Monday, May 11, 2009

Transparency . . . the best policy

China, India, Malaysia and Thailand and the rest of the Asian tigers all lived through the imperfections of the global economy . . . as well as that of their leadership, corruption, systemic and other structural weaknesses.

Are we still pointing fingers at many elements to explain our weaknesses as a nation? No one will be sympathetic if we continue to blame every conceivable culprit for our economic woes? Victimhood is not applauded?

“Lady, you are here to confess your sins not that of your husband,” so said a priest at a confessional.

In marketing and sales the typical slap on the wrist is the boss saying: “stop pointing your finger at the competition, remember that every time you do you are pointing three fingers at us”.

Obama rose above the biggest defense mechanism that had been associated with minorities in America, victimhood. And which is why he inspired the majority of Americans, black and white, and elected him at a time when the country was and still is facing such unprecedented challenges.

While the global economic crisis has impaired every country’s ability to right their economic ship, countries like us with fundamental structural issues better deal with our own problems lest any global recovery leaves us again in the dust?

Are we dissecting our economic woes ad infinitum or simply cheering that our glass is half-full or flirting with socialism? There is a report that a group from the academe is advocating socialism as a cure to poverty.

This thought would just not go away despite the fall of the Berlin Wall and the series of events that followed and dismantled centrally planned economies.

Over the last 6 years the writer has divided his time between Eastern Europe, the U.S. and the Philippines spending the most time in Eastern Europe, doing business across a number of former socialist countries. He first came over to represent US AID/IESC, who had tapped Fortune 500 companies to equip young local businesses with sufficient competitive skills as these countries prepared for EU membership.

The Eastern Orthodox Church celebrated Easter over the weekend. Just like in the West, this is a day when families get together, roast lamb being the special dish – served with Rakia or fruit brandy. They call it ”Great Day” (like the appellation “Great” to describe Alexander). And they don’t say “Happy Easter”, instead they say “Christ is risen” and the response is “Indeed, Christ is risen.”

Over the sumptuous lunch the writer was reminded of how some of us Filipinos continue to talk about the virtues of socialism given our frustrations with capitalism.

The writer was a guest of his assistant’s family – maternal grandparents who were celebrating their 50th wedding anniversary, the parents and the sister. The parents had just bought a new apartment that they intended to rent out in a new development near the airport in Sofia, Bulgaria; and like most families felt good about an acquisition more so with the 11% discount that they got. The country is in the midst of a housing bubble gone bust and the timing of the purchase was by design.

The grandmother had a wicked sense of humor and talked about the upscale apartment their family had during the communist rule – she still votes for the socialist party. The rest of the family tried to explain to the writer that the grandmother’s family was special because within her family was a member of the communist party. The bottom line: most Bulgarians resented the communist rule precisely because of the special privileges those in the party enjoyed while everyone else made 180 leva (or 90 Euro) a month, irrespective of skills.

And to the father, the biggest shortcoming was the absence of motivation. And the mother and sister chimed in that they had to fight their way to buy the apartment that they needed, i.e., separate rooms for the two kids, a boy and a girl.

And the humor continued: at night the whole city was like a disco club, every two hours the lights would go out . . . and water was also rationed just like the food staple that every family was allotted.

There was not much to spend money on so families would save to buy a car; but to buy a Lada (a Russian car) took years of waiting. (Today, the father drives a Toyota and the mother a Seat-Volkswagen.)

And of course, in the end, the system became unsustainable: goods were sold below market prices (i.e., something had to give – the cycle cannot replenish the factors of production when the output is priced below costs) and so the system grounded to a halt; it could no longer supply even staples like bread. The writer has heard this story line in various shades and hues as he traveled across Eastern Europe.

The fundamental issue with socialism is transparency: when pricing is not transparent it follows that the decision-making process, i.e., how prices are set, is not transparent. And when the decision-making process is not transparent then leadership is prone to abuse, i.e., or why those in the party had special privileges.

But in the Filipino culture we don’t instinctively see anything wrong with the absence of transparency? The Catholic Church upon which we were born is not a model of transparency; for instance, we were told we were not equipped to read the bible. We thought initially that Marcos was doing us a great service so we did not question the lack of transparency.

The bottom line: our hierarchical culture tends to accept the lack of transparency, but in a democracy whatever the shade, transparency is fundamental; and similarly, what undid socialism was the lack of transparency. Likewise, the collapse of the global financial system was due to the absence of oversight over and lack of transparency of derivatives and subprime mortgage loans. And in a recent study, even in entrepreneurship, a key element in economic development, transparency has been found to be a critical factor. (See:

And in the age of facebook, myspace and twitter we are bound to learn more in the spirit of transparency, e.g., Obama releasing secret memorandums re CIA harsh interrogation tactics.

A Spanish hotel chain at its Black Sea location has, spread out around the resort, dozens of cylindrical decorative planters about 6 feet in height engraved with Rizal’s Mi Ultimo Adios – an open, transparent tribute to Rizal’s heroism?

Back to Bulgaria: what has happened to Bulgaria since it joined the free-market system?

The assistant of the writer is a product of the local technology university but in his job is learning about business both local and multinational – beyond being a translator, he can explain in his language key marketing and sales principles as well as the dynamics to generate margins and profits, among others. The mother, educated under the Russian education system taught Russian, and then pursued a PR (Western-style) career; and the father, a respected chemist who had worked in the Bulgarian defense department now runs a snack food factory for a company owned by Greeks – in a country of less than 8 million people, the turnover of the factory is more than the average sales of the average Western multinational subsidiary, i.e., their export business is bigger than local consumption.

Foreign ownership is not unique. The print media in Bulgaria is controlled by the Germans and foreigners have bought into radio and TV; and foreign banks have a major stake in financial services and Western investors financed a big chunk (23%) of the real estate industry.

What model are these people following? Like the Asian tigers and China and India, they know what they lack and so they have embraced foreigners that could provide these to them. As the global crisis deepens Western investors are seeking to acquire local companies that are predisposed to selling their businesses.

In just a couple of decades, Bulgaria has seen the extremes of capitalism: from massive devaluation when they first joined the free-market system to an influx of foreign investors to inflation to the global economic crisis to business restructuring to a big drop in unemployment and most recently to an increase in unemployment.

Small as they are they have relied on the global economy and have practically no option but to stay with it especially given the size of their external debt – 100% of GDP but still a huge drop from where they started. And importantly, they have been in a budget surplus for the past several years that they reduced income taxes (corporate and individual) to 10% - to compete for and attract investors.

Their GDP (PPP) per person (given smaller population) is at $12,900 versus the Philippines at $3,300; while their poverty rate is down to 14.1% (from 35% in 2001) against our 30% - Ukraine (38%) and Georgia (31%) have higher poverty rates yet have higher GDP per person than the Philippines, a function of our higher population, i.e., population size is not irrelevant. Bulgaria’s GDP has grown in the 6% range annually since 2004.Their foreign direct investment is more than 2 times ours at $45 B.

They still feel they are a poor country and just like the Philippines 10% of Bulgarians are migrants in search of a better life. And just like everyone else, including the Asian tigers, they believe that their government is corrupt and that their system needs lots of repair.

Yet they don’t equate ownership to nationalism or patriotism. It is not important to them who own the businesses; all they want is for the economy to grow even more so that they can partake in the benefits. They may be Easterners but still European and the 7 pillars of Western wisdom (e.g., pragmatism) are probably inherent to them.

Here is a country that has lived through socialism and the imperfections of capitalism; they simply smile whenever the writer tells them he knows people leaning to socialism.

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