by Parag Khanna
But most countries on the lower rungs of the global economy won’t become the next Dubai anytime soon. What they should instead aspire to be is the next best thing. What is the most attainable or proximate model for them to emulate in the coming five to ten years? For largely mismanaged and teetering states such as Egypt and Syria, that means aiming for Tunisia, not Qatar. Tunisia has consistently been ranked one of the most competitive economies across Africa and the Mideast due to its solid infrastructure, comprehensive educational system, and transparent decision making. Numerous Arab countries could do far worse than to focus on these first steps, which might also earn them more breathing space on the authoritarian nature of their regimes (as Tunisia has done). Similarly, impoverished Tajikistan can at best over the next few years focus on copying Kyrgyzstan and Nepal, places where tour operators ferry in and out thousands of tourists seeking bracing mountain scenery. There is no Thomas Jefferson in Africa, but at least President Paul Kagame of Rwanda, who rigs elections and marginalizes opposition, also builds roads and boosts education. Afghanistan’s best-case scenario is none other than Mongolia: poor and landlocked, but stable and profiting from taxing mineral exploitation. Countries can learn from those who have done it right and reached the next stage.
China has become the iconic example of a large, third world nation rapidly ascending the global economic and political ladder. Deng Xiaoping’s policies—farmer subsidies, opening the economy to foreign markets, and limiting families to one child—combined to achieve the fastest decrease in poverty in history. China has also constructed about sixty-two thousand miles of highway per year, creating access to expressways for almost all its midsize and larger cities. Property rights are also increasingly widespread, allowing farmers to borrow against collateral, and China plans to have a medical clinic in every village by 2012. All of this may have the ring of a master plan, but the government explanation translates as “feeling the stones while crossing the river.” Victor Chu, a prominent Hong Kong businessman, sums it up more bluntly: “Innovate or die. Do whatever works.”1
But the China model is far more often discussed than successfully imitated. No other large country has anything like the capacity for sustained mass mobilization or the relatively unified vision of China. Instead, even the best parts of the developing world more often resemble the haphazard but frenetically high-energy India. Cities taking part in India’s economic miracle—such as the Delhi suburb of Gurgaon—are a study in contrasts. Architecture of steel and glass is almost always juxtaposed with heaps of poverty and disavowed destitution.2 India, South Africa, Nigeria, and other self-promoters tout their pulsing economic hubs but also have multiplying masses left behind by the elites who have bought their way to statelessness. India still ranks near the very bottom of the development ladder, has the world’s highest number of child laborers and indentured servants, and is rife with caste and religious divides. Its democracy appears to be thriving, yet it suffers from a nearly total absence of governance. Its government is a gerontocracy in which incumbents win due to good harvests rather than good policy. India’s political slogans—“Food, clothing, shelter” in decades past and “Roads, electricity, water” today—should really be combined, since all of them are still lacking for hundreds of millions of Indians.
In other words, India is a far more realistic portrait of the challenges of the developing world than China. Rather than futile attempts to copy China, most countries way down the development ladder should look to India’s many idiosyncrasies as a useful collage of possibilities for their own future. India spent two generations as an aid and foundation super-project, but has since lifted perhaps three hundred million people out of absolute poverty and gotten rid of most foreign aid agencies. Its roaring information technology sector supports several million citizens, while private investment has boosted its manufacturing, textiles, auto-parts, pharmaceutical, defense, and telecom industries as well—all working to create gainful employment for the world’s second largest population. In one fundamental respect, India is the anti-China: It works best when the government gets out of the way.
India is a postmodern role model for the developing world because all of its successes are attributable to a mix of entrepreneurial leadership and hybrid public-private governance. The Confederation of Indian Industry (CII), the country’s premier chamber of commerce, works in lockstep with the government to create a friendly business environment for infrastructure investment. From tax policy to road projects to career training, CII works with the Indian Planning Commission, and consults with relevant NGOs, on just about everything. This multi-stakeholder consultation builds trust and encourages openness amid competing agendas and cacophonous politics—and is the real reason India is viewed as a country on the make today.
Public-private partnerships are the name of the game: Out with the National Highways Authority, in with a new “Road Finance Corporation” that has boosted road construction from two kilometers per day to twenty.
India’s family-owned conglomerates are also role models for third world industrialists. The Tata corporation all but owns the city of Jamshedpur, which corporate founder Jamsetji Tata carved out of the jungles outside Calcutta a century ago. It pays the health, education, and medical expenses for all employees of the town’s steel factory. In Delhi, Tata Power helps the municipal government turn electricity thieves who tap into power lines into paying customers. Like Tata in Jamshedpur, Reliance Petroleum is building the world’s largest oil refinery at Jamnagar in Gujarat, creating hundreds of thousands of jobs now and for decades hence. Big business doesn’t have to put village entrepreneurs out of business. Bharti Enterprises makes sure not to destroy local retail operators when it enters a municipality, instead integrating them into larger supply chains that generate greater incomes, and ICICI Bank has bought large stakes in micro-finance bodies and funds local self-help groups. The development of the third world hinges on such elder corporate statesmen taking responsibility for their countries’ bulging national populations. From community-level job creation to high policy, India’s public-private and domestic-foreign governance represents the future of how most countries will be run.
Trading Up
In Voltaire’s classic fable, Candide’s most important lesson comes from a Turk who sends his fruit to be sold in Constantinople. “Work,” the Turk says, “keeps us from three great evils: boredom, vice, and need.” The people of the world need work on a scale so massive that all the governments in the world together cannot figure out how to do it—and they needed to yesterday. The World Bank estimates that 90 percent of the economic growth in the developing world is attributable to jobs created by small- and medium-sized enterprises in textiles, agriculture, steel manufacturing, tourism, and other labor-intensive, low-skilled areas. Almost none of these companies are listed on a stock exchange anywhere, yet they represent much of what most people in the world do every day. The construction sector alone generates the most jobs of any in the world. The only way to build and maintain a better life is to work for it.
Contrary to popular belief, poor countries have grown as fast as rich ones from the spread of free trade and open investment. In wealthy Sweden, Arctic towns would live off hunting and handouts were it not for the IKEA outlets that attract two million visitors a year. For underdeveloped countries, trade and investment have had the greatest impact on reducing poverty. NGOs that made headlines a decade ago for bashing globalization and trashing WTO summits have become vigorous champions of free trade. They’ve realized that a bigger problem than unfair trade is simply not enough trade. Indeed, global trade isn’t really global. Ten countries alone account for 60 percent of the world’s trade, while sixty countries make up 92 percent of it—so the remaining 130-plus other nations represent just 8 percent of global trade. While the WTO is perhaps permanently stalled, unable to force Europeans to reduce the two-dollar-per-day subsidy each of their cows receives (an amount greater than the daily income of seven hundred million Indians), targe
ted reductions in tariffs can help jump-start economies in need. The U.S. African Growth and Opportunity Act of 2000, for example, has boosted African exports to the United States multiple times over. Ghana has duty-free access to both Europe and America. Caribbean nations need the same deal.
But mandating free trade isn’t enough; countries need to make things worth selling. That is why private investment remains the best and fastest hope for many countries. Mauritius is a shining example. The island nation was the first in Africa to abolish trade barriers, immediately attracting textile manufacturers from Hong Kong, but it also lowered restrictions for locals to start businesses so they could compete to become suppliers to foreign firms; it even expanded secondary education so that its workers would be worth higher wages. Eventually, local entrepreneurs acquired the know-how to get into the textile business themselves, and they lured Mauritian workers away from foreign-owned factories. By the late 1990s, indigenous investors owned more than half of the firms operating in the country’s export-processing zones.
Yet even when local companies compete with the foreigners who have set up shop in their backyards, there are still benefits to be had. In Kenya, Tanzania, and Uganda, for example, foreign firms are more productive than local ones, but they have introduced valuable management skills to local markets, trained native workers, and invested in infrastructure. Most important, they have better access to global markets to stay afloat in good times and bad, providing consistent employment for local citizens.
To claim that foreign investment is bad for countries because it increases inequality is like saying no medicine is better than some. Globalization scholar Ulrich Beck said it best: “There is only one thing worse than being overrun by multinationals; that is not being overrun by multinationals.” By changing the actual rules—or in some cases creating rules for the first time—of how economies are run, foreign companies create opportunities for countries to define their place in the global economy. Multinationals help countries deregulate stagnant financial sectors and even lobby heavily for debt relief as a way to earn goodwill with their supplier nations. International banks push for stable electricity supply in India, because without it their ATM machines would shut down and could be bashed open and robbed. Nepal’s leadership is so incompetent that the Norwegian firm SN Power paid for lawyers to represent the government in negotiations for proposed hydropower projects that the country desperately needs.
Every country can have a niche in the global division of labor. In the Dominican Republic it’s garments and footwear, Egypt is a leader in marble ceramics, and Kenya exports cut flowers. Vietnam has quickly become one of the largest exporters of both rice and coffee. Many experts fear that if economies are not diversified, they will become dependent on a single commodity or export, with all the exploitation and corruption that entails. But the sad fact is that many poor economies will never have the luxury of diversifying until they first get just one thing right, which usually means labor-intensive goods and services. If enough goes well, the poorest countries can become like Costa Rica, the Philippines, Malaysia, and Thailand, all of which not only export commodities such as coffee and rubber, but also manufacture a mix of auto parts, semiconductors, and circuit boards. It would be nice to see more African countries move up the value chain from raw materials to manufacturing, but they must get the former right first to prove themselves. Being part of the supply chain at all is an improvement for the poorest countries—even if they are the lowliest links.
It’s pointless to talk about labor standards when people don’t even have work. According to the International Labor Organization (ILO), our goal should not be just jobs, but also “decent work.” How long could it take to achieve that? In ever-patient Chinese fashion, labor rights activist Han Dongfang argues that “respect for people’s basic rights, limited work hours, decent compensation, better working conditions laws that are enforced—all these things will happen because it is natural that they do. That’s just the process of civilization.”3 In the meantime, if the third world’s unemployed are lucky they will be recycling tires and plastic bottles, dismantling laptops and keyboards, or picking apart discarded cell phones.
Penalizing countries for not complying with standards they can’t yet reach makes no sense—but helping them implement such standards does. Rather than railing against poorly enforced labor standards, the NGO Ethical Trading Initiative works directly with the governments of Bangladesh and other countries. Social Accountability International (SAI), a multi-stakeholder nonprofit, has certified facilities in fifty-seven countries across seventy industries and funds itself through contracts with businesses looking for ways to improve labor conditions. SAI’s certification and codes of conduct do far more for labor rights than empty appeals from the ILO.
Rather than “racing to the bottom”—always seeking the cheapest labor—more and more foreign companies are driving the “race to the top,” spreading good management practices, training workers with new skills, and offering better salaries than what is offered domestically. Exporting good businesses is among the smartest diplomatic strategies the West can pursue to create tangible change worldwide. If we want to achieve “decent work” for the poor, then we must globalize the work. Because hundreds of thousands of small-scale enterprises in the world often go unscrutinized by labor activists, forging supply-chain connections between multinationals and local firms is the single greatest step to improving labor standards—and such joint ventures are also free of the odious colonial taint. A foreign-financed factory can contribute to income, women’s rights, health care, and education all at once. As Leslie Chang describes in Factory Girls, the massive Yue Yuen factory in China employs seventy thousand workers and has its own kindergarten, hospital, and fire department; women earning a living there now play a stronger role in family financial decisions than they did before.
After China’s successful hosting of the Olympic Games in 2008, foreign political leverage over the country on labor rights has dropped to virtually nil. But market pressure can be far stronger. Wal-Mart, whose $400 billion annual revenue dwarfs most countries’ economies, currently employs more than two million people across seven thousand stores. The Chinese government doesn’t enforce labor regulations tightly, but Wal-Mart can, with massive effects throughout its supply chain of more than fifty thousand factories. If Wal-Mart wants to support women’s rights in Africa, all it has to do is open a store there and hire women. McDonald’s already works with Chinese food producers, stores, and universities to devise and deploy a social compliance model into its operations that allows workers to individually voice concerns while requiring management to comply with high ethical codes at the factory level. Such practices have payoffs for a company’s image, explaining why Wal-Mart, widely demonized in the United States, is welcome around the world.
Africa: The Final Frontier (for China)
Jonathan Auerbach doesn’t throw rock concerts championing poor countries, but he’s been to almost all of them, wherever in the world they may be. His purpose? To set up stock exchanges and find brokers to handle the billions of dollars in investment capital that an ever-growing number of American pension and mutual funds want to invest outside America. The firm of Auerbach Grayson makes their markets liquid, and the rest can take care of itself. It has built formal ties with stock exchanges in 128 countries, many of which have delivered impressive returns on index funds in recent years. Even when the worst news is coming out of countries—the Israel-Hezbollah war of 2006, the Kenyan riots of 2008, Israel’s incursion into Palestinian Gaza in 2008, and the Sri Lankan military campaign against the Tamil Tigers in 2009—Auerbach sees arrows pointing upward. “Even when they’re bombing in Gaza, they’re trading in Ramallah,” he says. As conflicts in Iraq and Sri Lanka wind down, investors quickly move in. Indeed, Auerbach established relations with an Iraqi brokerage in 2009.
By providing access to capital where it is needed most, Auerbach is an agent of development for the connected age. In Zambia
, where the U.S. Embassy mostly runs HIV/AIDS programs, Auerbach gets cash into the hands of farmers to help them upgrade to Caterpillar tractors. Because he shares commissions on investments fifty-fifty with local brokers, he provides a great incentive for them to act professionally. “In sixteen years in Africa I’ve never had a customer fail, a trade not fulfilled. They have the same Bloomberg terminals in Zambia and do the trades in real time like rich countries do.” When the public sector alone ran the show in Africa, more capital fled out of Africa and into European banks than came into Africa in investment. Now, growth in Burundi and Tanzania has been greater than 7 percent for several years straight, savings rates are increasing, and cell phone and Internet usage have doubled every year. When Botswana’s president Festus Mogae visits the United States, he courts private equity firms and hedge fund managers and reminds them that investments in Africa can return more than 300 percent, impossible anywhere else in the world. This is the Africa that is hungry for trade, not handouts.
Auerbach helps Africa brand itself as the final frontier of investment. In Kenya, he urged investors to take seriously the country’s privatization of banks and extend credit. West African countries, which are rich in rubber, cocoa, palm oil, and coffee, are also good investments. The Ivory Coast’s ports, run by the French Bolloré Group, can help boost West Africa’s exports just as Dubai Ports World has for East African Djibouti. Zimbabwe’s new investment laws have finally scrapped local ownership requirements in favor of joint ventures, and the agricultural sector desperately needs investment after Mugabe’s land seizures. Someone has to move in, and Auerbach leads the charge. His investor conferences in South Africa are the financial equivalent of speed-dating: Portfolio managers from America and Europe sit for one hour each with CEOs from twenty African countries representing companies active in telecom, agriculture, consumer goods, micro-finance, and waste treatment; after an hour a bell sounds and they rotate.
