finance; legal and social status; barriers to entrepreneurship; lack of education and training; and labor policy and practice.

The group wants to bring together corporations, governments, NGOs and institutions such as the World Bank to address each of those issues.

Among those that have already partnered with La Pietra are Coca Cola, Wal-Mart, Goldman Sachs and Standard Chartered Bank. Brooke, who is global vice-chair for public policy at Ernst & Young, said a key goal of the campaign is to enlist more big companies.

from The Great Debate:

The urgent need to protect the global supply chain

Every day, staggering numbers of air, land and sea passengers, as well as millions of tons of cargo, move between nations. International trade and commerce has long driven the development of nations and provided unprecedented economic growth. Indeed, our future prosperity depends upon it.

At the same time, threats to trade and travel -- whether from explosives hidden in a passenger’s clothing or inside a ship’s cargo, or from a natural disaster -- remind us of the need for security and resilience within the global supply chain. A vulnerability or gap in any part of the world has the ability to affect the flow of goods and people thousands of miles away. For instance, just three days after the earthquake, tsunami and nuclear tragedies struck Japan last March, U.S. automakers began cutting shifts and idling some plants at home. In the days that followed, they did the same at their factories in more than 10 countries around the world.

Ten years after the terrorist attacks of Sept. 11, 2001, we also continue to see the determination of individuals and groups to disrupt economies by targeting our transit and cargo systems. Understanding the seriousness of these threats underscores the need for a continued focus on protecting the global supply chain.

Just as important, we must move away from the outdated dichotomy that we have to choose between trade and travel efficiency, and trade and travel security. Security and efficiency must no longer be seen as mutually exclusive. It is possible to enhance security without increasing wait times, creating more paperwork and driving costs higher – and we are doing so already.

As I announced at the World Economic Forum in Davos this week, the United States released a National Strategy for Global Supply Chain Security, the product of more than two years of collaboration across the U.S. government, and with international and domestic public and private partners.

The National Strategy, created with the input of more than 60 subject matter experts and hundreds of supply chain stakeholders, takes a whole-of-nation approach to global supply chain systems, with two explicit goals: promoting the efficient and secure movement of goods; and fostering resiliency.

We will pursue this strategy in three main ways:

UK needs to look beyond BRIC markets to emerging CIVETS

By Torrie Callander, Global Reach Partners. The opinions expressed are his own.

The world’s mighty are currently meeting in Davos, Switzerland to discuss the progress – or lack of progress in some cases – of the global economic recovery. The financial crisis and resulting recession has brought many of the world’s major economies into the same boat. Subsequent years have seen a shift towards collective policy making in order to aid recovery. Here in the UK there has been a major shift in economic policy during that time, as a result of both collective world policy and a regime change at home. But this refocusing of our economic policy has to be taken further.

The UK of the industrial revolution was renowned as the “workshop of the world”. Now, with the overwhelming focus on a world-leading services sector, the UK is barely a workshop at all. This has got to change if we are to meet the Government’s ambitious growth plans.

Britain needs to recalibrate its commercial offering and refocus on manufacturing in order to vastly grow the export sector. The government is making gestures to achieve this aim. Already they have set a target of 100,000 UK businesses entering the export market for the first time within the next five years.

We are already making progress. Exports to the EU – our primary market place – were up 18.3% year on year in May 2011. We are making gains in the emerging markets too, with exports to China up 43.7% and India 43.4% in the same time period.

However, the BRIC markets (Brazil, Russia, India, China), are now well established as market places for UK exports and, although these relationships must be kept , UK businesses would be wise to realign some of their focus onto the CIVETS (Columbia, Indonesia, Vietnam, Egypt, Turkey and South Africa).

The CIVETS are the emerging markets most widely tipped for sustained growth over the next decade. As a collective, these nations have shown excellent economic growth in recent years. They share in the opportunity presented by a young population and they all have increasing levels of personal wealth. As such, these countries are the ideal marketplace for commercial and consumer offerings from the UK.

A crisis of trust is at the heart of global uncertainty

By S. D. Shibulal, CEO of Infosys. The opinions expressed are his own.

During the first day at the World Economic Forum yesterday, we witnessed delegates arriving with two things on their minds — how heavy the snowfall was and the realisation that new business models are needed to overcome global economic pressures. (It goes without saying that the mood at Davos hasn’t been helped by the IMF downgrading world growth targets). We all agree that we’re living in a volatile world and it cannot go ignored that there are many uncertainties we face, including currency volatility and high unemployment.

The euro zone crisis will undoubtedly be at the centre of the discussions concerning “uncertainty” but what the attending business leaders, governments and global organisations must understand and discuss, is what they can do together to put in place measures to transform and change, so we can better safeguard our future.

The discussions I had at Davos yesterday support my fundamental belief that corporations have a critical role to play in creating a future where opportunities are abundant and growth inclusive. Moreover, at the heart of the global macro-economic uncertainty is the crisis of trust. Leaders across businesses and governments alike need to work together to rebuild that trust. Creating jobs and fostering sustainable growth is the first step in this journey. While businesses will need to look at measures to manage their short term crises and be truly evolved, smart enterprises will have to balance their focus between “short term needs” and investing for “long term growth through innovation”. We must also recognise that the emerging  future is being shaped by global mega trends in business and society, along with changing demographic profiles.

In view of these trends and the events that led to the recent economic crisis, leaders have their work cut out. Balance the short term versus long term, create a frame of reference to drive growth and innovation, and envision and create a sustainable future. All the views that I shared above resonated strongly with the panel that debated the critical issue of “the role of the CEO” at the Infosys Lunch Panel discussion yesterday. The panel also concurred that talent, which will be at the centre of these strategies is in short supply. Organisations therefore, not only need to look at new hubs of talent but also at retraining and reskilling existing talent pools. Businesses increasingly need to work in partnership with governments and educational institutions to ensure the mobility of talent and the career development of generation Y so tomorrow’s workers are in line with business demand.  Finally, there was unanimous agreement that leadership by example, client centricity and healthy balance of choices are the need of the hour.

Image — A visitor walks past WEF logos at the venue of the World Economic Forum (WEF) in Davos, January 26, 2012. REUTERS/Christian Hartmann

from The Great Debate:

Yemen needs an insurgent democracy

After months of uncertainty around whether Ali Abdullah Saleh has been sincere about stepping down from his post as Yemen’s president, Sunday brought confirmation that he has left the country to seek medical treatment in the United States. Under a deal brokered by the Gulf Cooperation Council with United Nations, United States and United Kingdom assistance, Saleh is barred from partaking in the Feb. 21 elections for an interim president. In exchange, he received immunity in an unamendable law -- both nationally and internationally highly controversial -- passed by Yemen’s parliament the day before his departure.

And yet Saleh made it immediately clear that he intended to return to Yemen before the elections to lead his General People’s Congress party, which holds a majority of seats in parliament. This is, of course, somewhat reminiscent of the last time Saleh left Yemen for medical treatment in June 2011. Following a bomb attack on the presidential palace which left several senior government officials dead and Saleh and others seriously injured, he sought treatment in Saudi Arabia amid hopes he would step down from office. He returned to Sana’a as president at the end of September. While Saleh will not be able to hold this office again, his intention of continuing to play a major role in the future of Yemen taints the otherwise good news of his departure.

But now what? We’ve seen leaders who had desperately tried to hold on forced from power in Arab countries before. Zine al-Abidine Ben Ali was run out of Tunisia. Hosni Mubarak, under withering domestic and international pressure, stepped down from Egypt’s presidency. And Muammar Gaddafi wouldn't leave and was finally killed.

Yemen, though, is different. Its crisis goes much deeper than socioeconomic and political dissatisfaction. It has insurgencies to worry about.

There are two: the al-Houthi uprising in the north since 2004 and the increasingly secessionist rebellion in the south that, while tracing its origins back to the brief 1994 north-south civil war, has gained violent momentum from 2007 onwards. Both insurgencies are reactions to political marginalization and economic neglect by Sana’a.

But these insurgencies have telling differences. The situation in the north has been destabilized by past military operations against a Shi’ite rebellion that allegedly received support from Iran (doubtful as it may be in its significance). For years on-and-off fighting had seen little gain for either side until the government launched operation "Scorched Earth" in 2009. That push involved Saudi forces, but the insurgency, although reduced in strength, continued. To date, a number of ceasefire agreements have been signed, and broken, most recently in 2010.

In the south, meanwhile, a battle with secessionist forces is complicated by the significant and growing presence of al-Qaeda in the Arabian Peninsula (AQAP). This fight has garnered significant international attention, not least because of two failed international terrorist plots that originated in Yemen — the attempt to bring down airplanes with explosives hidden in printer toner cartridges in October 2010 and the Christmas Day bombing plot in 2009. The alliance between AQAP and the southern secessionists, however, is one of convenience above all else. The southern movement is deeply divided among different factions and has limited military capabilities. It thus relies to an extent on AQAP to challenge the regime without sharing the terrorist network’s religious fundamentalism or anti-Western agenda. For the regime, southern secession is unacceptable given that most of Yemen’s dwindling oil resources are located there. Internationally, too, there is broad support for Yemen’s unity and a fear that instability in the south will further enable and embolden AQAP.

from The Great Debate:

The strange, rocky beginnings of DHL

This is an excerpt from King Larry: The Life and Ruins of a Billionaire Genius, published this month by Scribner.

With over a quarter million employees and a network of more countries than the U.N., DHL remains the largest express shipper in the world. Contrary to conventional wisdom, it was also the first, beating FedEx by several years. By some measures, the little-known (in the U.S., at least) DHL remains the fastest growing corporation in history and was certainly the most visionary. DHL instigated the destruction of the centuries-old tradition of the postal monopoly and invented its own word processor in the mid-1970s. Anticipating e-mail, it employed the grandfather of the Internet as its president in the early 1980s.

And yet if DHL’s official corporate history is to believed — and we really have no choice here, since only two men were there and both are long gone — the company was conceived during a chance encounter in a grocery store parking lot between Larry Hillblom and a salesman from a small courier firm where both men worked, a silver-haired, gray-suited 58-year-old bon vivant named Adrian Dalsey. Dalsey was the opposite of Hillblom — an impeccably groomed smooth-talker who lived in a suburb of San Francisco with his loyal wife of thirty years; by his mid-fifties, the silver fox had spent enough money on other women that none remained for his and Marge’s golden years. Hillblom’s conservative politics and his work ethic would have endeared him to a man of Dalsey’s generation, but he lacked the older man’s finesse, meaning that their encounter was probably more intense than respectful. Customers who happened to push their shopping carts by that fateful meeting might have mistaken them for a wealthy father tolerating an obnoxious child.

But they eventually agreed that their boss had left a lot of low-hanging fruit unpicked. Insurers were not the only ones with time-sensitive documents. There was tremendous value to be captured if, for example, a shipping company could forward its bills of lading to customs in advance of a ship’s arrival, saving days or even weeks in port. Ditto for banks, which could only begin collecting interest on deposits once the original, cancelled check, was received by the Federal Reserve, or a law firm that needed a physical signature in order to effect a contract. Sending these documents via the postal service might take two weeks, if they reached their destination at all. At a time of double-digit interest rates and looming postal strikes, both men knew that the market for a fast, reliable courier service was huge — and growing. They understood that their skills complemented one another almost perfectly. And they disliked each other immensely.

“Larry and Dalsey had a visible acrimony,” an old friend of Hillblom’s told me. “Dalsey liked to snipe and he had this, he was a bit unctuous, he had this — it wasn’t a lisp, but an impediment — speech pattern that was distinctive and a little bit patrician. He was a distinguished-looking guy, a ladies’ man, and thought himself so. He used to snipe at Larry in a scornful, patronizing way, and it annoyed you. So here you have these two people with totally different worldviews and different functions within the company at loggerheads, creating the nascent IBM — unknowingly.” The friend paused for a moment and smiled. “Or maybe not.”

Regardless of the natural tension between two very different people from two very different generations, Hillblom and Dalsey ultimately understood that they needed one other in order to make a go of it. Hillblom was overflowing with ideas and energy; he was willing to work twenty-four hours a day and could do a lot of the legal legwork. Plus, he had saved up six-thousand dollars, which would become the company’s seed capital. Dalsey had the client connections. They incorporated in September, using the initials of their last names and adding that of Robert Lynn, a real-estate investor friend of Dalsey’s who had promised to help them raise capital. Lynn, however, dropped out of DHL immediately, sniffing that the company would never succeed.

Dalsey quickly signed DHL’s first client — the shipping giant Seatrain, which needed to courier bills of lading between Los Angeles and Honolulu — then hit a wall. Hillblom and Dalsey had hoped that Lynn’s financing would carry them through the lean months but now they were forced to rely on a trickle of cash to survive. Marge, Dalsey’s wife, became the corporate secretary and kept the books on her dining room table. Hillblom was forced to not only travel with DHL’s bags but also to pick them up at Seatrain before boarding the plane and drop them off after he arrived. During the few hours he was not working, he slept or studied for the bar exam. And he waited for his super-salesman to sign one of their dream clients. But Dalsey, scouring the Bay Area in an old Plymouth Duster whose unmatched doors were salvaged from a junkyard, had stumbled on the first in a long line of catch-22s: DHL needed banking clients in order to become profitable but they could not afford the expensive insurance that banking clients demanded. While the value of the checks that the banks were sending was, on its face, negligible — nothing more than paper and ink — if even a single, large check became lost or delayed for more than a few days, the interest lost could be substantial. Nearly a year would pass before an insurance agent offered up a solution. In the meantime, Hillblom nearly starved to death in paradise.

from The Great Debate:

The frugal revolution

General Electric’s healthcare laboratory in Bangalore contains some of the company’s most sophisticated products—from giant body scanners that can accommodate the bulkiest American football players to state-of-the-art intensive-care units that can nurse the tiniest premature babies. But the device that has captured the heart of the center’s boss, Ashish Shah, is much less fancy: a handheld electrocardiogram called the Mac 400.

The device is a masterpiece of simplification. The multiple buttons on conventional ECGs have been reduced to just four. The bulky printer has been replaced by one of those tiny gadgets used in portable ticket machines. The whole thing is small enough to fit into a small backpack and can run on batteries as well as on the mains. This miracle of compression sells for $800, instead of $2,000 for a conventional ECG, and has reduced the cost of an electrocardiogram to just $1 per patient.

In Chennai, 202 miles farther east, Ananth Krishnan, chief technology officer of Tata Consultancy Services (TCS), is equally excited about an even lower-tech device: a water filter. It uses rice husks (which are among the country’s most common waste products) to purify water. The device is not only robust and portable but also relatively inexpensive, giving a large family an abundant supply of bacteria-free water for an initial investment of about $24 and a recurring expense of about $4 for a new filter every few months. Tata Chemicals, which is making the devices, hopes for an eventual market of 100 million.

GE and TCS are doing something more exciting than fiddling with existing products: they are taking the needs of poor consumers as a starting point and working backward. They are producing radically simpler products in order to reduce costs: instead of adding ever more bells and whistles, they strip the products down to their bare essentials. But there is more to frugality than simply cutting costs to the bone. Frugal products need to be highly adaptable.

Anurag Gupta, a telecom entrepreneur, has reduced a bank branch to its essence—a smartphone and a fingerprint scanner—so that banks can take ATMs to rural customers. These products also need to be tough and easy to use. Nokia’s cheapest mobile handsets come equipped with flashlights (because of frequent power cuts), multiple phone books (because they often have several different users), rubberized key pads, and menus in several different languages. Nor does frugal mean second-rate: emerging-market consumers are obsessed by both value-for-money and the latest trends. GE’s Mac 400 ECG incorporates the latest technology. Many inexpensive mobile handsets allow users to play video games and surf the net.

The fortune at the bottom of the pyramid

Frugal innovation is not just about redesigning products; it involves rethinking entire production processes and business models. Companies need to squeeze costs so they can reach more customers, and accept thin profit margins to gain volume. Three ways of reducing costs are proving particularly successful.