Thursday, Jul. 01, 2010

Look Who's Leading

The world always looks better when you wake up and find yourself in a drop-dead gorgeous place basking in glorious weather. So it was hardly surprising that the overwhelming sense of the crowd at the Global Forum hosted by TIME and our corporate cousins FORTUNE and CNN in Cape Town should have been one of optimism. In winter sunshine, underneath a Table Mountain that (most of the time) was without its habitual tablecloth of cloud, South Africa's Mother City looked magical, its people enjoying to the maximum the thrill of hosting games in the soccer World Cup.

The theme of the conference was the New Global Opportunity. The phrase is not just a recognition that, as the world economy emerges from the Great Recession, there are markets aplenty in the developing world but also that, if we are wise, we will take the chance to build an economy that is more inclusive than before and more respectful of the need to conserve natural resources for future generations. That way, everyone will benefit. As former U.S. President Bill Clinton said in a keynote address to the forum, right now the world is "too unequal and too unsustainable to be stable." But it doesn't need to be like that. The question facing the more than 350 leaders of government, business and civil society assembled in Cape Town was how to help build a different world.

The developed economies of the Atlantic region are seeing a fragile recovery at best, one with little growth in jobs — and even that slow growth is threatened, in the view of many economists, by the hair-shirted fiscal tightening that has been seen of late in Europe. Concomitantly with the forum, world leaders at the G-8 and G-20 summits in Canada were wrestling with the question of how long stimulus programs that have injected much-needed demand into economies could be continued. In that context, the performance of what we will soon have to stop calling the developing world has been tremendous. China grew by 8.7% in 2009, according to official figures. India showed excellent growth too, and even in Africa — so long dismissed by seers as an underperformer — growth hit 2% before the recession took hold, which followed years when the continent was growing at the historically robust rate of 6% or more.

This isn't simply a function of the famous BRICs — Brazil, Russia, India and China — setting the pace. Indeed, as veteran global economist Kenneth Courtis of Themes Investment Management pointed out, Russia has fallen out of the club of most-favored developing economies, having been unable (so far) to use its endowment of natural resources to build truly world-class companies. With Indonesia increasingly catching the attention of business leaders, and Africa too, it might be time to try a new acronym: ABICI, for Africa, Brazil, India, China and Indonesia. Whatever you call them, the performance of the leading economies of the developing world has been sufficiently robust that political leaders like Rob Davies, South Africa's Minister for Trade and Industry, were able to trumpet the potential of south-south trade — while acknowledging that even the best-performing southern economies had been hurt by the continuing weakness in the rich world.

The caveat is important, especially if, as Oxford University's Ian Goldin warned, there remains the real risk of a double-dip recession in the most-developed economies. Household-debt levels remain worryingly high, which is bound to dampen the recovery of consumer spending, and some banks still have substantial exposure to overvalued assets. But the worrywarts notwithstanding, corporate titans in Cape Town could hardly restrain their sense of excitement about the opportunities in the developing world. For AstraZeneca's CEO David Brennan, DuPont's chair and CEO Ellen Kullman and management consultancy McKinsey's global managing director Dominic Barton, the story of the recession was the acceleration of a trend toward growth in the developing world that had been under way before the downturn started.

It isn't just that the developing world provides vibrant markets — 84% of the world's population lives outside the combined area of the North Atlantic economies, Japan and the four original Asian dragons — that explains the new corporate focus. Increasingly, it is the potential for low-cost innovation in the poor world that can provide goods and services that can be sold everywhere. From telecom to banking to medical supplies, companies are finding business processes and products in the poor world that they can apply and sell everywhere.

There are bound to be many such examples of "reverse innovation" as more Indians, Chinese, Africans and Brazilians take advantage of educational opportunities and find jobs at the growing number of R&D establishments that Western giants such as Microsoft, GE and Unilever have established outside the U.S. At the Cape Town forum, Kullman said candidly that while basic research remained concentrated at DuPont's home in Wilmington, Del., the chemicals giant had "globalized our applied research." But it's one thing to detail the exciting corporate opportunities that are now presented in areas of the world that have long been marginalized. For those who live in poor countries, the more pertinent question asks what their political and business leaders should do to maximize the chances of creating better life chances. Four factors are key:

Kill the Curse
It's long been a staple of global economics that simply having a bountiful endowment of natural resources can be as much of a curse as a blessing. Globally traded natural resources can distort relative prices in an economy, divert investment from other sectors that need capital input and, perhaps above all, provide a tempting target for political elites who want to get their hands on easily monetizable assets.

But it's too simple to think that resources are always a curse. Some nations have been able to manage natural endowments to the benefit of all. (One thinks of Norway's record of managing the development of its hydrocarbons.) The plain fact is that the insatiable demand from China and other industrializing nations for natural resources is helping many economies — rich ones like Australia and poor ones like most African nations. Africa, says Courtis, is a veritable treasure chest of resources. Martyn Davies of the University of Pretoria says there is an extraordinary correlation between Africa's modern growth and China's. "African growth," he says, "is being underpinned by demand for commodities from China." The trick is to manage resources well, as Botswana has done with its diamonds, keeping high-value-added processes in the country rather than doing little more than export raw materials and letting the rich world make the most of them.

Use Talent Wisely
For McKinsey's Barton, the key business imperative of the recession was to use the time to recruit the best talent available. More and more, said Josef Ackermann, chairman of Deutsche Bank, top managers will have global experience. It will be increasingly important to career development, he argued, for professionals to "spend a lot of time in foreign markets."

From the perspective of developing nations, the question of talent takes on a different hue. There is a growing consensus among development economists that the key driver of China's stellar success in the past 20 years has not been government policy (however effective it may have been) or the technocratic skills of its public-sector managers (though they are certainly impressive). It is that for two generations — going back to the dark, autarkic days of Maoism — China has educated its women. China would not have been able to become the workshop of the world if its factory workers, mainly girls and women, did not have the literacy and numeracy essential to perform assembly tasks. If there is one lesson from China that African nations (and ones in South Asia too) need to learn, it is that you cannot build a modern economy if you ignore the innate talents of 50% of your population.

Stay Close to the Dragon
China is an exemplar not just because of its record in women's education. Increasingly, the country is vital to the economies of the developing world because it is a major investor in poor nations. In a constant search for secure supplies of natural resources from oil to food, China and Chinese firms are "going out," not only buying up natural resources but also developing the infrastructure — roads and ports — to take them to market.

Such investment is proving vital in Africa, where infrastructure is often poor to nonexistent and many nations are landlocked. Chinese companies have enormous experience with such major infrastructure projects because much of China is itself part of the developing world — a fact often missed by those who notice only its booming eastern provinces. The skills that Chinese companies have been able to acquire in developing the nation's poor western areas are precisely those that are useful when investing in regions like Africa.

China is not a total newcomer to Africa. As Trevor Manuel, South Africa's longtime Finance Minister and now Minister in the Presidency, noted in Cape Town, it was Chinese funds that built the Tan-Zam railroad in the 1970s to take Zambian ore to Tanzanian ports on the Indian Ocean. But the scale of its recent investment — from Sudan to the Democratic Republic of Congo, from Nigeria to South Africa (China's ICBC owns 20% of South Africa's Standard Bank) — has been simply breathtaking.

China's record in Africa has not been without controversy. In some cases, a certain high-handedness has been seen, causing political leaders like South Africa's former President Thabo Mbeki to warn of a new form of colonialism from the East. Philanthropist and former telecom executive Mo Ibrahim said China needs to learn how to make contact with African people, not just with African leaders, some of whom have a reputation for wanting to use foreign investment to line their own pockets. The overwhelming attitude toward Chinese investment in Africa among the participants in Cape Town was positive, though there was certainly a sense of wariness that China should not adopt the rapacious practices of Africa's colonial masters before they eventually changed their ways. "China," said Ibrahim, in a phrase that should be pinned on the office wall of every Chinese CEO thinking of investing in Africa, "should start from where the West ended, not from where the West started."

Clean Up Your Act
One other aspect of China's success resonated at Cape Town: the idea that China's model of state-led economic development offered a better prospect for developing countries than the market fundamentalism that, as Courtis argued, has dominated debate since the Bretton Woods system collapsed more than 30 years ago. It's not China alone that provides an exemplar. Patrick Dupoux, who led a study by the Boston Consulting Group on emerging African companies, says many African governments now quite consciously adopt Singapore, with its state-led but market-friendly policies and clean, efficient government, as a model for development.

But it's one thing to admire Singapore's transformation from a sleepy colonial backwater to a great city — anyone with a brain can and should do that — and quite another to imagine that by honoring Singapore, one can, as it were, become Singapore. One theme at Cape Town was that the quality of African political leadership is improving more quickly than outsiders realize, with a new generation of leaders (often, Dupoux says, with business experience from outside the continent) determined to avoid the mistakes of the past. The quality of African governance, said Cyril Ramaphosa, founder and executive chairman of the Shanduka Group and a former secretary general of the African National Congress, is "improving exponentially."

It probably is. But we shouldn't kid ourselves. Outside of a few usual suspects, the capacity of African governments for effective implementation of policy can be quite limited; that is why programs like Tony Blair's Africa Governance Initiative, now working in Liberia, Rwanda and Sierra Leone, are so important. Too often, Africa remains a place of governmental inefficiency and corruption. (Though it is far from alone in that — Greece, anybody?) My worry is that a new fashion for state-led development will lead African nations into grand schemes of state-directed industrial policy that proved to be a dead end in the 1960s and '70s. It is fine to recognize that, as a development strategy, market fundamentalism has failed; it will not be fine if we, as it were, overlearn the lessons of that failure.

That is a warning for the future. Even in a city whose setting is as spectacular as Cape Town's, there's a need to temper optimism with a shot of reality. But the takeaway from the first Global Forum to be held in Africa was plain. There really is a new global opportunity, and it is being seized alike by the most forward-looking corporations and states in the world.