Nine developments that will fuel world prosperity.
Out of the Box Thinking
'Nothing is stronger than an idea whose time has come.' - Victor Hugo
We are in the midst of a monumental global reshuffling. Thoughtful macroeconomic reforms in tandem with favorable demographics are altering deep-rooted economic patterns. A host of secular reforms are priming emerging markets for significant growth and signaling the establishment of what may be the Ultimate Contagion.
What was unimaginable a few years ago is now a reality:
* Ethiopians are using the Internet to purchase slaughtered sheep for their traditional meals.
* Cell phones get better reception in Kabul than in Los Angeles.
* In Latvia, Estonia, and Lithuania, 90 percent of bank transfers are made online - this is three times the rate in France and Germany.
Decades of failed developmental policies and discouraging wars on poverty and disease have led many to question government's ability to effectively deal with the problems of globalization. New and more effective approaches to increasing foreign investment, strengthening rule of law and improving educational infrastructure are jump-starting stagnant economies the world over. A global microfinance movement is giving the world's poor access to credit for the first time, empowering hundreds of millions to start businesses and send their children to school.
Most emerging countries have another, less apparent, catalyst for growth - their people want it more. After enduring decades of oppression, the drive to have a better life is a potent force, one made more powerful by the Internet, which is opening eyes to what is possible.
Today, a farmer in Brazil reads about a farmer in Mexico who uses his land as collateral to buy a house, and he wants to be able to do the same. Leadership in Bangladesh watches India's economy blossom following an influx of foreign investors. They aspire to the same growth, so they begin deregulating state-controlled assets and set up a handful of economic zones. In this way, one country's success has become another country's inspiration. This dynamic, the 'Contagion of Success,' is playing out across the globe.
According to the World Bank, the global population will reach 9 billion by 2030, and 90 percent of the planet's inhabitants will be living in developing countries. The world's poor are its largest market, representing more than $14 trillion in purchasing power, more than Germany, the U.K., Italy, France and Japan combined. In a concept championed by C.K. Prahalad, the world's poor represent the Bottom of the Pyramid (BOP). It is a simple, yet powerful, observation that 4 billion people remain outside of the global market system. For companies struggling with maturing markets and questions about where their future customers will come from, the BOP represents the largest potential opportunity in the history of commerce.
Driving the Ultimate Contagion are nine catalysts:
1. Technological Innovation
Low-cost broadband access and wireless telephony are key drivers of technological innovation. These technologies enable advanced applications that promote: distance learning, better health care, greater civil participation. improved transportation infrastructure, and e-commerce.
Mobile phones reduee transaction costs, broaden trade networks and reduce transportation costs by eliminating the need for many face-to-face meetings. They can be used by those who have trouble reading or writing and their relative value increases as the existing transportation and fixed-line telephone infrastructure diminishes. Fishermen and fanners can use cell phones to check prices at different market locations before selling their produce.
* In 2002, Afghanistan had only 15,000 mobile subscribers, which grew to 100,000 in 2003. and reached almost I million at yearcnd 2005.
* In Kenya, a text messaging service advertises jobs and enables candidates to apply from their mobile phones. The service eliminates the need for jobseekers to travel long distances or pay expensive fees to access the Internet.
2. Expanded Credit Availability
For years, many have wondered how the developing world could embrace credit cards when most merchants do not have the infrastructure to accept plastic. Yet, wireless card readers are making their way into developing nations in the Far East, Africa, and India.
* A study sponsored by Visa International found that the number of credit and debit cards in India grew at an annual rate of 55 percent from 1997 to 2004.
* The Trade Bank of Iraq, which was established in November 2003. has since issued over 1,700 letters of credit worth approximately $6.5 billion.
* Lending in Latin America continues to expand; consumer credit in Chile has experienced double-digit growth rates; in Peru, consumer loans have increased at a rate of 20 percent; in Mexico, growth in bank lending and consumer credit has exceeded 20 percent.
The number of households with incomes over $3,000 in the HRIC's (Brazil, Russia, India, and China) is likely to double in the next three years. This swelling middle class is at once a catalyst for and a product of improved mortgage financing. Many governments are now looking to housing as a vital economic engine rather than as a social sector issue.
* In early 2005, Brazils mortgage and savings association estimated that financing to the housing sector was up 43 percent over the same period a year earlier.
* According to the securities firm KGI, mortgages in China grew at an annual compound rate of 115 percent between 1998 and 2004.
Microloans, small loans between $25 and $150, have a highly simulative impact and their ability to combat poverty is gaining wider acceptance.
* They have been instrumental in Bosnia and Herzegovina, where GDP has tripled since 1996.
* In 2003. the World Bank established a microfinance program in Afghanistan. Since inception, about 85,000 Afghans have borrowed money or set up a savings account with one of the microfinance groups.
3. Tax Reform
A recent survey showed that 80 percent of international companies now cite taxes as a key factor when it comes to choosing where to locate their businesses. It is small wonder that the ilat tax contagion continues unabated.
Unquestionably, the greatest example of the 'success contagion' to date is Russia's flat tax. In 2001, Russia overhauled its archaic tax system and replaced it with a 13 percent flat income tax-rate. The result: Tax revenues have jumped (up 50 percent since 2001) and the Russian economy has enjoyed significant growth ever since.
* Russia's successful flat tax has compelled many of its neighbors to do the same Estonia, Latvia, Belarus, Poland, Hungary, Moldova, the Czech Republic, and the Ukraine have all either adopted a flat tax, or initiated tax cuts and reforms. 'Old Europe' is taking notice. In the past two years, Portugal, Austria, Italy, Greece, and Germany have all either made or announced plans to cut taxes.
* As part of its aggressive economic reform agenda, Egypt has cut corporate taxes from 42 percent to 20 percent. The reductions have prompted a surge in FDI, which more than doubled in 2004.
* In January 2004, Romania introduced a flat tax of 16 percent that replaced income taxes that ranged to a high of 40 percent. Tax receipts during the first five months of 2005 rose 19.2 percent.
4. Increased Educational Opportunities
The importance of education in economic growth cannot be understated. Look at the example provided by Ireland. More than a century ago, the Irish left their country in droves for a better life in America. However, in recent years, numerous American companies have moved their operations to Ireland. As Thomas Friedman noted in The New York Times, Ireland's turnaround can be traced back to the 1960's, when the government mandated a free secondary education. Graduating students were more apt to remain in Ireland, which gave companies that much more reason to locate operations there. The result is a workforce that has nearly doubled in the last 15 years; nine out of the world's top 10 pharmaceutical companies have operations in Ireland, as well as 16 of the top 20 medical device companies, and seven of the top 10 software designers.
Similar emphasis on education is emerging around the globe.
* The government of Thailand has set aside almost $100 million to invest in the country's fiber optic network in order to provide access to long-distance learning for some of its most remote regions.
* In China, the government is in the midst of a five-year program, expected to be complete in 2007, which aims to equip thousands of schools with disc-playing facilities, satellite TVs, or Internet access.
* A project in Jordan has begun installing 5,000 kilometers of fiber optics and several thousand IT-network devices. This technology will link its 3,200 public schools, eight public universities, and 23 community colleges, and hopes to provide access for 1.5 million students by yearend 2006.
5. Institutionalized Property Rights
Prosperity and property rights are inextricably linked. Property rights, supported by the necessary rules and judicial system, provide people with incentives to create and innovate. They help connect individual effort and reward.
After years of neglect, the central role that secure property rights play in promoting and sustaining economic growth is being recognized by policy makers and scholars around the world.
* Spurred on by Ukraine's Orange Revolution in 2004, government officials have recently promised an active privatization policy and guaranteed property rights for all assets in the Ukraine.
* Under the guidance of Hernando de Soto, Turkey has instituted a number of reforms to help convert unrecorded resources into active capital - including empty parcels of land and homes without deeds.
* The World Bank's Board of Directors approved a loan for the Philippines second Land Administration and Management Project, which is committed to promoting social stability and stimulating economic growth by improving the land administration system and securing land tenure rights.
6. Reform & Privatization
Deregulation
* Half of the members of Ethiopia's Horticulture Producers and Exporters Association are foreign investors who have been attracted by an improved investment code, a five-year tax holiday, duty-free import on machinery, and easy access to bank loans and land acquisition.
* Vietnam is drafting a new investment law that will allow foreign investors to purchase, buy back, or merge affiliate companies operating in the country.
Foreign Direct Investment
* In May 2005. Microsoft co-founder Paul Alien announced plans to spend $1.6 billion building power and fertilizer plants in Bangladesh. This injection of funds will be the second largest in Bangladesh, behind a $2.5 billion project by India's Tata group.
* In June 2005. South Korea's largest steelmaker signed a preliminary agreement with the regional government of Orissa in eastern India to build a $12 billion integrated steel complex. The deal represents India's single biggest foreign direct investment.
* Barclay's acquisition, in July 2005, of a majority stake in South Africa's largest retail bank, Absa Group Ltd., represents the largest foreign investment in the country since the apartment era.
7. Wider Distribution of Wealth
* Today, rural India is no longer 100 percent dependent on an agrarian economy. In thepast, the ratio between those involved in agriculture and in other businesses was 75:25, but today the estimated ratio is 50:50. As a result, India's National Council of Applied Economic Research has noted that income in rural India has grown sevenfold in the last ten years. In 1990, for every $100 earned by a rural villager, an urban worker earned $82 more. Now, the gap has narrowed to $56.
* In Hanoi, Levi's priced between S70 and $129 a pair are a big seller. Market reforms and privatizations have helped Vietnam become one of the fastest-growing economies in Asia, charging ahead at an annual growth rate or more than 7 percent. While the wealthiest Vietnamese are seeing their incomes rise dramatically, many of the country's 83 million people are also sharing in the economic success.
8. Parents' Desire for Their Children's Success
The more parents have suffered, the more they want to provide a better life for their children. As prosperity catches on because of good economic policies - these parents will work harder to be able to spend more to educate their children, thereby laying a stronger foundation for continued economic growth.
* In China there is a saying, 'Parents want their children to become dragons.' This sentiment is clearly demonstrated by many parents' willingness to sacrifice for their children's education. According to the China State Bureau of Statistics, the average family earmarks roughly 10 percent of its savings for education. Put in perspetive. Chinese families expect to spend 7 percent of their savings on housing.
* In India, many parents in rural communities are willing to dedicate a significant portion of their income towards paying for their children to bypass the substandard government run primary schools in order to attend more costly private schools.
9. Women's Rights
The World Hank has determined that countries that promote women's rights and increase their access to resources and schooling have lower poverty rates, faster economic growth and less corruption than countries that do not. Increasingly, it is acknowledged that educating young girls may be the investment that yields the highest returns in the developing world. Educated women have fewer children, provide better health and nutrition, and generate more income than women with little or no schooling.
There are a number of events which signal a growing global gender equality:
* In Hgypt. women have been playing a key role in trying to organize opposition to the Mubarak regime. In Iran, women have been participating in unauthorized demonstrations against sex discrimination.
* Kuwait appointed its first female cabinet minister just one month after its parliament agreed to allow women to vole and stand for office. Women will be able to take part in parliamentary elections in 2007.
* Michelle Hachclctt is Chile's first lemale president. Ellen Johnson-Sirlcaf has been elected Liberia's first female president - she is Africa's first elected female head of state. Germany has appointed its first temale Chancellor - Angela Merkel. Many developing countries have improved their transparency, rule of law, and accountability. This has helped to restore investor confidence and to create more opportunity for the Ultimate Contagion in emerging markets. We believe these nine trends are helping to create self-sustaining market dynamics and have created a secular force that will not only be long lasting, but powerful - and of historic proportions. It has great significance for world growth, world trade, and global stock markets. If there was ever a time to be bullish on the world economy, it's now.
[Sidebar]
'The drive to have a better life is a potent force, one made more powerful by the Internet, which is opening eyes to what is possible.'
[Sidebar]
'Prosperity and property rights are inextricably linked. Property rights, supported by the necessary rules and judicial system, provide people with incentives to create and innovate.'
[Sidebar]
'In China there is a saying, 'Parents want their children to become dragons.' This sentiment is clearly demonstrated by many parents' willingness to sacrifice for their children's education.'
[Author Affiliation]
Kiril Sokoloff is the founder and president of 13D Research - an independent institutional research firm whose flagship newsletter, What I Learned This Week, has a worldwide following of institutional investors, political leaders, and senior executives. He is recognized for his uncanny ability to identify market-changing events early in the investment cycle. With this column we commence a series of reports by him for readers of Directorship that will offer insight about institutional investors and global markets. By bringing Sokoloff's thinking to our pages, readers will be more attuned to how institutions think and about the key investment theses on which their companies will undoubtedly be judged. To read more about his interests and involvements, see www.kirilsokoloff.com
[Author Affiliation]
Kiril Sokoloff is the founder and president and Kale McChire is an analyst for 13D Research (www.13d.com (206) 219-9205), an independent investment research firm.
