The point here is that every region of the world has its strengths and weaknesses, and all are in need of reform retail to some degree. What is reform retail? In the simplest terms, it is more than just opening your country to foreign trade and investment and making a few macroeconomic policy changes from the top. That is reform wholesale. Reform retail presumes you have already done reform wholesale. It involves looking at four key aspects of your society—infrastructure, regulatory institutions, education, and culture (the general way your country and leaders relate to the world)—and upgrading each one to remove as many friction points as possible. The idea of reform retail is to enable the greatest number of your people to have the best legal and institutional framework within which to innovate, start companies, and become attractive partners for those who want to collaborate with them from elsewhere in the world.
Many of the key elements of reform retail were best defined by the research done by the World Bank’s International Finance Corporation (IFC) and its economic analysis team led by its chief economist, Michael Klein. What do we learn from their work? To begin with, you don’t grow your country out of poverty by guaranteeing everyone a job. Egypt guarantees all college graduates a job each year, and it has been mired in poverty with a slow-growing economy for fifty years.
“If it were just a matter of the number of jobs, solutions would be easy,” note Klein and Bita Hadjimichael in their World Bank Study, The Private Sector in Development. “For example, state-owned enterprises could absorb all those in need of employment. The real issue is not just employment, but increasingly productive employment that allows living standards to rise.” State-owned enterprises and state-subsidized private firms usually have not delivered sustainable productivity growth, and neither have a lot of other approaches that people assume are elixirs of growth, they add. Just attracting more foreign investment into a country also doesn’t automatically do it. And even massive investments in education won’t guarantee it.
p. 318 “Productivity growth and, hence, the way out of poverty, is not simply a matter of throwing resources at the problem,” say Klein and Hadjimichael. “More important, it is a matter of using resources well.” In other words, countries grow out of poverty not only when they manage their fiscal and monetary policies responsibly from above, i.e., reform wholesale. They grow out of poverty when they also create an environment below that makes it very easy for their people to start businesses, raise capital, and become entrepreneurs, and when they subject their people to at least some competition from beyond—because companies and countries with competitors always innovate more and faster.
The IFC drove home this point with a comprehensive study of more than 130 countries, called Doing Business in 2004. The IFC asked five basic questions about doing business in each of these countries, questions about how easy or difficult it is to 1) start a business in terms of local rules, regulations, and license fees, 2) hire and fire workers, 3) enforce a contract, 4) get credit, and 5) close a business that goes bankrupt or is failing. To translate it into my own lexicon, those countries that make all these things relatively simple and friction-free have undertaken reform retail, and those that have not are stalled in reform wholesale and are not likely to thrive in a flat world. The IFC’s criteria were inspired by the brilliant and innovative work of Hernando de Soto, who has demonstrated in Peru and other developing nations that if you change the regulatory and business environment for the poor, and give them the tools to collaborate, they will do the rest.
Doing Business in 2004 tries to explain each of its points with a few colorful examples: “Teuku, an entreprenuer in Jakarta, wants to open a textile factory. He has customers lined up, imported machinery, and a promising business plan. Teuku’s first encounter with the government is when registering his business. He gets the standard forms from the Ministry of Justice, and completes and notarizes them. Teuku proves that he is a local resident and does not have a criminal record. He obtains a tax number, applies for a business license, and deposits the minimum capital (three times national income per capita) in the bank. He then publishes the articles of association in the official gazette, pays a stamp fee, registers at the Ministry of Justice, and waits 90 days before filing for p. 319 social security. One hundred sixty-eight days after he commences the process, Teuku can legally start operations. In the meantime, his customers have contracted with another business.
“In Panama, another entrepreneur, Ina, registers her construction company in only 19 days. Business is booming and Ina wants to hire someone for a two-year appointment. But the employment law only allows fixed-term appointments for specific tasks, and even then requires a maximum term of one year. At the same time, one of her current workers often leaves early, with no excuse, and makes costly mistakes. To replace him, Ina needs to notify and get approval from the union, and pay five months’ severance pay. Ina rejects the more qualified applicant she would like to hire and keeps the underperforming worker on staff.
“Ali, a trader in the United Arab Emirates, can hire and fire with ease. But one of his customers refuses to pay for equipment delivered three months earlier. It takes 27 procedures and more than 550 days to resolve the payment dispute in court. Almost all procedures must be made in writing, and require extensive legal justification and the use of lawyers. After this experience, Ali decides to deal only with customers he knows well.
“Timnit, a young entrepreneur in Ethiopia, wants to expand her successful consulting business by taking a loan. But she has no proof of good credit history because there are no credit information registries. Although her business has substantial assets in accounts receivable, laws restrict her bank from using these as collateral. The bank knows it cannot recover the debt if Timnit defaults, because courts are inefficient and laws give creditors few powers. Credit is denied. The business stays small.
“Having registered, hired workers, enforced contracts, and obtained credit, Avik, a businessman in India, cannot make a profit and goes out of business. Faced with a 10-year-long process of going through bankruptcy, Avik absconds, leaving his workers, the bank, and the tax agency with nothing.”
If you want to know why two decades of macroeconomic reform wholesale at the top have not slowed the spread of poverty and produced enough new jobs in key countries of Latin America, Africa, the Arab world, and the former Soviet Empire, it is because there has been too little reform retail. According to the IFC report, if you want to create prop. 320ductive jobs (the kind that lead to rising standards of living), and if you want to stimulate the growth of new businesses (the kind that innovate, compete, and create wealth), you need a regulatory environment that makes it easy to start a business, easy to adjust a business to changing market circumstances and opportunities, and easy to close a business that goes bankrupt, so that the capital can be freed up for more productive uses.
“It takes two days to start a business in Australia, but 203 days in Haiti and 215 days in the Democratic Republic of Congo,” the IFC study found. “There are no monetary costs to start a new business in Denmark, but it costs more than five times income per capita in Cambodia and over thirteen times in Sierra Leone. Hong Kong, Singapore, Thailand and more than three dozen other economies require no minimum capital from start-ups. In contrast, in Syria the capital requirement is equivalent to fifty-six times income per capita . . . Businesses in the Czech Republic and Denmark can hire workers on part-time or fixed-term contracts for any job, without specifying maximum duration of the contract. In contrast, employment laws in El Salvador allow fixed-term contracts only for specific jobs, and set their duration to be at most one year . . . A simple commercial contract is enforced in seven days in Tunisia and thirty-nine days in the Netherlands, but takes almost 1,500 days in Guatemala. The cost of enforcement is less than 1 percent of the disputed amount in Austria, Canada and the United Kingdom, but more than 100 percent in Burkina Faso, the Dominican Republic, Indonesia . . . and the Philippines. Credit bureaus contain credit histories on almost every
adult in New Zealand, Norway and the United States. But the credit registries in Cameroon, Ghana, Pakistan, Nigeria and Serbia and Montenegro have credit histories for less than 1 percent of adults. In the United Kingdom, laws on collateral and bankruptcy give creditors strong powers to recover their money if a debtor defaults. In Colombia, the Republic of Congo, Mexico, Oman and Tunisia, a creditor has no such rights. It takes less than six months to go through bankruptcy proceedings in Ireland and Japan, but more than ten years in Brazil and India. It costs less than 1 percent of the value of the estate to resolve insolvency in Finland, the Netherlands, Norway and Singapore—and nearly half p. 321 the estate value in Chad, Panama, Macedonia, Venezuela, Serbia and Montenegro, and Sierra Leone.”
As the IFC report notes, excessive regulation also tends to hurt most the very people it is supposed to protect. The rich and the well connected just buy or hustle their way around onerous regulations. In countries that have very regulated labor markets where it is difficult to hire and fire people, women, especially, have a hard time finding employment.
“Good regulation does not mean zero regulation,” concludes the IFC study. “The optimal level of regulation is not none, but may be less than what is currently found in most countries, and especially poor ones.” It offers what I call a five-step checklist for reform retail. One, simplify and deregulate wherever possible in competitive markets, because competition for consumers and workers can be the best source of pressure for best practices, and overregulation just opens the door for corrupt bureaucrats to demand bribes. “There is no reason for Angola to have one of the most rigid employment laws if Portugal, whose laws Angola adapted, has already revised them twice to make the labor market more flexible,” says the IFC study. Two, focus on enhancing property rights. Under de Soto’s initiative, the Peruvian government in the last decade has issued property titles to 1.2 million urban squatter households. “Secure property rights have enabled parents to leave their homes and find jobs instead of staying in to protect the property,” says the IFC study. “The main beneficiaries are their children, who can now go to school.” Three, expand the use of the Internet for regulation fulfillment. It makes it faster, more transparent, and far less open to bribery. Four, reduce court involvement in business matters. And last but certainly not least, advises the IFC study, “Make reform a continuous process . . . Countries that consistently perform well across the Doing Business indicators do so because of continuous reform.”
In addition to the IFC’s criteria, reform retail obviously has to include expanding the opportunities for your population to get an education at all levels and investing in the logistical infrastructure—roads, ports, telecommunications, and airports—without which no reform retail can take off and collaboration with others is impossible. Many countries today still have telecommunications systems dominated by state p. 322 monopolies that make it either too expensive or too slow to get highspeed Internet access and wireless access, and to make cheap long-distance and overseas phone calls. Without reform retail in your telecom sector, reform retail in the other five areas, while necessary, will not be sufficient. What is striking about the IFC’s criteria is that a lot of people think they are relevant only for Peru and Argentina, but in fact some of the countries that score worst are places like Germany and Italy. (Indeed, the German government protested some of the findings.)
“When you and I were born,” said Luis de la Calle, “our competition [was] our next-door neighbors. Today our competition is a Japanese or a Frenchman or a Chinese. You know where you rank very quickly in a flat world . . . You are now competing with everyone else.” The best talent in a flat world will earn more, he added, “and if you don’t measure up, someone will replace you—and it will not be the guy across the street.”
If you don’t agree, just ask some of the major players. Craig Barrett, the chairman of Intel, said to me, “With very few exceptions, when you would think about where to site a manufacturing plant, you would think about the cost of labor, transportation, and availability of utilities—that sort of stuff. The discussion has been expanded today, and so it is no longer where you put your plant but now where do you put your engineering resources, your research and development—where are the most efficient intellectual and other resources relative to cost? You now have the freedom to make that choice . . . Today we can be anywhere. Anywhere could be part of my supply chain now—Brazil, Vietnam, the Czech Republic, Ukraine. Many of us are limiting our scope today to a couple of countries for a very simple reason: Some can combine the availability of talent and a market—that is, India, Russia, and China.” But for every country Intel considers going into, added Barrett, he asks himself the same question: “What inherent strength does [the] country bring to the party? India, Russia—crummy infrastructure, good educational level, you have a bunch of smart folks. China has a little bit of everything. China has good infrastructure, better than Russia or India. So if you go to Egypt, what unique capability [does that country have to offer]? Exceedingly low labor rates, but what is [the] infrastructure and education base? The Philippines or Malaysia have good literacy rates—you get p. 323 to employ college grads in your manufacturing line. They did not have infrastructure, but they had a pool of educated people. You have got to have something to build on. When we go to India and are asked about opening plants, we say, ‘You don’t have infrastructure. Your electricity goes off four times a day.’ ”
Added John Chambers, the CEO of Cisco Systems, which uses a global supply chain to build the routers that run the Internet and is constantly being wooed to invest in one country or another, “The jobs are going to go where the best-educated workforce is with the most competitive infrastructure and environment for creativity and supportive government. It is inevitable. And by definition those people will have the best standard of living. This may or may not be the countries who led the Industrial Revolution.”
But while the stakes in reform retail today are higher than ever, and countries know it, one need only look around the world to notice that not every country can pull it off. Unlike reform wholesale, which could be done by a handful of people using administrative orders or just authoritarian dictates, reform retail requires a much wider base of public and parliamentary buy-in if it is going to overcome vested economic and political interests.
In Mexico, “we did the first stages of structural reform from the top down,” said Guillermo Ortiz. “The next stage is much more difficult. You have to work from the bottom up. You have to create the wider consensus to push the reforms in a democratic context.” And once that happens, noted Moisés Naím, a former Economy Minister of Venezuela and now editor of Foreign Policy magazine, you have a much larger number of actors participating, making the internal logic and technical consistency of the reform policies much more vulnerable to the impact of political compromises, contradictions, and institutional failures. “Bypassing or ignoring the entrenched and defensive public bureaucracy—a luxury frequently enjoyed by the government teams that launch initial reform measures—is more difficult in this stage,” Naím said.
So why does one country get over this reform retail hump, with leaders able to mobilize the bureaucracy and the public behind these more painful, more exacting micro-reforms, and another country get tripped up?
Culture Matters: Glocalization
p. 324 One answer is culture.
To reduce a country’s economic performance to culture alone is ridiculous, but to analyze a country’s economic performance without reference to culture is equally ridiculous, although that is what many economists and political scientists want to do. This subject is highly controversial and is viewed as politically incorrect to introduce. So it is often the elephant in the room that no one wants to speak about. But I am going to speak about it here, for a very simple reason: As the world goes flat, and more and more of the tools of collaboration get distributed and commoditized, the gap between cultures that have the will, the way, and the focus to quickly adopt these new tools an
d apply them and those that do not will matter more. The differences between the two will become amplified.
One of the most important books on this subject is The Wealth and Poverty of Nations by the economist David Landes. He argues that although climate, natural resources, and geography all play roles in explaining why some countries are able to make the leap to industrialization and others are not, the key factor is actually a country’s cultural endowments, particularly the degree to which it has internalized the values of hard work, thrift, honesty, patience, and tenacity, as well as the degree to which it is open to change, new technology, and equality for women. One can agree or disagree with the balance Landes strikes between these cultural mores and other factors shaping economic performance. But I find refreshing his insistence on elevating the culture question, and his refusal to buy into arguments that the continued stagnation of some countries is simply about Western colonialism, geography, or historical legacy.
In my own travels, two aspects of culture have struck me as particularly relevant in the flat world. One is how outward your culture is: To what degree is it open to foreign influences and ideas? How well does it “glocalize”? The other, more intangible, is how inward your culture is. By that I mean, to what degree is there a sense of national solidarity and a focus on development, to what degree is there trust within the society p. 325 for strangers to collaborate together, and to what degree are the elites in the country concerned with the masses and ready to invest at home, or are they indifferent to their own poor and more interested in investing abroad?
The more you have a culture that naturally glocalizes—that is, the more your culture easily absorbs foreign ideas and best practices and melds those with its own traditions—the greater advantage you will have in a flat world. The natural ability to glocalize has been one of the strengths of Indian culture, American culture, Japanese culture, and, lately, Chinese culture. The Indians, for instance, take the view that the Moguls come, the Moguls go, the British come, the British go, we take the best and leave the rest—but we still eat curry, our women still wear saris, and we still live in tightly bound extended family units. That’s glocalizing at its best.
The World Is Flat Page 37
