Up the Magic Mountain - Again

Globophobe is once again in Davos - our 11th time to this Swiss ski resort that becomes globalization central for one week every January when more than 2,000 business, government and civil society leaders converge in this non-descript linear town with stunning mountain scenery. It has been snowing all day today, heightening the anticipation. Tomorrow, the World Economic Forum's Annual Meeting 2008 begins. 

We tend to be quite busy during the meeting, but Globophobe will do our best to post a few observations as this jamboree proceeds.

Globalization at the Movies: "You make me want to be a better economy"

When we talk to people about globalization and its impact, we often discuss how China's rise shouldn't cause its competitors to lose hope. The key is for other economies to figure out how to take advantage of the opportunities China offers and how to better compete. It's a matter of pursuing the reforms, restructuring and retooling necessary to survive, whether that means going up the value chain or creating new innovative products and services. Globalization, in our view, is all about that pressure-reaction dynamic - the winners will be those that want to become better economies, companies, individuals once it dawns on them that they aren't that competitive anymore. Can they take the tough medicine?

All of this is neatly summed up in the following dialogue form the film As Good As It Gets, which starred Jack Nicholson as Melvin Udall, the author suffering from obsessive-compusive disorder, and Helen Hunt as Carol Connelly, the long-suffering coffee shop waitress, to whom Melvin is attracted. The two go out on a date and Melvin's behavior is frustrating for Carol. She demands that he pay her a compliment:

Melvin: I've got a really great compliment for you, and it's true.
Carol: I'm so afraid you're about to say something awful.
Melvin: Don't be pessimistic, it's not your style. Okay, here I go: Clearly, a mistake. I've got this, what - ailment? My doctor, a shrink that I used to go to all the time, he says that in fifty or sixty percent of the cases, a pill really helps. I *hate* pills, very dangerous thing, pills. Hate. I'm using the word "hate" here, about pills. Hate. My compliment is, that night when you came over and told me that you would never... well, you were there, you know what you said. Well, my compliment to you is, the next morning, I started taking the pills.
Carol: I don't quite get how that's a compliment for me.
Melvin: You make me want to be a better man.
Carol: ...That's maybe the best compliment of my life.
Melvin: Well, maybe I overshot a little, because I was aiming at just enough to keep you from walking out.

When the China juggernaut appears, the survivors - the winners in this age of intense globalization - will be those economies that want to take their medicine and look China in the face and say "You make me want to be a better economy" rather than haplessly sulk in self-pity, inefficiency and odd behavior.

The Crisis Plus Ten (Part Two): Asia's Leadership Challenge

One of the challenges analysts of Asia have is that the continent is a place where it is often difficult to discern rhetoric from fact, perception from reality. The gap between what is at the surface and what lies beneath, between what is said in public and what is admitted behind closed doors, can be significant.

Take South-East Asia and the region’s integration. On the one hand, ASEAN countries have hailed their efforts to create a free-trade area and to conclude a spaghetti bowl full of bilateral deals in the face of setbacks at the multilateral level. At the same time, ministers tacitly acknowledge that much of the work so far has been focused on lowering tariffs, while certain sensitive sectors have been kept protected. The heavy lifting required to eliminate non-tariff barriers, facilitate trade, and create a real single and seamless market remains to be done. For example, there is no harmonization of rules in the trade of services in the ten ASEAN economies. This deficiency means that global services companies have no ASEAN business strategy; it would not make sense to have one. “What we need is for ASEAN to have a free trade agreement with itself,” advised Steven Okun, Vice-President, Public Affairs, for global package and document distribution company UPS in Singapore, at the World Economic Forum on East Asia which recently took place in the city.

Behind that somewhat jocular statement was a very serious plea for authenticity, for leaders to focus less on grand visions and more on pragmatic policies that would have real impact. “We need less planning and more doing,” said meeting Co-Chair Carlos Ghosn, who is President and Chief Executive Officer of both Japanese automaker Nissan and French car manufacturer Renault. “ASEAN has more of a facility for planning and less of a facility for execution. We may have wonderful plans but execution is 5%.”

ASEAN officials usually bristle at charges, particularly from the business sector, that the organization is all talk and no action. But today, with the pressures of globalization mounting and China and India continuing their market-shaking rise, the chips are down and South-East Asian leaders are speaking more plainly. “The step-by-step way they are handling the integration of ASEAN and East Asia is slow by the reckoning of many of us, too slow by the reckoning of business people,” Singapore Senior Minister Goh Chok Tong conceded. Vowed Ong Keng-Yong, the Secretary-General of ASEAN: “In the coming year or two you will see the leadership focus on implementation.”

In politics, there may be wisdom in discretion and necessity for spin. Yet leaders today cannot coast on vision alone but need to deliver results – and in short order. To be sure, the collective record of Asian leaders over the past two decades has been laudable. Asia has performed extraordinarily well, the 1997-98 financial crisis notwithstanding. According to the World Bank, the number of East Asians living on less than a dollar a day was halved from 300 million to about 150 million between 1990 and 2004, a decline in the incidence of poverty from 29% of the population to just 8%. In Asia as a whole, however, about 20% of the population is still poor.

“We have two faces in Asia,” said Rajat M. Nag, Managing Director-General of the Manila-based Asian Development Bank. “One Asia is growing; the other is falling behind. There are 1.9 billion people in this part of the world who live at US$ 2 a day; some regions are even worse off than sub-Saharan Africa. These two faces must converge rather than diverge as is the case now.”

As Asia progresses and many of its countries become middle-income economies, the shortcomings of the region will stand out more sharply against the backdrop of its fantastic success. Already, a new set of problems has emerged – infrastructure deficits, environmental degradation, energy security, technological development and innovation, and ageing demographics. The most urgent priority will have to be the growing gap between the rich and poor, particularly in countries such as China and India, where the ranks of the middle class have swelled and some have become rich while hundreds of millions remain in poverty. “Differential responses to globalization are leading to income inequality that is becoming a more serious problem in every country, every city and maybe every family around the world,” warned George Yeo Yong-Boon, the Singaporean Minister of Foreign Affairs. “Unless we have global leadership, this problem will become even more acute.”

But therein lies a major challenge. Today, there are no clear lines of global or regional authority. In a world of global threats that require regional and global solutions, there is a lack of regional and global leadership with any clear mandate. In the absence of such an agenda-setting force in Asia, it is up to each country to balance their national interests with their regional and global responsibilities. Authentic leadership means acting to prevent or prepare for crises, not responding to them. It means staying ahead by pursuing reforms constantly, not reacting to competitive pressures or public criticism. It means taking a long view, not governing with the next election or quarterly results in mind.

Indeed, how a government responds to widening disparities in income that are stirring a sense of insecurity, fear and resentment among citizens could be a real test. “Governments may be pressured to roll back reforms and liberalizations and revert to nationalistic rules for foreign investments or protectionist policies for trade,” Singapore Prime Minister Lee Hsien-Loong told participants. “This will not only choke off growth in the region but lead to tensions and souring of relationships.” How countries prepare for the next regional or global crisis will also be an indicator of the quality of their leadership in both the public and private sectors. “A shock will come at some point,” warned Tharman Shanmugaratnam, Singapore’s Minister for Education. “Emerging markets must have shock absorbers. It requires astute management.”

How can East Asian countries ensure that they have the leadership that can provide that astute management? One way is to invest in education that encourages creativity, innovation and a global perspective, attributes that future leaders of the region will need. “The educational system is not responsive enough to the new world that we are facing,” said meeting Co-Chair James T. Riady, CEO, Lippo Group of Companies, Singapore. Minister Yeo stressed the importance of preparing the next generation for globalization. “We can’t just feed them rules and regulations or canned knowledge,” he concluded. “Countries which pay attention to education and value systems will do well. Those which neglect this area are not in the game.”

The Crisis Plus Ten (Part One): Asia's Competitiveness Landscape

When South-East Asian economies were laid low by the financial crisis of 1997-8, their vulnerability to the swift movement of short-term capital and the weakness of their banking and corporate sectors were exposed. Investors fled. Then came a surge of China fever as investors discovered the mainland’s second and third-tier cities and the impressive cost-competitive power of Chinese manufacturing fully flowered. The China machine would produce everything, relegating ASEAN to the role of purveyor of commodities and agricultural products to feed the hungry dragon, said some analysts. China would suck away FDI and South-East Asia’s factories would close, its manufacturing shifting to its giant neighbour. Recently, India’s rise has grabbed the attention of investors and raised questions about East Asia’s competitiveness in the low-cost services sector.

But South-East Asia held its own. ASEAN exports grew along with China’s, though raw material and natural resources demand from China was in no small measure responsible. Vietnam has emerged as a low-cost manufacturing platform with a skilled workforce, an attractive alternative for Japanese investors concerned about their country’s tense relationship with Beijing. According to Nguyen Sinh Hung, First Deputy Prime Minister of Vietnam, speaking at the recent World Economic Forum on East Asia held in Singapore, FDI into his country this year could increase by up to US$ 20 billion, doubling the inflow in 2006. The Philippines, meanwhile, has managed to carve out a niche in electronics, software programming, back-office and call-centre operations. Thailand has continued to be a key automobile assembly hub, while Malaysia’s electronics and semiconductor industries have thrived. Singapore has pushed itself further up the value chain, developing new industries such as biotechnology and strengthening its position as South-East Asia’s premier financial hub. Even in Indonesia, shunned by investors for years after the crisis, FDI has started to rebound. “We have seen companies that left after the crisis come back,” said Muhammad Lufti, Chairman of Indonesia’s Investment Coordinating Board. Indeed, while investment levels in crisis-hit countries may not yet have recovered to pre-1997 levels, not all of the FDI heading to developing Asia is going to China.

The scenario of an overwhelming China juggernaut has not happened. And now, among business strategists, the talk is of a “China Plus One” approach – don’t put all your eggs in one basket, even if it is a Chinese basket. “China Plus One” makes sense for three reasons, said Ko Kheng-Hwa, Managing Director, Singapore Economic Development Board, Singapore. First, there is the logical need to diversify operational risk. SARS, the tsunami, and earthquakes that have hit the region underscore how a sudden crisis could disrupt supply chains. If China’s is knocked out, manufacturers will need reliable alternatives where production can be ramped up quickly. This is especially true in these days of just-in-time production, delivery and inventory management. Second, there is the business optimization motive. Many companies including Chinese enterprises know they have to be global in scale to compete even in their home markets. And third, China and India’s rise is forcing other economies in East Asia and elsewhere to find ways to be more competitive and more attractive to investors. “Everybody is trying to replace red tape with red carpets,” said Koh.

Marketing an economy to investors has become a global game. If an economy cannot beat China on labour costs, then it must try to do so in other ways – the availability of skills, the strength of the intellectual property regime, and a workforce’s capacity for innovation could be key drawing cards. Investors setting up offshore operations do not necessarily flock to the lowest-cost market, said Joseph L. Rice III, Chairman of US direct investment group Clayton, Dubilier & Rice. Reliability and quality are important considerations since these companies keenly want to maintain or even increase the quality of their products, not just make them more cheaply.

There are many other factors for success that countries have to keep on their planning boards. China, for example, has already found that as labour costs go up in parts of the country due in part to the shortage of skilled managers and the growing affluence of the workforce, it must adjust. Affected businesses have moved to hinterland regions. Others have moved up the value chain. Indeed, China has surprised competitors by how quickly it has moved from low-end manufacturing where it dominates to more sophisticated mid-range and even high-end products where it is beginning to have an impact in the market. The Chinese leadership also understands that as energy and environmental costs mount, the country’s industries must become more efficient and innovative.

To be competitive, every economy has to take up the innovation mantra. Singapore, which regularly performs well on global competitiveness rankings, has put the cause at the forefront of government policy. “If we leave out education and skills training, then we will be stuck with the old ways of growing the economy,” explained Goh Chok Tong, Senior Minister of Singapore and Chairman of the Monetary Authority of Singapore. “For the future, you have to create wealth. To create wealth, you have to innovate.” Concluded meeting Co-Chair Carlos Ghosn, President and Chief Executive Officer of both French carmaker Renault and Japanese automobile manufacturer Nissan: “Because of the increasing weight of Asia, the number of industries and sectors where Asia is leading in innovation has got to increase.”

The winners in the globalization age will be those economies and regions that put their competitive advantages package together right and make the right policy choices. The challenge for a region such as ASEAN is that the going is only going to get tougher. South-East Asia will have to make good on its regionalization commitments and go beyond the superficial lowering of tariffs to achieve much deeper integration that truly makes the area a single, seamless market. In this respect, quality leadership and governance – actually implementing ambitious plans – could be the essential ingredient of a globally competitive economy or region. As Goh said, “if you don’t have a government that understands the importance of macroeconomic policies, investment in education, and how to manage socioeconomic divisions in a country, it would be difficult for an economy to thrive.” This plain truth applies as much to the giants of Asia – China and India – as it does to their smaller neighbours who may be scrambling to keep up.

L'état, c'est lui: Will Sarkozy be a Thatcher/Reagan or a Bush/Blair?

The election of Nicolas Sarkozy as the next president of France yesterday had us thinking about the nature of leadership in the globalization age. His arrival on the scene marks a major break from the past for France: the Hungarian immigrant's son is the first French president to be born after the World War II. In addition, Sarkozy has presented himself as a reformer, a tough guy who would not hesitate to make tough choices in pursuit of his strong-held beliefs.

The question is whether he will turn out to be a Thatcher/Reagan or a Blair/Bush. What do we mean by this distinction? Both pairs of British and American leaders presented themselves as people of conviction who governed by principle rather than by polls. They pushed ahead with their ideas regardless of the political setbacks and, at least in the case of Thatcher and Reagan, they were either admired or vilified for their commitment, grit and steely determination. Though his administration ended up creating a huge deficit due to the combination of high defense spending and tax cuts, Republican Ronald Reagan is now beloved - even by many Democrats - for his vision, his simple ways and his communication skills. Even Thatcher's critics would agree that her handbagging style and "the-lady-is-not-for-turning" rhetoric did force structural changes in Britain that were necessary and have turned out to be beneficial in the medium term.

As for Blair and Bush, both have turned out to be less-desirable "mini-me" versions of the two giants of the closing years of the Cold War. Blair came in on a wave of optimism, promising a "third way" - the free market outlook of Thatcher with the compassion and progressiveness of the Labour Party. Bush spoke in a pseudo-folksy manner and promised to rid Washington of the parsing of the Clinton years and instead govern along simple conservative principles. After 9-11, he took that a step further when he adopted a "with-us-or-against-us" stance in his "war on terror" - black and white, no gray.

Unfortunately, Blair and Bush went down the path to Iraq together, ensnaring themselves, their countries and the world in possibly the worst foreign-policy debacle in their respective histories. Their performance, however, has belied the rhetoric. Blair has been less than successful in improving education, healthcare and public services, while Bush has turned the Clinton surpluses into huge deficits. And of course there is Iraq - a devastating triumph of demagoguery and corruption over thoughtfulness and common sense that the world will pay for for many years to come.

So what then of Sarkozy? As former US treasury secretary Larry Summers said last year in Singapore, globalization means that the positives that result from it are magnified, as are the negatives. So when leaders do right, the full impact of benefits is greater than it might have been when the world was not as interconnected as it is today. In other words, good governance can really help. But the opposite is true: screw up and you can really make a mess. Iraq is just such a debacle.

If Sarkozy comes in with ideological blinkers on and pursues reform for reform's sake without the pragmatism and wisdom that comes with experience and perspective, then he could turn out to be a Bush/Blair. But if he takes a pragmatic approach even as he pursues his policies, he could be a great leader. France certainly needs to be shaken up. But you can shake a tree by the roots and kill it.