The Multiplying Effect of Knowledge

Intellectual capital —that is, knowledge— is often underestimated.

Whenever goods are exchanged, the selling party deducts them from an inventory and receives money in return. However, that does not happen with knowledge. If properly processed, whoever receives that knowledge increases his or her intellectual heritage and information level. But whoever transfers it still retains the knowledge. If dealing with more than a simple piece of information, quite frequently such knowledge is enhanced and perfected during the process. This is what happens to teachers every day—a truly perfect win-win situation!

Today’s communications tools, especially the Internet, provide a virtually limitless supply of information, including very valuable university level courses in different disciplines. Apple Inc. [AAPL] through its iTunes Store, and YouTube, a subsidiary of Google Inc. [GOOG], offer an endless menu of free academic materials in various media formats, such as video and audio, and are related to virtually all areas of knowledge taught in dozens of renowned universities from around the world. The areas of knowledge covered include business, engineering, mathematics, science, fine arts, medicine and health sciences, history, humanities, languages, literature, social sciences, pedagogy, and education. Because this scheme is fully flexible, it can be extended with virtually no limits. Examples are MIT’s courses on video, and an analysis of various famous literary works from the University of British Columbia in Vancouver. It is important to consider that these academic institutions and companies are highly competitive and feature their best talents within their vast range of options. There is no way to overstate the monumental importance of this kind of development: the highest quality, university education, is now available worldwide for free!

In order to provide an idea of the extensive variety of possibilities mentioned in the paragraph above, we must underline that when this survey was conducted, more than one hundred prestigious universities from different countries, such as the United States, Canada, the United Kingdom, France, Spain, and Australia, were already offering this amazing free service.

There truly is no way to overstate the extraordinary opportunities, many of them free, that our times offer to anyone who is genuinely willing to improve his or her skills.

Information availability has undergone a radical transformation since the Internet’s birth. Just take a look at Google [GOOG], Wikipedia, and social networking. Not too long ago, only a few narrow-minded, jealous guardians had access to information and knowledge. This is no longer the case —the current amount of available information is overwhelming, quite frequently at a nominal cost, as the case previously exposed. In fact, we now suffer from the opposite problem, surplus instead of scarcity of information. This makes it imperative to analyze all the available information, so as to be able to keep the best and discard the rest.

Even knowledge follows the principles of creative destruction. Good sense about the content, of course, should include a very high dose of basic moral values in addition to appropriate intellectual essence.

The World’s State-Owned Oil Companies

There are very few global instances where an industry analysis can be made with so much public and contrasting information available; furthermore, an instance where meaningful comparative analysis between state and private sector performance.

There is not much point in debating which arrangement, on the average, makes more economic sense for society, privately owned and managed oil companies versus state-owned and managed ones. We all are well aware that private structures, on the balance, tend to outperform government ones; structural incentives to run a company well tend to be higher and more effective in the private sector than in the governmental. However, it is very important to recognize some exceptional cases of well-managed state oil companies, like Norway’s StatOil [STO], Brazil’s Petrobras [PBR], and more recently Colombia’s Ecopetrol [EC]. The legal and management structures set up by the governments behind these three companies are praiseworthy. The results obtained, on the average, have been excelled in adding value to society.

The state-owned oil company cases can be classified in several groups, related to their performance levels. It is not the purpose nor the reach of this post to delve into too much detail and depth in this fascinating topic; in fact, only the top twenty oil producing nations were considered in this analysis. The purpose is to provide a general perspective on the subject.

Source: Computations based on GLOBALIZATION, Opportunities and Implications, The ABCs to a Global Social Revolution, Martin Marmolejo. Market prices obtained from

The top of the performance list is formed by the group of the three cases already mentioned. Those three companies have a lot in common. In addition of being government owned and operated, they are very well managed companies, with shares listed in the NYSE as well as in their respective countries of origin; these three outstanding companies have independent management –from their governments– with a meaningful number of independent board members. The table below summarizes some relevant financial information about them.

Brazil’s PBR has worldwide recognition for its deep-water operations, with several world records set along the way. Norway’s STO has generated such a surplus in the past two decades, that the autonomous fund established in 1990 for this purpose, had accumulated about $557 billion USD by the end of 2010, two times Norway’s GDP! Colombia’s EC, the youngest of them, was listed on September of 2008 in the NYSE, and evidently has modeled itself after STO and PBR, with excellent performance both in increasing reserves and oil production in recent years.

Listed in a separate category, the oil companies of Saudi Arabia, UAE, Kuwait and, Qatar, all of them with strong interactions and joint-ventures with the big oil multinationals. Although transparency and accountability can be substantially improved in all four cases, some well-invested surpluses, in well-taught efforts to diversify from hydrocarbons, are a clear, if indirect, testimony of a reasonable level of proper management practices and performance.

China must be placed in a special category because: a) Its gigantic size (world’s second largest economy); b) PTR is by far, the world’s largest market cap among state-owned oil companies; c) Despite having its two largest oil companies listed in the NYSE, when dealing with China, the level of transparency and accountability must be taken with a grain of salt, until proven otherwise.

In a fourth category are countries like Russia, Iran, Venezuela, Iraq, Nigeria, Algeria, Angola, and Libya. These countries share two basic similarities, very closely interrelated between them: a) Very poor level of transparency and extremely poor accountability –if any at all. b) To different degrees, oil revenues are considered a personal right –somehow shared with the inner circle of power– by the rulers of those countries.

Finally, Mexico, and Kazakhstan belong to a fifth category, of stated-owned oil companies that seem to be transitioning away from the fourth previous category. Mexican government has been struggling in the past decades –essentially since 1988– to open-up that industry to private investment, with limited success so far; Pemex is still a very poorly run operation. Kazakhstan is more advanced in that topic, since january 2001, it established a sovereign oil fund with its surpluses modeled after Norway’s experience, currently worth over US$20 billion.

Both the energy and the oil markets are very dynamic. There is a lot of change in progress in many countries in those areas. The coming years might present a very different energy landscape, with more evolved management structures, where the global private sector continues to increase its participation in numerous joint-ventures –if not outright ownership– in many projects all over the world. The increasing availability and development of alternative energy sources is also enriching the possibilities and additional supply of that precious resource.

Beyond the ownership and management of any company, there is something non-negotiable: transparency and accountability, effective checks and balances systems in place. There is no substitute for that. When that basic principle is appropriately observed, at the end of the day the ownership and management issue is not necessarily that relevant. The private sector has also had plenty of sour experiences in the corporate arena all over the globe: the Enrons, the Tycos, the Parmalats, the Lehman Brothers, the AIGs, the Olympuses of the world, just very disgraceful recent cases.

The New World Order: G7 and E7 Nations.

There has been a profound change in the world’s progress as we have known it up to recently; capitalism’s geography is changing. In recent years, the average economic growth rates gap between the big emerging countries versus the big developed ones has been both substantial and consistent; that has already been going on for a considerable number of years, overwhelmingly favoring the largest emerging nations. The relative economic and political weight of the E7 economies has been the net result, said weight has been progressively increasing compared to the G7 countries’ weight.

Source: Computations based on GLOBALIZATION, Opportunities and Implications, The ABCs to a Global Social Revolution, Martin Marmolejo, Section 5, page 567-575.

The previous table shows a most interesting comparison between those two groups of nations: the G7 and the E7. The figures shown in the table are 2010 statistics. There are several outstanding points which are very important to bear in mind:

  • The G7 nations’ total output was approximately 33% larger than the E7’s during 2010. That gap was 44% the year before. During 2011, that gap was still reduced further, to less than 30%; we’ll know that for sure later in the year when official 2011 figures are released.

  • During 2011, there also must have occurred a couple of momentous displacements among the top-eight nations of the world in economic output: a) India overtook Japan as the world’s third-largest economy. b) Likewise, Brazil and the UK traded places. Brazil started the year as #8, ending up as #7.

  • During the previous year, 2010, a couple of displacements took place among the top-eight nations: a) Russia displaced the UK from 6th standing. b) Brazil displaced France from the 8th position.

Most of the G7 countries have yet to successfully overcome major long-term structural issues: debt, deficits, deleveraging and the accompanying slow-growth. The E7 nations, in contrast, are  growing at a very healthy and substantially higher rate of growth than the E7’s countries, they currently have very low debt levels, and also low and manageable budget deficits. As a result, to different degrees, the E7 nations are very much on a speedy and consistent catching-up trail with their developed brethren. There still remains a gigantic per capita output gap to be filled, before the E7 countries can be close enough to a developed nation status; it will take a few decades for that gap to be completely filled. On a volume basis, however, that gap is not substantial, and is getting smaller by the day, as we have already seen.

We are living in a very dynamic world. What we have witnessed in the past few years is a harbinger of things to come. It does not have to be a traumatic repositioning of economic and political power. It is of utmost importance, however, to understand what is going on and why in order to be better prepared for new opportunities and risks, as they emerge.

Austria, Netherlands and UK offer the world a great and very constructive testimonial of former world-leading-nations that have transitioned with class and dignity from that status to a new one of highly respected developed nations of a second tier nature. Indeed, they are three role model nations that can teach the world a lot in that particular aspect so critical for the world’s well-being.

Kazakhstan and the Former Soviet Republics

The world offers an almost unlimited supply of very interesting countries to analyze and learn from. That’s one of the most useful and promising aspects of globalization. One of those very attractive cases is Kazakhstan, a relatively unknown Central Asia republic with 15.5 million inhabitants, and the world’s largest land-locked country –the world’s ninth largest, overall– with a territory slightly larger than Western Europe’s. Kazakhstan was one of the 24 countries that emerged as an independent nation from the Soviet system implosion in 1990–1991.

Unquestionably, the most interesting aspect of Kazakhstan’s contemporary history is its relative good economic performance, within a relatively stable political local environment. Kazakhstan is the most affluent Muslim country in Central Asia. Like the popular saying goes, “Kazakhstan is a good house in a terrible neighborhood”. Although Kazakhstan is far from being at the forefront in socioeconomic development among its former Soviet brethren –like Slovenia, Czech Republic, Slovakia, Poland, Estonia, Croatia and Lithuania–, whose performance, on the average, exceeds that of Russia’s, it is not that far behind from the latter. Most unfortunately, the remaining 16 former Soviet republics’ socioeconomic performance is very poor, some of them indeed deplorable. Among the former Soviet republics, Hungary could have been classified as a successful case, until recently; however, given its ongoing monumental debt crisis, it is left apart. Among those 16 lagging, former Soviet countries are Kyrgyzstan, Uzbekistan, and Turkmenistan, three neighbors of Kazakhstan.

The current and only president Kazakhstan has had during the last 20 years as an independent, post-Soviet nation is Nursultan Nazarbayev, its former communist-era leader. To a different degree, Nazarbayev has been following some of Deng Xiaoping’s transformation footsteps. The major similarity in both cases is the commitment to get away from the centrally-planned economy model.

Kazakhstan’s vast oil and gas reserves make it an energy powerhouse, the major pillar of its economy. It has been making significant progress toward developing a market economy, becoming one of the first former Soviet country to receive an investment-grade credit rating, in September 2002. Kazakhstan established, since January 2001, a sovereign oil fund, modeled after Norway’s StatOil experience, currently worth over US$20 billion; it is  funded from oil, gas, and other extractive industries taxes, royalty payments, and signing bonuses by joint venture partners.

Kazakhstan has, since 1998, an ambitious private pension program in place. Vanguard tax reforms have been adopted since the 1990s, lowering the tax burden across the board. It has also embarked itself on an ambitious diversification program, aimed at developing strategic sectors like telecommunications, transport, pharmaceuticals, petrochemicals and food processing.

During 2011, Kazakhstan had a solid economic performance: both the budget deficit and the government debt level, as a percentage of GDP –2.3% and 16%– are low and very low, respectively. The inflation rate, is still at an unacceptable level –8.3%, although it seems not to represent any immediate threat. The economy approximately grew by 6.5% during 2011.

Kazakhstan may have a very bright future ahead, provided that profound structural reforms continue to materialize. It is very encouraging to see the smart government policies this Central nation has taken since becoming independent from the Soviet Union. Kazakhstan’s government has been remarkable in overcoming its communist origins, and having chosen an increasingly pro-market orientation.  Although, in that regard is seriously lagging most of its European former Soviet brethren, so far it is the only viable former Soviet country in Asia. In the political side, there is much to be done still, towards a more open, democratic, transparent, accountable and equitable society. A solid economic background, however, seems to be an ideal springboard for that utmost objective. Kazakhstan is, by and large, the most prosperous of the Central Asian countries, compared to everyone, not only to the former communist countries. It seems to have the momentum in place for an adequate transition to a developed economy status in the decades ahead.

What do Singapore and Congo (DRC) have in common?

At first glance, not much.

Singapore is a tiny nation, both population and territory wise, whereas Congo is a large one, in both accounts. Singapore is deprived of many of the most basic natural resources –it doesn’t even have enough supply of drinking water, not to mention any oil or minerals in its tiny territory. Congo, in contrast, has been blessed with one of the biggest mineral reserves on Earth, oil, and is also the better endowed African country in water supply.

The table below shows some very relevant information that captures a great deal of what is behind this couple of profoundly contrasting nations.

The comparison, as it can be seen, is a most dramatic one. Congo is about 15 times more populated than Singapore, in a territory 3,364 times larger. Notwithstanding that, Singaporean society managed to produce 12.6 times more output in a year (2010), and to export almost 42.9 times more than Congo. As a result of all that, output per person during 2010 was 191.3 larger in Singapore than in Congo. The comparison is indeed a most brutal one. Precisely for that reason I chose this real life case to exemplify the huge disparities and opportunities that lie in front of us, mankind. In fact, this is about the most extreme comparison of its kind to be found in the world. Unfortunately, there are tens of these real, most sorrowful stories, involving about ⅔ of mankind. Luckily, the other side of the coin shows a universe of potential, and opportunity, ahead for everybody, the unfortunate citizens of those failed nations, and the rest of the world, if this humongous drama is appropriately approached and dealt with.

How, in the world, can something like this happen? The answer, as complex as it may seem, is actually very simple: it has to do with cause/effect, the most basic of all philosophical principles. In its simplest approach, the only major fundamental difference between this couple of very contrasting nations is leadership and management (or lack thereof). The analysis can and must go much deeper than what we have already done here. GLOBALIZATION, the book, does just that, and much more, since it goes well beyond the usual analysis done elsewhere. Furthermore, it provides a specific workable, self-sustainable solution to this most painful humanitarian, social and economic paradox.

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