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Innovation/Global Crisis Blog

Leaders of the World: Benchmark Brazil!

By Shlomo Maital

  I truly love the delicious irony in the following:  For decades, America lectured Brazil and its leaders on how incompetent and worthless they were, ruining their currency with runaway inflation, incurring enormous short-term debt and generally behaving irresponsibly.

   Ah, how lovely. The shoe is on the other foot.  President Obama should get on the next (Air Force One) plane and visit Rio.  He would learn a great deal about effective leadership from the Brazilians, and not solely from its legendary former president Lula.

    Here is what he would learn: 

   ●  From Jose Graziano da Silva, now incoming head of the FAO (UN Food and Agriculture Organization), previously father of Brazil’s lauded “Zero Hunger” program:   (Wall St. Journal, July 22-24, “Marketplace”):   Zero Hunger integrated 50 policies, involving everything from direct financial aid for small farmers to low-cost restaurants, in order to feed the poorest and alleviate extreme poverty – the root cause of hunger.  “To eradicate hunger is not a goal that a government can achieve; it is society that does this,” Mr. Graziano said. “It shows that if you have a basic society already organized, then you can organize it into communal goals.” 

    Zero Hunger lifted some 24 million people out of poverty since 2003.   Graziano actually launched Zero Hunger, but was removed from his post after the first year.  Brazil, however, under Lula persisted.  According to Fox News, “President Silva launched Zero Hunger in 2003 after saying at his inauguration that ending hunger was his administration’s main goal. The effort united several social programs and introduced new measures, such as Bolsa Familia. Dozens of other initiatives fall under the plan, including support for small farmers, running restaurants serving 50-cent meals and job training for women.   Brazil spends 0.4 percent of its gross domestic product on the Bolsa Familia program, yet it has a bigger impact shrinking inequality than far costlier programs, such as Brazil’s version of the U.S. Social Security effort.

 Brazil’s programs, which borrow partly from a Mexican initiative, have inspired other government initiatives around the globe, including 16 conditional cash transfer programs in Latin America and at least 14 outside the region.  “Brazil’s experience is hugely inspirational to a lot of developing countries that are themselves battling with a lot of issues around food security and hunger,” said Asma Lateef, director of the Washington-based anti-hunger Bread for the World Institute. “That it could be done and done so quickly is a wonderful success story and gives hope to a lot of people around the world.”

    ●   And  from  Celso Amorim (Foreign Minister of Brazil from 2003-2011, and current Minister of Defence), a man who has been described as having “…masterminded a transformation of Brazil’s role in the world that is almost unprecedented in modern history…”.

    Writing in the blog “thought economics”, Thoughteconomics.blogspot.com,  Vikram Shah observes:   Brazil’s 191 million strong population have, within their lifetimes, seen their country exit the Great Depression of the 1930’s only to end up with seemingly never-ending cycles of economic and political crises which led to a coup (in 1964), a twenty year military dictatorship and then a process of re-democratization and rapid industrialization (from 1985 to present-day). During this period, Brazil’s GDP has grown from $15.1 billion in 1960 to almost $1.6 trillion today (making Brazil the world’s seventh largest economy by purchasing power parity).   “This rapid socioeconomic transformation…” says Werner Baer in his book ‘The Brazilian Economy: Growth and Development’ “…can be illustrated with a few numbers. In 1940 only 30 percent of the country’s population was urban; by 1970 this proportion had increased to 56 percent, and by 1999 to 78 percent. The contribution of agriculture to gross domestic product (GDP) declined from 28 percent in 1947 to about 10 percent in the late 1990’s (measured in current prices), whereas that of industry rose from not quite 20 percent in 1947 to about 36 percent in the late 1990s. After four decades of intense industrialization, Brazil was producing 2 million motor vehicles in 1997, 26 million tons of steel in 1997, 39 million tons of cement in 1998, about 7.8 million television sets, and 3.7 million refrigerators in 1997. It had over 58,000 megawatts of installed electric power capacity in 1998, and over 60 percent of its exports consisted of manufactured products. Its paved road network increased from 36,000 kms. in 196 to close to 150,000 kms. in 1999. ”  Recent history (since 2001) has seen more than ten percent of Brazil’s population rise out of poverty – and the nation adopt a driving posture in global economics and foreign policy (having led UN peacekeeping in Haiti since 2004, and being central to missions in Liberia, the Central African republic, Cote d’Ivoire and East Timor).

    Amorim says: “In the case of Brazil, one of the most important things is the huge ethnic and cultural mixture which makes us a country with dynamism, vibrancy, and the ability to understand the psychology of other nations. We have problems, of course, but this is one of our huge strengths, and a huge foreign policy asset. “

    At a time when many countries are blaming immigrants on job market problems, and doing their best to keep them out or evict them once they have arrived (America’s immigration officials now call themselves Border Protection – which says it all), Brazil understands that its cultural diversity is a source of strength. 

   I recently visited South Africa.  I learned first-hand how the incredible blend of African tribal cultural (Xhosa, Zulu, etc.), along with Afrikaans and British culture, plus Indian immigrants, has created an enormously interesting and dynamic society. 

    Leaders of the world:  Benchmark Brazil. You have a lot to learn.  Pay some homage to the country you loved to hate and criticize.   America, too, has deep poverty and hunger.  Perhaps it would do well to invest 0.4 per cent of its GDP, like Brazil,  in a Zero Hunger program.  The cost?  $56 b.  Not even the rounding error on the federal government budget. 

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Innovation/Global Crisis Blog

Is Apple Worth More than Exxon? Is Luft Geshäft More Valuable Than Petroleum?

By Shlomo Maital

  Steve Jobs announcing the Mac in 1984

 Financial Times reports that last Tuesday, in intraday trading, the market value of Apple shares briefly exceeded that of Exxon.  At the close of trading, though, Apple again trailed, but not by much – its shares were worth $347 b., compared to $351 b. for Exxon.  Apple and Exxon now far exceed the market value of Wal-Mart, GE and other giants. 

   This leads us to ask:  Is Luft Geshäft (German for “air business”, i.e. gadgets that fetch very high prices and earn high margins) worth more than sticky black oil that powers our cars, cools and lights our homes and makes our plastic?   

   The answer is, yes.   Last quarter, Apple’s net profit doubled, reaching $ 7.31 billion, on revenue of $ 28.6 billion.   iPhone and iPad did not exist five years ago, but now  account for about two-thirds of revenue.  Apple’s cash reached $ 76.2 billion – again, at one point, more than the cash on-hand of the U.S. Treasury (before the debt ceiling was raised).  Apple’s growth was particularly driven by demand growth in China, and iPhone  shipments reached 20.3 million.  Moreover,  in the coming year, Apple computer sales are expected to double,  and iPhone sales are expected to triple.  If Apple’s new iCloud music and information storage services are successful, it will bring Apple millions of new users.

    So, for a brief but glorious moment in time, it was indeed possible to say that Luft Geshäft did exceed Big Oil in value, and more important,  consistent, persistent, blue-ocean innovative energy was more valuable than conventional energy.  Stuff that came out of the minds of creative people was more valuable than stuff that was pulled out of the ground.

    On the other hand, how many other such examples are there?  Very few.  It may indeed be tougher to extract ideas from deep in the minds of creative people, than it is to pull gas and oil from a sea bottom three miles deep and five miles under the seabed.    

Global Crisis/InnovationBlog

What is Going on?  In One Short Paragraph

By Shlomo Maital

 Today’s Financial Times (Saturday August 13) claims that the ‘flight to safety’ (a euphemism for panic sale of stocks and other assets)  last week exceeded the panic following Lehman’s Brothers catastrophic collapse on Sept. 15/2008.  Other items discuss the rioting in Britain, Greece’s deep recession, France’s crisis, Israel’s protest movement, and other types of social unrest.

   What in the world is going on?

   Here is a very short explanation.  The financial crisis of 2007-9, beginning with the U.S. and spreading to the world, led expectedly to an economic crisis, because when people lose their savings and homes, they spend less, the economy declines and joblessness rises.  Governments everywhere reacted to the economic downturn by spending more, even though tax revenues were falling. The resulting deficits created a new financial crisis, in America and in Europe, as mounting government debt panicked investors.  Central banks reacted by slashing interest rates and flooding money into the market, but that did not help, because banks and companies held the money rather than spend it, fearing future crises.  So the new financial crisis (just a continuation of the previous one, with govt. debt playing the role bank debt played before) led to renewed economic stagnation, which in turn has now become social unrest.  Governments are powerless, because a) they are now slashing their social programs, owing to deficits, so they cannot respond with more resources, and b) money policy has no room left for maneuver. The young middle class, and the poor, are revolting,  in different ways, some peacefully, some with violence – and some, as in America, with continued quiet desperation.  The tragedy is, this drama unfolds predictably, because social unrest always follows economic depressions, which always follow severe financial downturns. Yet as always our leaders were taken by surprise by it.  And that deepens the financial panic. It is a series of feedback loops.

     It is unclear how the world can emerge from this mess.  If you, dear reader, have some ideas, please pass them on. 

Innovation/Global Crisis Blog

Bad Times Means Great Books: Here are the Best!

By Shlomo Maital

   Bad (economic and financial) times inevitably bring a crop of great books, telling us why we got into a pickle and who is to blame.  Here is this year’s batch: The partial list of books nominated for the annual FT Goldman Sachs book award. 

  • Entrepreneurs:   No Angel, by Tom Bower (about Bernie Ecclestone, who built Formula 1 into a huge business empire);    Grand Pursuit: The Story of Economic Genius, by Sylvia Nasar;  also,  Car Guys vs. Bean Counters, by Bob Lutz, about how the financial cost-cutters ruined America’s car industry. 
  • Global Crisis 2007-9:   Fatal Risk: A Cautionary Tale of AIG’s Corporate Suicide, by Roddy Boyd.  Exorbitant Privilege: The Rise and Fall of the Dollar, by Barry Eichengreen; Extreme Money: The Masters of the Universe and the Cult of Risk, by Satyajit Das; The Wizard of Lies: Bernie Madoff and the Death of Trust, by Diana Henriques; Wilful Blindness: Why We Ignore the Obvious at Our Peril, by Margaret Heffernan;
  • Future Trends:  That Used to be Us: How America Fell Behind in the World It Invented and How We can Come Back, by Thomas Friedman and Michael Mandelbaum; The Next Convergence: The Future of Economic Growth in a Multispeed World, by Michael Spence; Triumph of the City: How our Greatest Invention Makes us Richer, Smarter, Greener, Healther and Happier, by Edward Glaeser;  The Quest: Energy, Security and the Remaking of the Modern World, by Daniel Yergin.   Poor Economics: A Radical Rethinking of the Way to Fight Global Poverty, by Abhijit Banerjee and Esther Duflo.
  • Management:  Good Strategy/Bad Strategy: The Difference and Why It Matters, by Richard Rumelt. 

I especially recommend the “future trends” books.  The books about the scoundrels who brought us the 2007-9 global crisis, which is now fast becoming the 2007 – no-end-in-sight global crisis,  will raise your blood pressure. 

Innovation/Global Crisis Blog

Three Cheers for David Beers… David Who?

By Shlomo Maital

 David Beers:  Last Honest Man?

 

Very few people have heard of David Beers.  He is the head of Standard & Poor’s sovereign bond rating department.   He makes the decision whether to, for instance, downgrade America’s Treasury bond rating from AAA to AA plus.   Which is just what he did last Friday, after the stock market closed in New York.  Both before and after his decision he was subject to pressures one can only imagine – including a claim by the U.S. Treasury Dept. that he and his team made a mistake amounting to $2 trillion, in estimating America’s debt burden.   (It turns out that $2 trillion, which is 14 per cent of US GDP, is insignificant; $15 trillion have to be cut from America’s budget in the next decade!).

   Former U.S. Assistant Treasury Secretary Larry Summers vilified Beers, recalling that S&P failed to downgrade mortgage-backed securities and hence directly helped cause the global financial crisis in 2007-9.   Thanks, Larry, we had forgotten that.  But, Larry, as you well know, Beers had nothing to do with that – that was another department in S&P.  Do you think the Republican and Democrat leaders, including the President, bear any responsibility, for an anemic  deficit-reduction plan that only cuts spending by $20 b. this year? 

    Here is the key fact that justifies Beers’ courageous decision, which fires a shot across the bow of America’s dysfunctional politicians. (From Bloomberg Business Week):

  “A June analysis by the Congressional Budget Office concluded that keeping the U.S.’s ratio of debt to gross domestic product at current levels until the year 2085 (to avoid scaring off investors) would require spending cuts, tax hikes, or a combination of both equal to 8.3 percent of GDP each year for the next 75 years, vs. the most likely (i.e. “alternative”) scenario. That translates to $15 trillion over the next decade—or more than three times what Obama and Boehner were considering.   You start to see why, absent signs of a serious commitment to deficit reduction, the rating services are warning they may downgrade the federal government’s triple-A rating even if Congress does meet the Aug. 2 deadline. Fortunately, our debt hole is escapable. But digging out requires that leaders of both parties come to terms with just how deep it is.  

   In other words, just to keep America from sinking deeper in debt,  American consumers, for instance, will have to lower their average standard of living by 12 per cent (lowering personal consumption from 70 per cent of GDP to 62.5 per cent – still far higher than in China, for instance).  This is not impossible, or even draconian.  It means giving up all eating out and entertainment, for example.  Has any American leader pointed out to Americans, that in order to dig the U.S. out of its hole, every American will have to stop eating out in restaurants and going to movies, forever (not just for a month or two)?  

    David Beers deserves praise.  All those attacking him deserve sharp criticism.  By attacking Beers, they are discrediting perhaps the last honest person in a position of authority in America, one willing to tell the truth.

Global Crisis/Innovation Blog

Equal Societies are Stronger

By Shlomo Maital

The Spirit Level: Equal Societies are Stronger!

   

After protest movements swept across the Arab nations in the Mideast, they have now spread to Israel.  Some 100,000 young protesters gathered last Saturday night, in Israel’s major cities.   As in the Arab Spring, it is unclear what the young Israelis seek.  But reading between the lines and listening carefully, it becomes clear. They want a more equal, more fair, more just society. 

    Harvard Univ. economist John Kenneth Galbraith once write, “The modern conservative is engaged in one of man’s oldest exercises in moral philosophy: that is, the search for a superior moral justification for selfishness”.   Once an egalitarian society, Israel embraced raw capitalism, justified selfishness on grounds of efficiency and wealth – and its modern “conservatives” led by our Prime Minister helped Israel join America as a country with one of the most unequal income distributions in the world.  (U.S. ranks third, Israel a close fourth; top of the list are Hong Kong and Singapore).   

    A 2009 book by two British epidemiologists, Richard Wilkinson and Kate Pickett, titled The Spirit Level, reaches the following conclusion:  above a certain level of GDP per capita, say, $20,000,  income is uncorrelated with all the major social indicators, such as health,mental illness, violence, education, etc.   What does correlate well with social wellbeing is (lack of) inequality.  The more unequal the society, the worse its health and society, in every indicator.  Their careful study includes a large cross-section of wealthy nations, along with the 50 American states. 

     Capitalists, you have run out of excuses.  Inequality is not only morally wrong, it is socially and politically stupid, because it makes your people worse off.    Read the book (you can download it from Amazon); the evidence is very strong.  

   As the late Harvard U. professor Albert Hirschman noted, there are two things you can do when faced with something you dislike:  “Exit” (leave, quit, don’t buy it, drop out), or “Voice” (protest, organize, complain, act).  For years, we have practiced “Exit”,  in all parts of the world.  Now, the young people are using their “Voice”.   We wish them all well.        

Global Crisis/Innovation Blog

Why Did the Stock Market Crash? Why Now?  

By Shlomo Maital

   The 1929 Crash…  and the 2011 Crash 

 

NEW YORK August  4/2011 — The Dow Jones Industrial Average plunged 4.3 percent Thursday, its worst one-day drop since the financial crisis, as global markets melted down over fears of a new economic downturn.  The Dow closed down 512.76 points to 11,383.68. The broader S&P 500 lost 4.8 percent to 1,200.07, while the tech-heavy Nasdaq Composite plunged 5.1 percent to 2,556.39.   The last time that the Dow fell as many points in a single day was in October 2008, during the nadir of the global financial crisis.    

  Why now? 

  The world is finally realizing that another perfect storm has occurred. 

  • Governments are slashing spending, as they find it harder and harder to borrow, and more and more expensive to borrow.  This, at a time when government demand and government jobs are the only things holding up the economy, in Europe and the U.S.
  • People are cutting their spending, in the face of daily headlines featuring dysfunctional political leaders who cannot even understand the problems their nation faces, let along deal with them, in Europe and the U.S.
  • Businesses are piling up cash, but are not even thinking of spending it on investment. American businesses like Apple have huge piles of cash, but it is held abroad where taxes are low, thus not benefiting America.  
  • World trade is weak; when GDP is stagnant, so are imports and hence exports. The only good news in this is that the price of oil is dropping like a stone.

     Failure to address the fundamental cause of the 2007-9 global crisis (massive expansion of dollars in the world, at a time when the world needs a stable reliable currency) has now led to a ‘double dip’, which is simply a continuation of the original crisis, in different forms.  It is not a double-dip recession, but rather the same one that is getting worse.   US Treasury Secretary Tim Geithner’s New York Times Op-Ed last August, “Welcome to the recovery” should cost him his job.  He just didn’t get it.  What recovery???

    President Obama says his Administration will now focus on creating jobs.  Well, how, Mr. Obama?  How about these data, from The Economist: 

    Some 6.3m workers have been off the job for more than six months, and the average duration of unemployment has grown to nearly 40 weeks.  With over 16% of the labour force jobless or underemployed, some firms are advertising that the long-term unemployed need not apply.   Workers recently laid off have a 30% chance of finding work in a given month. For workers off the job for more than six months, that chance is no better than 10%.    Growing ranks of the unemployed are exhausting the available 99 weeks of unemployment insurance. When the current emergency benefits program expires, the maximum duration of benefits may drop to just six months—a quarter of the current time span—although the Obama administration says it will fight for a new extension.  (Chances the House will approve it?  Zero).  Further attempts at fiscal stringency may hack away at other support programs, including food stamps and Medicaid, a health-care entitlement for the poor.  A staggering 45 million Americans now use Food Stamps.

  Happy 50th Birthday, President Obama. Perhaps, given the above, you should come home from Chicago, call Congress back into session and start to address the deep crisis America and the world finds itself in.  This is no time for summer vacations.

Global Crisis/Innovation Blog

 Could the Tea Party Possibly Be… Right?

By Shlomo Maital

 John Tenniel’s ‘take’ on Alice’s Tea Party     

 Perish the thought, but – could those extreme 87 United States Congresspersons, who call themselves the Tea Party, be right?   They’re regarded by most people, even by Republicans, as extreme fanatics who want to slim government at all cost, even if means cutting Medicare, Social Security and other key social benefits.  They’re the ones who brought the U.S. to the brink of defaulting on its bonds and rattled capital markets all over the world. 

      I always urge my students to think different(ly).  Think contrarian.  So, could the Tea Party actually – be right?

     In a recent piece in the Singapore Business Times,  R. Sinvanthy recalls an episode in history worth remembering.  In 1981 Margaret Thatcher, British PM, brought in a draconian budget that slashed government spending, raised taxes, narrowed the budget deficit, closed coal mines and in general radically reduced the role of government in Britain.  In response, 364 economists wrote a letter to Thatcher, saying that her budget was disastrous and would deepen Britain’s economic crisis (the 1980-81 recession).  Among the signatories were top academics, incuding a Nobel Prize winner and two would go on to win the Nobel Prize in economics, along with Mervyn King, current Governor of the Bank of England. 

    And boy, were those guys wrong!  Within two years, Britain’s inflation rate fell from 18 per cent to 5 per cent.  (See Phillip Booth, Were 364 Economists All Wrong?   Institute of Economic Affairs, 2006).  Britain’s economy began to grow.  Thatcher was right. The geniuses were wrong.

    The Tea Party is extreme, but often to make a point you need to express it in an overly extreme fashion, just so people will take notice. As I understand it, the basic point they make is a correct one.  America is a business, like any country.  The business of America is being run badly by its political leaders.  Get your act together. Shape up.  Run America like America’s managers and entrepreneurs run their businesses.  President Obama, it’s not enough to appoint Jeff Imelt (GE CEO) to head a committee.  You have to BECOME him!  Run America like Jeff runs GE.  Deleverage. Reduce the debt. Slash waste. Do all the hard things America needs to become strong and stable again.  And do it quickly, using the principle:  All the bad news at once, good news a little at a time.  If this is what the Tea Party crazies are saying – well, I think I support them.    

Global Crisis/Innovation Blog

Fighting Terrorists With Mice: Not a Mickey Mouse Idea

By Shlomo Maital

   The website  http://www.israel21c.org  provides the following vignette, in the annals of Mickey Mouse innovation:  Mickey the terror fighter. 

   Here is the basic idea:  

 Israeli startup Bioexplorers has developed a new and unique way to sniff out terrorists – literally. After years of research, company CEO Eran Lumbroso tells ISRAEL21c, Bioexplorers has hit upon a foolproof, non-invasive and easy method to detect contraband in purses, luggage and even cargo – using mice.  It’s no joke. “Mice have an excellent sense of smell, and they’re relatively easy to train. And they’re easier to use for odor detection than other animals traditionally used for their olfactory capabilities.” Dogs are most often used by security forces to detect drugs and explosives, says Lumbroso, but they generally respond to the directions of their trainer, making their work more of an art than a science. “I was looking for a way to automate and mechanize the training process, so it could be duplicated easily and installed in a variety of settings. And we have been able to achieve that goal using mice.”  Here’s how it works: A person passes through a passageway in which a Bioexplorers system is installed. A fan passes air into a sensor receptor, and delivers it into a chamber with several mice. The mice, having gone through intensive behavioral training, sniff the air. If the odor is one associated with items the mice have been trained to recognize, like drugs or bombs, they move into another chamber – setting off an alarm. Security officers can then move in and stop the appropriate suspect.   “The mice rarely make an error, and the entire procedure is far less invasive or intimidating than the alternatives, like using dogs or X-ray machines,” says Lumbroso. “There’s no radiation, and no concern about being seen naked,” he adds.  The system is appropriate for use in any setting – airports, government buildings, shopping malls. In fact, the company has conducted several tests at sites in Israel to ensure that the sensors work in real situations, including at Tel Aviv’s Azrieli Mall. More than 1,000 people passed through a Bioexplorers sensor – some having been given “suspicious” objects and substances to hold – and the mice made the right call every time, says Lumbroso.  The rodents employed on this security detail are specially raised lab mice, “which are very clean, and there is no chance that they will transfer diseases to humans, since there is no contact between the mice and the people passing through the sensor,” says Lumbroso.  The mice are trained over a period of about two weeks using a patented computerized program based on Skinner-style behavior theory and methods, “which we have tweaked using our own special technology and methodology,” Lumbroso says.

  Lumbroso is a biologist. He’s been working on his idea since 2004.  We can only imagine the kinds of comments he got, when he first proposed his idea.  

Blog entries written by Prof. Shlomo Maital

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