Archive for July, 2011

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latin america rising

Friday 29 July, 2011

Fellow Thunderbird alumnus Luis Alberto Moreno, President of the Inter-American Development Bank (IADB), was a guest of the Chicago Council on Global Affairs to talk about The New World Rediscovered: The Rise of Latin America Based in Washington, D.C., the IADB has 26 member countries, & is the oldest & largest source of multilateral assistance in this hemisphere. IADB is seeking a capital increase of $300M from congress. Illinois exports $9.2B to Mexico, which is more than it exports to China.

Latin American (LA) countries are the most democratic emerging markets. The financial crisis shifted the balance of power. Inflation is in single digits as a region & they are now a global creditor. LA bounced back quickly by reaping the benefits on 1990’s reforms. The new middle class now encompasses 60% of the population as illiteracy is being eliminated. They are meeting & exceeding the Millennium Development goals by shifting mortality to less than 23/1000. Mobile phones have penetrated 90% of the population. US influence is waning from 55% of imports in 2002 to 32% of imports on 2009. Asian trade, particularly with China, is picking up that slack. Copper prices supported Chile in the crisis, but they are getting away from the boom & bust commodity cycles of the past. The stock exchanges of Colombia, Peru, & Chile recently merged. SME’s comprise 90% of business & create 70% of jobs.

Unequal distribution of wealth is still a problem. There is slow progress in Haiti. Public services need to be improved-80% of sewage is still dumped raw. Productivity still lags. Violence issues affect 8% of GDP. LA is still vulnerable to disasters & climate change. They are implementing disaster risk management strategies against hurricanes, floods, droughts, etc. IADB is financing sustainable energy projects. Some places get 65% of their power from hydroelectric power, but droughts impact upon that. Education & innovation lags as indicated by standardized tests & patent submissions.

Luis was in Santiago, Chile for Obama’s speech there, when he encouraged new trade ties & vowed to connect LA SME’s with American SME’s. Lessons learned from dictatorships were that democracy works best. An LA summit coming up sets the goal of doubling GDP, dropping poverty from 32% to 10%, having the middle class reach 500M by 2025, which requires 4.8% growth.

Q&A

  • US consumption of drugs drives problems in LA. As ambassador of Colombia, Luis took 120 congressmen to Colombia. None were willing to legalize drugs. The US needs to consider gun use too. We need to take a hard line on crimes by starting with drugs & moving on to other crimes too.
  • LA learned the hard way about money-laundering. They had 31 financial crises from 1975-2001, & have made huge advances by subsequently changing their banking laws.
  • Advice to America: quick responses help. Send bankers to jail. Taxpayers shouldn’t save those too big to fail. Solve major fiscal problems. Economic power is greater than military might.
  • LA has had good & bad history with privatizing public goods. Water was privatized @ the city level in the 1980’s & that failed because people didn’t want to pay for water. Chile changed pay as you to to a system where they created a 3rd pillar with more private savings. Telecom, toll roads, & airports have been successful privatizations.
  • Chinese consumption drives LA agricultural growth. The Chinese are interested in ports & logistics. The US consumes on China’s credit card. There is competition out there, so strategic vision is required to compete.
  • IADB should be lending 25% of their projects on climate change, for example on watersheds. 70% of LA live in cities, so there is a local dimension. They adopted mass transit early on. Clean coal, hydroelectric, & natural gas are all important power sources.
  • Despite the fact that Brazil & Mexico comprise 2/3 of the GDP of LA, they should deepen their relationships regionally. Soon all countries on the Pacific will have Free Trade Agreements, so they need to develop reasons to group together.
  • Unions fight the trade agenda. There is no risk to the FTA with Colombia. We pay duties on goods being exported to Colombia while they pay none in the reverse direction.
  • America’s rising health care costs provided opportunities to provide health care in Costa Rica.
  • Despite Corporate Social Responsibility programs, poverty is not being alleviated. Coke sent mangoe juice to Haiti. We need to apply success of intervention in public/private partnerships.

 

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human rights vs. rights of foreign investors

Wednesday 27 July, 2011

I had lunch & learned with Prof. Sabine Schlemmer-Schulte Fragmentation of International Law: The Case of International Finance & Investment Law vs. Human Rights Law  when she talked about which essentially pits the rights of foreign investors against the human rights of people in the host country receiving that investment. Cases in Germany & Argentina examined the issue. Argentina provides a case in point. In pursuit of growth, the Argentines privatized/sold public sector assets to foreign investors, but the anticipated growth was not achieved & Argentina defaulted on it’s debts, creating an upward debt spiral. Foreign investors didn’t want to restructure the debt. Courts in Germany & the US looked into the rights of investors in their countries. Given the dire situation in Argentina, they have to wait until after economic restructuring for enforcement. There is no sustainable solution. Breaches of contracts are clear contract cases, but were environmental treaties violated? Investment treaties protect international investors while there are also international covenants on human rights. There are conflicting international norms. International financial institutions have not subscribed to financial treaties creating a new body of law. The fragmentation of international law requires the rethinking of the rudimentary hierarchy of international law norms. No 1 disagrees with debt restructuring-80% of Argentines agreed to restructure. Different approaches to these fragmentation issues bring more questions:

  • Does this create a race to the bottom?
  • Do human rights trump commercial rights?
  • Does corporate social responsibility have any teeth?
  • Why isn’t this all more similar to domestic laws?
  • Does suspending debt payments work?
  • This is a WTO issue of trade vs. the environment. The tools are already available. We could integrate human rights concerns. We need a comprehensive overhaul of the rules of the game.

Prof Karen Halverson Cross added her commentary. The US constitution says both treaties & federal statutes are the “supreme law of the land.” Statutes are to be construed consistent with international law. Customary international law trumps inconsistent state laws. But the International court of Justice’s judgments create international obligations, but they aren’t directly enforceable in US courts. Venture funds in the US bought Argentine debt for $.25/$1 & sued for the full $1 value of the debt. Creditors should be able to enforce a contract. They were invited to bring in international law. Bilateral investment treaties say “investment shall …be accorded fair & equitable treatment.” 3 foreigners claims were brought by bondholders against Argentina, which then became an issue of jurisdiction. Is the basis for the bondholder’s claim a breach of the debt contract or a breach of the bilateral investment treaty? Collective Action Clauses (CAC’s) allow qualified majority holders of debt to change the payment terms of the bonds & restrict the ability of a single bondholder to accelerate or bring suit to enforce the debt. As of 2006, the worldwide stock of bonds with CAC’s stands @ 60%.

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thru hong kong to china

Monday 25 July, 2011

The Hong Kong Trade Development Council put on another even bigger event  china” href=”http://edm.tdctrade.com/intimate/viewMessage/content_path/messageId_131028644/logEnabled_true/ctEnabled_false/trackerType_3″>HONG KONG: YOUR PARTNER FOR SUCCESS IN CHINA to promote approaching China through this SAR Special Administrative Area. Mary Roberts of the Illinois Trade & Investment office said Illinois exports through Hong Kong were up 23% in 2010. Rita Athas of World Business Chicago made a trip with then mayor Daley & 30 business leaders to Hong Kong in March. 30 big name Chicago companies already have operations in Hong Kong while there are at least 30 Hong Kong companies in Chicago.

Dr. John Chai, Managing Director of Fook Tin Technologies, Ltd. Gave the keynote address. He returned from the US to Hong Kong 10 years ago & found the city had totally changed. ½ of the world’s population is within 5 hours of Hong Kong. In China, there are now 50K companies which employ 10M people. They have not been prepared for inflation, so their goal is to cap it in the single digits. Hong Kong has 13 universities, 68 colleges, & 6 science parks. It’s Chinese neighbor Shenzen has a population of 15M, 11 universities, & 6 science parks, & is the most affluent province in China. The Hong Kong Shenzen Innovation Circle is a self sufficient subsidiary. 1.9% of 5048 companies spent $5.5B on some form of R&D in Hong Kong in 2009. 13% of companies spent HK$14B on some form of design activity. The government has commissioned 5 R&D centers to be created to become a testing & certification center. Onlyh ½ of R&D takes place in science & technology parks: 344 companies are in incubators. In 2000, only 34 foreign MNC’s were doing R&D in Hong Kong. That has risen to 750 by 2005. By 2007. 1/3 of respondents were setting up in China. 60% consider the business location ideal.

Panel 1: Hong Kong was H2O+’s 1st partner in Asia 20 years ago & are now in 22 countries in 2010. They are launching Korea, Vietnam, & Russia in 2011.

Calumet Industries has 28 factory locations in 5 countries, ½ of which are in Hong Kong/China. They use Taiwan, Hong Kong, & Shenzen as a staging platform for the region.

Panel Q&A:

  • Hong Kong trade shows are the best way to meet potential customers & local partners.
  • Globalization is having severe impacts on prices.
  • Calumet sourced in China much earlier than other companies & their competition followed & is coming directly to the market.
  • It’s important to be consistent around the world. Although sizes of products might differ, trends are shortening.
  • Regardless, it’s still important to tailor products geographically based on what the competition is doing.
  • Hong Kong can be a great springboard to other markets.
  • A physical presence is required: visiting partners/customers once every 6 weeks is not enough to build the proper relationships.

Open Q&A

  • Chinese consumers look @ trends in Hong Kong.
  • Launching in Hong Kong can allow you to be the 1st to seed the market.
  • Hong Kong nationals are more westernized than the Chinese, so communication is easier in HK.
  • It’s best not to compete head-to-head on price with Chinese companies. Focus on quality & on specialties rather than mass markets.

Louis Ho of the HKTDC talked about the Pacific Bridge Initiative, for which a Memorandum of Understanding was signed in Nov., 2010.

Panel II

70% of health care companies have some kind of branch or office in Hong Kong, which plays a role of health care reformer. They’ve adopted & harmonized with international standards & legal systems. The HK$ is more stable than the renminbi. Hong Kong is home to 4 of the top 100 universities in the world, which contribute more intellectual property and the top 100 in China. Hong Kong offers easier certifications of medical devices. Adapting for the Hong Kong market is still important. “Clinically proven in the USA” helps. Legally, patents are not extra-territorial, so it’s important to secure intellectual property rights in Hong Kong. There are no international patents, so they effectively stop @ the border. Register in Hong Kong with a Hong Kong attorney (http://ipd.gov.hk) , but be sure to pay attention to tight deadlines. Use non-disclosure agreements & don’t publicly disclose patent applications. Do your intellectual property due diligence to avoid infringement problems.

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naked vs. undercover economist

Friday 15 July, 2011

The Chicago Council on Global Affairs Young Professionals hosted another hip function THE UNDERCOVER ECONOMIST MEETS THE NAKED ECONOMIST  Alas no bodies were bared.  Charles Wheelan was back at it again, while Tim Harford was plugging his new book on how complex problems are solved.  His toaster project, to build a toaster from scratch in the forest, symbolizes how complex our lives have become.  He also noted that there are 10B distinct bar codes for products sold just in Chicago’s economy.  But all problems can’t be solved by markets, which are not necessarily the sum of businesses run by smart people, rather a result of lots of trial & error, which creates it’s own selection mechanism.  As innovative as the printing press was, Gutenburg went bankrupt because of the bible:  it’s 1st profit came only when he printed papal documents for the catholics.  To fix a problem, you need to experiment & make many failures, but society doesn’t value it.  Denying failure & the psychology of it is a bad process.  For poker players, the most dangerous time for them is right after their 1st loss, when they tend to double up.  Stock investors tend to hold on to losing shares too.  We suffer from loss aversion when we won’t admit even small losses.  Students experiment & fail safely.    Failure is inevitable, so get used to it, but fix it fast.

Wheelan noted that Harford’s book crosses interdisciplinary lines & drills down on what works & what doesn’t.  It’s important to understand when markets don’t work.  For example, recognize the public costs of driving when observing the private costs differ from the public costs of climate change.  Car fleets should run @ 24 miles/gallon because there is currently no incentive to get better gas mileage than that.  Regardless, all economists, myself included, argue for a carbon tax.

Panel Q&A

  • Hindsight is 20/20 in reinterpreting the past.  Make little bets on your career & all might not work out, but it should be much more interesting.
  • All Wall Street firms made bad bets which led to the financial crisis, & there were no small bets.  Now there is no room for failure.  Banks can & will fail-whistle-blowers are important to exploit errors.
  • Google inspires a culture that encourages innovation & failure.

Open Q&A

  • It’s not helpful to think of whether knowledge comes from the enlightened or collective thought, rather “What should you know when you need to know it?”
  • We don’t know if risk-averse financial institutions recognize resource misallocations.  “Black swans” (not Natalie Portman)  are high impact events with low probabilities that are based on few data  points.  We need more modular safety gates which decouple the dominoes in finance.
  • Innovation transfer happens better in health care than in many other industries.  Professors are practicing clinicians & their journals create a tight evidence loop.
  • There is no bottom line measurement of success in education.  Kids learn at different rates & we don’t really know who’s doing well & who’s not.
  • Creative people are often simply stubborn, impossible to intimidate, & indomitable.  Entrepreneurs are more likely to be delusional.

 

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revolutionizing development economics

Monday 11 July, 2011

The Chicago Council on Global Affairs hosted a lunch for Esther Duflo of MIT who is Revolutionizing Development Economics.  She’s written a book about how she’s seeking to understand how the poor function & how to design effective policy to help alleviate poverty & check it’s effectiveness.  The debate on aid & poverty is how broad & general should it be?  The US has no solutions & only creates problems which are difficult to resolve.  Africa received lots of aid during the 1960’s & still has little GDP growth today.  They still don’t have many good alternatives.  We’re obsessed with aid because we only see it dispersed from here, but only a small percentage is actually spent.  The real question is “How can aid monies be spent more effectively?”

There is a fair amount of ineffective policies that adhere to the 3 i’s:  ideology, show ignorance of reality, & can’t overcome existing inertia.  Where are the levers?  How do we lead the charge?  What constitutes success?  There are no new products or markets to tell us.  Social policies operate where markets are missing.  When social value exceeds private value, it leads to subsidies.  Assuming schools are a given means they won’t change unless they are private.  Randomized control trials create comparable results.

Esther has uncovered a number of surprises in her research.  The poor are actually not hungry.  Indians are eating less & less, but rice is only subsidized 10%.  If it becomes any cheaper, they will eat anything but rice.  There is a nutrition problem:  ½ of poor women are anemic.  Poor people still make rational conscious decisions.

We can improve education by removing the best students, which is good for everyone.  In Kenya, the educational system was biased towards the elites & tended not to change.  Parents are only interested when their students are doing well.  Classes that were heterogeneous made teaching become more focused.

Many are entrepreneurs, but they don’t want to be.  They are simply resilient.  80% of parents say their children should become civil servants.  Entrepreneurs move up to close the “Missing Middle” but there’s still a growth gap.  They’re invested in moving up but can’t lift themselves out of poverty.  The objective of microcredit is not to lift people out of poverty because it will never grow big enough to bridge the gap.

People don’t like women politicians, but they’re more reluctant to change.  After they’re exposed to women leaders, the biases disappear.  Women are good leaders who take fewer bribes, but men rate them lowest.  Politics matter, but there is still slack to do better.  We need to aspire to better than leading good institutions with bad policies (the 3 i’s).  Improving the lives of the poor may or may not spur economic growth, but poverty is everybody’s problem.

Q&A

  • Randomized control trials are easy to explain & a good way to get the ear of politicians.  Esther encourages experimentation, asking-not telling, & leaving behind a monitoring ability.
  • The role of for-profits needs to be “spaced” adequately with non-profits.  For example, there’s no money in immunization because the money is in vaccines, so identify what’s missing to find opportunity.  Not everything can be solved by for-profits:  use the right tool for each problem.
  • Modifying existing food like sweet potatoes to be more nutritious makes more sense than promoting macronutrients.
  • Corruption is a result of institutions which needs to be fought with sets of rules that make the population more incumbent.
  • The new leaders of South Sudan shouldn’t listen to the elevator pitches of all the experts, rather they should subscribe to a plan & learn what will work for them.  They do need to legitimize themselves from early on.

 

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bye Chicago-hi India, EU & Baker McKenzie on China, invest in Bulgaria, BRIC middle classes, enter India

Wednesday 6 July, 2011

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