Thursday, January 31, 2008

Understanding global competitiveness

The IMF recently projected 2008 global growth as 4.1 percent, lower than the 2007 estimated growth of 4.9 percent. Of note though is that Advanced Economies are projected to grow at 1.8 percent (2007 estimate of 2.6 percent) while Emerging Market and developing Economies are projected to grow at 6.9 percent (2007 estimate of 7.8 percent). This is ironic, as it shows that global growth is now being held up by the emerging and developing markets, which once depended heavily on the advanced economies, such as the US, for handouts. What we find now is that many US companies are in fact depending on economies such as China and India for year over year growth,

The world indeed changes. In fact the global slow down was in fact caused by irresponsible risk management practices in the US (an advanced economy) and perpetuated by other advanced economies such as the UK. Africa, for example, is expected to do better than the 2007 growth estimate of 6 percent by 1 percent, and the locomotive China will slow down from 11.4 percent to 10 percent, which is a plus for its overheated economy by calming further inflation concerns.

Poor risk management
But what is it that creates this disparity in global growth, and why do countries such as the mighty US see themselves going through this crisis, while developing countries such as China and Africa are able to defy the woes of a global slow down? It seems as if we are constantly being bombarded by bad news coming out of the US and the UK, while dismissing the bright spots globally, such as the Africa we love to sing about.

The main reason for the slow down in the advanced economies is because they failed to practice good risk management principles and went overboard in creating instruments related to the sub prime mortgage instruments, merely because of greed. The only major financial company that was not affected by this crisis seems to be Goldman Sachs, which has so far had no write downs. On the other hand, companies we look up to such as bear Stearns and Merrill Lynch, had massive write downs amounting to US$ billions.

The emerging and developing markets, however, did not get involved in too much fancy financial footwork. So while advanced economies are reeling from failed financial instruments, emerging and developing economies are benefiting from higher commodity prices and growth in consumer demand. China and India, for example, are the largest single markets in terms of numbers of people, which advanced economies drool at.

This contrast between economies tells us that it is not all about doom and gloom but a reminder that our fortune depends on how we handle our own affairs. Jamaica has always had competitive advantages in areas such as agriculture and tourism but has squandered it with poor leadership and management. There can be no doubting the facts that our agricultural products are among the highest quality and sought after in the world, and our natural beauty and culture are amongst the best in the world. If the basic ingredients for success exist then the reasons for our dismal failure to realize our potential over the years can only be because of the leadership.

Failure to understand global climate
What we have failed to understand is that within the global environment the requirements of competitive advantage have shifted. Prior to the 1990s, when globalization started to take hold, competitiveness could be garnered by unique products and services. With globalization, however, the nature of competitive advantage shifted with improved communication, information, and technology. Increasingly competitive advantage comes not from just the products and services but the knowledge base of the human resources behind the product and services. This happened because as technology and information became more available then products and services become more homogeneous. The only distinction therefore is the quality of human resources, and this is my greatest fear for Jamaica.

The fact is that Jamaica has developed into a country of talkers and profilers, and this is compounded by the fact that many of our leaders actually make choices based on profile or friendship (form) rather than substance. The result of this is that since the 1970s our productivity has been on average declining every year. But no sweat, when that started to happen we just continued to borrow to maintain our unproductive lives. This is the reason why even smaller states such as Trinidad and Barbados have done better than we have. Even with all their money they prefer to spend it on developing quality human resources (as evidenced by their high literacy rates) and productive infrastructure. This is the critical factor that will, with all our natural beauty and resources, make us suffer from the global slow down.

I do see where changes to this attitude are likely to take place, and this is no where more pronounced than in the announcements made by the police commissioner. Many have criticized Derrick Smith for not appearing to be in control of the crime situation, which as far as I am concerned is hypocritical. The high crime rates, and the deterioration in social conditions and break down in the crime fighting infrastructure, was well cemented by many years of neglect, and three months after coming to office he should solve the problem. I believe that he is doing the right thing by systematically putting in place the proper infrastructure to address the crime problem by first starting with the selection of a good police commissioner.

The commissioner has indicated that he will do what should have been done in the first place, and what I have always been saying. That is attack the problems that shape the break down of law and order, namely “night noise”, indiscipline on the roads, and providing an avenue for citizens to air their concerns of the police force. We will not be able to solve murders if we do not start with shaping social behaviour. The attempts in the past have been to form police squads and report “one day’ crime reductions as successes.

If we are going to do better during the global slow down then the first thing we need to do is rethink how we employ human resources. We must adapt the concept of value added, and employ persons not on the basis of who they were or know but what they can bring to the table. It is the use of the best human resources that will drive this country forward, as human resources have become maybe the most important factor of production. Many still believe it is capital but with the easier access to capital globally this in my opinion is secondary to human resources. Financial innovation can create money in a short period of time, but it is very difficult to develop a person that thinks “outside the box”.

The inability to use the best human resources will not only be the downfall of companies but also countries, and will determine which countries survive in the global slow down.


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