Sunday, 28 February 2010

Hail the Queen

All rise and applaud the magnificent Kim Yu-Na. Kim who ? You could be forgiven for asking that if you aren’t into winter sports. But if you have been following the Vancouver Winter Olympics, you cannot , but be mesmerized by the story of the wonderful Kim.

Kim Yu-Na is arguably the most famous athlete in South Korea. All of 19 years old, she’s dubbed “Queen Yu-Na” and is a superstar in her country. She was the overwhelming favourite to win the women's figure skating event in the Olympics. A nation’s hopes was riding on her shoulders – South Korea had never won anything in the Winter Olympics apart from speedskating. They are having a great Olympics, winning well beyond their expectations, and their Queen was their brightest hope. But her long time rival Mao Asada of Japan was a formidable threat. And the emotions and the crowd were with Joannie Rochette, the Canadian, who lost her mother only a couple of days before. This is an event where America has traditionally dominated – no South Korean had ever won before.

Kim came out and stunned the world. She smashed the world record and almost delivered perfection on ice. These are sporting moments that transcend history. Like Nadia Comaneci’s perfect 10 in Montreal. Like Usain Bolt’s 100m in Beijing. Like the tied test between Australia and the West Indies in 1960. If you can get to see the video, do it – commercial rights being what they are, we are unlikely to see it in the public domain, but you can see the short program she did the day before at www.youtube.com/watch?v=lK_z0LtRu3M&feature=channel (sorry Net Nanny has become very painful these days)

There are a small bunch of people who carry enormous expectations and the weight of their whole nation on their shoulders. Its incredible how they do it. Like Cathy Freeman of Australia in the Sydney Olympics, Like Michael Phelps in Beijing, Like Brazil’s football team whenever it steps on the pitch, Like Sachin Tendulkar of India for the last 20 years. There must be some incredible greatness in them that they carry such a weight and still pull it off.

This Winter Olympics in Vancouver has been a great success. So many stories that make your heart go thump-thump. Today is the men’s ice hockey final . This sport is a religion in Canada. Their team is expected to win every time. They are in the finals. And they meet a traditional rival in the US. The US have never won in the Olympics outside of their own country – but this team is in such roaring form that they are the favourites. They’ve already beaten the Canadians in the preliminary rounds. But the finals is a different matter altogether. It will be one cracker of a game.

But even amongst all the drama, this Olympics will be remembered for the sheer poetry on ice that Kim Yu-Na created. There are some times when you just revel in a sublime sporting moment. This was one such moment. All hail the Queen !

Friday, 26 February 2010

The US does not rule the world !

If you have followed the Toyota story, the latest twist of Toyota’s Chairman, Akio Toyoda being called to “depose” before the United States Congressional Committee, shows that the US politicians just don’t get it. “Surely if Congress can be here, so can you," Congressman Darrell Issa of California said in an electronic letter to Toyoda. Separately, he said he would "fully support" subpoenaing Toyoda, which means compelling him to appear. Behave like this and then wonder why the US is disliked so much elsewhere !!

To his credit, Toyoda-san chose to appear in person. He was subject to typical bullying and rudeness by pompous Congressmen, who were of course making political capital. Toyoda-san handled it with much grace and typical Japanese politeness. Grace and politeness are alien concepts to US Congressmen.

While Toyota is facing huge recalls and much business trouble, the key is that they have done nothing breaking the law. The “outrage” by the US Congress is all about when management knew about the defects, when it recalled etc etc. There is nothing to suggest any criminal act. While the faults itself have been in relatively few instances, the size of the recall and action is massive. If the same standards of immediacy of response were to be made applicable to US Congressmen on health care, every one of them must cool his or her heels in jail.

There is one small point to be made. Akio Toyoda is a Japanese national. He is based in Japan. He may be the Chairman of Toyota, but he does not run the US operation. Since when has the United States Congress the right to demand presence of every foreign national for “investigation” and “deposition”. If he has committed a crime on US soil, sure subject him to due process of law. If not, it might be good to reflect on the fact that the jurisdiction of the US Congress is only on US nationals and the rest of the world should bluntly tell it where its place is.

Its very rich coming from a body that preaches sovereignty to others. Would they take kindly to Bill Gates being called before the EU parliament and insulted for the anti trust violations, the Chairman of Johnson & Johnson being summoned by the Fijian parliament over the Tylenol recall, the Chairman of Boeing being grilled by every country’s parliament whenever there is an aircrash. Just imagine a US Chairman being summoned by China’s Communist party politburo whenever its Chinese subsidiary did something which angered the hosts.

There is an unbelievable amount of good and great in the US. It is a great nation with much to admire. Sadly, there is not much to admire in their lawmakers. Their sheer insensitivity, rudeness and misbehaviour may be fine in Washington, but that is strictly where it should be restricted to. Global corporations are subject to the laws and practices of each country they operate in. Equally the laws of a country stop at its borders and on its nationals. The United States Congress has no business bullying Toyoda san. The right response from Toyoda san , although he wouldn’t dream of doing it, would have been to tell the windbags to stuff it !

Toyoda san did this to manage the image of the company in the US. But he has set a dangerous precedent on a matter of principle.

Monday, 22 February 2010

When is too much, too much ?

How do you price services which are very exclusive and for which there is no possibility of a real market ? Is there some such thing as a “fair price” or is that concept an oxymoron ? Does public opinion on what constitutes “excessive” have any role to play ? Should pricing have any relation to cost at all ? Not easy questions to answer. Welcome to the world of investment banking.

The case that triggers this post is a legal suit filed by JP Morgan on Consolidated Minerals (ignore who they are for the purpose of this issue), in an Australian court. The case relates to the acquisition of Consolidated Minerals, a mining company, by Palmary for A$ 1.3 bn. JP Morgan was Consolidated Minerals' advisor in the acquisition. But the new owner, Palmary has a dispute on what fees must be paid by them to JP Morgan. Palmary believes that JP Morgan’s fees should be A$ 7m. JP Morgan believes it should be A$ 50m. Hence the dispute.

Its extremely rare for investment banking fees to be brought to court. It’s a rarified and secretive world, which usually settles its fees in cosy chats. The amounts involved are huge. In big M&A transactions, fees would routinely be in hundreds of millions of dollars. The fees are usually a percentage of the size of the transaction and since acquisitions are routinely in many billions of dollars, the adviser’s fees are also massive.

But there is growing criticism that the fees are “excessive”. Herein lies the rub – who, if anyone, is to determine what is excessive ? In a normal free market, you would say its none of anybody’s business. But as I observed before, its not a free market – in fact its not a market at all. Its all cloaked in secrecy. Does just that fact justify intervention by anybody ?

One thing is certain – the fees bear no relation to costs. But then in a million other products and services, the price bears no relation to cost. In the case of M&A adviser’s fees the costs are probably less than 5% of the fee amount. That, by itself, is no argument for saying the fees are excessive. The difficulty is that fees of many millions of dollars does seem usurious; there’s just no way it will not attract attention. Especially since it usually one of the most profitable lines of a bank leading to large bonuses, which the public and governments seem to be very agitated about.

Defenders say that as long as a company is willing to pay the fee, it’s a matter between the company and the adviser and everybody else should keep their noses out of the matter. There is a lot of merit in this position. If at all anybody should object, it should be the shareholders of the company - they are the ones with the power to restrain Boards from paying excessive amounts. And they should exercise that power, and not merely keep quiet.

But the socialist bleeding heart that I am, I have some qualms. I have had some insight into this business in a previous avatar. With a few shining exceptions, the “advice” the many investment banks dole out is often trash. That they should be paid many hundreds of millions for this, doesn’t sit easily, even though the economic rationale for it may be somewhat strong.

I have some difficulty swallowing the pricing of different services in the banking world. It does look a bit too much. But then, when is too much, too much ? And who is to say so ?

Sunday, 21 February 2010

Hu nian kuai le

Hu nian kuai le; or as they say in Guangdong, Kung hei fat choi.

It’s the end of the spring festival holiday in China. After a week of festivities, millions of people are wending their way back to work. Come Monday, and life will be back to the routine. The overwhelming feeling is akin to a schoolgirl having to go back to school after the summer vacation.

It is rather a strange feeling being in Guangzhou during this period. It's my third spring festival in China and I still haven’t got over this strangeness. For Guangzhou is half empty at this period as everybody who’s from elsewhere in China goes back home for the new year celebrations.

This period sees the largest human migration in the world. Some 200 million people leave their place of work and go home for the festival. As China is full of migrant labour who have come from for work, this number balloons every year. Imagine the challenge of transporting 200 million people in a week. And then a week later transporting them back. Amazing. Even though I come from a country where crowds are usual, I am still open mouthed at the sheer number involved here.

Spring festival is a period when the family congregates at home. Somewhat like Christmas in other parts of the world. It is not unusual in rural China that both the mother and father have gone to work in different cities of the country. The children are left with the grandparents. And the spring festival holiday is almost the only time the husband and wife meet each other as well as get to see their child. No wonder, despite rain and snow, people will do anything to get back home.

But in Guangzhou, it’s a very strange period. The city is empty, for half its usual population has gone away. The roads are empty; the shops are deserted. Fireworks, a critical part of the celebration is banned in Guangzhou. The Chinese are the world leaders in fireworks – even Diwali has to take second place when it comes to defeaning and amazing fireworks. So, while most of China is suffering from sore eardrums, Guangzhou is eerily silent. Its hard to kindle a festive atmosphere in Guangzhou.

Being an expat, one of things you miss is festival time. When its Diwali, it feels odd to go to work as if it’s a normal day and not have the festive cheer. But at least you can make up by enjoying the local festivals. Unfortunately in Guangzhou, even that is denied – the still, empty and quiet spring festival is a, sort of, let down.

There’s a quaint tradition here. Come Feb, in every shop, you’ll see red underwear all over the place. The belief here is that if you are a tiger and this is the year of the tiger, you may get bad luck. To ward off ill luck and bring some of the good variety, you are supposed to wear something red all through the year. But men wearing red is somewhat odd – so the tradition has been interpreted to mean that its OK to wear red underwear ! Hence all the red underwear in the shops !!

Well, I am a tiger, but ……… . Hu nian kuai le (Happy year of the tiger).

Friday, 19 February 2010

Hail the entrepreneur

One of the largest job creators in the world is, well, you. You don’t need to necessarily work for somebody else – you can work for yourself. Millions do. Entrepreneurship is truly a magic bullet to overcome unemployment.

Entrepreneurship is a long and complicated word. It hints at some grandiose big startup ; it doesn’t need to be. The largest number of entrepreneurs run an organization of 1 – themselves. It’s the corner shopkeeper, the street trader, the plumber, the carpenter, the doctor, the taxi driver, who are truly the greatest of entrepreneurs. They don’t moan about unemployment. They don’t demand 6 weeks of holidays a year. They don’t demand travel privileges in first class. They just work hard and earn their own living.

Entrepreneurship need not necessarily need huge capital. It doesn’t need breakthrough ideas. It doesn’t need a MBA. It however needs commitment, guts, hard work, luck and some breaks.

I’ll tell you the story of an entrepreneur I know. He comes from Bihar, one of the poorest states in India. He came to Bangalore, a few thousand miles away, to try and earn a living. Without real qualifications, he did not stand much chance of a job. So he took to being an entrepreneur. He made snacks and came to the office area in the evening and sold it to hungry office workers. He didn’t have a place to sell from; nor had he a roadside stall. Instead, he brought his stuff to the staircase in the office building and caught the attention of the smokers who usually inhabit this place. Little by little his business grew. Come rain or shine, he was there. The office folk started to regularly buy from him. He was meticulously polite. He was always there, everyday. He looked upon each person buying his stuff as “God” – who was enabling him to survive. Little by little he grew his business. He started doing well with a steady clientele, a steady income . So much so that he caught the attention of a catering outfit who found him an ideal candidate to run one of their shops. He is still humble, polite to a fault and still looks on you as “God” when you buy something from him. He is truly an unsung hero and he shows the way how to overcome unemployment.

In this entire series on jobs, I have been preaching that governments should do this or not do that. Entrepreneurship is one area where my position is that governments should do nothing. Just stay out of the entrepreneur’s hair. Not do like what has happened in Europe - any entrepreneur there will tear his hair out trying to follow a million directives from Brussels and a million more from his own country. Stop putting barriers in front of entrepreneurs and then let them find their own way.

This series on creating jobs has dragged on, but I submit that this is a justified topic to examine in some detail. One of the most degrading of situations is to be unemployed. One of the most "punch in the pit of the stomach" feeling is losing your job for no fault of yours. Being gainfully employed is fundamental to any person. Besides the economic necessity, it brings a sense of identity to a person. Some measure of social standing. An anchor in this difficult world.

Full employment is not an utopian dream. It is something every society must strive for. It is possible to achieve this to a large measure. It is a holy grail worth toiling for.

Wednesday, 17 February 2010

Build baby, build

Build and they’ll come. Economists hate this phrase. They won’t come; they say. Maybe not to the land of the politician who said "Drill baby, drill" and to whom the title of this post owes apologies to. But in most parts of the world, they will indeed come.

Infrastructure development is surely the policy area where most countries have performed poorly in. In developing countries it is because of lack of prioritisation (wasteful subsidies are considered more important) and rampant corruption. In developed countries – it is the NIMBY problem – do it anywhere, but not in my backyard. Everywhere infrastructure has been allowed to dramatically deteriorate (witness America’s airports, Britain’s M25, California’s power cuts, …..) Two stellar exceptions – Britain in the colonies in the early twentieth century and China of today.

That a robust infrastructure is fundamental for economic growth is well known. But I argue here for infrastructure building as a great way of creating jobs.

China has created a huge number of jobs in the construction sector. It cushioned the unemployment caused by the recession primarily because of stepping up infrastructure development to an even higher level. In India, despite the leakages, the National Rural Employment Guarantee Scheme has been successful primarily because of the big jump in road building happening in various parts of the country. China is successfully exporting this concept – it goes around the world scouring for minerals and oil and offers infrastructure development in return, which incidentally also sucks up a fair amount of Chinese labour.

India has a crying need of infrastructure development – both urban and rural. It can safely be depended upon to provide millions of jobs for the next 20 years Bottlenecks such as land acquisition and corruption can be overcome and should not be conveniently explained away as the “price of democracy”. That’s sheer bunk.

Developed countries have allowed their superb infrastructure of 50 years ago to wither away. No country typifies this more than the US. Because any lobby with half a dozen supporters can block anything, America has allowed its infrastructure, especially airports, railroads and power plants, to drop to third world levels. With its high potential for adding jobs, the current economic climate is a great opportunity to correct this aberration.

What about the money ; the sheer size of investment required. Much of this can be recouped by economically pricing the services – tolls on roads, fair price for power, etc etc. Capital is always available if there is a possibility of adequate returns. Its unbelievable that infrastructure investments cannot yield a proper return – after all what competition can there be for an airport or a road or a port ?? The trouble has been mistaken pricing policies for generations which have made infrastructure seem a dead investment.

Build baby, build; for the legions are coming !

Sunday, 14 February 2010

Brightly fades the Don



That’s the title of the book written by Jack Fingleton, for me the greatest cricket writer who ever lived. Its about the famous post war series, which was Don Bradman’s last series ever, when he led the 1948 Aussies, arguably the greatest test team of all.

So a visit to the home of Don Bradman, is a form of pilgrimage to a cricket lover. I was in Adelaide last week and did something which I rarely do in business travel – took an evening off to go to the Adelaide Oval to see Australia play West Indies in a one dayer.

The Adelaide Oval is one of prettiest cricket grounds in the world. Not the barbed wire coliseums that you see in India. Not even the huge gargantuan monument that is the MCG (Melbourne Cricket Ground for the cricket uninitiated). A small pretty ground where you can roll on the grass near the sight screen and watch a lazy day’s cricket.

It was a day night match and I could only go after the end of one innings. But then summer evenings are long in Adelaide and it was more like an afternoon’s viewing. The match itself was a hugely one sided affair. The West Indies are no longer the cricket force of yore and Australia specializes in pulverizing anyone who’s not as good as them. But then I didn’t go for the game alone. I went to drink in the atmosphere and to listen to the ghost of Don Bradman.

Cricket is a much changed game these days. Even the one dayers are on their way out – Twenty20 is the “in thing”. In the Don’s days, men wore white. Full sleeves rolled up. The players are now garishly dressed – in red and green with huge numbers on their back and the batsman looking more like the American football hunks. The Don would have tut tutted. The fall of a wicket gave rise to weird contortions in the name of celebrations – do men behave like that in real life ?? The Don would rather have approved a cheery “well done mate”.

Batsmen these days are often wild sloggers – maybe that’s why they are more often called batters. Ugly heaves like a six over third man are met with rapturous applause. One foot is in the air and the other is pointing towards square leg. But then Ponting made a fifty in this game. He still makes those silken cover drives. The impeccable forward defence. The late cut. The straight drive all along the ground …..

As the Aussies pulverized the Windies. I looked around. Rolling on the grass were the usual Aussie types. A river of beer was flowing. Hoots at the scantily clad Sheilas. Wild yells whenever an Aussie hit a sixer. The sun was going down and it was twilight time. The grass never looked greener. The air was still. Not a cloud in the sky. You could hear the satisfying sound of leather striking willow. As if on cue, church bells tolled in the distance. Ponting just delicately glanced for four. All was well with the world. I fancy I saw the Don smile.


PS – Today is Chinese New Year – the dawn of the year of the Tiger. To all my Chinese friends – xin nian kuai le.

Friday, 12 February 2010

Invest in Vocational Training

Education is key to development – it would be hard to dispute this simplistic truism. But what education ? Primary ? Secondary ? Institutions of high learning ? What ?

This post argues for vocational training being the single biggest priority. There is no doubt that universal primary education has to be a basic human right, and a basic human responsibility. But I would place vocational training a shade above even that. For vocational training ensures people have jobs. Ensures that they have a little more wealth. And when they have that they would themselves ensure that their children receive the best primary education they can find, and afford.

Both China and India do a lot in the field of vocational training. Training people to be machine operators, welders, plumbers, carpenters, nurses, technicians – there are scores and scores of professions where , with a little training, people, who are otherwise unemployable, can find a job. These don’t need a very high basic education for it to be effective. And they offer quick rewards – it does not take an enormous amount of time to acquire these skills and get a job. And even if jobs are not plentiful readily, these skills lend themselves to entrepreneurship.

Start National Institutes of Vocational Training. Give them an aura of respectability. Start dozens of them in every city, in every state, in every country. Governments, in partnership with industry, must invest heavily in them (better to invest in this than to pay the dole). Make it virtually free for those being trained. Make employers, or employees, pay off some portion of the costs after they have found the job.

Make these institutes a place where people can come back to multiple times in their career. If they get laid off, they come back and acquire a different skill, perhaps. If at that point in time, there are plentiful jobs for hair dressers, but not so much for boiler operators, well – whoever wants to train to be a hairdresser can easily do so (incidentally, the most promising profession in China should surely be the hairdresser; every Chinese is obsessed with his or her hair and there are only 5 hairdressers every 10 mtrs in China ! And surely it has to be the most depressing profession in India; Rajalakshmi wouldn’t be caught dead having her hair cut !!)

I also suggest that when somebody is laid off, the employer is required to fund that person’s reentry into the technical school as part of the compensation. And the employee needs to constantly re skill into the professions that are in demand. To my mind, it’s a tragedy that most of us, when we pass out of University and take up work, stop re skilling ourselves.

So IITs, IIMs, Harvard, Jiaotong, are all very good. But they should come slightly lower down in the pecking order. The technical schools should occupy the pride of place. Mao Zedong said, in a completely different context, “Let a hundred flowers bloom”. I suggest, “Let a million technical schools bloom”.

Tuesday, 9 February 2010

Governments - Incentivise employment

Every government in the world says one of its biggest priorities is to create jobs. And yet, very often, they do precisely the opposite. Governments, and policy makers, do not normally get it as to how to create jobs. A shining exception is China – no government in the world comes even remotely close to China when it comes to job creation.

How should governments stimulate job creation. By helping in all of the areas covered in this series – by favouring the manufacturing industry, by not adding burdens on to labour cost, by not putting insurmountable barriers to labour flexibility, by creating the right skilled work force, by investing in infrastructure, etc etc. But governments can directly aid employment too. Here’s (again of doubtful practicality) some prescriptions.

Firstly reduce incentives based on investment and increase incentives based on employment. Remove capital subsidies, investment subsidies, and shift to employment subsidies. Base tax holidays on employment, not investment.

Secondly, enable free movement of labour to areas where manufacturing is concentrated (instead of trying to bring manufacturing to where development has not taken place). Provide cheap housing options in such manufacturing clusters. This has been the key to China’s success. Manufacturing was stimulated in the coastal provinces (especially Guangdong), Because that was the ideal location for plants. Labour moved in from all the interior provinces (especially the hugely populated Sichuan). Shenzhen, a non descript fishing village 20 years go, is now a mega city. And for heaven’s sake jail the clowns who propagate the sons of the soil theory.

Thirdly make state and local governments accountable for number of jobs that are created in their state. Give them quotas for employment generation. Today, the progressive states woo investment. They should woo employment. Again, this is taken from China’s strategy. China woos both, but there are specific job creation quotas for officials and they get promoted based on how well they achieve this.

Fourthly make the salary bill tax deductible by two times the salary, for all wages paid to workers of below X dollars. Thus there is a tax incentive to employ lower wage workers, which is where unemployment hits the most. Fund this out of the reduction in the dole (unemployment benefit, social security, or by whatever name its called) that such a move would surely result in.

Fifthly, the government, as the largest single consumer in any country can use its huge buying power very effectively. Other things being equal, favour suppliers who have contributed to job creation. Make % increase in number of people employed as a criteria in vendor selection.

Governments can do a lot directly to incentivise employment. They have to believe passionately in it. That they will do if they know that they can remain in power (win election in democratic states ; get the favour of the leader in communist ones). Both the electorate and the leader might want to consider moving this to the top in the criteria for deciding whom they wish to back.

Sunday, 7 February 2010

From rookie to sophomore

Exactly a year ago a “young” man, I know, made his first blog post – not knowing where it will lead him to, but start, he did. He was, and is, an oddity – in a media which is inhabited by young people, for he is, let us say, skewing the age profile. Today he sheds the rookie tag and becomes a sophomore.

But why blog ? Some do it because its the “in” thing to do. Some do because they have an opinion and want to express it. Some do because they love to write. Some do because they want to connect up with other people. A little of each of this was behind his attempt to write. But it was also for him, a way to read more – for to write, you have to read.

How has a full year of blogging been, I asked ? A wonderful experience, he says. For he has met some incredible people, who he has never seen in real life , but have become close friends. If you had asked him sometime ago as to whether this was possible, he would have looked at you as if you are a little weird – why would you want to trawl the virtual world for friends when you can make them in the real world. But then, he doesn’t say such things these days.

A big bonus , he says, was connecting up with some friends who he had lost touch for quite a while. The online medium does this to people – you can stumble upon long lost friends. And make deeper friendships with people you were only occasionally in touch.

How popular is his blog ?, I asked. He says, he really does not know. Yeah, he does look at the stats once in a while, but he says, like every other blogger, what is most heartening is when he receives a comment. Somebody has taken the trouble to read and then write a comment. No amount of thanks and appreciation, he says, will be adequate for those who comment.

Has he had any regrets ? , I asked. Yes, he says. He is a trifle saddened by bloggers he loved to read and followed, but who sort of dropped off. This is, alas, all too frequent. He is particularly saddened that this blogger, this blogger, and this blogger have gone cold. But he was beside himself with joy when this blogger who toyed with dropping out, came back. Especially since she even remembered that his blog was getting to be a year old and wished him well. He understands that it is tough to remain a blogger and blog actively – its clearly not for everybody. When it stops becoming fun and starts to become a chore, you know its time to get out. But still, every time a nice blogger opts out, it’s a sad moment.

What are you going to do on your birthday as a blogger ?, I asked. He says he gets the best treat he could hope for. He’s going to meet two of his most favourite blogging friends, who he has never met before. Now, how wonderful can that be.

He’s a fairly decent bloke. If you wish to read his blog, you can do so here.

PS – He got a delightful surprise – One of his favourite bloggers whose disappearance, he moaned about, came back here, much to his unbridled delight.

PPS – This blog takes a rest from blah blah on business on Sundays. Has something non businessy instead. The ponderings on job creation will continue next week !

Thursday, 4 February 2010

Labour flexibility is fundamental to job creation


In China, when you are employed, you get a fixed term contract. Usually 2 years or 3 years. Even if you are a manager. Even if you are a very senior manager. There is no “endless” employment agreement. And this is ostensibly a communist state. It is not a complete coincidence that in the last 20 years, China has created jobs in the manufacturing sector for some 200 million people.

This blogger might prattle on like an Ayn Rand and is unapolegetically a capitalist. Yet, in his heart, he is a bleeding socialist. Witness the almost pathological aversion to layoffs, as posted here, here and here. BUT ……

One of the biggest myths behind unions and governments “protecting” jobs is that they protect jobs. They don’t. What they actually do is cosset the privileged few and make vulnerable the underprivileged many. The employer simply does not take on “permanent” workers and instead takes on temps, or contractors or part timers or whatever. These get no security of employment, they are often exploited, and there’s often nobody to stand up for them. Or else the employer starts to favour capital over labour as ironically the flexibility he has with stupid machines, is way above the flexibility he has with intelligent people. Any which way, it’s the worker who loses.

We are not talking about those employers who abuse or exploit their workers here. There the law must be stringent and must make no compromises. It’s the flexibility to scale up and down, which is the point of contention.

Take the case of the humble house maid or ayi, or whatever she is called in the developing world. This is one of the most unregulated of labour markets. They are often abused or exploited ( some would argue that they are the subject of exploitation by the maid, but that’s another story !). But such a thriving market exists only because there is freedom of entry and exit. Imagine a situation where once you employed a maid, you could never sack her without a hefty compensation, and only after a lengthy consultative and court process. There isn’t a single housewife on earth who’ll employ a maid under those conditions. A thriving labour market that exists today will come to a standstill. Are maids sacked at a whim ? – sure. Unfairly – certainly ? But at least there is a possibility of getting a job and earning some money.

So here’s another impractical idea. Allow much more freedom to let people go . Legislate a small, but not wild compensation (say 3 months wages). The state then pays another 3 months wages (the dole which many countries already have). Provide a disincentive to companies who get rid of people, without replacing them elsewhere in the country - like a monetary penalty of another 3 months wages, which goes to fund the dole. The state funds retraining of such people, if required ( covered in a post to follow). Create an environment for jobs to flourish, as I have been arguing all week. By doing this, people may get sacked more often. But they are unlikely to be long without a job.

The Indian IT industry employs hundreds of thousands of people. IT companies take great pride in boasting about how many people they have added. Part of the reason is that they are not worried about having to let people go – they have the opposite problem of getting people to stay. Very few employees are really worried about getting the boot; for they know that they can get another job. All this, even though the legal environment is the same restrictive environment where there are draconian permanency rights.

Now wouldn’t it be wonderful when all employers are worried about retaining their people, rather than how they are going to sack them ?

Wednesday, 3 February 2010

Labour pricing - don't score an own goal


One of the most amazing consequences of the recession over the last two years is that, for the first time, employees are willing to accept pay cuts, or even zero pay for periods of time, in order to retain their jobs. Labour has realised (the unpleasant truth) that just like any other factor of production, there is an equilibrium price. Go above it and business will be killed. Its much better to have low pay than no pay. High pay and constant increases are not an automatic entitlement.

This post is primarily for the developed economies where cost of labour is high. Because this has been accepted as a given, manufacturing has inexorably moved to the east, notably China. So the developed world has accepted, without challenge, that their costs will be high and therefore they can do nothing about jobs going away. Such a defeatist attitude is unbecoming of the great innovative cultures they are. Any cost, even labour cost, can , and should, be controlled to keep manufacturing jobs from going away. But how ? Here’s an unpalatable prescription.

Lets take a typical situation – the cost of a worker in a factory is say $ 25,000 per annum. The equivalent cost in a developing country is $ 2,500. Now that’s a huge gap – 90%. While there is no magic bullet, we can chip away at the difference.

Firstly, a significant portion of the cost in developed countries is the social costs that are imposed by the government. Generous pension rules. Unbelievable medical rights (for god's sake, artificial breast implants should not be an entitlement in any medical scheme). The US system of employer paying the medical insurance is a horrible way to drive labour costs up and ensure that manufacturing jobs keep going to China. Retain very basic social costs and remove everything else. Costs are down by 10%.

Employees must work longer hours. No 6 week holiday entitlement. Work five and a half days a week; maybe even six days. Work eight and half hours a day. Another 15% reduction.

Governments must provide an incentive for lower level manufacturing jobs in the form of tax concessions (argued in the previous post). Abolish investment related subsidies (the amount of pork in the US is unbelievable). Channel that money to tax breaks for the low end manufacturing jobs. Another 10% reduction.

Allow inflation to chip away another 10%. Wage inflation in developing countries will always be higher than wage inflation in developed countries. Aspirations rise everywhere – even in the poor world. And contrary to economic theory it will not be nullified by exchange rate movements. Keep wage inflation in developed countries to 0%. In 5 years, you’ve made up another 15%.

The employee should take charge of his destiny and guarantee a 5% productivity higher than in the low cost developing world. By working smarter; not necessarily harder. Write it into the employee contract. Another 5% is chipped away. Give up some “luxury perks” like swank canteen, gym, etc. 5% more goes. And finally exempt them from paying the union subscription. Another 5% gone.

That still leaves a 25 % differential. But that is safe. No company will ship jobs to another country for a mere 25% savings in labour costs. The additional costs of shipping, supervision, risk, etc will outweigh such a differential.

Does this all look like a horrible killjoy proposal ? Capitalist pig being anti labour ? A sweatshop ? For sure it would seem like that to the entrenched employee with a “safe” job. But stand on the outside. Ask the unemployed single mother struggling to find work – any work. Ask the person who’s on the street having been evicted from his house. Ask the guy who’s applied to 436 jobs and got deafening silence, not even the courtesy of a reject letter. You’ll get a very different perspective.

Is this politically saleable ? Absolutely not. But try introducing this with an undertaking that anybody who opts for this is guaranteed a job for the next 10 years. Purely optional. Only in new plants being set up afresh. Whoever wants to take this up can take it up, purely voluntarily.

Try this in El Centro, CA, the town with the highest unemployment in the US. Somehow, I think you’ll find enough people signing up to fill 5 factories.

Tuesday, 2 February 2010

Manufacturing is key


Manufacturing sector is the key to creating jobs. Not agriculture. Not services.

Agriculture employs a lot of people , especially in developing countries, but cannot create more jobs. Land is finite. Agricultural development will be primarily in improving productivity and output ; not in expansion of jobs. In this sector, policy must focus on efficiency; not on job creation.

The services sector is sexy, but not a massive creator of jobs. For all the growth of the Indian IT industry, the number of direct jobs it has created is probably 1 million. Add the indirect employment and you probably can get 5 million. That is a drop in the ocean of the employment challenge in India. So from a policy perspective, this sector needs to be left free, facilitated to grow, and encouraged, but with limited policy intervention.

The sector that can really boost jobs on scale is manufacturing. This is where policy initiatives must be most active.

What sort of policy initiatives ? Some thoughts, equally applicable to developing as well as developed countries.

Make it easy to open a manufacturing unit. In developing countries it is the problem of land acquisition. In the developed countries, it is the problem of myriad of planning permissions, approvals, fighting green lobbyists, obstructionists, etc etc. (Try setting up a power plant in California). Countries must legislate clearly facilitating easy setting up of plants – a fast track clearing process that must be mandated. In today’s atmosphere of joblessness, the political selling of such legislation is feasible.

Provide a clear incentive based on number of jobs created (not on the size of the investment). This will attract those operations that create more jobs, as opposed to capital intensive sectors. I suggest that, especially for developed countries, this is the most desirable track. For example provide an income tax holiday to employees (thereby lowering the cost of labour) and not to the company.

Develop great infrastructure. Manufacturing units needs perfect infrastructure – power, water, transportation, etc. It’s the job of governments to facilitate building such an infrastructure. This is particularly true of developing countries like India and those in Africa. It’s a fallacy that these are mind bogglingly expensive. Allow private participation and capital will come.

Add to this the other boosters namely labour flexibility, labour pricing and training (all to be covered in separate posts) and you can stimulate the manufacturing sector, even in developed countries.

It’s a myth that all manufacturing will move to the low labour cost countries like China. Firstly, labour cost is only a component of total manufacturing cost and often not the largest component. Secondly China is not the lowest wage country – India for example has lower labour costs; it’s a combination of infrastructure, labour flexibility, productivity, speed, etc that makes China’s manufacturing many times India’s.

But labour cost is an issue. Manufacturing will move to places where the total cost of production is cheapest. Can anything be done about labour cost ? I believe yes. In tomorrow’s post.

Monday, 1 February 2010

The challenge of job creation

Every nation is battling with this problem – how to create jobs for its people. Growth is all fine, but without jobs, there cannot be real progress. The problem with much of capitalism and economic development in the last decade has been that job creation has lagged behind growth. By definition, this leads to inequality, resentment and ultimately a backlash. The recession last year exacerbated the problem through significant job losses, especially in the developed world.

The single most important economic challenge for nations is job creation. Being unemployed is one of the most demeaning of situations for any human being. A lot of the world’s ills can be attributed to joblessness. Create full employment and hunger will largely go away, terrorism will subside, lifespans will increase, the quality of life will transform and the world will be an altogether nicer place.

But how ? A problem everybody has grappled with for a long time. Some thought socialism was the answer – only to be proved completely wrong (that hasn’t deterred many people from dreaming of it again). Does capitalism inherently not care about jobs ? What sort of policy initiatives would be sensible for nations to undertake.

This blogger strongly believes that the route to job creation is through capitalism. Many learned experts have propounded many excellent theories. I am no learned expert, but blogging is all about airing one’s views, however ill informed they may be. So, with all humility, here are some thoughts for policies that will aid job creation.

Manufacturing is key. This is the sector that has the maximum potential for job creation. Services may be sexy, but doesn’t create the same number of jobs.

Labour pricing has to be sensible. High labour cost coupled with social tariffs by governments is actually more harmful to labour than beneficial. Labour must not price out enterprise.

Labour flexibility is fundamental to job creation. Protecting jobs protects a few and excludes many, Paradoxically allowing companies to shed people, actually creates more jobs. Organised labour just does not get this.

Governments must incentivise employment, as much as they incentivise investment. Today most government policies encourage investment. But they are neutral, or even negative, towards employment.

A massive investment is called for in vocational training. In training specific skills for specific jobs. And efficient reskilling and retraining opportunities for people who lose jobs to be employable elsewhere.

Infrastructure development is a great way to create jobs. Both hard and soft infrastructure. Hard such as upgrading roads, railways, bridges, ports and soft such as education, health care, etc.

Entrepreneurship is a magic bullet. Not necessarily big start ups. The corner store, the self employed artisan, the trader, the maid – these are true entrepreneurs who create jobs for themselves. There are more jobs created this way than in the industrial sector.

Over the next few days, I'm hoping to explore each of these areas in separate posts.

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