Prescriptions and more prescriptions

With PHL going through its challenges – Asean integration and the Mindanao peace accord, among others – prescriptions running the gamut are in abundance. And I am reminded of the stack of research materials that I had to read through to assist a PhD candidate. We’ve been in development mode for decades yet are stuck in square-one – i.e., poverty has long defined us as a nation? It’s a tough nut to crack because the human condition gets in the way? For instance, hierarchy, something we saw with our Spanish colonizers, has remained a characteristic of our culture. And in Marcos we saw that on top of hierarchy, to perpetuate power one must reject transparency. And transparency is not how we would describe governance in PHL? But a US Appeals court has seen through it and handed Imelda and Bongbong an unfavorable judgment? And given that these characteristics are inherent to the human condition we would be unable to deal with them until we learn to be a bigger person – no different from what Occupy Wall Street was demanding? Greedy bankers may not, but can Juan de la Cruz prove to be a bigger person?

Clearly our underdevelopment poses fundamental challenges. But even countries ahead in the development curve like Poland (with a GDP per capita at PPP five times ours) can be faced with daunting challenges. "The biggest economy in Eastern Europe . . . is one of Europe's least innovative economies . . . Universities do not cooperate well with business . . . It has thrived on attracting low value-added businesses . . . That type of economy depends on low costs . . . To compete in the future, Poland will need to replace its low costs with innovation . . . It filed 8 patents per million citizens in 2010 ... compared with an average of 108 in the whole European Union and 266 in Germany . . . Poland has a long way to travel if it is to catch up on its more innovative competitors . . . Unless Poland turns itself into an innovative, knowledge economy, it risks heading down the same path as Spain, Greece, or Portugal . . . Those countries experienced rapid growth but failed to shift in time the structure of their economies away from low-cost industries." [Poland fails to move to high tech, Business World, 29th Oct 2012.]

Poland can use a mutually reinforcing relationship between industry and academe. In the US, for example, the academic community has the big advantage of being right next to global enterprises – i.e., they could be privy to real world challenges and how industry deals with them in the here and now even before a case study is available. But in developing countries, as another once mentee (who had received a PhD in economics) explained, the two worlds of academe and industry are not necessarily Siamese twins – i.e., the “shallowness of industry” is contrary to academic rigor?

In the US this supposed divide has been bridged in many cases. For instance, a Korean company had sent a group of managers to attend a program at an Ivy League institution many years ago and a major part of the program had the Koreans visiting R&D centers in the U.S. And one in particular was my MNC employer and we welcomed the Koreans with open arms. And the Koreans could not believe the openness of a US company to the academic community: “It would have taken us an inordinate amount of time – if we would even be spot on – doing research to gather what we picked up here in one afternoon.”

Developing countries can learn from this aspect of Western practice. A couple of weeks ago I sat through the successful thesis defense of an Eastern European friend. As the mentor I read through the stack of research materials that she assembled and I remember the first exercise we did was to develop an outline for the dissertation. As a practitioner (the subject was measuring brand loyalty) it was natural for me to separate the wheat from the chaff. And in the real world, there is no such thing as the ‘silver bullet.’ And hence I was glad my mentee immediately agreed to define the limitations of the study, the algorithms notwithstanding. And in the end it was a simple outline that she used and which she was able to test via the paper she published – a prerequisite before moving into the dissertation proper – following the green light from her professor. She added: “I would have approached the dissertation from a different perspective if no one kept reminding me that the test of the pudding is in the eating.”

From virtuous to vicious circle

“PH poverty reduction remains dismal says UN.” [Inquirer.net, 28th Oct 2012.] “The Philippines’ performance in meeting its Millennium Development Goals (MDGs) has remained dismal with barely three years into the deadline to achieve the objectives set by United Nations member-states . . . The UN report on the MDGs disclosed, among others, that the Philippines was years behind on most of its development objectives.”

“Of the seven MDGs, the country got failing grades in four – eradicating extreme poverty, achieving universal primary education, reducing child mortality and sustaining maternal health . . . The UN described as “regressing” and “no progress” the Philippines’ performance in education-related objectives, and “slow” in dealing with anti-poverty reduction, child mortality reduction, as well as maternal health problems.”

We may be doing fine in three of the seven goals but poverty will continue to define us. And so CCT (to address poverty) is a major piece of the administration’s agenda . . . and we assumed it was to be a virtuous circle? We’re not alone in the instinct to intuit or in our “pakiramdam.” Even the legendary Steve Jobs demonstrated “pakiramdam” and opted to pursue alternative medicine when he first learned about his illness. Many of us ‘born again’ Christians that have done discernment exercises and/or discernment training arguably would see discernment as not necessarily supernatural – i.e., that the sciences can’t be dismissed when human challenges clearly say so.

Visiting a museum in Ukraine [and sadly they seem unable to leave their totalitarian tendencies behind] many years ago, my wife came back with one of the most vicious stories in the history of that country. Their anger would still seethe through decades later recalling why despite being the breadbasket of the Soviet empire countless of them had to die to fight for crumbs of bread. The insult had come earlier, being convinced that their food ration was confirmation that the system was indeed a virtuous circle.

Over the last ten years a group of Eastern Europeans (and they have become friends) have experienced the reality of what a sustainable economic activity ought to be. And I wonder what, when, where and how would Juan de la Cruz experience a similar reality? Our problem is that we are proud being long a free market and have assumed that ours is a virtuous circle . . . and so what is there to change? [On the other hand, extreme critics remain radicalized precisely because they’ve witnessed the shortcomings of this supposed virtuous circle. There is no perfect system and ours is not the model to crow about – because it is lopsided yet serves the purpose for many of us. Radical groups make a valid point but they are, because of “pakiramdam” and/or ideology, also jaded?]

We can learn from our architects and builders – and they are world-class – about how they are able to design, build and create a system that is functioning. [We can’t be ever driving our economy on the backs of our Christian charity. ‘Give to Caesar the things that are Caesar’s and to God which are God’s.’] It was like yesterday when my Eastern European friends wanted to figure out how a functioning system comes about. And it is beyond “pakiramdam.” And ten years later I sat amazed in their budget reviews for 2013; it was as though I was in a time machine – sitting once again in a business review in a Fortune 500 company headquarters, not perfect but world-class.

These once socialist folks have learned to anchor their thinking in some higher order – to stay ahead of “global trends.” They’ve realized that if they were merely to replicate the product ideas of MNCs and sell them at a cheaper price they could not sustain the undertaking. It was a reminder that their once celebrated food ration was unsustainable, a disaster waiting to happen.  

Asean integration

“. . . [T]he Millennium Challenge Corp. (MCC) of the US has remained non-committal if it can come up with another package for the Philippines but instead urged the private sector to do its share by investing more,” Manila Bulletin, 19th Oct 2012. Another Manila Bulletin article that appeared on the same date reads: “Power Sector Assets and Liabilities Management Corporation (PSALM) extended transition supply contract (TSC) with Manila Electric Company (Meralco) will be expiring this December . . . [I]f PSALM will not take calculated steps on how it will market or treat its un-contracted capacities, it could be a risky option for consumers as increased spot market exposure could trigger price hikes especially during the summer months . . . “

Are we ready for Asean integration? We know how similar initiatives unfolded in North America and Europe, and even in Asean after 1992 – when we lost some MNC manufacturing to our neighbors. Economies of scale make MNCs locate manufacturing facilities where they would yield the optimum if not maximum benefits; and in an integrated Asean, the most cost-efficient country would always win out. [And we still don’t have a coherent energy plan?] It is beyond friendship, it is about economics – “business is business.” Unfortunately, PHL is indeed Shangri-la (quoting American friends) and who would want that quality of life changed? And so Juan de la Cruz is simply cool? And that’s not necessarily a problem. The problem is when we take a challenge for granted.

Now that the Asean integration is around the corner, the alarm bells are ringing louder. If even our largest banks – and for many years we saw them as paragons of success – are now admitting they would be dwarfed by the integration, what more of our much smaller enterprises? Still, blogs like this are a pain in the neck: nobody wants to be at the receiving end of unsolicited advice. And which is why I find myself learning a lot from my Eastern European friends. Their desire to seek ideas and experiences from the outside says they’ve understood and accepted that they could use help – yet they remain proud as a people. They saw value in the efforts of the West to assist them in their accession to the EU. Still just like what the MCC said, the private sector had to do its share of investing. And this especially applies in the case of PHL given that we’re lagging in investments. And to be hardest hit in the meantime are our much smaller enterprises – which “employ 70 percent of the population,” writes Florangel Rosario Braid, Manila Bulletin, 24th Oct 2012.

Small enterprises thrive when the ecosystem is geared to innovation and competitiveness. In the Japanese or Korean model, for example, major enterprises sought to become global players and the smaller enterprises they spawned (as auxiliary industries) developed an innovation culture given their symbiotic relationship with the former. In contrast, our small enterprises are more like livelihood undertakings. The challenge goes beyond the conventional support to MSMEs that we may be familiar with. We need to create that larger ecosystem that has the requisite infrastructure – from power generation and beyond – and an industrial base of strategic industries that is sustained by investments, innovation and competitiveness.

In the meantime our industry worries that populist legislations supposedly to protect workers would create a bigger problem not only for them but eventually for the workers themselves. (Similar to the fallouts we saw in land reform and the unwitting bias of minimum wage legislations to unskilled as opposed to skilled work?) Not surprising, again, because our industry is meant to market to poor Juan de la Cruz and thus low or affordable price is the mantra. And precisely because of this paradigm we have yet to develop the inquisitiveness that spurs innovation and competitiveness. And our efforts in raising our competitiveness rankings to date are still at the level of “ease of doing business” – where the real barriers include the absence of a culture of efficiency and productivity, our hierarchical culture that feeds on cronyism and corruption and the restrictive economic provisions in our charter – and have yet to move up to the heart of competitiveness, that is, of innovation.

Indeed we must ring the alarm bells. Asean integration will not be easy – our optimism notwithstanding – given the outmoded paradigm and model we see as virtues?

The self-actualized Juan de la Cruz

Is the status quo in fact our be-all and end-all because it serves our purpose? And that we weathered the Great Recession while the rest of the world tripped? More so since we believe that our faith holds the keys to heaven? Yet the status quo is also the reality of hapless Juan de la Cruz who can’t call the shots? [Thousands of miles away, while sitting through 2013 budget reviews, it wasn’t surprising that some of my Eastern European friends would reveal their inability to visualize the future – given their dark past – even when many of them have already benefited from the continuing education their leadership has put them through.]

But back to PHL: The good news is global finance types are talking about us as the next tiger, thanks to "daang matuwid.” Yet we ought to be circumspect given how they also saw Russia as part of BRIC, the supposed tigers? People in this part of the world who know what Russia is like take that BRIC label with a grain of salt. Russia is still very much driven by oil and Putin, and when oil is over $100 they are prosperous, and Putin is a hero – but not to the protesters in Red Square. What about PHL? Indeed we must be circumspect about being the next tiger. Fortunately we have "daang matuwid" instead of a Putin. Yet we can't take the status quo as our ticket to truly becoming a tiger, precisely why we needed "daang matuwid." We can't be like a house that is built upon the sand? And our elders drilled into us what that meant. In the hierarchy of needs, for example, they preached that we must recognize that a roof over our head comes before a car. [And which my wife repeated to our daughter after she got her driver’s license and thus had to make do with what was available in the garage, going against the American convention.] Of course in the modern era that has been supplanted by the credit culture peddled by bankers . . . until the bubble burst and plunged the world into the Great Recession. And my Eastern European friends would remind themselves that indeed there are risks in being roped into the credit culture of the West – as they witnessed how a property boom could turn into a bust.

But bad credit comes in different forms. And the Dutch have become the classic example of what is now known as the Dutch disease. And the best way to explain that is our OFW remittances have kept our consumption-economy humming; and we think its manna from heaven. And this has been reinforced by our half-a-dozen dominant entities that continue to prosper principally due to these remittances – and the simple arithmetic is reflected in our local economy being more than twice our export receipts. And we’re proud of it, making it our Dutch disease?

And that house upon the sand becomes glaring given the absence of something as fundamental as basic infrastructure. Add to that the absence of an industrial base of strategic industries that have a greater multiplier effect than our consumption-driven economy. And because our export history is one of third-party contracting, the sad reality is innovation – which directly impacts competitiveness – is a major gap in our capability as an economy and as a nation. And we gloss over this reality and look at an economy either as consumption- or export-driven. While nations that are steeped in innovation and competitiveness generate greater wealth; and why international agencies are preaching innovation and competitiveness especially to developing countries. On the other hand we like to think that our handful of dominant enterprises are great models failing to recognize that they are such not because of innovation and competitiveness but rather in our parochial society they are dominant in a market that is fairly large – of 100 million consumers. And thus we've remained poverty-stricken. To be parochial, as the last 50 years bear witness, can't make us a developed economy or raise our per capita output 10-fold. Meanwhile our neighbors who took the outward and global view developed their competitiveness and simply left us behind. 

And which brings us to the status quo, which in this day and age is not what we must preserve? What we need is to build our house upon a rock, one that has its basic infrastructure in place as well as its strategic industries that are sustained by continuing investments and innovation. We have no choice but to learn the ropes and move up the learning curve. We can't be an island unto ourselves, especially as we discourage foreign investors, the surest way to perpetuate hierarchy and oligarchy (and turn back the hands of time) like they do in Russia.

An escalator to the moon

There was none . . . yet Kennedy driven by the risk of giving the Soviets the confidence that could have led to greater adventurism on the part of Khrushchev set for the Americans a commitment to get man on the moon within a decade. The reality was even the scientists were uncertain how it would be done.

The Eastern European representative of US AID on the ground was selling me the idea of coming back after my one month commitment; and it so happened it was the US Thanksgiving Day and there was a celebration in the office for the handful of American consultants, including myself. [To the Eastern Europeans I am "Amerikanska," and spoken in Russian-like accent.] And one guy said he was jealous because he was not being asked. I took it as a joke: "Vensi, there, he just solved your problem." That night the Americans and their spouses celebrated Thanksgiving in a fancy restaurant that later on we would learn was not recommended for expatriates – to be expected of naïve Americans! The buzz was it was the favorite of the "local mafia" – former communist commissars that had controlled the transition to free market and taken over major industries like power, telecommunications, media and the like. Sounds familiar?

"We need to rapidly develop our fledgling enterprises especially because in 5 years we expect to be in the EU, but even today MNCs have already set up shop in this country. They will eat our lunch. And in your industry there is this one company that I believe has the best chance to successfully compete against foreign companies. They are begging if you'd give them a few minutes to present themselves. They asked me to have you try some of their products.” And as they say, the rest is history. But the point to make is that these people had no clue what they had to do other than the aspiration to succeed in a globalized world.

It's been well over a decade since the Ramos administration had to first deal with our nagging power issue. And we are in a better position that Kennedy was simply because power generation is not an unknown challenge. But it requires a Kennedy-like mindset. For example, we have to think outside the box, literally outside the Philippines and put out a project brief, something like: “From the outside one would see a market of 100 million consumers. Given this market size and the population and economic growth rates and per capita GDP, how would the market look like in 10, 20 or 30 years? Given those fundamental parameters as well as the characteristics of an archipelago and the distribution of the population and commerce and industry, what is the ideal energy mix that this country should have? They must deliver sustainable power supply as well as competitive rates, the object being to spawn other economic activity, i.e., attract foreign investments and pave the way for the establishment of strategic industries and beyond. What will the transition scenario be like from a supply and rates standpoint? More importantly, where are we, where must we be and how shall we get there?

Assuming a globally respected energy enterprise with a track record of success globally is presented this market, will they find it attractive? Only capable global entities will be prequalified to pursue the project; they can partner with local players when the latter’s facility or facilities fit the overall project design and objectives and thus would satisfy the supply and rates parameters envisaged. And they must spell out the mechanisms that will be put in place to ensure failure is not an option. Given the risk of cronyism and corruption, what is the ideal mechanism that will ensure a best-practice project management model? How can the process be made transparent including creating a totally independent project management team that will report to an oversight body (headed by a Warren Buffett-type) that will in turn be responsible to the Philippine leadership: the president, the energy secretary and the cabinet's economic cluster? How will the project managers interact with the relevant government agencies, the public at large, etc.? What communication mechanism must be in place so that there is absolute transparency; and what safeguards must be in place to ensure efficiency throughout the process and until project completion?”

Imagine Juan de la Cruz is putting a man on the moon; failure is not an option! It’s not about me and myself!

Why “pwede na ‘yan” won’t cut it

“America’s leadership in several areas has eroded much more rapidly than most Americans think. They (the authors of Innovation Economics: The Race for Global Advantage, Robert Atkinson and Stephen Ezell) are right to argue that classical economists are often blind to the fact that innovation is the product of ecosystems rather than individual companies and that ecosystems are fragile,” How not to be left behind – Why America cannot see that it is losing traction; The Economist, 13th Oct 2012.

If it could be argued that Americans (and classical economists) could be blinded, what about PHL? Of course we are proud that our resiliency was once again proven through the Great Recession. But is that to crow about? In today’s globalized world we remain inward-looking. In an age where innovation is valued and rewarded because it drives progress, we continue to reward hierarchy and the lopsided economy it yields. But we’re well-informed and proudly prescribe cures which could indeed be state-of-the-art. Yet we ourselves are missing something? We have yet to visualize the ecosystem that will create the climate conducive to transforming our efforts into a virtuous cycle? [Forward thinkers have realized the contributions of da Vinci, Einstein, Edison, and Jobs, among others, in the discipline and art of visualization, and made them confident as they pursued innovation.]

We are still touting the over 6% GDP we registered in the most recent reading but that is the outcome of stepped up spending by the government following the criticisms from last year that “daang matuwid” was choking the economy. And that GDP number does not represent bringing us to a virtuous cycle. We’ve recognized that basic infrastructure, for instance, is an imperative if we are to create that ecosystem. But while we read about new PPP initiatives to be sent out for bids, we have yet to make a dent on PHL’s very basic infrastructure needs. But because of “pwede na ‘yan” we’ve patted ourselves in the back, especially as we’ve addressed and are moving forward in the competitiveness rankings.

Those efforts are laudable, but if we are to move closer to creating the ecosystem that nurtures competitiveness, we have to start looking outward. Our enterprises, including banking services and property development, remain parochial targeting OFWs wherever they are in the world. Ergo: we have yet to look beyond our local market and our own people being especially proud that we are satisfying their needs – that as marketers we are constantly fine-tuning our target market and that we are successful businesses because we are focused on the market that is our strength.

But what is the reality in today's globalized world? That parochial bias is already accounted for by the $20 billon in OFW remittances absorbed by our economy each year which while incremental is at best a manifestation of incremental thinking – and as President Ramos says, “the pie is too small.” We are not creating a virtuous cycle that comes with moving up the learning curve in innovation, for example. How can we then prescribe cures though state-of-the-art when the platform of our economy remains backward: infrastructure-wise, strategic industry-wise and investment, technology and innovation-wise, for instance.

How do we create that ecosystem that will elevate us to that desired state of a competitive economy – and move from incremental to quantum-leap thinking? Otherwise we simply fall back on our old paradigm: OFW remittances and the same half-a-dozen entities that control our economy? And which is why it’s called spinning wheels – i.e., we would remain stationary (e.g., poverty levels) and fall behind the rest of the world as well – even Vietnam, Cambodia and who else?

Peace Accord

The Mindanao peace accord is a confirmation that “daang matuwid” will move us forward as a nation. Still we must be guardedly optimistic especially when individuals and/or parties remain skeptical if not opposed. And the administration would do a world of good to keep them engaged. Deep-seated concerns don’t just go away. And personal interests could indeed derail collective progress. But sincere efforts to engage disgruntled elements would minimize if not eliminate the downsides.

Transition efforts no matter how sincere would take some doing as experienced by Eastern Europe where to some it is taking a lifetime. But still we can’t afford not to capitalize on the Mindanao peace accord. People, like consumers, can’t be fooled. For example, “daang matuwid” must come down to the barangay level. Nature is hierarchical and why local bosses come about. It takes the civilized man to overcome nature’s hierarchy. (And why the late Cardinal Carlo Maria Martini was critical of the Vatican, being 200 years out of date.) In Eastern Europe to be tsar-like is rewardingly intoxicating. And in the US we have our “hot dogs”!

But hot dogs don’t necessarily build a culture of innovation, which is what the 21st century world is about. For instance, how does the West overcome the loss of manufacturing to China? The US cannot simply harp on their history of successes. And unfortunately financial engineering is not the way to go. Many years ago when derivatives first hit a bad patch it became clear that creating tangible value is key, not some mirage or financial mambo-jumbo. And later on the Eastern Europeans, after the initial euphoria with the stock market, had to learn that the stock market ought to be founded on enterprises that create value. And in the small countries in Europe the bias must be to become regional if not global players. This was on top of going through a property boom that went bust.

The good thing is their country’s leadership is accelerating infrastructure development while attracting technology enterprises from the West to make them a regional hub. And to their credit, they have built a modern airport with the requisite fly-over access to the main avenue and the city center; and the new subway system is well on its way to completion. They have the highway network to their seaside which attracts loads of tourists from the West practically done, and they are busily – in a more accelerated fashion – working on the highway to the border in the south that will ease travel to their mountains. They attract skiers from the West. This is the kind of mindset we can use in Mindanao and beyond especially the discipline . . . to prioritize.

Yet my Eastern European friends can’t ignore the imperative of creating a culture of innovation – beyond being activity-driven they must attain that desired state. Technology is a great leg to develop yet the object is the ability to create tangible products. Fortunately they’ve already overcome the first hurdle by looking beyond cheap products their compatriots could afford – which they realized had dictated their inward-looking bias. [And which we Filipinos have yet to realize: low-priced products may generate volumes and yield margins but the greater benefit from innovation comes in higher valued-added products that will find a broader international market and spawn corollary industries locally thus realize their multiplier effect.] And they’ve become globally competitive, developing across their four businesses products for a wider world. And with Asia a new addition to their geography, erecting facilities there is on the drawing board. But the excitement comes in the thinking and the discipline that undergirds the pursuit of the next generation of products. Instead of creating hot dogs they’ve created cross-functional teams that are moving up the learning curve developing higher value-added products, not by chance but via a virtuous cycle.

These people went though very tough times, and our folks in Mindanao could say something similar, and many are still pessimistic. And both need forward-looking leaders that will lead them away from primitive times and into the civilized age, where value-creation or innovation is rewarded, not hierarchy – because of its attendant poverty.