Benchmark . . . for national pride?

(This article tees up the dichotomy of national pride)

Where must we compartmentalize and where must we harmonize?

We ought to compartmentalize when we are assessing gaps against a set of norms, i.e., what precisely and where precisely are the gaps between our performance and the norms used by IMD (Institute for Management Development, a Swiss business school) in the Competitiveness Yearbook? In other words, to be able to objectively assess these gaps we need to be dispassionate and not allow our “sama ng loob” to get in the way?

It is what benchmarking is all about; it is reducing the deviation against the norm such that the tolerance is practically nil – or why German and Japanese cars have a superior quality index than American cars; and why the US auto industry is all but demised. Do we believe we are doing better than, say, Singapore because they are in a recession (owing to the global financial crisis)? That will be akin to embracing the GM mindset, i.e., they have been in denial – a “dead-man walking” – given declining market share for decades; while “Singapore is a nation of homeowners” and their GDP per person is better than the US? Benchmarking imposes the straight and narrow and has no tolerance for fallacy, e.g., it will tell us that countries with meager GDPs per person and alarming poverty rates like we do have economies like we do, i.e., focused and reliant on domestic economy?

We are not new to benchmarking (in private industry) and we can adopt the same perspective when we benchmark our competitive performance against other Asia Pacific countries.

On the other hand, it is imperative we harmonize when we are figuring out how we would address these gaps as well as when we execute whatever plans we devise. In other words, we ought to harmonize our best ideas and the efforts of industry and public sector leaders. Clearly, inertia will work against us as we purposely broaden our economic base to compete for and win overseas markets, hence the need to pull together. (Tripling our exports will mean a huge positive for us but still a drop in the bucket in the global economy and thus should find markets if we strive for competitiveness. See other articles in http://www.phileconomy.blogspot.com/)

But first we must look at the competitiveness rankings like a mirror, nothing more and nothing less.

Money . . . or industrialization . . . may not be important to us. What about national pride and interest?

Our latest competitiveness ranking is bad news says a news report by Business World. We stand at number 43 in a group of 57 countries (and “the worst among 13 Asia Pacific States”) measured by: economic performance, government efficiency, business efficiency, and infrastructure.

Does national pride represent a dichotomy though as The Economist magazine sees it? See: The romance has gone; April 30, 2009: ”. . . Filipino national pride often obscures the national interest . . .” And to “Filipinize” the economy, policymakers have risked even economic setbacks. Anti-Chinese economic measures starting in the 1930s (which included retail trade nationalization in 1955) apparently put many Filipinos out of work”. That’s how a respected Filipino writer (Juan T. Gatbonton) explains the Filipino mindset; and adds: “Protectionist sentiment may be only one expression of our inward-looking nationalism. In our country—as in Latin America—nationalism has been shaped by the overpowering presence of the United States. Resentment of the Americans—coupled with a recognition of our utter dependence on them—had produced self-doubt and turned nationalism inward, toward cultural authenticity and economic preferences for nationals.”

How do we deal with our economic challenges while lifting national pride and not undermining national interest?

Is industrialization really in our psyche?

(This article highlights a study on what makes us happy and their implications on our economic development. It has a link to a paper relating culture to economic outcomes.)

It appears that we could not care less if we catch up with the living standards of industrialized countries. So the Asian Development Bank (ADB) report that appeared on May 7th, that it would take nearly two centuries for the Philippines to catch up is irrelevant to the Filipino? (While the top 5 % are thinking: “if it ain’t broke, why fix it?)

On June 8, 2008, the Philippine Daily Inquirer reported the study by Ma. Gladiola M. Santos (PhD, Dean of the College of Sciences of Adamson University) about what makes the Filipino happy. And “family, not money, makes Filipinos happy”.

“Material possessions came fifth (out of twelve themes) as a source of happiness . . . it shows the practical side of the Filipino. But more than anything, it proves that economics is not the topmost source of well-being . . . Responses related to . . . national prosperity and clean government came sparingly.”

What about the poor?

“Surprisingly, the spiritual life occupies only the seventh rank. Faith in God, joining spiritual activities and doing good to others were the variations on this theme. Filipinos are supposed to be known for their religious piety but they have also been criticized for their “split-level Christianity.”

And it appears we can more or less tolerate corruption in public service, i.e., “responses related to . . . clean government came sparingly.”

We’ve survived Marcos and Erap; and we will survive the current and the next one too?

The good news is the export sector is pursuing a more aggressive agenda in order for us to raise our competitiveness and win overseas markets, including setting up R&D capability in electronics, our biggest export. And it appears we’re likewise stepping up efforts in agribusiness. In the same manner that we have strong individuals driving private-domestic business, we surely do have strong individuals to drive our new export agenda.

And of course, the remittances from our OFWs shall tide us over until we become a more competitive exporter.

Albeit slowly it seems we are moving forward, i.e., as the export sector moves up the learning curve we would pick up greater competitive skills. And that they would be able to overcome whatever cultural biases we may have re global trade? (For instance, do we believe that big countries can exploit smaller ones? Yet, it does not require one to be big to succeed in global business; what it demands is competitiveness and economies of scale – which is what Paul Krugman, the Nobel Prize winner, prescribed for our economy to achieve sustainable growth. The Asian tigers were not born tigers.)

See: http://www.nber.org/papers/w11999.pdf - an example of “how economists have begun to apply their analytical frameworks and empirical tools to the issue of culture and economic outcomes”.

The Asian century . . . is 175 years hence?

(This article poses the question: Is this our wake-up call? And has a link to Paul Krugman’s article describing the economic model that won him the Nobel Prize; it is the foundation of his prescription for our economy.)

On May 8th two news reports appeared: (1) “Asian Century”, in Newsweek and (2) “Filipinos 175 years behind”, in The Manila Times. And the following day, Phil Star reported: “Foreign direct investments seen to hit only $700 million”.

“Every bit of economic data that comes across . . . these days seems to back up the idea that we're very quickly headed for the Asian century”, reports Newsweek: “Investors are steering what little money they have to Asia -- net portfolio investment into the region is running at a pace not seen in five years. It seems clear that Asia will recover from the recession faster than either the US or Europe, and that it will continue to leave other emerging markets in the dust, too. Korea returned to quarterly growth earlier this year, and there are positive signs in Japan, Malaysia and China, too”.

It appears that for us the Asian century is not due until 175 years hence: “It would take nearly two centuries for the Philippines to catch up with the living standards of industrialized countries at its current pace of economic growth”, the Asian Development Bank (ADB) reported Thursday, May 7th.

Do we want to pave the way for the next five or so generations to overcome such a verdict? Or do we . . . ?

What to do? Why worry, be happy?

Clearly 10% of us are happy since we disproportionally generate 31.2% of the country’s income and consumption. The top 5% or almost 5 million are very happy indeed; not to mention the 10 million OFWs who make middle-class income. Unfortunately 10% have to partake a measly 2.4% which is why 30% or almost 30 million of us are poor.

Given the vast number of Filipinos (and they are roughly equal to the population of Singapore or New Zealand or Norway) enjoying prosperous-level income and a lifestyle that is something to cherish – with access to chauffeurs, maids and other domestic help, on top of world-class local resorts, country clubs, gated communities and upscale condominiums, and unheard of to the average person in developed countries – it will not be surprising if none of the above news would give us a wake-up call.

Success (read as prosperous-level income) which has been attained by the top 5% of the population will most likely reinforce the status quo? And they are the opinion leaders effectively steering the course of our economic ship? In short, to them, “if it ain’t broke why fix it?”

Of course, it is a lifestyle that mirrors Latin America’s haves and have-nots which the religious community has been fighting – not very successfully? They probably need Krugman in their bag of tricks? (And similarly, Latin America mirrors our inward- or domestic-focused economy. It appears we share temperaments with the Latins more than the Orientals, more specifically the Asian tigers.)

And when we talk of Christian charity we talk in terms of compassion and giving. But as one columnist put it, “poverty has no cure in poor economies”. The writer could not have said it better.

Unfortunately, those frustrated (47% of Filipinos rate themselves poor according to SWS) about our economy entertain options that could unwittingly throw us from the “frying pan into the fire”. We cannot undo the collapse of the Soviet empire or the interconnectedness of the world? Europeans have realized that they no longer live for the past, i.e., New Europe; and they could share this realization with us?

See writer’s prior articles in www.phileconomy.blogspot.com: (a) “Transparency . . . the best policy” and (b) “In survival mode?”. The first narrates a brief personal history of the collapse of a former socialist state. The second illustrates how our inward or domestic focus in driving our economy precisely puts us at odds with countries that have done better. And reinforces what Cielito Habito wrote on October 19th, 2008 in the Inquirer summarizing the “Krugman’s Philippines prescriptions” as follows: “In short, the only way to achieve long term sustainable growth was to have much higher export growth, by attaining export competitiveness that had long eluded the country’s highly sheltered economy. The essential policy change required, he wrote, “is a removal of the incentives that channel scarce resources into capital-intensive, inward-oriented production.”

Paul Krugman won last year’s Nobel Prize for Economics for his model describing trade and economies of scale which he explains in the following article: http://krugman.blogs.nytimes.com/2008/10/15/about-the-work/.

Wal-Mart and San Miguel responding to global economy?

The Wal-Mart story is a microcosm of how the global economy plays out.

Blue chip Western companies, not unlike the Ayala group of companies, are committed to progressive business and management practices. Yet, it took a company in the middle of nowhere from a very poor, conservative, Midwestern state to force Western businesses to update their practices.

The Proctor & Gambles of the world were caught flatfooted when Wal-Mart started dictating terms and conditions of doing business with them. Despite the history of progressive management education and training in these companies and cutting-edge innovation and technology, they woke up one day to realize that they were not geared to deal with the new Wal-Mart – their sales force were not equipped to negotiate with Wal-Mart buyers; as bad if not worse were their infrastructure, systems and processes especially sales forecasting and supply chain – production planning, materials, warehousing and logistics management.

How can these pillars of Western business not foresee what Wal-Mart saw much earlier?

Paraphrasing George Soros (in reflecting the influence of Karl Popper, Aristotle and his own life experience): our cognitive function cannot be divorced from our own view of what we consider reality such that our understanding is not a pure outcome of our thinking but colored by our culture, ideology and other biases.

In particular, Wal-Mart saw that their margins were at risk as they faced greater competition from other retailers; and so they had to reassess their business model, beliefs and practices. Early on they assumed that economies of scale were the key to their success. But retailing is not a high-value adding (essentially a brick-and-mortar and no R&D) business such that their margins were very thin; while a manufacturer (given greater value-adding elements) is able to generate double-digit profit margins north of 10% - retailers net a much lower 3% to 4%.

Wal-Mart did not have to go very far to seek models to adopt given the learnings from the challenge the U.S. faced with Japan, Inc. – that threatened the profitability of Corporate America. From Japan they “shamelessly copied just-in-time” inventory management principles and from the U.S. (and later Germany) they acquired state-of-the-art computing and communicating technology; while still pushing economies of scale but in a more aggressive manner – they put together a plan to rapidly build more stores across the U.S. and in numerous strategic international locations.

And then they announced to the manufacturers that henceforth there would be new rules that they had to meet if they expected Wal-Mart to continue to carry their products – Wal-Mart accounting for upwards of 10% of their revenues.

Here was where the manufacturers were caught off-guard: Their sales force’s skills-set was based on relationship selling; while logistics was driven by traditional inventory practices, e.g., safety stock levels.

Wal-Mart buyers could run rings around the sales managers of the manufacturers. To begin with, they were savvy MBAs and financial analyst-types who were writing up orders based on: “just-in-time” delivery (so that they would not be carrying safety stocks and hence reduce inventory and improve working capital), shelf-space allocation by market shares of categories/brands/SKUs as well as planned in-store promotion programs (designed to cover any margins of error in their forecasting and/or realize incremental revenues). Such a bias for driving revenues may not be inherent in the public sector but given our negative balance of trade and if we are to become a developed country, do we need to put our collective brainpower behind gearing up to drive export revenues? Both Thailand’s and Malaysia’s exports alone are bigger than our total GDP – this is where we need to invoke and rally national pride; but we can’t go it alone with our limited resources; we need to partner with the right global players?

The Wal-Mart buyers were no longer predisposed to oblige and indulge in such niceties inherent in relationship selling as having coffee or a meal or even a night out with the manufacturers. The manufacturers were blown-away! They had to say yes to most everything Wal-Mart demanded or lose the business.

The manufacturers had to quickly do their homework and then in rapid succession: developed the appropriate training and education programs, installed enterprise-wide information systems and linked their order-processing to the Wal-Mart system (i.e., integrated checkout scanners and warehouse network) which in turned drove their own inventory management and production planning processes.

The result of all these combined efforts and on-line processes was to reinforce Wal-Mart’s “everyday low-price” pitch while the manufacturers similarly achieved greater efficiency, productivity and profitability – and at the macro-level they held inflation at bay thus fueling consumption and higher GDP.

The rest of the retail industry including those outside the U.S. (Metro/Macro, Carrefour, etc.) did the same thing thus elevating competition to an even higher level – and challenging human capacity once more.

How will a retailer in a smaller market like the Philippines deal with this development? As we now know, a couple of our taipans partnered with these global retailers so that they co-own the business in the Philippines. Another opportunity they pursued was to partner with these global retailers as they set up shops in other countries. “Partnering” is today’s mantra as opposed to “monopolizing” (a throwback to our cacique history), e.g., San Miguel very recently sold a major stake in the company to Kirin to diversify and optimize its investment portfolio; and generate greater profit potential – that would reflect a bigger dent on our GDP. (It appears San Miguel is not waiting for the global economic turnaround and instead is gearing up to exploit the moment – mirroring the investment philosophy of Warren Buffett.)

The Wal-Mart story is a microcosm of how economies of scale drive businesses to go global and how smaller businesses and countries can piggyback on and partake in the benefits/positives of the global economy and engender a healthy GDP.

In the same manner that a typical negotiation does not have to be a win-lose proposition, leveraging the global economy does not have to be a zero-sum game. (But there is anecdotal if not empirical evidence that countries with hierarchical cultures see things otherwise, i.e., the “master” will always get the better of the “servant” especially when transparency is the exception than the rule. Yet, China and the Asian tigers have overcome their cultural and ideological baggage in pursuit of free-market economics.)

And as importantly even blue chip institutions (or the Proctor & Gambles of the world – progressive, cutting-edge and innovative) can be overtaken by the rapid and accelerating generation of new thinking, knowledge and practices in today’s age – of Gmail, facebook.com, iPods and Black Berrys.

At the country level, invoking ideology that shunt “imperialism” or multinationals or foreign investors will not stop the speed and progress of today’s cyber world. At best it will stunt the progress of economies like the Philippines, i.e., limiting our options means establishing an economic model that will be characterized by sub-optimization – sub-optimized: capital formation, investment, market, technology, efficiency, productivity and competitiveness; and in the final analysis, sub-optimized GDP growth yielding more not less poverty. And that is without factoring corruption yet; and when combined equates to a perfect storm?

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: http://phileconomy.blogspot.com/2009/04/entrepreneurship-does-not-mean-local.html)

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.

RP-Taiwan partnership: moving on the right track

Two news items about the Philippines and Taiwan were truly welcome news: RP, Taiwan sign 4 agreements at joint economic conference – including the grant of a host of incentives to Taiwanese high-technology firms that will locate in Subic and Clark; RP scientists get pointers from Taiwan. And so were a couple more about Del Monte shifting from domestic to export orientation and the WTO warning against protectionism.

In his blog (see www.phileconomy.blogspot.com) the writer talked about the dynamic of: capital formation, investment, technology, market, productivity and efficiency as key to competitiveness. And that for a developing like we are it starts with partnering with the right global/regional players in order to optimize as opposed to sub-optimizing these elements.

On other hand, there is the school of thought that given the greater impact of the current global economic crisis on the Asian tigers that we should not rely on exports, foreign investment and remittances of OFWs. In his blog the writer raised the imperative that remittances from OFWs must simply be a stop-gap measure – they are in exchange for draining talent; what we need is an economic engine that provides a larger, more sustainable revenue-generating capacity.

While we are in the current global economic crisis both exports and foreign investments are expected to decelerate; yet they are two critical elements if we are to become competitive. And so we must gear up like businesses do via a multi-year plan. As importantly forward-looking businesses (e.g., Del Monte and San Miguel) view the current crisis as the time and the opportunity to step up investments.

We cannot talk about competitiveness in isolation given our limited resources. It is market forces that make exports ideal, specifically economies of scale. The bigger the market the greater the potential for higher margins . . . though the more competitive it is; and precisely why competitiveness is an imperative.

Marketers keep an eye on their product architecture in order to overcome the product-cycle phenomenon and as importantly open up new categories and segments that offer higher-value added products, the key to competitiveness. (See www.phileconomy.blogspot.com re Coca-Cola’s redrawing of their product architecture.)

The RP-Taiwan joint economic conference brings to mind the evolution experienced by economies over the years.

By the East River and the Hudson River bordering the east and west of Manhattan are relics of the once engine of New York’s economy, manufacturing – and hence the shift to a service economy. Germany has switched its emphasis from consumer goods manufacturing to industrial equipment and machinery given their high cost structure and thus leveraging instead their competitive advantage in higher-value added industrial products – because of their engineering and manufacturing prowess. Beyond the U.S. Taiwan has established manufacturing facilities in China to take advantage of lower costs. And with China experiencing an economic imbalance of its own, new manufacturing facilities are coming to India and Vietnam.

And it appears Taiwan now sees opportunities in establishing manufacturing facilities in our export processing zones. A businessman in Angeles was telling this writer over dinner the other night that in Clark a couple of new investments (by an American and a South Korean) are going live shortly, and it would be good for his business.

This seeming shift to the Philippines should be most welcome; and the right response from us would put us on the right track: to move beyond comparative advantage – to competitive advantage – we have to optimize capital formation and acquire state-of-the-art technology by seeking regional/global players like the Taiwanese, and the American and South Korean investors at Clark.

In the past countries were focused on comparative advantage especially low labor cost. But as we now know such advantage could be short-lived when labor cost alone is what drives comparative advantage.

On the other hand, competitive advantage leverages all the elements that drive competitiveness:

• Capital formation – our tendency to go it alone is reflected in our higher external debt versus foreign direct investment – see www.phileconomy.blogspot.com; the Asian tigers mirror the strategy of progressive private enterprises, i.e., seek low-cost capital; competitiveness starts here – the lower the cost of capital the greater the ability to move towards competitive advantage
• Investment – the more expansive the source of capital the greater the ability to elevate investment capacity – to pick and choose the most viable investments that will yield the best returns, including acquiring the critical input – from talent to technology to machinery and equipment to raw materials to infrastructure to market, etc.
  
• Market – the bigger the investment capacity the greater the ability to target a bigger market and the greater the margin opportunity and the potential to sustain the undertaking, building from strength to strength; this requires a market-oriented mindset, constantly updating the product architecture and delivering higher-value added products – product development efforts must be part of an innovation culture: it is not purely R&D or purely marketing or purely engineering. (See www.phileconomy.blogspot.com re the Toyota model.)
  
• Technology – our tendency to go it alone is reflected in our inability to partner with the right global/regional players that can provide state-of-the-art technology; our scientists working with their Taiwanese counterparts in the electronics industry is a step in the right direction
• Productivity – the better the technology and the bigger the market equate to leveraging economies of scale, i.e., greater volume, revenues and margins
• Efficiency – the ability to pull together all the above elements brings about efficiency in every aspect of the undertaking and sustains competitiveness

We should be focusing on developing competitive advantage so that the “ideological debates are left behind”? (See www.phileconomy.blogspot.com re the 7 pillars of Western wisdom.)

“Parable of the talents”

The master was unforgiving using words like evil and lazy.

The Rockefellers had to yield to events (when antitrust judgment scaled down their entity) and a century later the original Standard Oil still evolved into one of the world’s largest enterprises (though others argue that it would have been much bigger) with professional managers running it; and generating wealth that benefits far more people (with over 50% owned by institutions managing investments like pension funds and the balance spread out even more broadly) beyond the Rockefeller family – while the Rockefeller Foundation remains one of the largest charitable institutions.

Yet this business-model is facing an altogether different challenge – to explore alternative sources of energy. Man is constantly challenged ever since Adam and Eve were challenged to conquer the world despite their human nakedness – and that is the source of man’s strength? Overcoming two world wars and several regional or local conflicts, tyrants, famines, recessions and the Great Depression, among others? And we can now add the current global economic crisis to this list.

Warren Buffett and Bill Gates are putting their enormous wealth into charitable endeavors, having generated or mirrored the performance of the first two servants with their God-given talents.

The converse of the above examples may not be as noble: for example, the rule of three (generations) applies to inheritance? That sub-optimizing talent or resources risks them fading away as opposed to flourishing? And which is why both Buffett and Gates are giving away most of their wealth? They expect their heirs to compete and win like the master expected of the three servants?

Is San Miguel surrendering a big piece of itself if not national pride in selling over 40% of San Miguel Brewery to Kirin? Or does San Miguel’s action mirror the object of the parable of the talents? That it is broadening its investment portfolio and optimizing its profit potential?

McKinsey, a consultancy, has published a study: The new dynamics of managing the corporate portfolio, Number 23, Spring 2007 - it spells out when to stick to the knitting and when to diversify. For instance if we view our market as limited to the Philippines it follows that the conglomerate model will work – especially if a business has a high probably to saturate the market and reach the point of diminishing returns, and hence the need to diversify. Yet the underlying principle still applies, that every business venture must seek and attain competitive advantage lest it becomes a liability.

For decades San Miguel was the pride of the Filipinos despite Don Andres switching to American citizenship. (The Sorianos had to yield to events too.)

Fortunately, aside from San Miguel, our tycoons are pursuing profit optimization having adopted a more inclusive capital formation strategy – generating a greater ability to invest beyond our shores and likewise pulling in outside investors.

Are our ownership concepts and beliefs sub-optimizing our ability to invest, develop and grow?

Are we unwittingly rationalizing our economic performance by pointing to the many flaws of capitalism and globalization? And do we see the global economic meltdown as doomsday? Like Adam and Eve thought when they were driven out of Eden? And as a knee-jerk reaction do we want to isolate ourselves from the rest of the world albeit temporarily?

We’ve been there before? Done that – what we think is temporary becomes ingrained in our system like our OFWs and import substitution?

Every developing country needs to institute some form of protection, e.g., import substitution, until it becomes competitive. But yet today or decades later we are still uncompetitive. Why? Because we have made the temporary so ingrained by sub-optimizing the factors that should have driven our economy – from capital formation to investment to market to technology to efficiency to productivity – and instead collectively made us uncompetitive? We are caught in a vicious circle that will require some doing for us to break free?

And given our low GDP per person of $3,400, which is a fraction of Thailand’s or Malaysia’s, how can an isolationist strategy substantially raise revenues and make us competitive? We need to do a temporary fix but bearing in mind that we need to gear up beyond the temporary?

In fairness we have though somewhat reluctantly acknowledged the economic successes of our neighbors, the Asian Tigers – they clearly were able to leverage and benefit from capitalism and globalization, drastically reducing poverty in East Asia to 18% versus our over 27%.

Will they likely owing to the global economic crisis shut their borders and expect the rest of the world to shut theirs too? Why is China railing against protectionism by the US? Just like every beneficiary of capitalism and globalization, these countries given economies of scale will continue to make the world their market once the global crisis sorts itself out – when supply and demand approximate equilibrium; the bad news is the crisis may take longer to put to bed given the artificial demand created principally by the subprime mortgage mess that can be at least a trillion dollars, i.e., this artificial demand has now become a real oversupply (of products directly and indirectly related to housing like construction materials, appliances, cars, furniture, etc.) of the same magnitude that must be flushed out. And which explains why Obama wanted a stimulus plan to match this oversupply. Unfortunately, the stimulus plan given the politics in Washington is a watered down version and most likely prolong the fix. And the longer the fix takes the longer exporters to the U.S. will suffer like the Asian tigers.

In the meantime, Germany, like GE, is gearing up to exploit the infrastructure and industrial needs of emerging economies like China. “The Chinese have to restructure their economy in the long run (as they move beyond consumer goods) and they need new industrial facilities for that. That’s where German industry can step in.” – c/o the head of the German exporters’ federation, Anton Börner, February 15, 2009, newspaper Berliner Zeitung. And this is the kind of mindset that made Germany the world’s largest exporter?

Early on Germany figured that despite their engineering and manufacturing prowess their cost structure made them uncompetitive in the consumer goods market so they had to shift to industrial equipment. But the core model (see www.phileconomy.blogspot.com) remains, whether for private entities or countries, i.e., moving up to higher-value added products is key to competitiveness. And small countries don’t have to go it alone – small Eastern European countries have partnered with German entities to acquire German technology.

And not surprisingly, communist China and communist Vietnam as well as Eastern Europe (former members of the Soviet socialist bloc) have emulated the Asia tigers albeit sounding the alarm bell against American excesses and greed especially given the global economic meltdown. None of these countries ever embraced capitalism and globalization for their perfection?

Pareto’s Principle and the Great Commandments come to mind – that we must not overlook the vital few when we dissect capitalism and globalization? Even Eden was made imperfect by an extraneous presence; and so was the Last Supper – man’s ways are inherently imperfect . . . but perfection is anathema/not a requisite to innovation, progress and development? None of the most developed countries (the U.S. or Japan or Germany) would claim that perfection resides in them?