Chrystia Freeland

Tony Hsieh and Sanjay Madan wrote the program to create LinkExchange over a weekend. Before the following weekend, they had more than a dozen websites participating in their ad-sharing network. Over the next several weeks they worked frantically on the project. They refined their business in real time, learning—quickly!—from their mistakes. Less than a year later, the Harvard grads were offered $1 million (U.S.) for the company. Less than a year after that, they sold it for $265 million.

That was 1996. Since then, this story of development on the run has become commonplace. Hacker culture is now part of the broader culture: “beta test” is in the dictionary, and we accept innovative, albeit imperfect, beta releases even from multibillion-dollar global behemoths such as Google. We’re prepared to accept flaws because the tech revolution is progressing so quickly that it is usually better to be fast, and possibly wrong, than to try to be perfect and end up being slow. By the time your flawless product is released, it will likely be obsolete.

Technologists aren’t the only people operating in a rapidly changing, uncertain environment. Thanks both to the tech revolution and to globalization, that is true of all of us, including our governments. But, as Nobel-Prize winning economist Michael Spence argued at a private equity conference in Quebec City this week, emerging-market governments seem to be better at dealing with an unpredictable, volatile world than Western ones. They are like Silicon Valley entrepreneurs—willing to act swiftly, even if it means making mistakes. Leaders in the West are more like Detroit, reluctant to make bold moves until it is too late.

Part of the problem is the way we judge various types of mistakes. Spence argues that we make two types of mistakes—implementing a bad idea, and failing to act on a good one. If you are religiously minded, you could think of these as sins of commission and sins of omission. In stable times, sins of commission are probably worse. If your industry isn’t changing very much or if your country’s economy and the world economy are on an even keel, launching an expensive new product or government program that fails is probably more damaging than missing out on a great opportunity.

But in times of radical change, making a mistake is less risky than doing nothing at all. Spence thinks that emerging-market leaders understand this better than Western ones do, and he cited the examples of China’s fast and big stimulus program after the financial crisis and the Indian government’s willingness to act to burst asset bubbles.

The effectiveness of China’s government—especially in contrast with the paralysis of some Western nations—is often understood as evidence of the greater agility and decisiveness of authoritarian states. Spence’s analysis suggests another phenomenon could be at work. Emerging-market leaders—both the democrats and the dictators—are more accustomed than their Western counterparts to fast and disruptive change: They’ve experienced revolution, hyperinflation and devaluation. That may give them an edge in today’s volatile global economy.

Speaking at the same conference, Glenn Hutchins, co-founder and co-CEO of private equity firm Silver Lake in New York, said that in the corporate world the heat is shifting from Western companies to ones in the emerging markets. In the past, he said, developed Western economies were “the best crucible” for coming up with the most appealing inventions and the most effective business practices that were then exported to the rest of the world. But Hutchins, argued that emerging markets, with their rapid growth and demanding, low-income consumers, were turning out to be a tougher—and therefore better—hothouse for pace-setting companies than the West.

“It used to be that to be a global company you had to forge your business model in the crucible of competition in North America,” Hutchins said. “Today what you are seeing is companies that are growing up … whose business models are being forged in the crucible of competition in the emerging markets.”

American financiers haven’t been getting a lot of praise lately for their skill at capital allocation. But the speed with which the smartest investors, such as Hutchins, have grasped the shift of ideas to the emerging markets is impressive. Western politicians could do worse than to follow their example.

Following her chat with Glenn Hutchins at the Quebec City Conference about how globalization is changing corporate strategy, Chrystia interviewed NYU Economics Professor A. Michael Spence about how globalization is bringing about structural change in the world’s leading economies.

Spence, a 2001 winner of the Nobel Prize, chairs the Commission on Growth and Development, a multilateral effort to determine the practical conditions developing nations need to implement in order to achieve high growth. Given his expertise in emerging markets, it comes as no surprise that he thinks their future is bright. Spence was impressed with emerging markets’, especially China’s, brisk comeback following the capital flight and collapse in world trade that resulted from the financial crisis, and he thought they would be able to sustain their current growth rates:

American policymakers — and other Nobel Prize winners – are far less impressed with China’s resurgence, which they view as the result of the malevolent Chinese policy of keeping the yuan undervalued. Spence, however, argued that a one-off revaluation of the sort Washington demands will not only be bad for China, since it will destabilize most of the country’s export-oriented businesses. But it would also be bad for the global economy, since China is the engine for growth in large parts of the world. Instead, he said, China should focus on finding a way to make necessary structural changes while sustaining growth:

China is in a complex set of transitions, and one of the objectives of Chinese policy in navigating through this next five years, is going to be to increase domestic consumption and domestic incomes and let that drive the economy. Part of that will involve a reduction in excess savings in China… That’s in China’s interest; it’s also in the global economy’s interest. But what the global economy wants from China is success in making these structural changes in such a way that the growth is sustained. Chinese growth is an enormously important factor in the global economy and especially in the emerging markets. I mean, I think it’s widely known that the growth in Latin America–which is running at a rate of 4.5% real–is dependent on the growth in Asia.

Finally, Spence told Chrystia that as the United States looks for ways to pay for much-needed investments in education and infrastructure, it has much to learn China, particularly in the area of self-sacrifice:

I mean, look, I know people don’t get it in the Western world, so let me describe China thirty years ago. Thirty years ago China had a per capita income of $500, changed direction, and started saving at 35% and investing at 35%. OK? Now when you have a $400 income and you’re saving at 35%, that means you’re consuming 66% of $400. That is a huge commitment to the future as opposed to the present, right? Now you either make the commitment, as the Chinese did and all the other high-growth developing countries, or you don’t. And there’s lots of developing countries that haven’t made the commitment and the investment and savings rates are down around 15%, and you just can’t sustain high growth on that.

Posted by Peter Rudegeair

The theme of this year’s Quebec City Conference, a gathering of some of the world’s pre-eminent private-equity investors and venture capitalists, is innovation and globalization. Chrystia was in attendance earlier this morning and interviewed one of the event’s keynote speakers: Glenn Hutchins, co-founder of Silver Lake Partners, a $14 billion private-equity firm that focuses on the technology sector.

Hutchins’ remarks focused on the shift of economic power from the U.S. to China. He noted that as long as China grows much faster than the United States, multinational corporations will shift more of their business there. But his other insight was that for the first time businesses are tailoring products to the Chinese consumer rather than just selling the Chinese products developed for American consumers:

It used to be that to be a global company you had to forge your business model in the crucible of competition in North America–potentially Europe, but usually North America–where you define your business model, define your product set, define your customers, and then once you were successful there took it outside the world and essentially sold the same products and services to a strata of groups and people around the world who can consume it.  Today what you’re seeing is companies that are growing up–we talked a little earlier about Huawei being a very good example, but there are many, many others–whose business models are being forged in the crucible of competition in the emerging markets.

Hutchins gave an example from the mobile phone industry to illustrate his point. Americans are willing to pay upwards of $400 for Blackberries, iPhones, and other all-functional smartphones, but emerging-market consumers tend to spend only $20 on mobile phones. Instead of following the integrated business model of RIM or Apple, mobile-phone makers are forced to develop a new model that uses many small workshops across the developing world to keep phones both cheap and customizable.

Staying on the topic of mobile phones, Hutchins called the rapid development of mobile wireless broadband the “biggest technology trend of our lifetimes.” The technology revolution that took off with the PC and Microsoft, continued with the network and Cisco, and grew to include the internet and Google, has reached a new phase with today’s mobile phones. He gave some numbers to make his point:

Twenty-five or thirty years into the PC trend there are about a billion PCs in use in the world today. There are about 1.5 billion television sets, about 1.2 billion telephones. I think there are only 2 billion bank accounts.  There are already 5 billion subscrpitions to wireless handsets just in the nascent days of this.  So it’s three to five times the size of the addressable market of these technology trends that are twenty-five to thirty years in penetration.  It’s enormous potential.

Posted by Peter Rudegeair

They call economics the dismal science, but Larry Summers, one of its pre-eminent public practitioners, is anything but dull. That penchant for intellectual controversy means he hasn’t always won popularity contests, but he is unfailingly stimulating, as he proved in a speech in India last week, when he hit on one of the biggest issues in the world economy today, and coined a snappy catch-phrase to describe it: the “Mumbai Consensus”.

The Mumbai Consensus, Summers said, is “people-centric.” He contrasted it both with the Washington Consensus, the U.S.-led, free-markets-and-democracy formula that seemed to have conquered the world after 1989, and with the Beijing Consensus, China’s state capitalist approach that today is winning fans in emerging markets and in some developed ones.

Summers thinks the real model to watch is India’s, the world’s largest democracy. Partly because of its political system, India’s economic rise has been powered as much by the voracity of its domestic consumers as it has by the country’s push into foreign markets. That’s a sharp contrast with China, where the focus has been on working for the rest of the world, while the Chinese people, who are poorer on average than those of Albania or Jamaica, nonetheless save more than half of their GDP.

What makes the idea of the Mumbai consensus, and of people-centric economic growth, so powerful is that the smartest and most politically potent critique of global capitalism right now is that it isn’t delivering for the middle class.

We are living in an age of unprecedented economic prosperity: since the 1970s the world economy has been growing at a faster pace than at any other time in human history, and billions of people have been lifted out of poverty as a result. Yet a perversity of this global boom is that it has benefited the super-elite most of all.

That is apparent most starkly in America, where 23.5 per cent of total income in 2007 went to the top 1 per cent, but it is also the case in countries with a more generous social safety net, like Canada and the UK. It is happening as well in communist China, where the gap between the rich and poor is as great as it is in the U.S., and in other emerging market powerhouses, including Russia, and, yes, India. (Income inequality has been falling in the fourth BRIC, Brazil, but that may partly be because it has historically been so high. Today it remains far greater than in the U.S.)

This unequal return on globalization is a pretty good key to understanding domestic political battles in most countries around the world. That’s true in authoritarian China, where, according to the state-run China Daily, the key concern of the Communist Party as it debated its twelfth five-year plan this week was “the widening wealth gap”. That is also true in the United States, where the rage of the Tea Party, with its proudly anti-elite heroines, is largely animated by anger that the American middle class is losing out.

Income inequality is high in India, too – Raghuram Rajan, the Indian born and educated University of Chicago economist pointed out in a 2008 speech in Mumbai that India was second only to Russia in its number of billionaires per trillion dollars of GDP. But Summers is right to assert that India’s rise out of developing world poverty has been “people-centric”:  both an engine and a consequence of India’s ascent has been a surge in consumption that extends deep into the income distribution.

For America and the rest of the developed world, there’s still a catch: people-centric growth is easier to achieve in countries where the people are cheap relative to the rest of the world. Consider IBM, which highlighted 29 per cent growth in the BRICs when it reported third quarter earnings this week. IBM’s engagement with the emerging markets is not just about exports: in 2003 IBM employed 9,000 people in India; today, 75,000. By contrast, since 2003 IBM has laid off 30,000 workers in the US, where it now has 105,000 staffers, just a third more than in India.

Summers, who has been worrying aloud about the hard-hit US middle class since well before the credit bubble burst, is painfully familiar with this problem. Identifying the Mumbai Consensus is a first step towards a solution, but alone it won’t be enough.

On a recent trip to Hong Kong Chrystia recorded a podcast for the American Chamber of Commerce in China, about an op-ed she published in the Washington Post this summer that critiqued China’s economic system of state capitalism.  Chrystia, invoking a recent speech from Mike McFaul of the National Security Council, tells the Chamber that while the Chinese system succeeded in raising the country out of the lowest rungs of poverty, there is no historical evidence that suggests it can turn China into a rich nation:

My argument, and as it turns out quite independently, Mike’s argument, was we have to be really careful about thinking that authoritarian regimes are better at modernization, and one reason why we have to be careful is there is some historical evidence that says that authoritarian regimes can be quite good at the early stages of modernization.  They can be pretty good at that brute force moment when you’re dragging and economy out of being an agrarian society into industrialization.  What we haven’t seen yet—and as we look across the world, across histories—we haven’t yet seen that an authoritarian state is able to move an economy to the next level, and in fact what we’ve seen is that even in those countries where an authoritarian state successfully led an industrialization effort, as the country got richer and the economic transformation that needed to be achieved was more complex, what you actually have had happening is democratization.  There are some Asian countries that are a really good example of that.  I think South Korea is perhaps the best one.  […]  What we don’t have evidence of is that the state capitalist model… works in a really rich country.  All the countries that are really rich are democracies.

Chrystia also elaborates on a topic she touched on in her original op-ed, namely economic historian Joel Mokyr’s thesis that the same centralized, authoritarian decision-making process which foreigners marvel at today actually caused China to miss out on the Industrial Revolution centuries ago:

What is most interesting is China could have been the place where the Industrial Revolution actually started.  If you look at medieval Chinese history, China had all of the ingredients for an Industrial Revolution centuries before Western Europe did, but it didn’t happen in China.  And why was that?  Because China had a highly centralized authoritarian state, and just as those elements were coming together, the Chinese state, which was authoritarian and centralized, decided, “We don’t want that,” and decided to go in another direction.  That couldn’t have happened in Western Europe because Western Europe was much less centralized.  Suffered from that of course—lots of wars, lots of countries moving in bad directions, less good at doing all sorts of things.  But because you didn’t have this centralized, authoritarian decision-making process, industrialization did happen in Western Europe.  And when one Western European country slowed down, went off the rails, became too authoritarian, that process—those people, those ideas—very quickly jumped across the border into another country and the energy, the economic growth went there.  And the whole continent, the whole society benefitted.

Do go listen to the whole thing.

Posted by Peter Rudegeair

As the U.S. mid-term elections approach, it is easy to despair about the quality of this country’s political debate. Christine O’Donnell, the surprise Tea Party-backed Republican candidate for the Senate seat in Delaware, has captured the nation’s attention with her opposition to masturbation and a campaign ad in which she assures voters that she is neither a witch nor a graduate of Yale University. Here in New York, Buffalo businessman Carl Paladino, running for the governor’s office, has made his contribution to the carnival atmosphere by discussing his rival’s “prowess” and urging reporters to investigate whether he was a faithful husband.

Part of my job at the moment is appearing as a commentator on other people’s TV shows. Viewed from the green room or the studio, America’s political discourse can look particularly grim. I sometimes find myself in the role of finger-wagging, middle-aged scold calling for a discussion of global financial imbalances, rather than the latest juicy scandal or mockable example of political foot-in-mouth disease. TV producers, I’m afraid, find this schoolmarmish persona as unappealing as my kids do — and given the juicy alternatives available it is hard for me to blame them.

But the campaign trail has always been as much about providing a circus as it is about bread and butter issues. And, dipping just below the froth of the cable sound bites and the blogosphere, I’ve realized this campaign is actually revealing a country that is struggling seriously and passionately to come to grips with the very big issues it faces.

The first is America’s role in the world economy. After a century on top, this is the year when ordinary Americans have realized their country needs to re-establish a place for itself in the global economic order (unemployment at nearly 10 per cent is a powerful instructor). This epiphany doesn’t tend to express itself in measured debates about global financial imbalances or special drawing rights and the role they could play in creating a new reserve currency. Instead, the big focus has become China, with politicians in both parties arguing that the undervalued renminbi is a significant source of America’s woes and calling for a tough reaction, possibly including import tariffs.

Three economic mandarins I interviewed this week — Laura Tyson, a former advisor to President Bill Clinton, Glenn Hubbard, a former advisor to President George W. Bush, and James Wolfensohn, the former head of the World Bank — all told me that this China bashing was not entirely merited, and that it could have a counter-productive impact in Beijing. They are probably right. But it is always a mistake to confuse campaign advertisements with actual policies—most voters certainly don’t. And the fact that mainstreet Americans are grappling with their country’s changing role in the world — outsourcing is the theme of one of this season’s sitcoms — is significant and important.

The second big subject America is chewing over is its fiscal situation. Again, it is easy here to feel the heat and bemoan the lack of light: after all, the Republicans, who are making the most hay of this subject, are mostly guilty of, St Augustine-like, calling for a balanced budget, but declining to name what they would cut to get there. The bigger point, though, is that American voters care passionately about this issue. Even if you believe in a stimulus in the short term—and Hubbard surprised both me and Tyson this week by conceding that would be wise—it is surely a good thing for America and the rest of the world that the country cares about what is certain to be one of its toughest political challenges in the coming decade.

Finally, Americans are starting to wrestle with what is likely to be the third big issue of the next 10 years—the country needs to upgrade its physical and social infrastructure. The second problem—the budget deficit—will make this tough. But the first challenge can’t be resolved without it. Americans get that: hence the heated national debates around education, healthcare and signature projects like the New Jersey tunnel.

Of course, there is no national consensus on these three big questions, and most of the debate about them obscures as much as it reveals; that is called democracy and a free press. But what’s remarkable is how central these issues are to the current political debate. Look beyond the today’s latest gaffe, and you’ll find an America thinking hard about its place in the post-American century.

While Laura Tyson thinks America has no intention to inflate away its debt, former World Bank President Jim Wolfensohn said in an interview today he believes inflation and a devaluation of the dollar are “inevitable”:

Countries that get into heavy debt find that other countries realize that their currency isn’t as valuable as it was because they owe so much money. So the currency devalues. As it devalues, you have an inflation. And it is my judgment that that is likely to be a very important element in how we unwind this whole issue of debt to income levels in the United States.

Wolfensohn has a similarly gloomy outlook for Africa, a continent whose development he championed during his tenure at the World Bank. African institutions and governance are less efficient and effective than their counterparts in India and China, he says, and growth will suffer as a result:

I think [a coming African miracle] will happen in some few countries, but I do not think it will be anywhere near the speed that it needs to be. And it worries me enormously that you’ll have 2 billion out of 9 billion people on the planet so far behind. And they’re not running around carrying spears and hunting — they all have cellular radios, they’re all linked with the rest of the world. It’s a very different Africa, and I think we spend far too little time thinking about our responsibilities to Africa but also the role that Africa is going to play in the world of my children.

Posted by Peter Rudegeair

“There is no other policy tool available [besides quantitative easing],”‘ Laura Tyson, a former chairwoman of the Council of Economic Advisors, said at this morning’s Reuters/YouTube live debate on how to fix the economy. Tyson argues that additional Fed purchases of long-term bonds is the most viable way to energize the U.S. economy since a new fiscal stimulus bill is unlikely to pass Congress:

She appears alongside Glenn Hubbard, another former CEA chairman, who maintains the Fed will spend another $1 trillion to lower rates by 20 basis points. “We can’t inflate our way to prosperity,” he said.

Tyson disagrees and thinks the risk to inflation is low. She admits we have to convince the rest of the world that the U.S. has no intention to inflate away its debt.

Their conversation then turned to China. Both agree that the increasingly fiery rhetoric Washington directs toward Beijing is counterproductive and that the U.S. is better served by enacting policies to reduce its trade deficit:

HUBBARD: If [the U.S. and China] both keep beating up on each other and try to beggar our neighbor, we’ll get into a very bad place. China does have a protectionist policy. It does have a mercantilist policy. And I think focusing on those things quietly rather than from the hilltops, as the administration is doing, would be the right answer.

TYSON: [the rhetoric towards China is] a mistake for them and it’s a mistake for us. … but I honestly think that, just like Glenn does, the exchange rate is not the issue here … frankly, I think we’ve seen much more of a sign that the Chinese are rebalancing and restructuring than we’ve seen in the United States so far. [...]

HUBBARD: [If you focus] on export led growth, you’re guaranteeing, at some point, to have a large financial crisis, because you’re building up a lot of negative net present value projects in China.

As for a second fiscal stimulus, Tyson said the U.S. should spend $1 trillion on infrastructure over the next five years. She thinks direct aid to states should be a priority at a time when 25% of the nation’s children live in poverty and state and local governments are forced to lay off 88,000 teachers because of budget shortfalls.

Surprisingly, Hubbard conceded that a second stimulus would be helpful, but said it should only take the form of investment incentives and a mass refinancing of mortgages held by Fannie Mae and Freddie Mac. While infrastructure spending could be stimulative, he says shovel-ready projects are few and far between.

Posted by Peter Rudegeair

Reuters Global Editor-at-Large Chrystia Freeland teams up with YouTube to bring you the first-ever live debate between two of the most influential economists of the past decade, and possibly the next:

Laura Tyson and Glenn Hubbard

Live coverage begins Tuesday, October 12 at 8am ET.

To participate in and watch the live debate: Conflicting Visions: Fixing the Global Economy

For most of the past century, the big global narrative has been the clash of rival paradigms: Nazism versus liberal democracy, communism versus free market democracy, and, more recently, fundamentalist Islamic states versus the secular, democratic west. When the cold war ended, Francis Fukuyama predicted that this clash of paradigms would end. He was right, but not for the reason he thought.

The battle of rival ideologies has ended not because, as Fukuyama foresaw, the triumph of capitalist democracy has been universally acclaimed. Instead, it is because all of us have realized we face a new challenge — how to thrive in the high tech, global economy — and no one country or single ideology is yet certain of getting this exactly right.

This isn’t the cold war, or the clash of civilizations, or even the end of history — it is the age of uncertainty, as the entire world struggles to understand and keep up with the biggest economic transformation since the industrial revolution.

I was persuaded that this single, uncertain global effort to keep pace is our new overarching challenge at a venue which was the setting for one of the seminal decisions in the age of rival paradigms: the Livadia Palace, in Yalta. In this cream colored villa a comfortable lawn’s distance away from a rocky cliff that drops to the Black Sea, Churchill, Roosevelt and Stalin made their infamous pact to divide Europe between the communist east and the democratic west.

Today, Yalta is again at the crossroads of democracy and authoritarianism as Ukraine, the country to which it now belongs, wavers between integration with Europe and integration with Russia. But when I spent two days there early this month moderating a conference on geopolitics, the most important takeaway was that this old dilemma was the wrong one for Ukraine — and everyone else — to focus on.

The most articulate expression of the new paradigm came from Carl Bildt, the former Swedish Prime Minister, who was re-appointed foreign minister last month after the election victory of his centre-right party.

“The megatrend of our age is globalization,” Bildt said. “That process of globalization has shown remarkable resilience over the last ten to fifteen years. In one crisis after another, globalization comes back and is stronger each time. The success or failure of nations is really are you able to plug into and be successful in globalization or not.”

One thing that’s interesting about Bildt’s remarks is that they could be made in any city anywhere on the planet and be as relevant as they were in Yalta — one aspect of the economic revolution we are living through, and one sign that it truly is global, is the fact that the whole world,  from London to Lagos, and from Silicon Valley to Shanghai, is going through the same transformation at the same time.

What else is interesting about what Bildt identified as the challenge of “plugging in”, and what makes it very different from the ideological clashes of the past 100 years, is that no one country and no single ideology has yet claimed to have it all figured out. China’s state capitalist model, with its repressed citizens and efficient government is delivering high growth, but so is India’s flourishing democracy and chaotic government, while neo-authoritarian Russia struggles to become more than a petro-power.

The welfare states of southern Europe are among the most troubled economies in the developed world; the Nordic welfare states among the most vibrant. Success and failure co-exist even within a single country or even a single region — consider the miracle of Silicon Valley and the failed state of California.

Bildt alluded to the diverse models of success by pointing to the wildly contrasting examples of his native Sweden and of China: “We had a global age that ended in August of 1914 and then it took us a long time to recover,” Bildt said. “It was only in 1990 that Sweden was back where we were in 1914 [in terms of connection with the global economy].”

But between 1990 and today, he said, Sweden’s integration with the global economy doubled. “We’ve gone through an enormous process of globalization just in two decades,” Bildt said. “But we are not as successful as China, which has gone from being one of the most closed economies in the world thirty years ago to an even more integrated global economy than Sweden today and accordingly has growth figures that are fairly impressive, to put it mildly.”

Tolstoy wrote that happy families are all alike and unhappy families are unique in their unhappiness. Today, it is the unhappy countries that have a lot in common — corruption, lawlessness and autarky don’t work anywhere — and the happy countries that are a pretty diverse lot. But, for once, the whole world is grappling with the same question: how to plug in.

Photo: Carl Bildt, center, at the Yalta European Strategy conference in October 2010.  Photo Credit: Sergei Illian (Yalta European Strategy).