May 24, 2013

WASHINGTON – In a major policy speech President Obama tried to outline current and future US conduct regarding the use of unmanned drones to target and kill terrorists. That said, there is something profoundly wrong in the way the President framed the issue. “This war, like all wars, must end” –he said– “That’s what history advises. That’s what our democracy demands”. 

When will this war end?

To the layman this statement may appear unobjectionable. Of course this war, just like all wars in the past, will come to an end. They all do. Of course democracies do not want to be endlessly at war. Well, it may be so. But there is one key variable in this continuum that is entirely outside of America’s control. And the variable is when any war, including this ”War on Terror”, will come to an end. Carl von Clausewitz wrote long ago that in any war the actual  end of hostilities is determined not by the victor but by the vanquished. This statement may sound innocuous; but it has profound implications.  War does not end until one the parties says: “I give up. I accept defeat and I shall stop fighting”. Until this critical moment comes along, the war is on. It will cease only when the losing party formally accepts defeat and stops any kind of military operations.

How WWII ended

This is how WWII ended. The Germans capitulated in 1945; and later on so did the Japanese. But imagine for a moment that, even after the dropping of the A bombs on Japan, the Japanese had decided to keep on fighting on every beach and on every piece of their homeland, come what may. The war would have ended, eventually. But much, much later; and at a much higher cost for the US. The war ended when it did because the Emperor publicly conceded defeat and formally ordered the cessation of hostilities. If  he had decided otherwise, the war would have continued, despite the devastations caused by the A Bomb.  So, it wasn’t the A Bomb that ended the war. it was the conclusion that the Japanese drew after they saw the devastation it had caused that convinced them they were finished and therefore it made no sense to continue fighting.  

Who will surrender on behalf of al Qaeda?

Well, what does this have to do with “War on Terror”? Plenty. Simply stated, the “War on Terror” will end not because America’s democracy demands this, (truly silly statement); but because the last terrorists will say: “Enough. I give up. No more of this”. And here it gets really tricky.

In rigidly hierarchical war time Japan an order from the Emperor was obeyed by all. He said “We stop fighting “, and the armed forces obeyed. (With the notable exception of a few stranded soldiers who never received the information about Japan’s surrender and therefore, most amazingly, continued “the war” on their own in the jungle of the Philippines. Having received no new orders, as far as they were concerned, the war was still on.) 

Someone will keep on fighting

When it comes to loose transnational organizations with unclear hierarchies like al Qaeda and affiliates, with nothing even remotely resembling a conventional  ”chain of command”, there is no one who can “surrender” on behalf of the entire organization. One particular group may give up. But this would not bind all the others, nor would it deny the opportunity for new groups to start their own fight. Which is to say taht the “War on Terror” may never end, because we cannot have and enforce a binding agreement with a a collection of non state actors that keep morphing regarding membership, leadership, funding and recruiting methods. They are motivated by irrational ideologies. As long as some people will believe whatever they believe, they will keep on fighting.  

“War on Terror” is a misnomer

In all this the real stupidity goes back to President George W. Bush who insisted on calling terror attacks against America “a war”. This was most unhelpful because the term “war” conjures up conventional ideas about armed conflict. “Here are the bad guys who do nasty things. We are the good guys. We mobilize. We go after the bad guys. We find them, engage them, destroy them. End of war. we go home and all is well”.

Clearly this is not the case regarding the “War on Terror”. As the Boston attack shows, just a couple of determined people can launch an attack, with tragic consequences. Until any of these would be terrorists will be at large, the “War on Terror” will not be over.

When will it end?

Therefore, while it is true, in principle, that all wars will come to an end, regarding this one there is no predictable time line. The President of the United States, the Commander in Chief of the largest armed forces in the world, is in no position to determine the end of this conflict. It is not up to him. It is up to al Qaeda to conclude that this conflict is pointless. And they may not come to this sensible conclusion any time soon, because they are not sensible.

May 23, 2013

WASHINGTON – For many (and not too good reasons) Western intellectuals truly believe the fantasy of all knowing, supposedly benevolent, authoritarian but “wise” leaders who behind the scenes quietly concoct far reaching strategies that will benefit all humankind. Just like Plato’s Philosopher-King, these benevolent leaders are never moved by issues of power or greed . No, they just put in place the “right” policies for “the people”. Insn’t that comforting?

The “Good Policies”

And when the wise leaders announce measures that seem to be in perfect sync with the prevailing conventional wisdom already embraced by all ”progressive intellectuals” in the West, then there is a chorus of approval. And this is precisely the case with supposedly enlightened pro-environment policies launched by China’s leaders.

Green Champion?

There you have it: China’s ”Green Leap Forward“. It consists of massive investments in green technologies, starting with renewable energy. And so China almost overnight became the paragon of virtue. While here in America we are still in the dark ages, unhappy prisoners of the devious lobbyists working for wicked Exxon and Chevron, China’s virtuous leaders are busy building wind farms and solar panels. So, we are behind. They, the truly enlightened, are ahead. Wise leaders, happily unencumbered by the mundane worries of  running for re-election, have the chance of seeing the “Big Picture”. And so, they do “The Right Thing”, for China and for the world.

Not so

All very nice. Except that it is not true. Let me explain. It is not entirely false. But it is mostly false. It is true that China is investing massively in renewable energy. And it may very well be true that some Chinese top policy makers do understand the need to develop workable alternatives to carbon based energy.

But it is also true that China is and will remain a gigantic polluter. Chinese environmental standards regarding energy are very relaxed. Chinese diesel has more than 20 times the pollutants allowed in supposedly super dirty America. Yes, you got that right. Chinese fuels foul the air big time. And why so? Because it would cost a lot of money to upgrade refineries so that they would produce cleaner fuels. Got the idea? The short term gain of making money selling dirty stuff prevails over any considerations regarding cleaner air.

Reckless industrialization

In case we forgot, China managed its massive industrialization without any concern whatsoever for environmental protection, at a time in which ignorance about the consequences of these totally irresponsible policies could not be used as an excuse.

In other words, driven by the desire to “make the growth numbers” China’s leaders willfully destroyed the environment, knowing exactly what they were doing. Sure enough, now some realize the extent of the damage. But they have to fight against those who still couldn’t care less about pollution, while they most greedily look at production figures and net profits, without any concern for environmental consequences.

Water and air pollution

And here is the true picture. In China most of the (scarce) fresh water supply is polluted. Most of China’s large metropolitan areas have bad to horrible air quality. So much so that until recently the authorities refused to publish real air quality data, for fear of adverse public reactions. Data on soil pollution is not publicly available, because it is a state secret.  There are millions of premature deaths due to pollution. Many Chinese do not trust made in China processed foods because they are afraid of illegal chemicals used by producers.

Yes, there are laws in China. And there is also corruption. Inspectors are paid off, standards are not upheld. The only hope here is in the real proliferation of genuine grass roots environmental movements created by semi-desperate citizens who fight against pollution. These movements are numerous and quite vocal.

High production rates v. higher environmental standards

In summary, of course China produces state of the art solar panels. But then there are all the powerful vested interests  that pull in the opposite direction. If China wants to continue industrial production at the current rate or close to it, it will continue to be a super polluter. Retrofitting tens of thousands of industrial facilities, smelters and refineries, while claening up rivers and lakes, would have immense costs and it would slow down growth. The wise leaders have not resolved this issue. The “Green Leap Forward” is at best an aspiration, at worst just propaganda.

May 22, 2013

WASHINGTON – The Guardian reports that the EU Commission bureaucracy, known for its entrenched habit of over regulating everything up to the point of ridicule, continues to live up to its well earned reputation. Now the focus of Eurocratic zeal –please believe that this is not a joke– is the small dish of olive oil provided my many restaurants throughout the EU, (mostly those serving Italian or Mediterranean food), along with slices of focaccia or bread sticks, to patrons as they look over their menus.

How do we serve olive oil?

Well, in its supreme wisdom, Brussels decided that for (vaguely described) improved  consumer protection in the future restaurants throughout Europe will no longer be allowed to serve olive oil in this fashion. Olive oil will have to be placed on tables in small, sealed bottles.

OK, I get the point. There is a concern that what the restaurants place in these small dishes may not be real, 100% olive oil. May be it is a mix of olive oil and something else. Maybe it is not totally healthy stuff. Who knows. Still, if this is the new safety yard stick for olive oil, then restaurants should provide certifications, receipts indicating provenance and what not about all the meat, fish and vegetables they serve. Well, all this is impossible. This is why local authorities have health inspectors who check on various establishments, more or less effectively, to make sure that they observe basic mandatory health and sanitation standards. So, why single out olive oil for extra EU wide regulation?

Silly over reach

Indeed, why? Well, obviously there is no rational reason. This is just another example of bureaucratic stupidity and idiotic over reach. And this is Europe for you. And the silliness of all of this becomes even more obvious if you look at the EU issues that truly demand attention.

Europe’s real problems unattended

Indeed, consider the real and grave problems Europe is facing: anemic economies, a lingering and stifling recession, systemic fiscal crises in several member states, sky high unemployment and more. Now, given all this, do you really believe that regulating how complimentary olive oil is served in restaurants is a burning issue that demands immediate corrective action? 

Ineffective institutions focus on the wrong things

One of the hallmarks of ineffective institutions is to focus inordinate attention on the wrong stuff. What else will these geniuses come up with? The proper size of table napkins? The number of holes in salt shakers? Go tell the Greeks and the Spaniards that this is how Europe is looking after their welfare.

May 21, 2013

WASHINGTON – If you like Marx Brothers movies humor, with all its irreverent absurdities, praise for law breakers and seasoned con men who in the end come up on top, while large audiences cheer, then you must like today’s Italy. The only problem is that this “Italy” is not a movie. It is sadly real. And the entire country, good and bad stuff lumped together, is well on its way to slow motion self-destruction.

Enormous problems, unattended

The country urgently needs to tackle lack of global competitiveness, uncompetitive labor laws, lack of investments, lack of modern infrastructure, a sub par public education system, a colossal public debt, a hopelessly inadequate and super expensive public administration, high levels of corruption, and –yes– organized crime.

Political mess

But if you read the papers you wouldn’t get any of this. The Italian media incessantly cover farcical Italian politics. There were inconclusive political elections held just a few months ago. Nobody won; but the anti-system Movimento 5 Stelle,  created by comedian Beppe Grillo, emerged as a major new national force. This is a “party” whose “program” is to send everybody else home or to jail. Clearly this new Movement is not an organized political entity. It is a loose coalition of millions of unhappy Italians. Lacking a clear program, it is mostly a messy pastiche. Of course, the first thing the leaders did to celebrate their significant electoral affirmation was to start internal fights.

Weak government

And then there is the most improbable Left-Right ruling coalition. Enrico Letta, the new Prime Minister, himself a leader of the Left wing Partito Democratico, may be a decent guy. But he looks like the one straight character in the Marx Brothers movies. He is trying to operate amidst total chaos. Will his fragile coalition Government have a chance to “do anything”?

I wouldn’t bet on it. Instead of putting together an economic policy package aimed at resuscitating the Italian economy, Letta has to worry about new ideas to change the electoral system. He has to worry about Berlusconi’s (head of the PdL, his coalition partner) endless trials and proposals to make him ineligible for public office. He has to worry about laws against corruption. Finally, he has to worry about open squabbles within his own, now rudderless, Partito Democratico.

A tragic farce

In Italy, on a daily basis, national leaders accuse one another of wrong doing, underhanded practices, back stabbing, and who knows what else.  

In the meantime, the country is still in a prolonged recession, while unemployment is above 11%. True enough, much of what is going in Italy is unquestionably farce. Yet, unfortunately this is not a movie. The painful consequences of perennial mismanagement are and will be real.

May 20, 2013

WASHINGTON – The Greek economy is a disaster worse than post-tsunami Japan, the only difference being that this is a totally man made catastrophe. A movement is emerging in Greece demanding an exit from the Euro. This really means advocating bankruptcy. As horrible as this may sound, realistically it may very well be the best course of action.

Greece will never be able to pay

One of the leaders of this movement publicly stated that Greece will never be able to pay back its enormous debt. The economy is in free fall, unemployment is astronomic, youth unemployment much worse. There is no way that Greece can get out of this hole, while trying to comply with Eurozone mandates.

As sad as this looks, a painful bankruptcy may be the best option for Greece, for Europe and for the international community now forced to keep this comatose patient alive, through relief measures that do not have the strength to transform the situation.

May 19, 2013

WASHINGTON – Much is said about the magic powers of well crafted federal public policy to “create jobs”. Yet, the record is not so good. Plenty of honest attempts; modest results. But how about the opposite? How about a mix of bad policies that tend to depress job creation?

Job killers, according to Richard Kovacevich

Well, you should listen to Richard Kovacevich, former Wells Fargo CEO. In a recent interview on Bloomberg TV Kovacevich pointed out that small businesses, traditionally the true engine of jobs creation in America, are no longer performing their historic role. And why not? According to what business owners tell Wells Fargo, (their banker), for three reasons.

Number 1: Too much regulation makes it difficult and far too onerous to understand and comply with the new rules.

 Number 2: Obamacare compliance looks too expensive for small businesses. So, they prefer not to hire and stay small, in order to avoid the legal mandates that will soon hit larger firms on providing insurance to employees.

Number 3: Taxes are too high. And this is not about corporate taxes that may even be cut. The fact is that most small business owners pay taxes as individuals. As individual tax rates go up, small business owners feel the pinch.

Anybody listening?

The Obama administration should listen to people like Richard Kovacevich, people with considerable experience in lending to small enterprises. Contrary to popular belief, America’s economic might is not about General Motors, IBM, or General Electric. It is about small enterprises that energize the whole country. If they cease to be the jobs creators because they see too many public policy obstacles on their way, then you can expect this unprecedented period of American stagnation to last even longer.

May 18, 2013

WASHINGTON – According to the WSJ, Fed Chairman Ben Bernanke in an address at Bard College indicated that he is very optimistic about innovation-led future growth. He acknowledged that, beyond the always booming IT sector, we have not seen many technological breakthroughs in the last 50 years. Even allowing for improvements here and there, today we use pretty much the same laundry machines, dishwashers and vacuum cleaners we knew 40-50 years ago. And they are all powered by the same coal or gas generated electricity. Ditto for automobiles. Yes, they are safer and more fuel efficient; but they have not morphed into something our grandparents would not be able to recognize. Same for civil aviation. We use the same jet airplanes that went commercial in the 1960s.

New technologies?

However, Bernanke believes that we have barely scratched the surface regarding the transformative benefits of IT. By the same token, renewable energy is a very new sector. We have yet to see what it can deliver in terms of cheap, clean energy. And then there are the hidden promises of bio-technology. And so on, and so forth.

Of course, Bernanake is right, at least in principle. A prolonged period without any major technological advances is no conclusive evidence that “the age of innovation” is over. We are lucky to live in America, a society in which enterprise is possible, while innovators can realistically expect to be financially rewarded for their efforts. All this creates  powerful incentives to experiment and try something new.

New use of existing knowledge, tools

That said, let me point out that we are conditioned to think about innovation mostly as the invention of new “things”: technological contraptions that “do” amazing things, until now impossible. But innovation is also about different ways of thinking that would allow a better and more efficient allocation of resources for human gain using known technologies.

Wellness

Let me offer a few examples. The concept of “Wellness Education” as it relates to health care may sound faddish. Yet, consider that a disproportionate amount of US truly extraordinary health care costs are due to life style-caused preventable diseases, (like those deriving from obesity). Therefore, it should be self-evident that if the general population grasped that their health depended in large part on good diet and plenty of exercise we could see at the same time a healthier more productive population, people living longer disease free, and a dramatic decline of unnecessary health care costs. We are talking about hundreds of billions every year.

And, please do keep in mind that all this would happen without the aid of any new cure for this and that. No need of miracle drugs or ground breaking diagnostic equipment. Just sensible, yet truly transformative life style changes caused by education on how to change personal habits for real, personal gain.

Internet driven high quality education

And then we have IT enabled distance learning. This field is still in its infancy. But its transformative potential is just extraordinary. For centuries we have been used to the idea that good education is a precious commodity available only to the very few lucky enough or rich enough to attend elite schools. There they would have the unique privilege to sit in classes where the best minds would deliver most insightful new knowledge. 

Well, it turns out that now it is quite possible to “bottle” those lectures delivered by the best minds, with all the advantages of meaningful  interactivity, and make them available to millions, perhaps tes of millions, via the internet — and not juts to the hundred or so rich students whose families can pay extravagantly high tuition. 

Various experiments already conducted demonstrate that this new way to have distance learning is possible and that the results in terms of quality of the experience are pretty much the same for those who attend the lecture and those who watch on their computers. In other words, I can get great benefit attending classes at Stanford. But a student somewhere in India or Mozambique can gain just as much by watching the very same lectures delivered to him/her via the internet. Which is to say that existing technology, properly customized, already allows us, for the first time in human history, to make high level education (once the prerogative of the few) available to millions.

And what can be the transformative impact of new, quality knowledge spread far and wide? Who knows really. Who knows what new ideas this unprecedented abundance may generate. Who knows how new generations of scientists, technologists and intellectuals may be able to interact with one another, within and across countries, with the distinct possibility of speeding up the slow moving technological innovation process.    

Innovation is also about changing our mind set

All this amounts to saying that, while we wait for the hoped for transformative technological breakthroughs Bernanke talked about in his address at Bard College, it would be foolish not to take advantage of what is already available. But do keep in mind that in the examples I outlined the challenge is not in any lack of new technology. The challenge is to innovate our way of thinking about existing resources.

Yes, “innovation” is not just about new “things” bright people can conceive.

May 17, 2013

WASHINGTON – The most telling evidence of Obama’s weakness is that B or C category ”scandals” have monopolized the attention of most media and commentators. We have the resurfacing of the once dead Benghazi terror attack story. This is something that seemed to have legs during the political campaign last year. Then Romney failed to press it and the Republicans essentially let it go. Now there are new testimonies that have exposed at least one fact: the Obama administration was less than candid in telling the real story as it was unfolding.

Benghazi, IRS stories dominate

Still, all these embarrassing details do not amount to criminal acts. And yet the Obama administration is visibly on the defensive. Add to Benghazi the more recent story of the Internal Revenue Service denying tax free privileges to conservative organizations. We still do not know how bad this is; but the IRS story is dominating the news cycles. And then there is the story of the Justice Department using a very heavy hand against the Associated Press as it investigates a leak of classified information regarding terror activities in Yemen.

Nothing else to talk about

This stuff is serious. But these are not the mega scandals that can signal political death or worse for a sitting President. So why do they dominate the news cycle? Very simple. Because there is nothing else to report. President Obama has lost the initiative. There is absolutely nothing worth talking about coming from the White House. Of course, it is not Obama’s fault that Washington is now paralyzed due to divided government. And yet Obama is the incumbent President. There is only one President. And the President is supposed to lead, even when the going is tough. In fact, he is supposed to lead especially when the going is tough.

No Big Idea

And what could Obama do? Well, he could and should articulate a most compelling plan to reform public spending (yes, that would have to include Social Security, Medicare and Medicaid) and taxes. He could elaborate a national energy strategy. He could articulate a new vision of America’s role in world affairs in a multi-polar world. All this is tough, especially in this politically poisonous environment. Yet, who said that being President should be easy? We call “Great” the Presidents that accomplished difficult tasks. All the others get a foot note.

But, so far at least, the President has not even tried to be Great. He proposed nothing major. He has smallish ideas here and there. But, quite frankly, it looks as if the country tuned out. Hence the exaggerated space devoted to the “scandals”. There is excessive coverage because there is nothing else to cover.

Obama soon to become irrelevant

As things stand today, probably the only big new legislation coming out of  Washington in the next few months will be comprehensive immigration reform. And on this truly important issue President Obama is a follower rather than a leader. The whole idea was launched by a bipartisan group of Senators.

Of course, it is too early to call Obama an inconsequental President. Still, here he is, at the beginning of his second term, and it seems asd if he has already run out of gas. Unless he puts forward an ambitious, intelligently crafted agenda that will captivate and energize the Nation, as 2016 approaches, Obama will be less and less relevant.

May 16, 2013

WASHINGTON – What happened to the “Western World”? We were used to the idea that America, Europe and Japan, taken together, were and were destined to stay at the top of the economic performance charts, while their societies would keep enjoying a very high quality of life. They were the reliable engines of innovation-fueled solid growth. And the secret of this enviable successs? Strong and free societies, grounded on solid values guaranteed by well functioning democractic institutions. Add to that mix superior education institutions, working as a never ending fountain of innovation, and state of the art business management techniques. This enviable assembly of human capital, superior ideas, plus well oiled, modern institutions would guarantee the continuation of the unchallenged  primacy of the West.

It is all over

But all this is over. Finished. Probably for good. Most of Europe is in the grips of recession or slow growth. Eurozone unemployment is at 12%, (27% if you are unlucky enough to live in Spain). The US with a meagre 2% growth looks wonderful only in comparison. The glory of the West did not go suddenly up in flames, even though for a moment, back in 2008-2009, it appeared that a possible financial meltdown could indeed become a planetary catastrophe that would inflict a mortal blow to the West. Well, that did not happen. What happened instead, as a direct consequence of that most severe financial crisis, was the sudden deterioration of pre-existing chronic conditions: very slow growth and high debt. The West is short of breath. It is debilitated.

A values shift

And why is it that we cannot shake this off? The answer is so simple that its sounds superficially simplistic. The Western World has shifted its values. Over time we stopped emphasizing productive investments, while we started consuming all we had, including the seed corn. For some reasons enterprise is no longer in fashion, while we are concerned with keeping (unaffordable) debt-funded welfare. The state has become the provider, not of last but of first resort. And when ths state run of cash, it did not stop spending. No. It simply increased its borrowing. As its credit was good, nobody noticed. Today, even though the crunch is now self-evident, policy makers still pretend it is not there.

Europe is the primary example off this sad transformation. States, once upon a time well funded by high tax revenue generated by world class economies, now consume more than 50% of GDP. And this gigantic growth of state functions has been politically justified in the name of social equity. The state, we discovered, has a moral (and now legal) obligation to help the needy.

Unfunded entitlements

Indeed. And so new (and expensive) programs were created and funded. As revenue could not possibly finance all these programs, states resorted to more borrowing. The net result is that a combination of more welfare and more entitlement programs produced risk averse, highly indebted societies. Besides, as the focus is on funding entitlements, there is less and less capital to fund new enterprise. Here we are, from a culture that put a premium on enterprise to a culture that extols the merits of more leisure, more free time and early retirement.

The crisis of the West, a crisis that manifested itself with low growth, high unemployment and semi-bankrupt states, is rooted in this dramatic value shift. What is worse is that these values are now entrenched. All evidence notwithstanding, because of the ideological blindfolds now in fashion, to date there is still no true recognition that this extravagant level of unfunded public spending to subsidize unaffordable standards of living cannot be sustained by unproductive societies.

These societies are still mostly in denial. In fact, the Europeans protest daily against austerity and spending cuts. But if public spending is not cut, where will fresh money come from? In the US, even though the picture is somewhat better, there is not even an attempt to begin reforming entitlement programs.

How do we get out of this?

And so, what is the plan to get out of this historic swamp? Sorry to be blunt. There is no plan.

Unless you think that the easy cash provided by the monetary authorities in the US, Europe and now Japan is a plan. This is no plan. And it should jump at everybody that monetary authorities are not economic policy makers. In a best case scenario central banks are helpful. Via their controls on interest rates they can help modulate growth. They can make sure that enough credit will be available. They can keep inflation in check. But monetary growth cannot make economic growth happen if the fundamentals are insufficient.

Central Banks to the rescue?

And yet, this is what Ben Bernanke at the US Fed has been doing and this is what his Japanese counterpart just started doing. By keeping interest rates at or near zero, while buying tons of state bonds, the monetary authorities have forced private investors to seek higher returns in stocks. And so we see the Dow Jones breaking records, while share prices in Japan have never been so high in recent years.

But this is like giving a combination of steroids and cocaine to a chronically ill patient and then rejoice in seeing that all of a sudden he is perky and chatty. The Bank of Japan has induced a devaluation. Of course Japanese exporters, no longer held back by a strong yen, are doing much better. But don’t tell me that the forced debasing of the national currency is a ”real” cure. The real test of this “therapy” for Japan is if indeed easy money will boost investments in new, globally competitive enterprises. A central bank induced stock market boom is not a good substitute for genuine growth.

Bad business environment in Europe

In Southern Europe it is even worse. There you have the unhappy combination of high spending, inefficientt public services, bad education systems, low levels of investments, and finally plenty of corruption. In all this, the better educated young tend to emigrate, seeking greener pastures elsewhere; leaving behind the elderly and new, low skills, immigrants. Not exactly an exciting environment for new investors. All this gives you 12% unemployment and zero growth in the Eurozone. 

Will this change?

As I said earlier on, it is all about values. And values can be changed, if people believe there is a good reason for doing so. But I see no serious debate on any of this. The debate is about who pays for what and on short terms measures that could generate a few jobs. It is not about how we came up with this astronomic entitlements bill, while disregarding productive investments. Unless the ruling elites in Europe, Japan and America refocus on the real issues, I see little hope for qualitative change. And this is very sad.

May 15, 2013

WASHINGTON – Of all the comparative statistical compilations produced by multilateral lending institutions, the “Doing Business” Report published annually by the World Bank is one of the most useful. At a glance, the Report provides a good idea of how any given country is or is not “business friendly”. All countries are ranked on the easiness of performing certain operations that will indeed affect the ability of any business to get established and carry on its activities with minimal impediments. And so countries are rated on the length of time it takes to secure basic services, on their taxation system, on how long it takes to get a court to adjudicate any given matter, and so on.

Doing Business Report spurs reforms

One of the most noticeable consequences of this yearly World Bank publication is that some governments, especially the governments of the countries that get a low or poor score, have taken notice. As all nations compete with one another for scarce investors dollars, a bad Doing Business score is an embarrassing stain that turns investors away. And so, at least in some instances, governments have been spurred by the Report to enact reforms in order to improve their Doing Business score and therefore their ability to convince foreign investors to bring their business there. 

Critics

The Doing Business Report has its critics. It is accused of having too much of a pro-business bias. Some say that, if the perfect score is an environment in which business can thrive, then any country that suppresses workers rights will get a good score, even though its policies are inimical to social progress and elementary justice. Fair enough. There may be grounds to revisit some of the Reports’ metrics or some aspects of the methodology.

China does not like its low score

But now there is a different type of criticism. China does not like the low score it gets –only 91 out of 185– and therefore Beijing argued in a very public way that the Report must be poorly formulated. Indeed, from a public relations stand point, a low Doing Business score clashes with the image of China as the rising star, well on its way to overtake the United States as the world’s largest economy in just a few years. If China is going up and up, how can it have such a low Doing Business score? Impossible, claim the Chinese. Therefore it means that the Report follows a flawed methodology that gives wrong results.

China’s rise had to do with low wages, and not with good public administration

Of course, it is entirely possible to have at the same time a fast growing economy and a poorly organized, inefficient and often unfair public administration –this is what the Report measures. The fact is that China is not for your average investor. China is for giant multinationals that cut their own deals and make sure that certain conditions, often tailor made for them, are met.

Besides, it is a well known fact that China’s meteoric rise in the last thirty had to do with an export-led boom featuring mostly Chinese companies exporting their own goods or goods assembled in China for major international brands. China’s comparative advantage was not based on the benefits of competent, Scandinavian style, public administration providing good services. It was almost entirely based on ridiculously low wages, an artificially undervalued currency and complete disregard for the disastrous environmental impact of its dirty industries. Low cost was China’s ticket to global competitiveness. In that context, the disadvantages of inefficient government services paled in comparison with the huge profits generated by China’s enormous exports volumes. 

But now China is aspiring to be taken seriously as a world class economy and it does not want the stain of a low Doing Business score. And so, in the typical fashion of authoritarian governments, instead of taking corrective action in order to improve its score via meaningful reforms, Beijing says that the Report’s methodology is wrong; and therefore the Report itself should be eliminated or totally reformulated.

Political pressure

Jim Yong Kim, the World Bank (American) President is now in a tricky situation. If he bends because of this overt political pressure, the institution looks weak. However, China is now a major World Bank shareholder. There is no interest in picking a fight with the world’s second largest economy. Therefore management came up with a dilatory tactic. An ad hoc commission headed by Trevor Manuel, South Africa’s Minister of Planning and a respected economist, will review the Doing Business Report methodology and hear from many critics.

That said, if in the end the Manuel commission will recommend substantive changes that will turn the hard hitting Doing Business Report into a compilation of opaque statistical mush, you will know who won the fight.