Saturday, February 8, 2014

Free enterprise: the ABC

Every time I read comprehensive, holistic, inclusive, etc., I would remember my wife’s objection: “Why are we in this God-forsaken place?” It is simply about the dynamics. I am getting ahead of myself. But that was my wife’s knee-jerk the first time we were driving into a town in Bulgaria, 400 km northeast of the capital, Sofia, and 80 km west of the Black Sea. Comprehensive, holistic, inclusive, etc., were supposedly the virtues peddled by the Soviets to their satellite states. But these people chose to move on instead of being hostage to their past. People have the choice to either cling to the past or muster the courage to move on and play the cards they were dealt with? And so the first lesson my Bulgarian friends had to learn was margins – the platform we had to establish if indeed we wanted an enterprise that is comprehensive, holistic, and inclusive, etc. to our ever expanding constituencies – beyond our employees and including partners that were supporting us. It takes a village!

[N.B. The late Bernard Lonergan, S.J. is renowned for his contributions to economics: Journal of Macrodynamic Analysis 5 (2010), pp. 107, 109; Eileen de Neeve, Interpreting Bernard Lonergan . . . “What needs to be understood is that the extraordinary profits of the surplus expansion or boom are temporary, to be saved and invested in capital goods to extend the production of consumer goods . . . Lonergan's general theory of dynamics explains innovation and growth that result from “new ideas, new methods, new organization.”]

The prerequisite or the imperative of margins in free enterprise is something we Pinoys take for granted because we've been schooled in democracy? Yet by being parochial we've ceded a lot of ground to oligarchy and surrendered to our neighbors in today's highly globalized and competitive 21st century? It brings to mind Francis denouncing ideologues as narcissists suffering from leprosy, for misunderstanding our faith?

The imperative of margins sounded logical to my Eastern European friends until one day they came back rather distraught: “But we’re poor Bulgarians, we can only sell products at 50 euro cents.” It is simply about the dynamics. It was a simple lesson that took 8 years to largely sink in and 11 years to embrace. It is simply about the dynamics. Recall that President Ramos, trained as a soldier but at the core an engineer, talked about enlarging the pie. In other words, in the case of PHL, we did not have enough wealth to spread around and thus the need for a larger pie.

Still, years later, the church, for example, continues to preach comprehensive, holistic, inclusive, etc., without the context of an enlarged pie?

It is irrelevant but it needs to be swept away because it bugs Juan de la Cruz no end. We are reading too much about the US; but the character of their poverty has no semblance to ours. We are an underdeveloped economy thus a very miniscule pie, while the US is a fully developed economy and the world’s largest pie. And they are two different pies. Ours is Colette’s buko pie from Tagaytay, if you will, and theirs are macaroons from Ladurée. In other words, their ingredients are premium grade and thus expensive. Their poverty is largely driven by their costs structure (which is why they had to invent outsourcing only to be bitten by its collateral damage, i.e., decline in manufacturing and employment) while ours simply is a function of a very small pie.

What we ought to be talking about and learning from are the words of Lee Kuan Yew and Mahathir re how they embraced Western wealth and technology – and thus developed their economies faster than we did. Thus Malaysia has a bigger pie, roughly 4 times our average income, not to mention Singapore, being a First-World state! We don't have to reinvent the wheel but instead send people to these countries and pick their brains like what Deng Xiaoping did. But Juan de la Cruz wouldn't? Why? We may have the brains yet the test of the pudding is in the eating?

Wrote Val Araneta, Business Mirror, 30th Jan 2014: “The problem with subsidies, as can be discerned from the cases of Thailand and Indonesia, is that it entails the reallocation of resources from one sector of the economy to another sector in a manner that goes against the flow of market forces and cannot be sustained without eventually affecting other economic variables . . . This leads to the current debate on why electrical power cost in the Philippines is believed  to be among  the highest in East Asia and as to whether the government should subsidize it or not.”

“[T]he Epira law is the core of a whole process of transferring the business of power generation and transmission to the private sector, because the government and government-run corporations failed not only in operating the business of power generation and transmission profitably but worse it failed to put up the generating capacity needed by the economy . . . The government’s role is to bring down the barriers for entry into the business by capable investors to expand capacity and to regulate the industry to ensure optional competition and prevent monopolistic practices.”

But the hurdle doesn’t end there! If PHL is to attain regional, and ideally global, competitiveness industry or the private sector must be able to develop and market competitive products. And that means that at the enterprise level, it must be recognized that a competitive product, because it responds to a consumer need, while may cost more to produce given the requisite value proposition, can command a bigger market – and with economies of scale will generate a surplus. 

Precisely what my Eastern Europeans learned despite the struggle . . . And so from doing business in their one small country they are now in over 30 countries and counting. But is that model universal? Which is why in an earlier blog, I discussed the Malaysian auto industry, quoting from a article by Chong Pooi Koon and Manirajan Ramasamy, 20th Jan 2014:

“Malaysia will selectively seek foreign investments that bring advanced technology and offer customized incentives to attract companies . . . This is a big deal because previously we didn't issue any licenses for the manufacture of small cars . . . Effective immediately, the new policy further opens up the national maker Proton . . . to foreign competition . . .

“Malaysia wants to position itself as a manufacturing hub for energy-efficient vehicles to differentiate the country from Thailand, where foreign automakers have invested to produce pick-up trucks and other vehicles . . . By focusing on energy-efficient vehicles, we are also at the same time making Malaysia a center of excellence for technology.

“Vehicle prices may fall in Malaysia by as much as 30 percent by the end of 2018 as a result of local production by global automakers and other government incentives . . .

And thus my reaction: “Wow! That is the kind of thought process one would read in the Harvard Business Review or a Fortune 500 company's business-review minutes. It reveals decades of experience in successful global competition. It is real-world expertise that cannot be gained overnight . . . It is characterized by the imperatives of 21st century global competition – i.e., technology, innovation, product development, among others – that will command a market – with a clearly differentiated product portfolio – and generate a surplus given economies of scale and pricing advantage.”

We can’t expect to appreciate and embrace the ABC of free enterprise overnight especially given that PHL has been an oligopoly for decades. And so our mindset is either for or against oligopoly? But it does not follow that we are measuring our challenge against the imperatives of free enterprise especially in a globalized, highly competitive economy – because it is foreign to Juan de la Cruz? The evidence: three of our neighbors control regional trade to the extent of 70 percent! What are we waiting for – why haven't we picked their brains? Que sera, sera?

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