Full-potential Economic Growth

Reaching Full PotentialThe concept of full-potential economic growth is essentially theoretical. It is a theoretical concept to the extent that the world, as a whole, has never achieved it. Moreover, it can also be argued that even during its brightest period, no individual nation has reached its full-potential economic growth.

A handful of countries around the globe have been able to achieve rates of growth averaging over 7% for extended, multi-annual periods. The Singapores of the world, and more recently China, New Zealand, and the Czech Republic, among others, are a living testimonial of it. However, not even during their brightest moments, have those nations been able to get close to their full-potential economic growth rate.

Knowing the exact level at which full-potential economic growth lies at any particular point in time is like trying to catch smoke with your bare hands. Mankind’s performance has been so far away from that potential that, for practical purposes, it is not that relevant to know where the full-potential level is at any particular point in time, given that the room for improvement is simply colossal.

It is axiomatic that, in order to consistently achieve turbo-charged economic growth rates for extended periods, say over 10 continuous years, it is indispensable to be a very poor nation, well below the world’s GDP per capita income level, or alternatively, to be a nation with a per capita income level substantially below the developed countries’.

In other words, provided that a virtuous and drastic change in governance is implemented, the poorer a country is, the higher its potential for a sustained and accelerated economic growth rate.

Another worthwhile notion in this fascinating topic is that the full-potential concept is not an immutable benchmark. Not at all. The full-potential concept is a dynamic objective, that moves up or down according to how some basic variables evolve along time: demographics, natural resource availability, technological progress, economic and political stability, etc. The world’s current economic system, the monetary economy, is easier to understand once we have a grasp of the most basic of economies: The Robinson Crusoe Economy.

Where do developed nations stand in all this?

economic growth

Well, it stands to reason that, given the multiple imperfections, limitations and deficiencies in public administration, even developed nations are far from growing at their full-potential.

Having established that fact, however, another quite different story is to conclude that because of that relative mismanagement, some developed nations are inevitably headed into chaos, as many analysts have been suggesting during the recent quarters, given the sizeable debt overload of the EU, the US and Japan. Granted, that enormous debt overload is a drag, a substantial negative factor on the world economy, and a significant risk, which truly is pushing the normal growth rate well below of what it otherwise would be. Yet, there doesn’t seem to be a clear connection between that relative (severe) mismanagement and the timing of the inevitable harmful critical consequences that severe imbalance will yield.

However regrettable the current situation is, specifically in the light of the humongous opportunity costs incurred, it does not necessarily have to lead to concluding that an imminent deep global synchronized recession is unavoidable and/or that the substantial, unbearable levels of unemployment among major developed nations are here to stay for long.

No single human being or group, however competent they happen to be, can rightfully pretend to have such an advanced insight as to know the precise timing of an event of that complexity.

It is truly important to understand the limits of knowledge and act accordingly. Unfortunately, such a mind frame has always been in short supply.

This reasoning does not pretend to suggest that heavily indebted developed nations are doing just fine. Not at all. The sooner the huge debt overload challenge is adequately confronted, the better. This means starting to grow at sufficient levels that consistently decrease the total debt/GDP ratio.

 

Santa Clara & Comex: An Update

In the first edition of my book, Globalization: Opportunities & Implications, among the many practical examples of globalization-thriving companies in underdeveloped countries, a couple of very successful Mexican cases were presented, Santa Clara (page 41) and Comex (page 33, only in Spanish edition).

santa clara y coca colaSherwin-Williams Comex

As it is clearly stated in the book, given that most of the examples discussed are unlisted companies, their respective financials are unknown. So, an educated guess was made, a la Peter Lynch. Most fortunately, only a few months after Globalization: Opportunities & Implications was released there were a couple of well funded global corporations that coincided with the author’s initial take: Sherwin-Williams in Comex’s case, and Femsa (NYSE ticker symbol FMX), the Mexican beverages –largest Coca-Cola bottling company in the world, outside the US– and convenience store giant in Santa Clara’s.

On November 12, Sherwin-Williams offered US $2,340 million in cash, taking on Comex’s debt. The transaction is still conditioned

 

to the regulatory approval from the Mexican Antitrust Commission. A ruling is expected by the first weeks of 2013.

A few months earlier, on July 3, 2012, Femsa announced the acquisition of Santa Clara, the dairy products manufacturer and ice cream parlor leader in Mexico, for an undisclosed amount. The acquisition was made through Jugos del Valle, a Femsa wholly-owned subsidiary. This transaction does not include the 160 sale points currently operating on a franchise agreement base.

Regardless of the final outcome, a couple of world-class corporations have coincided with the appraisal made in Globalization: Opportunities & Implications. This proves something very consequential. Peter Lynch is right! However important financial statements and an adequate due-diligence process are, there is no substitute for logical, good judgement.

The corollary of this story must be that the examples presented in the book are solid, very valid testimonials of a thriving global economy, even in developing nations. The book presents plenty of very practical, solid and useful conclusions to learn from.

 

Italy’s Perennially Troubled Political Status

 

43729058-italy_flag_cracked_200.160x105

With Mario Monti’s resignation as Prime Minister, effective as soon as the 2013 budget is approved (expected this week), Italy may be beginning a new chapter in socio-economic mismanagement and despair. Most regrettably, that has essentially been the norm in recent decades.

During 2011, Italy was the eleventh largest economy on Earth, right between France and Mexico (CIA World Factbook), as well as the fourth largest economy in Europe. Italy is also a founding member and a pillar of the European Union. So, the fate of such a country is of great importance to the rest of the planet.

In many respects, the extremely sad and worrisome present condition of Italy can happen (and it does) to almost anyone, to different degrees. Hence, its troublesome situation is much closer to us than what we might think.

Mario Monti is the latest victim of a decrepit, worn-out, highly ineffective political system. Unfortunately, highly ineffective political systems are in abundant supply, almost everywhere we look.

cracked globe

The entire so-called democratic world has been abducted by their own political parties. Virtually, there are no exceptions to this rule. Those political parties, in turn, are essentially run by a relatively small team of individuals, with strong vested interests behind them. To complicate things further, those relatively small groups are not as powerful as common perception lets on… those small groups are entangled within their own conflict of interest web. The end result is endless dithering and bickering in a fundamentally ineffective political system in which, for practical purposes, strong and virtuous leadership is utterly absent. What the world needs are Global Society Strategists.

Perverse incentives are at the bottom of this most regrettable situation. Over 150 years ago, the illustrious Alexis de Tocqueville very wisely warned: “The American Republic will endure, until politicians realize they can bribe the people with their own money”. Understandably, that maxim is applicable to any country, anywhere, anytime. For more on this subject, read our article: Contemporary Political Systems and their Multiple Limitations.

The world’s contemporary political system has not experienced any significant improvement since the dawn of the US, over 235 years ago. What used to be, at that time, a truly innovative and avant garde sociopolitical system has been essentially stagnant during this period, while the rest of society has made substantial strides towards a new world order. Corporations, institutions and many professionals have been effectively preparing themselves for new challenges and opportunities.

The world’s socio-political system still insists in trying to solve new global challenges with old recipes and domestic ways of facing problems. No wonder the relatively high dysfunctionality is facing both the European debt crisis and the US fiscal cliff, for example. In the EU’s case, old and dysfunctional notions of nationality, among other things, stand heavily in the way of proper, lasting solutions. All over the world, with virtually no exceptions, political parties have abducted the control of nations. Even worse, not even those political parties have full control of things, since along the decades, they have basically abdicated leadership in trying to keep an impossible balance among so many vested and conflicting interests. The end result is ineffectiveness and disarray. More detail in our World Debt Bomb article for Business Excellence Magazine.

From this perspective, Italy is only a conspicuous example, an extreme one, of how things can deteriorate and become a big farce, within a so-called democratic system. Legality has been honored in Italy, yet results are deplorable. The rest of the world, although not in such an extreme situation (with relatively few exceptions, like Syria, and Venezuela, among others) is not significantly better off. The relatively few bright spots that still fortunately exist (like Singapore, the Nordic states, among others) owe more of their virtuous exceptional status to a favorable set of circumstances and spontaneous honorable management of their leaders than to a deliberate constitutional design with appropriate incentives and checks and balances.

There are plenty of signals around us pointing to the need of a substantial upgrade to our socio-economic systems. The task is so formidable, however, that most unfortunately, there is not much room for well founded optimism in the short and medium term.

 

Does a Recent World Bank Report Put Globalisation and Development in Latin American in the Wrong Context?

The World Bank reports that in Latin America poverty has decreased in the last decade. The report cites that middle class in the region, including the Caribbean, increased from 103 million in 2003 to 152 million in 2010. “A large number of people who were poor in the late 1990s are now no longer poor,” says Hasan Tuluy, World Bank Vice President, Latin America and the Caribbean Region.

However, writing for the Institute of Development Studies blog, Carlos Fortin gives us a coveat. Here are his two points:

  • The average Gini  in 2010 for the 12 countries that are improving was 0.482, compared with 0.257 for the Scandinavian countries.
  • The rate of improvement over the 10 years is very modest indeed; should the tendency be maintained it would take the 12 countries 50 years to reach the level of equality of Scandinavia.

In any study like this, there’s always two stories that prevail. Generally speaking neither on is exactly right. That why there’s always a third option.

We have proposed what has come to be known as The Turbo-Charged Global Project. In the manifesto, we posit five points we think are important for countries to transform their culture from rags to riches.

Download “The ABCs of  to a Global Social Revolution and learn an alternative approach to global change that works.

 

Five Change Making Sources Funding and Celebrating Social Entrepreneurs

Peter Drucker, the management expert, has written: “In a world buffeted by change, faced daily with new threats to survival, the only way to conserve is by innovating.”

On the surface, Drucker’s, statement is interesting because we would think institutions, such as, big business and government would lead the way. Not so! Average, everyday people are “taking it upon themselves to fix things and who, in many cases, are outperforming traditional organizations or making systems work better,” writes, David Bornstein for The New York Times.

With that in mind, we want to highlight several organizations funding and celebrating social changing making, just in case you’re wantied to do something big and improve the lives of people:

  •  Downser founded by Bornstein: This presents the world through a ‘solution frame,’ rather than a ‘problem frame.’ We’re interested in the practical and human elements of social innovation: Who’s solving what and how. We want to know how people come up with ideas, how they put them into practice, how they pay the bills, and what fuels their fire.
  • Schwab Foundation: This organization funds social entrepreneur programs and entrepreneurs working as change-makers.
  • Acumen Fund:  This organization’s vision is that one day every human being will have access to the critical goods and services they need – including affordable healthwaterhousingenergyagricultural inputs and services – so that they can make decisions and choices for themselves and unleash their full human potential. This is where dignity starts – not just for the poor but for everyone on earth.
  • Rainer Arnhold Fellows Program: These fellows  are social entrepreneurs with particularly promising solutions to the big problems in health, poverty, and conservation in the Third World. 
  • The Awesome FoundationWe are an ever-growing, worldwide network of people devoted to forwarding the interest of awesomeness in the universe.

You now, just after Apple CEO Steve Jobs passed away, he left us with this thought. “Everything around you that you call life was made up by people no smarter than you. You can change it. You can influence it. You can build things people can use.” We might also add, you can change things too, but the change starts with you.

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