Managing Human and Intellectual Capital for Sustaining African Organisations
By Hamid H. Kazeroony, Yvonne du Plessis, Bill Buenar Puplampu
In this article, the authors examine the needs of African organisations for human and intellectual capital and suggest how they should work with governments and the educational system to acquire, retain, and develop higher performing talent. Such efforts would create more dynamic and productive organisations to serve African growth.
African organisations to function and compete effectively in the global marketplace require particular focus on managing human and intellectual capital.
African continent, since the end of colonial era, which calumniated in the collapse of apartheid in South Africa in 1994, completing the transition, has undergone numerous social, political, economic, and cultural changes impacting management and organisational processes. The transitions within this period gave rise to a new set of human and organisational challenges in each African country in addition to the emergence of social and economic demands by various stakeholders for managing various resources (Kazeroony, 2016). To address their human and intellectual capital needs, African organisations – as stakeholders in their respective countries – should work with their governments and higher education institutions to expand capacity and address social, political, and cultural influencers in the development of human capital. They should continually examine their internal organisational dynamics and organisational practices and relate these to the current and emerging African market conditions within the global economy (Kazeroony, Du Plessis, & Puplampu, 2016). It is only through such focused attention that human capacity may be enhanced to serve African organisations. In this paper, we share a few thoughts on how these may be realised.
Macro and Micro Issues in Human Capital Development
At the macro level, public organisations such as the African Capacity Building Organization (ACBF) (What Do We Do, n.d.) help with a variety of financial and expertise resources to advance capacity building for governmental and private actors directly, addressing the human and intellectual needs of organisations for growth and innovation. In addition, organisations such as the African Development Bank Group have been very active in supporting the growth of human capital by engaging in projects that would benefit gender diversity to maximise the human capital utilisation while expanding support for higher education developments in enlarging the intellectual capital pool for African organisations (Capacity Building, n.d.). These represent tangential efforts by non-State actors to influence skill development. However, as the President of Liberia, Ellen Sirleaf noted, African governments may develop policies quickly to address capacity building, however, implementation, prioritisation, and governance issues pose difficult obstacles (Ratcliffe, 2013).
At the micro level, individuals attempting to build their intellectual capacity, face multiple obstacles such as lack of family financial means, lack of educated family members understanding particular needs for success, and limited pathways for access to and progress through higher education.
Higher Education Institutions are the actors who connect the human and intellectual capital requirements of organisations to the individuals who seek skill development and the marketplace which “consumes” talent.
African Higher Education Institutions currently face many challenges including policy gaps, resource constraints, and brain drain. Each of these challenges underscore the need for reform and changes in public policies, collaboration with the private sector, and attention to the gaps between foundational knowledge gained at the elementary and secondary schools and the curricula for developing human and intellectual capital at the higher education end of the spectrum.
Public funding of higher education as a part of the infrastructure crucial to the development of human and intellectual capital has remained uneven and subject to governments’ revenue stream. For example, for two decades, the Botswana government, using its mineral revenue, supported the development of higher education to grow its human and intellectual capital (Mpabanga, 2016). However, as commodity prices declined, the Botswana government along with many others in Africa could not sustain high expenditures on Higher Education (HE) in Ghana freezes on wages, recruitments and percentage allocation of government budget resources have been used to deal with dwindling resource options. In addition, regulatory liberalisations have been used to allow private operators into the HE sector to reduce the pressure on government spending.
There is no evidence of systematic integration of current and future industry skill needs with universities’ curricula design processes for sustainable development of human and intellectual capital. However, there are isolated cases where particular universities have adopted limited integration of some aspects of required industry skills into their programs. Examples can be found at Strathmore University Business program in Kenya; Central University in Ghana and Pan African University in Nigeria.
Finally, political issues such as terrorism in Somali and north-western Africa, and Nigeria, war in countries such as South Sudan and Central African Republic, and party in-fighting in places such as South Africa has had debilitating effects on primary and secondary education, destroying bridges to the higher education, and diminishing the higher education capacity to build the human and intellectual capital required by African organisations. The current “Fees Must Fall” protests (News24, 2016) within higher education institutions in South Africa are crippling opportunities for many scholars and do not contribute positively to the developmental landscape in the country and the African continent. We are at present witness to the political and policy impasse in South Africa regarding the “fees-must-fall” conundrum confronting that country.
Role of Agencies and Organisations in Building Human Capital
While international agencies such as the World Bank and the African Development Bank, just to name two, have been helping to build the higher education infrastructure in Africa (African Development, 2009; Africa, 2015), the African needs for sustainable human and intellectual capital requires localised attention in each country. For example, while some universities have benefited from prestigious accreditations status publicly stating their capacity to produce high quality human and intellectual capital to conform to international standards others have not had the resources nor support from existing policy frameworks to be as effective.
Education and human capacity must be built in ways which recognise and require uniquely African constructs embedded in African symbolisms, values, and cultures.
Many countries in Africa have national accreditation systems which oversee the HE sector. It is increasingly important that the educational policy directives issued by political actors in government address the gradual integration of Africa into global economy. It is also important that African organisations create their own sphere of influence to inform educational policy. In Ghana, there is a National Accreditation Board and a National Council on Tertiary Education. As an example, these two agencies ought to examine the peculiar African dilemmas and needs and build up credible human capital approaches which are context located rather than follow the Western organisational models. Education and human capacity must be built in ways which recognise and require uniquely African constructs embedded in African symbolisms, values, and cultures (Puplampu, 2016). It is also important that civil society actors must develop research models which expose the unique skill needs of different places in Africa. Research bodies must spearhead active and interventionist research which offers direct access to information which can be used to change educational policy. This would require links with industry, business regulators, scientific agencies and HEs.
African organisations are communities where relationships are imperative to the operation of the work as manifested by the concept of Ubuntu.
Unlike Western organisational models where relationships are built around the core values of organisation, rooted in organisational culture and enforced by a set of organisational policies and procedures outlined in their human resource manual, African organisations are communities where relationships are imperative to the operation of the work as manifested by the concept of Ubuntu (Bobina & Grachev, 2016). In addition, concepts such as Burungi bwansi (coming together in addressing the community needs) and Kirinju (the one with a grey hair) provide unique African perspectives regarding relationships and hierarchy within African organisations (Mutungi, Mutungi, & Fuentes, 2016). It is; therefore, important for scholars in management in Africa to work to unearth the complicated but viable nexus between some of the traditional cultural nuances noted above and the global demands for formalised procedure and organisational structures as well as the flexibilities demand by globalisation, ICTs and fast changing market situations. These understandings will be crucial if HEs are going to develop the required talent for the future of African organisations and if these organisations are aiming to successfully acquire, retain, and develop the necessary human and intellectual capital to become competitive in their respective industries.
The Sustainable Path to the Future
The prospects and views we share above will be important to enable organisations to work with higher educational institutions to shape curricula for developing the required human and intellectual capital.
We contend that managing human and intellectual capital for sustaining African organisations require a holistic approach which
- addresses the need for alignment between primary, secondary, and higher education curricular development and implementation,
- aligns and dedicates public funding and private foundations for projected human and intellectual capital for responding to each country’s organisations’ needs going forward
- supports the conduct of internal diagnostics by organisations to determine their inner dynamics and organisational models and assess their human capacity needs and translate these into practical curricula for universities
- facilitates the development of organisational processes to actively help recruit, retain, and develop internally and
- promotes relevant stakeholder dialogues which communicate and synergises organisational, economic, social and political agendas and with human capital needs so as to inform public policy and relevant actors.
Featured image courtesy: University of Ghana
About the Author
Hamid H. Kazeroony is Professor of the PhD Management program at Walden University, he is the co-editor of Sustainable Management Development in Africa (Routledge, 2016), Capitalism and Social Relationship (Palgrave, 2014), The Routledge Companion to International Management Education (Routledge, 2013), and The Strategic Management of Higher Education Institutions (Business Expert Press, 2011).
Yvonne du Plessis is Professor of Organizational Behaviour and Strategic Human Resource Management at School of Business and Governance at the North-West University, South Africa.
Bill Buenar Puplampu is Professor of Organizational Behaviour and Chartered Psychologist of the British Psychological Society and the Pro Vice-Chancellor (Academic Affairs)
Central University, Ghana.
References
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2. African Development Bank. (2009). African Development Strategy for Higher Education, Science, and Technology. Retrieved June 15, 2014, from African Development Bank Group website: http://www.afdb.org/fileadmin/uploads/afdb/Documents/Policy-Documents/yol%20%C3%A9duc%20eng.pdf
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8. News24(2016) FeesmustFall protests, retrieved October 5 2016 from http://www.news24.com/SouthAfrica/News/counting-the-cost-of-feesmustfall-protests-20160412
9. Puplampu, B. B. (2016). Alternative Approaches to Management Research in Africa. In H. H. Kazeroony, Y. Du Plessis, & B. B. Puplampu (Eds.), Sustainable management development in Africa: Building capabilities to serve African organizations (pp. 171-187). New York: Routledge.
10. Ratcliffe, A. (2013, April 26). Capacity building is key to delivering development in Africa. The Guardian. Retrieved from https://www.theguardian.com/global-development-professionals-network/2013/apr/26/development-delivery-aid-agencies
11. What Do We Do [Fact sheet]. (n.d.). Retrieved October 2, 2016, from http://www.acbf-pact.org/what-we-do/our-work
The Philippines “BRIC” Plan: From Regime Change Ploys to Accelerated Economic Development
While the Obama White House prepared plans for regime change in the Philippines, President Trump is working on an assertive strategy in Asia. Meanwhile, President Duterte is accelerating the country’s economic growth – dramatically.
After the election triumph of President Rodrigo Duterte, the Philippines has initiated a series of economic reforms to accelerate development, decentralise governance and a tough but controversial struggle against corruption and drugs.
The early economic signals are promising. Recently, Finance Secretary Carlos Dominguez III announced that the government is set to sustain growth at close to 7% in 2017, despite “political noise”, by banking on higher infrastructure spending, tax and other reforms, improved peace and order.
The big question is President Trump’s strategy for the region. With his keen interest in history, Duterte knows only too well that, while the US is a powerful regional ally, American security state and imperial dreams, including torture, originate historically from the Philippines. Yet, few expected the Obama State Department to respond as palpably as it reportedly did.
Regime Change Plan
After the controversial US Ambassador Philip Goldberg left the Philippines, he wrote a “blueprint to undermine Duterte within 18 months”. According to the document, which was leaked to The Manila Times early in the year, Goldberg advocates fostering public discontent with Duterte by isolating the Philippines through military assistance and economic “blackmail” relative to other ASEAN member countries.
While Goldberg thinks that “(deposing Duterte) would be a challenge for the opposition”, his goal is imperial “rule and divide” among Philippine congressmen and senators; the ASEAN states; and international multilateral organisations. Moreover, the pro-US opposition should be strengthened through aids and grants. The plan calls on Washington to deploy economic, political and military strategies against Duterte “to bring him to his knees and eventually remove him from office”.
According to Daniel Russel, State Department’s assistance secretary for East Asian affairs, the allegations of a blueprint are false. However, Russel himself is a key figure in the US pivot towards Asia. US-based sources have also tried to discredit the blueprint as coming from China’s Philippine Ambassador Zhao, which the executive editor of The Manila Times Dr. Dante Ang calls a “fantasy”.
It is not the first time Goldberg is associated with regime change efforts. In 2008 President Evo Morales and the Bolivian government gave him 3 days to leave the country after declaring him persona non grata – following efforts to fund the opposition leaders, separatists and think-tanks with millions of dollars.
Yet, President Obama rewarded Goldberg by appointing him assistant secretary of state for Intelligence and Research; one of the 16 elements of the US Intelligence Community. That made Goldberg the middleman between US intelligence and US diplomacy. Thereafter he was sent to the Philippines, which he left in less than three years after efforts to intervene with the election outcome.
Exploiting Opposition, Human Rights and Ngos
The regime plan ensued after election last May, when President Aquino’s designated successor – former interior minister Manuel Roxas, an ex-investment banker and Liberal Party leader – failed to deliver a democratic victory. Known as “Mr. Market”, Roxas appealed to elites in Manila and Washington but Duterte got almost 40% of the national vote, nearly twice as much as Roxas.
Since elections, there remain nagging questions about the rise of a “narco state” and “drugs generals” during Roxas’ watch as interior minister. One of them is a vocal Roxas supporter, retired national police chief general Marcelo Garbo Jr., a “protector of drug syndicates”. To set such perceptions aside, Goldberg’s plan argues that the political opposition “would need all the political weapons in their arsenal to replace Duterte”. The plan advises “restraint in expressing public support for former President Fidel Valdez Ramos and Vice President Leni Robredo, and other opposition leaders “so as not to alarm the Duterte administration of an impending destabilisation or a coup”.
These plans rely on the centre-right Philippine Liberal party, which is known for its market-friendly neoliberal policies and firm support of the US pivot to Asia. Ramos was trained at US West Point in 1960. In the 1980s, he was in President Marcos’s inner circle of national police and military. Following the fall of Marcos, he served as President Corazon Aquino’s military chief. In turn, Leni Robredo is a lawyer and social activist, who the Duterte administration sees more loyal to opposition and possibly the Goldberg plan. Her relationship with the Cabinet fell apart in December, when she was informed “to desist from attending all Cabinet meetings”.
In geopolitics, human rights and non-governmental organisations (NGOs) have only too often been used as geopolitical instruments. The Philippines is no exception. In the Benigno Aquino III era until mid-2016, complacency with drug lords and narco politicians went hand in hand with the rise of 3.7 million addicts. International media was quiet about both. However, when Duterte started his war against drugs and corruption, which has cost over 6,000 lives, international concern escalated rapidly.
In geopolitics, human rights and non-governmental organisations (NGOs) have only too often been used as geopolitical instruments. The Philippines is no exception.
In the public debate, the point person has been Senator Leila de Lima, Aquino’s former Secretary of Justice, who chaired a senate inquiry into the extrajudicial killings of drug suspects. She has been glorified by the BBC as “the woman who dares to defy Philippine president Duterte” and as an outspoken advocate of “justice”. For the same reason de Lima was invited to and awarded in the US as one of the “leading 100 global thinkers” by the Democrats’ Foreign Policy. In the Philippines, many see her awards as perversions of justice, however.
Last August, de Lima was found to have a 7-year affair with her lucratively-rewarded driver Ronnie Dayan who served as her money collector for drug protection and campaign financing. When she was still Justice Secretary, the Discovery Channel presented an unsettling documentary Inside the Gangster’s code on ruthless gangs exerting control over the notorious New Bilibid Prisons, while being coddled by the Aquino administration. Oddly enough, de Lima was removed from the Senate committee last September, but her international accolades ensued after the disclosure of her activities. International media has largely ignored her abuse of public office and public funds.
Non-governmental organisations (NGOs) also play a role in US-Philippines geopolitics, along with wealthy US Filipinos linked with the Aquino circles, such as billionaire philanthropist Loida Nicolas-Lewis, who served as an attorney for the US Immigration and Naturalization Services in 1979-90. Her sister is former chairwoman of Commission on Filipinos Overseas, Imelda Nicolas. Both are Robredo supporters.
A more influential source of funds is billionaire George Soros, who Duterte says has bankrolled local NGOs against him as he has been portrayed as a “mass murderer” in the West. International media has relied on these NGOs and think-tanks in their demonisation of Duterte.
Last November, the US-based Millennium Challenge Corporation (MCC) did not renew its $430 million aid grant to the Philippines. While the Duterte’s criticism about “aid conditions” was reported as “tirades against America” in the West, the MCC is hardly independent. It is chaired by State Secretary John Kerry and Treasury Secretary Jacob Lew. It also deploys indicators that precondition aid on neoliberal policies.
The MCC debacle is overshadowed by the economic implications of US-Philippine military ties. Until 2010, the country’s military expenditures decreased two decades from 1.6% to 0.8% of GDP. During the Aquino era, which coincides with the US pivot to Asia, the expenditures soared to almost 1.4% of GDP, according to SIPRI – which in dollar terms is over five times the proposed aid package in just one year.
Ambitious, Transformational Economic Efforts
Under Duterte’s leadership, Manila’s economic development has been dramatically accelerated. Again, international media has largely ignored the story. According to Ernesto Pernia, director general of the National Economic and Development Authority (NEDA), the Philippines must ramp up its total investment spending to some 30% of GDP to achieve its development goal.
The effort is to become an upper middle-income economy by the end of Duterte’s term in 2022, which would pave the way for a high-income economy by 2040. If peaceful conditions prevail in Southeast Asia and the Philippines remains united, such ambitious objectives could be viable.
Last July, I argued in the Philippines Foreign Service Institute (FSI) that, in order to accelerate growth, the country should drastically increase both its domestic and foreign investment, seek funds not just from the Asian Development Bank (ADB) but from the Asian Infrastructure Investment Bank (AIIB); and not just from US and European multinationals but from Chinese companies. Nor can the Philippines any longer afford to export its people, I added. Although some 10% of the GDP can be attributed to remittances, no BRIC-like emerging economy can misallocate its human capital in such a manner. Even the most favourable demographics will be wasted, if there are not enough jobs.
The Duterte administration is intent to restore the kind of growth track that the Philippines enjoyed in the early postwar era when its living standards were still second to those of Singapore in Southeast Asia.
It is this “BRIC-like” transformation that Manila is now trying to achieve. As a result, the public share of investments would have to climb from 5.4% of GDP in the ongoing year to 7% onward until 2022. As private and public investment is expected to contribute 18.6% and 5.4% of GDP, respectively, that would boost total investment to 24% of GDP. The Duterte administration is intent to restore the kind of growth track that the Philippines enjoyed in the early postwar era when its living standards were still second to those of Singapore in Southeast Asia.
However, even the ambitious infrastructure program will not be enough to eradicate poverty and become a high-income economy by 2040. To achieve its ultimate objective, the Philippines needs to raise total investments from the hoped-for 24% this year to 30% of GDP, of which only 7% would be contributed by the public sector.
Additionally, Manila needs to implement broad and deep reforms in tax policy and administration to raise enough revenue to fund the government’s huge spending plan. According to ASEAN, in 2015 FDI in the Philippines was around $5.7 billion, significantly behind Indonesia, Thailand and Vietnam, which attracted FDI of $16.9 billion, $8.0 billion and $11.8 billion, respectively.
As real GDP growth rate is accelerating, Manila is pushing for legislative reform, which would streamline the regulatory environment, and the pivot to China, which translates to the participation of AIIB in Philippine projects and has already led to $24 billion in aid pledges. At the same time, the longstanding maritime dispute has been set aside. At the same time, Japan, a historical investment partner, is planning to raise its FDI in the Philippines with $1.8 billion in business deals plus a pledge from conglomerate Marubeni to invest $17.2 billion in water, power and infrastructure.
Unlike his predecessors, Duterte has little interest in exporting more people. “We have to improve the economy so you will not come back here”, said Duterte during his recent visit in Japan to migrant workers. “If ever you will return to Japan, it will be for a vacation.”
Finally, in my FSI presentation, I also argued that the Duterte administration’s efforts to negotiate sustained peace deals with its Communist and Islamist insurgents could be seen as part of the new economic strategy. A “no-conflict” approach within and around the country would boost stability and thus increase the potential for prosperity. And that precisely has been Duterte’s objective, particularly in the troubled regions and islands in the south; particularly in Mindanao, whose natural resources hold great potential for future economic development.
From Obama’s Regime Changes to Trump Uncertainty
In the Philippines, the alleged plan of Vice President Robredo’s supporters to create dissent against Duterte has become a national issue. If a Ramos-Robredo scenario were to fail, Golberg advises exploiting possible rifts “among Duterte supporters”, or assisting “Robredo led opposition groups” coupled with the Catholic Church, business sector and NGOs.
Despite the controversial drugs war, Duterte’s approval and trust ratings in the Philippines remains 83%, according to the Pulse Asia survey. Only 5% of the nation disapproves of Duterte. However, the ratings of opposition figures have fallen. At the same time, the legal battle about vice-presidency is heating. Leni Robredo won vice-presidency with a narrow margin against former senator Ferdinand “Bong Bong” Marcos, former President Marcos’s son. In his electoral protest, Marcos says that the Liberal Party rigged the 2016 elections in favour of Robredo. That kind of fraud would no longer be surprising.
The stakes in the Philippines are no longer just domestic. Today the country’s stability is strongly supported by Beijing as well. Amid the news about the “ouster plot”, foreign ministry spokeswoman Hua Chunying said China was confident on Duterte’s leadership and would continue to support his policies.
Soon President Trump’s administration must reassess Goldberg’s regime-change scenarios in light of his own pledge to redefine “America First” policies in Asia and China. Before the US elections, Trump and Duterte had a brief but friendly phone conversation. While Duterte may get better along with Trump than former President Obama, the new White House’s Philippines plans are subject to its broader Asia and China strategy which – as secretary of state Rex Tillerton’s confirmation hearings suggest – could mean greater assertiveness in the region.
In the Philippines, any US-led regime change effort would face firm domestic, regional and international opposition. Only the Philippines can determine its own future. Unipolar regime change plans should have no role in the multipolar 21st century – especially in Asia which is critical to global growth prospects.
About the Author
Dr. Dan Steinbock is an internationally recognised expert of the nascent multipolar world. Dan Steinbock is the founder of the Difference Group. He has also served as the research director at the India, China, and America Institute (USA) and a visiting fellow at the Shanghai Institutes for International Studies (China) and the EU Center (Singapore). In the Philippines, he has addressed leading foreign policy, economic and climate change, as well as competition and innovation institutions. For more information, see http://www.differencegroup.net/
Trumping World Trade
After the inauguration, President Trump has begun to reset the White House trade policies. But the consequences of “America First” stance in world trade are wrought with threats.
Recently, President Xi Jinping gave a strong speech about the need for more inclusive globalisation at Davos. World trade is a case in point.
In 2015, world export volumes reached a plateau. World trade is no longer growing. Any major protectionist initiative has potential to make a bad situation a lot worse.
Trump’s Trade Appointments and Tariff Plans
In the early 2010s, the Obama administration touted the Trans-Pacific Partnership (TPP), which excluded China. On his inauguration day, Trump announced US withdrawal from the TPP and promised to renegotiate NAFTA; if Mexico and Canada would refuse a negotiation, he would have US withdraw also from NAFTA.
The goal is to force some countries, particularly Mexico and China, to change their trade practices, which he has vowed to challenge with “cease and desist” letters and greater pressure for intellectual property rights (IPRs).
Trump has promised to renegotiate or reject other US international commitments. And he has threatened to use 35-45% import tariffs, while his team has floated 10% tariffs. The goal is to force some countries, particularly Mexico and China, to change their trade practices, which he has vowed to challenge with “cease and desist” letters and greater pressure for intellectual property rights (IPRs).
Trump’s appointments suggest potential for serious trade friction. He selected Peter Navarro, the author of sensationalist China-bashing books (The Coming China Wars, 2005; Death by China, 2011; and What China’s Militarism Means for the World, 2015), to head the new National Trade Council (NTC), which will oversee industrial policy in the White House.
Navarro’s anti-China buddy Dan DiMicco, former CEO of largest US steel company Nucor and vocal free trade critic, became Trump’s trade advisor and former Reagan administration trade hawk Robert Lighthizer, his US Trade Representative.
The three will work with Secretary of Commerce, billionaire Wilbur Ross, who made a fortune by offshoring American jobs and as bankruptcy expert. He calls China “the world’s most protectionist country.”
Targeting US Deficit
Targeting the US deficit Trump has also named Japan as one of the deficit contributors, which Japan’s Finance Minister Taro Aso has considered inappropriate. In terms of trade imbalances, “China is No 1”, Aso says.
In protectionist initiatives, the blame is in the eye of the beholder because one country’s deficit is another’s surplus. Trump’s trade warriors will begin by singling out nations that have large trade surplus with the US. That makes big trading economies obvious targets. In 2015, the list was topped by China ($367 billion), Japan ($69) and Mexico ($61 billion), and Germany ($60 billion)
However, they are likely to ignore the size of these surpluses on a per capita basis. If we take into account the population size, Germany ($720) is the deficit leader followed by Japan ($543), Mexico ($488), but China ($262) is far behind.
Now, if the Trump administration really is serious about targeting deficit leaders, it should probably consider a trade war with Ireland. After all, US has a deficit of $30 billion with Ireland, which translates to $6,380 in per capita terms – that’s 9 times the German and 24 times the Chinese figure, respectively.
In reality, trade deficits are likely to serve as pretexts for protectionism – even if such policies penalise the rest of the world.
Regional Trade Deficits, Nationalist Tariffs
Trump’s goals may well be dictated by realpolitik. Deficit criticism serves largely as an effort to undermine European unity (hence his anti-Merkel tirade), the rise of China and Mexico, and Japanese reforms. In such a win-lose world, “America First” is not possible through cooperation or even competition, but only by winning and harming perceived adversaries.
A single-minded focus on trade deficits ignores the fact that global economic cooperation is not just about trade in goods, but about trade in services and high-technology.
And yet, historically, US trade deficits did not start with China, or any other single country. Rather, they are regional and have prevailed for more than 41 years with Asia – first with Japan, then with newly-industrialised Asian tigers and recently with China and emerging Asia.
A single-minded focus on trade deficits ignores the fact that global economic cooperation is not just about trade in goods, but about trade in services and high-technology. It also includes investment, which Trump would like to attract from the very same countries that he risks alienating with his trade policy.
And it includes migration flows, which Trump would like to restrict dramatically, which would hurt US long-term growth, reduce remittances to poorer nations and boost anti-US resentment particularly in the Middle East.
Smoot-Hawley Tariff Act Déjà Vu
Trump’s stated protectionism does have a historical precedent. In 1930, the US Congress passed the notorious Smoot-Hawley Tariff Act, which sharply raised the cost of foreign imports.
While the Tariff Act seemed to work initially, it soon caused other nations to retaliate. As rounds of tit-for-tat retaliation contributed to the Great Depression, the way was soon paved for another world war.
Trumping world trade is a bad idea, but its timing is even worse.
The original, slightly shorter commentary was released by China Daily on January 23, 2017
About the Author
Dr. Dan Steinbock is the founder of the Difference Group and has served as the research director at the India, China, and America Institute (USA) and a visiting fellow at the Shanghai Institutes for International Studies (China) and the EU Center (Singapore). For more, see http://www.differencegroup.net/
China’s Emerging Silicon Valley: How and Why Has Shenzhen Become a Global Innovation Centre
By Xiangming Chen and Taylor Lynch Ogan
Shenzhen is China’s very own Silicon Valley. Find out how it has become innovative by tracing its rapid growth and strategic transition; what are the four of its most innovative companies, and what are the key factors that make it an innovative ecosystem in which companies have thrived.
Many informed people would have heard about Shenzhen, which has grown, at a breakneck pace, from a small village and China’s first special economic zone to a prosperous megacity and an emerging centre of innovation over three decades. Yet how many people, even in the global corporate community, have heard about BYD, which happens to have risen from Shenzhen to the world’s manufacturing leader in rechargeable batteries and electric vehicles in 20 years? Probably not many. Besides the tale of Shenzhen as a “miracle city”, there is a story to be told about how and why Shenzhen has also become a global hub for innovative companies like BYD. While our previous article in this magazine focussed on the rise of BYD with Shenzhen,1 this article has two purposes. The first is to look at how Shenzhen has become innovative by tracing its rapid growth and strategic transition as a favourable backdrop and then profiling four of its most innovative companies. The second is to examine the key factors that make Shenzhen an innovative ecosystem in which companies have thrived.
Rapid Growth and Quality Transition
Few companies can perform well if their home city does not create and sustain healthy demographic and economic growth. This has not been a problem for Shenzhen, which has been one of the fastest growing cities in China and the world for the last 35 years. In fact, no other city anywhere in the world has gained more population than Shenzhen since 1980 (see Figure 1 below).
Unlike any other large city in China, Shenzhen has maintained a small proportion of its population (only about 30%) as officially registered with hukou. Besides the approximately 70% or eight million long-term residents included in Shenzhen’s total population, there are as many as another eight million short-term residents in Shenzhen today, bringing the total to around 18 million.2 This qualifies Shenzhen as China’s largest immigrant city. The inflow of human resources through the large influx of immigrants has contributed to Shenzhen’s innovative capacity (see later).
The rapid growth of Shenzhen’s economy has both paralleled and facilitated its structural shift favouring innovation. After averaging about 35% annually for its GDP growth through 1995, Shenzhen kept its annual growth at around 14% through 2014. As a result of this slowed but sustained high growth, Shenzhen’s GDP per capita in 2014 reached around $25,000, the highest of all Chinese cities. At this pace, Shenzhen’s GDP per capita is expected to hit $36,000 in 2020, equaling the 2012 figure for Hong Kong.3 Driving the more recent and future growth is the accelerated development of services and the relative contraction of manufacturing (see Figure 2 below).
The still substantial share of GDP in manufacturing is no longer produced by the labour-intensive and low-tech assembling industries that dominated the earlier phase of Shenzhen’s economic development. Instead Shenzhen’s manufacturing has become increasingly high-tech, new-tech, and clean-tech favouring such industries as new information technology, biotechnology, new energy, new materials, numerical control tools, and robotics. With this shift, the value added of these new industries as a share of GDP rose from 28.8% in 2010, to 35.6% in 2014.
Shenzhen’s industrial upgrading has been accompanied and fostered by the continued growth of human capital. As Figure 3 on the next page shows, as the number of college graduates rose, the highly educated base of the population became stronger. In Shenzhen today, college educated talents relative to its permanent population stand at 37.1%, higher than 28.6% in Beijing, and 23.4% in the New Pudong district of Shanghai. Shenzhen’s expanded human capital has translated into a greater and more effective capacity of R&D at both the firm and aggregate levels. From 2009 to 2014, the firms’ share of Shenzhen’s R&D stayed over 90%, and Shenzhen’s R&D budget as a share of GDP stood at 4.2%, doubling the national average of 2% and far exceeding the 2.5%, which is regarded as the international norm for innovative economies. High levels of investment in R&D have paid off in the number of patents Shenzhen has applied for and been granted. In 2014, Shenzhen applied for 82,254 patents, up from 42,279 in 2009, and was granted 53,687 patents, up from 25,894 in 2009.4 Shenzhen-based companies also accounted for 46.9% of all Patent Cooperation Treaty (PCT) applications from China in 2015. By then Shenzhen led all large Chinese cities in the number of patents applied and grant for 12 years in a row. Through June 2016, Shenzhen accounted for 51.8% of all applied patents in China.5
A Quartet of Innovative Companies
Since firms dominate R&D in Shenzhen, they logically form a wide and deep pool of technological innovation. But do they? What firms lead and in what key industry sectors reflect and represent Shenzhen’s growing identity and strength as a global innovation centre? Here we profile four of these firms, all started by entrepreneurs.
BYD
BYD was founded in Shenzhen in 1995 by a young, ambitious battery chemist, Wang Chuangfu, who aptly named his company BYD Co. Ltd., his acronym for “build your dreams”. The 29-year-old Wang began making rechargeable batteries for cell phones in his first factory in Shenzhen. Just five years later, BYD was the world’s largest cell phone battery manufacturer. The inevitable transition for BYD was to put their battery into a car. Five years after BYD purchased Xi’an Tsinchuan Auto Co., Ltd., a defunct Chinese automobile manufacturer, in 2003, BYD released the world’s first plug-in hybrid electric car, the F3DM. This attracted interest from investors, including Warren Buffett who bought 10% of BYD Co. Ltd. in 2008 for $230 million, and Wang became China’s richest man and has since been one of the wealthiest individuals.
BYD has grown to over 200,000 employees, the largest rechargeable battery manufacturer with over a 25% global market share, and the largest electric vehicle manufacturer in the world. Wang also stresses the other side of the coin, where there must be cleaner alternatives for generating energy, especially now that his company’s products demand so much electricity.
BYD also pioneered a solar tracking system, where the panels can follow the path of the sun across the sky, thus stabilising power generation and matching peak loading time.
BYD soon entered the solar power industry, which Wang stressed was a new energy total solution, one that was not only about grid parity, but also grid quality. BYD’s photovoltaic system was multilayered and the first of its kind in the industry, which is now being emulated by companies like Tesla/Solar City. BYD’s double-glass solar panel is highly energy efficient, long-lasting, and requires less precious metals in order to be cost competitive. BYD also pioneered a solar tracking system, where the panels can follow the path of the sun across the sky, thus stabilising power generation and matching peak loading time. Most importantly, the solar tracking system increases the efficiency of the panels by 29%.
BYD also stresses having an inverter in their photovoltaic system, which further increases efficiency and reliability. Arguably the most important part of any photovoltaic system is energy storage, a focus of BYD’s from the beginning. The Energy Storage System (ESS) is essentially a big battery that stores the energy produced by the solar panels during the day, which is also the peak loading time for energy usage. By storing the excess energy, the ESS can then feed the grid with its stored energy when demand is high. BYD’s newest slogan is aptly “The official sponsor of Mother Nature”.
DJI
Shenzhen is also home to the world’s largest consumer drone manufacturer, SZ DJI Technology Co., known to most as DJI. The privately held robotics company’s growth is strikingly analogous with that of Shenzhen. Founder and CEO Frank Wang started the company in 2006, and in 2011 DJI was still a startup. Frank Wang’s story is cliché Silicon Valley-startup. Growing up, Frank Wang struggled as a student, and at 16 years old, he finally received his long-coveted remote-controlled helicopter, which he reversed engineered. He studied electronic engineering at the Hong Kong University of Science & Technology, and in his senior year he moved with two of his classmates across the border to Shenzhen where he began selling drones to hobbyists out of his three-bedroom apartment.6
DJI has been called the “Apple of drones”, and Frank Wang “China’s Steve Jobs”, especially for his unique management practices, even admitting himself to Forbes that he can be an “abrasive perfectionist”. When Forbes asked what he thought of being compared to Steve Jobs, he said he appreciates it, his philosophy being, “All you need to do is to be smarter than others.”7 The 35-year-old entrepreneur is now worth over $3.6 billion, lives in Shenzhen, and drives a four-year-old electric car.
Now DJI has essentially created a market for consumer unmanned aerial vehicles (UAVs) where they currently control over 70% of the global market for consumer drones. DJI is already valued as high as $10 billion. Their Phantom series of drones, which rolled out in early 2013, finally brought an affordable entry-level drone to the market for $679. Though they barely broke even on the drone, they priced it so low to essentially create a market for UAVs and to prevent a price war from competitors.8 DJI’s product line extends further than just entry-level drones, however. Their highest level drones are used by nearly every production company in Hollywood, and are even replacing news helicopters.
DJI prides itself on engineering and designing every part of their drones, such as the blades, controller, gimbal, radar sensors, software, and even the camera. It is impressive such a new company is able to manufacture their own camera that shoots 4k video given the complexity of a camera the size of a golf ball. All of their main competitors, except GoPro, an action camera company, outsource at least the camera component of their drones. DJI’s gimbal, a mechanism that allows the camera to move on a fixed axis to create a stabilised image, is also incredibly advanced, so much so that DJI even has a product line for professional camera grips. Their gimbals and cameras have even been spotted mounted to the top of BYD police cars in Shenzhen, likely testing facial recognition software.9
Huawei
Huawei is a leading global information and communications technology (ICT) solutions provider. It overtook Ericsson as the world’s largest telecommunications equipment manufacturer in 2012. Huawei was founded in 1987 by Ren Zhengfei, a former engineer in the People’s Liberation Army. At the time of its establishment, the company reportedly had only RMB21,000 ($3,300 in today’s US dollar) in registered capital. Its employees, both managers and employees, worked in a small office that also served as a kitchen and dormitory. Huawei focused on manufacturing phone switches, but has since expanded its business to include: building telecommunications networks; providing operational and consulting services, and equipment to enterprises inside and outside of China; and manufacturing communications devices for the consumer market.
During its first few years, Huawei’s business model consisted mainly of reselling private branch exchange (PBX) switches imported from Hong Kong. Meanwhile, it was reverse-engineering imported switches and investing heavily in research and development to manufacture its own technologies. By 1990 the company had approximately 500 R&D staff, and began its own independent commercialisation of PBX switches targeting hotels and small enterprises. The company’s first major breakthrough came in 1993, when it launched its C&C08 program controlled telephone switch. It was by far the most powerful switch available in China at the time. By initially deploying in small cities and rural areas and placing emphasis on service and customisability, the company gained market share and made its way into the mainstream market.
Domestic success spurred Huawei to go global. In 1999, Huawei set up its first R&D centre in Bangalore, India. From 1996 to 2000, Huawei made a concerted effort to promote itself at many international expos. It engaged IBM, at a substantial cost, to be its technology-training provider. In 2003, the company entered into a five-year contract with IBM. In 2005, Huawei’s international contract orders exceeded its domestic sales for the first time. In late 2010, Huawei was planning to invest around $500 million to set up a telecom equipment manufacturing facility in Tamil Nadu, India and $100 million to expand its R&D centre in Bangalore.
In 2015, Huawei’s revenue reached RMB395 billion ($60.8 billion based on the year-end exchange rate), an increase of 37% year-on-year. Huawei’s 4G equipment is widely deployed around the world and is now being used in the capital cities of over 140 countries. Globally, Huawei is setting the pace for IT systems based on cloud architecture. Following a path towards a super-connected world, Huawei is already a leader in developing 5G, an enabler of disruption. Being one of the newest megacities in the world, Shenzhen is an ideal city to test 5G networks that connect the Internet of Things to smart buildings, devices, appliances, and vehicles. While the technology is still being developed and tested by the world’s top telecommunications companies, when released, 5G will connect 100 billion devices, and will be 66 times faster than 4G. 5G is expected to spark the materialisation of wholly new ideas and applications such as virtual reality-based immersive entertainment, remote surgery, and driverless vehicles. Huawei has been conducting much of their 5G testing in Shenzhen, and are likely working with other Shenzhen-based companies, such as BYD.10
Tencent
Tencent is a leading provider of Internet value added services in China and is one of the largest Internet companies in the world. Its many services include social network, web portals, e-commerce, and multiplayer online games. In 1998, Ma Huateng, with four other classmates, co-founded Tencent, after making money playing the stock market. In 1999, inspired by ICQ, the world’s first Internet instant messaging service, developed by an Israeli company, Ma and his team launched a similar software, with a Chinese interface and a slightly different name – OICQ. In December 2000, Ma changed the name of the software to QQ, which became widely popular in China.
In the early 2000s, Ma Huateng expanded Tencent’s business portfolio. In 2003, Tencent released its own portal (QQ.com) and made forays into the online gaming market. By 2004, Tencent became the largest Chinese instant messaging service (holding 74% of the market). Later in 2004, Tencent launched an online gaming platform and began selling virtual goods to support the games published on their platform (virtual weapons, gaming power), as well as emoticons and ringtones. In 2005, Tencent launched the C2C platform Paipai.com, a direct competitor to e-commerce giant Alibaba. In January 2011, Tencent released WeChat, a cross-platform instant messaging service, which quickly became one of the largest standalone messaging apps by monthly active users.
Fast forward to June 31, 2016, the monthly active user accounts of QQ were 899 million while its peak concurrent user accounts reached 247 million. WeChat has over a billion created accounts, 700 million active users, with more than 70 million outside of China. With this huge market, Tencent has passed telecoms giant China Mobile to become the nation’s most valuable publicly-traded company. Tencent’s new crown as Asia’s most valuable company reflects its dominant position, which could pose an eventual challenge to global social networking leader Facebook.11
Tencent’s newest foray into online payments has also paid off. One of its moves was to invest in Didi Chuxing, a ride-sharing service almost identical to Uber. Didi’s seamless integration with WeChat allows WeChat users to order a ride from within the WeChat app, as well as pay or split the fare using WeChat Wallet. This also allows WeChat users to pay for goods and services at numerous shops and eateries, large or small. Very quickly, Tencent has built one of the world’s largest payments systems, with transactions that could exceed $556 billion in 2016, almost doubling the $280 billion that PayPal banks per year.
An Ecosystem of Innovation
The four profiled companies exemplify a large number and heavy density of successful firms, mostly privately owned, based in Shenzhen. What explains this clustering in this particular city? We address this question by seeing these companies as embedded and thriving inside a favourable ecosystem, nurtured mainly by four factors (see Figure 4 below).
While the four companies represent different industries, they share an underlying emphasis on innovation through strong R&D. BYD relies on its 16,000 R&D engineers and state-of-the-art manufacturing techniques. In 2010, BusinessWeek ranked BYD the 8th most innovative company in the world, ahead of Ford, Volkswagen, and BMW. About 40% of DJI staff work in R&D, and they have opened an R&D centre in Palo Alto, California. As of September 2015, Huawei had over 170,000 employees, around 76,000 of whom were in R&D. It has 21 R&D institutes in China, the US, the UK, Germany, Sweden, Columbia, India, and Turkey. More than 50% of Tencent employees are in R&D. In 2007, Tencent invested more than RMB100 million (about $15 million) in setting up the Tencent Research Institute, China’s first Internet research institute, with campuses in Beijing, Shanghai, and Shenzhen.
A small and purposeful local government is the first key to Shenzhen’s successful ecosystem for breeding and sustaining innovative companies (the upper left box of Figure 4). This was baked into Shenzhen as a special zone-turned-new city over three decades ago. Untainted with strong state control and economic planning, Shenzhen charted a new course for developing innovative governance and created a municipal government with a more limited structure and purposeful role, not as a comprehensive administrator, but as a catalyst for targeted development initiatives.12 In guiding Shenzhen’s transition from a low-tech factory town to a global innovation hub, the municipal government has adopted a number of measures to foster creative industries and firms. The local government is spending RMB21.5 billion ($3 billion) on emerging industries such as new energy represented by BYD. Shenzhen has taken a clustering approach to the cultural and creative industry by creating model bases for creative design, cultural software, animation and games, new media, and so forth. It subsidises up to 70% of rent for “creative” start-ups. The local government also launched the 1st Innovation Competition of International Talents held from November, 2015 to April, 2016, which is open to all IT talents around the world, to win a total of $880,000 bonus plus an additional $200 million government subsidies and venture capital.13
Going beyond citywide policies, the Shenzhen government has targeted specific leading industries and firms. Climate change, energy conservation, and emission reduction has been a high priority. Shenzhen Development and Reform Commission (SDRC), the most important department under the municipal government and supervised by a Deputy Mayor, oversees urban construction to mitigate climate change and implement clean development policies. Already with the largest fleet of electric vehicles in the world, Shenzhen has recently added 2,000 more – 1,300 buses and 700 taxis – all bought from local EV manufacturer BYD through a subsidy-type program. Major support by a small and purposeful government for a leading firm like BYD illustrates both the relative status of and close interaction between state and market in China, especially in Shenzhen. It is reported that in Chinese cities, government officials walk in front of CEOs of local companies when they meet, while in Shenzhen, CEOs like Wang Chuanfu of BYD walk ahead of government officials.14 Wang walked side by side with President Xi Jinping of China during the latter’s official visit to the UK in October, 2015 when London bought more zero-emission electric busses from BYD (see the photo below).
The second factor in the ecosystem of innovation is immigration (the upper right box of Figure 4). Shenzhen is the largest city of immigrants in China, especially so if including the temporary migrant population not captured in Figure 1. Interacting with other factors, immigration is an important source of entrepreneurial spirit and drive. Research shows that a high percentage of start-ups in Silicon Valley have been launched by immigrants, largely from China and India.15 A popular saying in Shenzhen goes, “You are a Shenzhener once you come here.” The expression embodies the optimism of the new generation of entrepreneurs, high-tech experts, craftsmen, and others who see Shenzhen as a land of opportunity like no other city in China. “It’s a true paradise if you want to create your own business,” said James Wang, a 39-year-old Internet entrepreneur in a local science park.16 The young migrant entrepreneurs today, like their predecessors such as Ren Zhengfei of Huawei and Wang Chuanfu of BYD who migrated to Shenzhen in the 1980s and 1990s, prove that a lesser government and open immigration since the beginning of Shenzhen has maintained an open and attractive environment for some entrepreneurs to succeed.
As China’s first special economic zone bordering Hong Kong, Shenzhen has developed a “buzz” that does not exist elsewhere in China (the lower left corner of Figure 4). Besides being linked to economic opportunities, this “buzz” manifests itself in a lifestyle that appeals to young entrepreneurial people. The average age of residents in Shenzhen is 28.7 years old, and people aged 20 to 29 make up 35.8% of the city’s population. In comparison, the average age of Shanghai’s population is over 40, and people over 60 are 27% of the city’s registered population. Around Shenzhen, young people are everywhere and a feeling of a sense of excitement and dynamist is in the air. This lifestyle for the young was a critical cultural ingredient in the formation of Silicon Valley from its beginning.17 Half a century later, Shenzhen has reproduced the mutual reinforcement between youth, lifestyle, and immigration in producing an innovative ecosystem.
Hong Kong serves as a convenient and suitable neighbour that initiates and sustains fast and dense cross-border flows of human talents, innovative ideas, and business activities.
The demographic and cultural aspects of this system are hardened by the physical location of Shenzhen across the border from Hong Kong. Shenzhen’s earlier development and dominance of low-end manufacturing (toys, garments) would not be possible without these factories crossing the border from Hong Kong. Shenzhen’s strategic shift to the industries represented by the four firms above has also benefited from the location proximity and relative weakening of Hong Kong. Frank Wang started DJI with his classmates from the Hong Kong University of Science and Technology. In September 2016, DJI opened a flagship store in Hong Kong that will not only serve as a retail outlet, but also provide a prominent space for the worldwide community to share its experience of flight and explore the latest drones and aerial cameras. Given its more developed institution of higher learning and well-established global financial and marking capabilities, Hong Kong serves as a convenient and suitable neighbour that initiates and sustains fast and dense cross-border flows of human talents, innovative ideas, and business activities.
Hong Kong however has lost lustre in innovation as Shenzhen’s star has risen. Some companies in Hong Kong have a hard time finding local programmers with both technical skills in coding and the ability to think independently and creatively. A recent university study reported that there is a widespread feeling in Hong Kong that the city has lost its can-do spirit. A more pessimistic local designer commented, “Innovation wise, Hong Kong is doomed.”18 Is the erosion of Hong Kong’s innovation expected or inevitable as the much newer and younger city of Shenzhen across the border has become so innovative? This is not the place to figure out why Hong Kong has become less innovative than Shenzhen. The reversed positions of the two cities on the same border only further highlight Shenzhen’s ascent as an innovation centre.
We round up the four corners of the ecosystem (the lower right box of Figure 4) by returning to the rapid growth of higher education as demonstrated in Figure 3. It is no doubt that the presence of top universities such as Stanford in Silicon Valley, MIT in Boston’s Route 128, and Duke University in the Research Triangle Park in North Carolina have been critical to the success of these innovation regions. As a “factory city” built off a special zone in its earlier years, Shenzhen was a barren land for higher education. While Shenzhen University was established in 1983, it did not grow to scale and produce more graduates until later. The initial level of college educated were immigrants like Wang Chuanfu of BYD, although the base of college education, in both absolute and relative terms, remained low during Shenzhen’s era of traditional manufacturing through the early 2000s (Figure 3). Then higher education took off, spurred by the new graduate schools in Shenzhen established by Tsinghua University in 2000 and by Peking University in 2001, China’s top two universities. This rapid expansion of higher education (Figure 3) has both accompanied and fueled Shenzhen’s rise as an innovation centre. It is only fitting that the Shenzhen government is planning to increase the number of colleges and universities to 20 by 2025 when enrolled college students will rise to 250,000, with 200,000 of whom being full-time. If this ambitious plan materialises, Shenzhen will be able to draw a lot more on home-grown human talents to sustain its innovation.
A Bright Future
If Shenzhen is China’s emerging Silicon Valley, is it also on the way to become the world’s new Silicon Valley?19 In one respect, the four companies profiled are global leaders in their respective industries or industry segments. In another, they are already as, if not more, innovative as their best competitors. For example, Huawei submitted 3,442 applications for international patents, compared to 2,409 by Qualcomm, in 2014. The respective figures for Tencent and Microsoft were 1,086 and 1,460. Besides these leading innovators, another telecommunications equipment company based in Shenzhen – ZTE – filed 2,179 patent applications compared to 1,539 by Intel.20 There is much evidence that Shenzhen has accumulated a critical mass of innovative companies that are beginning to resemble and even rival the original Silicon Valley, at least relative to much of the latter’s existence.
As Hong Kong has lost some innovative capacity, it has enhanced Shenzhen’s already powerful position as a contiguous innovation centre.
Unlike Silicon Valley and most other innovative cities and regions in advanced economies, Shenzhen’s rise to an innovation centre has been driven by a limited and purposeful local government. This distinctive strength has also fostered a faster concentration of innovative technology companies in Shenzhen. Similar to other innovative places, heavy in-migration has created an open and diverse environment conducive to the birth and growth of innovative companies. A buzzing lifestyle has attracted even more entrepreneurially minded young people to Shenzhen. Bordering Hong Kong has facilitated Shenzhen’s innovation in two ways. It accelerates and densifies flows of creative ideas and practices. As Hong Kong has lost some innovative capacity, it has enhanced Shenzhen’s already powerful position as a contiguous innovation centre. Despite an earlier lack of higher education in Shenzhen, the subsequent rapid expansion has caught up in providing needed human resource for sustaining Shenzhen’s innovation. The relative strengths of these four factors have created a favourable ecosystem that distinguishes Shenzhen from other Chinese cities in industrial innovation. This ecosystem also characterises Shenzhen as a new global innovation centre.
*Parts of this article on BYD and other companies were presented by Taylor Ogan at the conference on Asia/Environment, Bard College, Annandale-on-Hudson, New York, 14-15 April, 2016; and at the Center for Urban and Global Studies at Trinity College, Hartford, 20 September, 2016. Helpful comments from these audiences were acknowledged, but we are responsible for any errors in facts and interpretations that might be in this article. We are grateful to the Henry Luce Foundation for an institutional grant to Trinity College that supported Taylor Ogan’s summer research project on BYD in summer 2015 and summer 2016. We also thank Professors Zhao Dengfeng and Chen Yong of the School of Economics at Shenzhen University for allowing us to refer to their materials and remarks from the Global Cities Forum, Shanghai Jiao Tong University, 30 October, 2016. Assistance by Xinyi (Ellen) Liu of Trinity College in producing Figures 1-3 is gratefully acknowledged.
About the Authors
Xiangming Chen is the Dean and Director of the Center for Urban and Global Studies and Paul E. Raether Distinguished Professor of Global Urban Studies and Sociology at Trinity College, Connecticut, and a distinguished guest professor at Fudan University, Shanghai. He has published extensively on urbanisation and globalisation with a focus on China and Asia. His most recent book Global Cities, Local Streets: Everyday Diversity from New York to Shanghai (with Sharon Zukin and Philip Kasinitz) was published by Routledge in 2015 (Chinese edition, Tongji University Press, 2016). He was instrumental in launching the China & the World series at The European Financial Review and has been the main author of a dozen China-related articles since 2012.
Taylor Lynch Ogan is currently a junior at Trinity College, Connecticut, majoring in Urban Studies. His focus is on the implementation and investment of sustainable energy and electric vehicles, specifically in China. He has done research in Shenzhen, China in the summers of 2015 and 2016 supported by the Henry Luce Foundation, as well as in New York City, Chicago, and Los Angeles.
References
1. Ogan, Taylor Lynch and Xiangming Chen, “The Rise of Shenzhen and BYD—How a Chinese Corporate Pioneer is Leading Greener and More Sustainable Transportation and Urban Development.” The European Financial Review (Feb/March, 2016): 32-39.
2. The 18 million figure was given by a scholar at the Graduate School branch of Tsinghua University in Shenzhen, June 2016.
3. These figures were drawn from the PowerPoint presentation given by Professor Zhao Dengfeng of Shenzhen University at Shanghai Jiao Tong University, Shanghai, 30 October, 2016.
4. Same as Note 3.
5. “Shanghai vs. Shenzhen: A most heated war between the two cities”, 11 November, 2016; accessed from http://mp.weixin.qq.com/s_biz=MzAxMTE0NDMyNA==&mid=2649509754&idx=1&sn=b8a3bdb93d98b2ff5b15650704e3f8af&chksm=835d7291b42afb87ef601ca7cec1358f105c0fd9c1639e3b77a8c9bd28b90de4eafb62867267&mpshare=1&scene=5&srcid=1112SHAbyxneaHajY11bodod#rd.
6. Accessed from http://www.australiannationalreview.com/frank-wang-worlds-drone-billionaire/.
7. “Forbes global game changers: The full list”, Steve Schaefer, 10 May, 2016; accessed from http://www.forbes.com/sites/steveschaefer/2016/04/13/forbes-global-game-changers-the-full-list/5/#6523b8d1509e.
8. Accessed from http://www.forbes.com/sites/ryanmac/2015/05/06/dji-drones-frank-wang-china-billionaire/#50b658b6210c.
9. This profile of DJI drew from Wikipedia.
10. This profile of Huawei drew from Wikipedia and Huawei’s 2015 Annual Report.
11. “Tencent Takes China’s Corporate Crown On Facebook-Sky Hopes”, Doug Young, blogs.Forbes.com, 6 September, 2016; accessed from http://www.forbes.com/sites/dougyoung/2016/09/06/tencent-takes-chinas-corporate-crown-on-facebook-sky-hopes/#77e40aa982ee. The profile of Tencent also draws from Wikipedia.
12. Chen, Xiangming and Tomás de’Medici, “The ‘Instant City’ Coming of Age: The Production of Spaces in China’s Shenzhen Special Economic Zone.” Urban Geography (31, 8, 2010): 1141-1147.
13. “Shenzhen offers awards, funds to attract IT talent”, Chen Hong, on ChinaDaily.com.cn, 5 February, 2016: accessed from http://www.chinadaily.com.cn/china/2016-02/05/content_23409928.htm.
14. Mentioned by Professor Chen Yong at the Global Cities Forum, Shanghai Jiao Tong University, Shanghai, 30 October, 2016.
15. Saxenian, AnnaLee, The Regional Advantage: Culture and Competition in Silicon Valley and Route 128 (Cambridge, MA: Harvard University Press, 1996); The New Argonauts: Regional Advantage in a Global Economy (Cambridge, MA: Harvard University Press, 2007).
16. “Shenzhen set to steal Hong Kong’s thunder”, on ChinaDaily.com.cn, 13 May, 2015; accessed from http://www.chinadaily.com.cn/business/2015-05/13/content_20700251.htm.
17. Rogers, Everett M. and Judith K. Larsen, Silicon Valley Fever: Growth of High-Technology Fever (New York, Basic Books, 1984).
18. “What Hong Kong can learn from Shenzhen’s buzzing startup scene”, Johan Nylander, 2 May, 2016; accessed from http://www.forbes.com/sites/jnylander/2016/05/02/what-hong-kong-can-learn-from-shenzhens-buzzing-startup-scene/#6aa4b5be2d8d.
19. See Lüthje, Boy, Stefanie Hürtgen, Peter Pawlicki, and Martina Sproll, From Silicon Valley to Shenzhen: Global Production and Work in the IT Industry (Lanham, MD: Rowman & Littlefield, 2013).
20. Same as Note 3.
Life After Trump
Trump’s election is not just a separate random episode of current politics. It is also not an indicator of American exceptionalism. It rather suggests that similar processes are under way in the US and in Western Europe. And is it just the West that is affected?
The vote of the United States Electoral College has finally put an end to the 2016 presidential campaign. Attempts to prevent Donald Trump from becoming the US president continued until the last moment: the electors were called upon to ignore the will of their states and voters; however none of these attempts have succeeded.
It is important; nevertheless, to understand why the liberal part of the American society reacts so hysterically to the Trump victory. President-elect did not even assume the office, but a fierce propaganda campaign, unprecedented in recent American history keeps raging; mass protests against his policies which are not only not being implemented, but also have not been formulated yet, are being organised. A grotesque and demonic figure of Trump haunts the consciousness of the liberal public, the evaluation of his words and actions is based on the presumption of guilt. This includes the words he never said, but could have said, and actions that he did not carry out, but according to the liberals, would certainly have to perform. In other words, the president-elect is being criticised not for what he has done, and even not for what he plans to do, but largely for what he is supposed to do according to the ideas of American liberals on how the absolute evil should behave.
In other words, the president-elect is being criticised not for what he has done, and even not for what he plans to do, but largely for what he is supposed to do according to the ideas of American liberals on how the absolute evil should behave.
Does it mean that the attacks on Trump are absolutely baseless and without merit? Certainly not. However, they simply reflect an unconscious fear by part of an American (and not only American) society of spontaneous objective processes, which are unfolding in the country and in the world, and which are beyond their comprehension and control. Trump’s victory is only one of the multiple symptoms of these processes, but this is the fact, which lies on the surface. As people often do, they confuse the cause with the consequence.
The panic reaction to Trump’s success is caused by the fact that the liberal circles have no grasp of the colossal tectonic shift currently under way in the world economy. There is also no understanding of the irreversibility of this shift. But there is a completely justified perception of its catastrophic nature: we are talking about the end of a social-economic order, which persisted for more than a quarter of a century, about destruction of the institutional base of neoliberal capitalism, which was systematically and consistently being constructed throughout this time.
Trump’s election is not just a separate random episode of current politics. It is also not an indicator of American exceptionalism. It rather suggests that similar processes are under way in the US and in Western Europe. And is it just the West that is affected?
British vote to exit European Union, similar vote in Italy against the government, referendum in Holland rejecting Ukraine association with EU, and many other political facts, which hit us almost every week, are interpreted, at best, as a rebellion of mistreated and uneducated lower classes discarded by the system. But why did the rebellion start now? Why is it becoming more and more successful, and, most importantly, why does it grow, inspiring millions of people, who, according to the establishment ideologues, should not get involved? Marginalised ideas suddenly became mainstream.
The ideological control, which, in the framework of Western democracy, is conducted through a meaningful consensus of all main parties, suggested a formal diversity of opinion accompanied by a compulsory uniformity of conclusions. In other words, you can support or oppose capitalism, have different opinions on the historical roles of de Gaulle and Stalin, but when thinking about specific issues, regardless of the starting point of your argument, you are obliged to conclude that there is no alternative to the policies of the European central bank, to the Eurozone membership and fiscal discipline.
As a result of these differences, the European Union entered the stage of institutional breakdown without going through the phase of “perestroika”, as did the USSR, which means that the psychological effects of this transition are even more traumatic and brutal. Everything started to crumble not “fast”, but “at once”, leaving people completely at a loss, especially those who still hope for the preservation of the existing order.
Such turn of events boggles their minds and causes panic. But the scope of the transition is not the only problem. The transition is accompanied by a collapse of an unprecedented ideological hegemony inherent to the western society of the past dozens of years. Neoliberal politics in its right, conservative, as well as the left, politically correct version, always relied on the small part of the society. No, this is not the notorious 1%, which entered the public consciousness thanks to the “Occupy Wall Street”. These are quite a few people who are part of the system in different ways, and who benefit from this system (including, by the way, a significant portion of the young radicals, whose symbolic protest was a kind of shadow of the official ideology).
This part of the society, who in Western Europe receives benefits from the clientele programs of Brussels bureaucracy, and in the US works to promote various politically correct practices, in a large part relies on the re-distribution of resources from the real sector of the economy. Nobody likes the Wall Street bankers or European Central Bank functionaries, but it is the symbiosis of the liberal public institutions and creative class with the financial capital that is the pillar of the current model of capitalism.
At the same time as the real sector (including not only the industry, but also science, public education, and social infrastructure) was degrading, jobs were disappearing, and workers were losing their livelihoods, the liberal class which earns their living from sharing profits of the financial capital under the guise of participation in “creative economy” and “civil society” was formed. This, mostly parasitic minority lived with a comfortable confidence that they were the majority, moreover, they were the core and the most progressive part of the society, while people holding viewpoints which differed from theirs were a tiny marginal minority, which should not be taken into account. This group spontaneously reproduced the dominating ideology in its different varieties, including the one of the radical left kind. In all versions of this ideology the problems of the economical structure and real politics were overshadowed by the cultural issues, making tolerance more important than the wages; protectionism and jobs were excluded from a serious discussion, and ecology became a quasi-religious symbol of faith. In this approach it is only important that you believe in climate change: the discourse left the framework of political pragmatism, and turned into a semblance of a religious dispute. What is important is not how you propose to solve the problem, but if your symbolic interpretation is the “correct” one, and if you are ready to repeat the correct words.
The absence of practical alternative guaranteed preservation of status quo, in the framework of which both the critics of the system and the conservatives played their roles, as if they were dancing a never-ending dance in one place.
The politics of targeted help, oriented towards the support of specific “minorities”, advocated by the left liberals, was a quite conscious and consistent attempt to split the society and undermine solidarity, not only the class solidarity, but any solidarity – professional, corporate, or regional. Clientelism became a substitute for the solidarity. Horizontal bonds between people belonging to the same social groups were blurred and weakened, while ties to the community leaders who are part of the liberal elite, were systematically strengthened.
The rhetoric of “justice” and even “resistance” was duly reproduced, but it became completely separated from the real social processes. Separate acts of solidarity with different “struggles” calmed the humanistic conscience of the left liberals, allowing them not to think about the complex strategy of the transformation of the society. This approach resulted in abandonment of not only class politics, but politics in general (if you understand it as an activity aimed at transformation of social institutions and relations).
All the talk about the privilege of the white males – workers, farmers, bureaucrats, small business owners, barely making the ends meet – was to substitute and stop all questions about the interests of the ruling class.
A myth about “white males” who allegedly were the main privileged group of the society, who stayed in the way of the progressive changes, and oppressed the minorities, became the key ideological rationale for this approach. It didn’t matter that the myth was constructed by the representatives of the liberal elite, who are predominantly white, and are mainly male. Their main goal was to substitute social and class criteria by gender and ethnicity, analysis of the economic contradictions – by discussion of cultural differences. All the talk about the privilege of the white males – workers, farmers, bureaucrats, small business owners, barely making the ends meet – was to substitute and stop all questions about the interests of the ruling class. On the other hand, the role of the main victim of the system was assigned to immigrants. They were seen not as active participants of the labour market, but exclusively as passive victims. The discussion about the direct connection between the encouragement of illegal immigration and systematic oppression of the migrants by the employers, which are two sides of the same coin, was an absolute taboo. The fact that these are the earlier arrivals who are interested in the limits on the flow of immigration the most, because it undermines their position on the labour market, was never discussed.
Thus the liberal left criticism of the system was in fact an essential ancillary of the conservative social and economic policy pursued by the ruling class.
However, the system still has slipped into a crisis, simply because it completely exhausted its capabilities for development. The endless growth of the global market, accompanied by increasingly depressed conditions of national markets and the weakening of societies on the national level, turned out to be impossible. The financial expansion does not only generate bursting bubbles, but also leads to an objective necessity for debt relief, and nationalisation of financial institutions. The era of free market naturally prepares the conditions for the onset of protectionism, while dismantling of the welfare state breeds conflicts on the scale and in the forms long forgotten, returning us not even into the first half of the 20th century, but in the beginning of the 19th century, when socialist parties or trade unions which could help to normalise the class struggle, and give it a sensible ideological perspective, did not exist. The protest of the masses really assumes the form of a riot, in the words of Pushkin, “senseless and merciless”, but it cannot be any different, because the ideological field is completely occupied by the supporters of the established order, while the order itself is crumbling, not under the assault from its opponents, but from its own contradictions.
In such situation only radical forces, which are not afraid of dramatic and unpredictable turn of events, have a chance to succeed. Catastrophic consequences will arrive everywhere regardless of who takes the power in the next one or two years. In this sense, Donald Trump with his indifferent readiness to achieve his goals through the scandals, crises and shocks, is psychologically much more adequate in the role of the president of the United States than any of his allies or critics. It is quite a different question if his recipes will be helpful to find a solution to the unfolding crisis.
The desire of conservatives to preserve things the way they are at any cost, to maintain the status quo, remains the main motive of their actions, moreover, there is no difference between conservative Republicans, liberal establishment and their critics for that matter. Some are happy with the existing system, others – with their role in the system. In fact, the West has worked out a very comfortable and convenient division of labour between the respectable right-wing and respectable left-wing. The former conducted their economic policies dismantling the welfare state, and state regulations, unlocking the markets of goods and capital for transnational corporations and banks. The latter advocated for multiculturalism, political correctness, affirmative action, positive discrimination, the rights of minorities, while understanding perfectly that they do not offer an alternative to the existing neoliberal economic order, but rather work to complement it. Economic policies of the right and cultural and social policies of the left together are two sides of a single logic and a single strategy aimed at fragmenting of the society. That is why the seeming paradox often mentioned by the liberal intellectuals who write for The Nation and The Guardian, has become possible: the decades before Trump’s victory were not only the years of neoliberal economic reforms – deregulation, privatisation, and redistribution of resources from the real sector to the financial capital, but also the time when many progressive victories were won: from passing medical marijuana legislation to gay marriage bills to putting ever increasing number of women and minorities in positions of power, and, finally, electing the first black president. This, however, is not just a coincidence, there is a direct link between these two processes. The ideology of political correctness served and supported the economic practice of neoliberalism.
Alas, the situation started to change drastically once the economic crisis kicked in. The measures that the ruling class were undertaking to stabilise the situation (regardless of which party occupied the White House) only created new problems, making the situation even worse. Since nobody offered a systemic alternative, the crisis only deepened as the time passed. The economic problems, in turn, inevitably led to the exacerbation of social contradictions, not the imagined ones, the constructed differences between identities, but the real ones, perceived on the level of everyday social life.
An awakening, revealing the harsh reality, which had nothing to do with the beautiful dreams, finally came. The minority, which perceived itself as a majority, found out how the things really are. But it was the suddenness and the harshness of the awakening that predetermined the reaction: instead of attempts to find a solution we see panic and determination to defend their positions from the “aggressive majority”, which all of a sudden stopped being “obedient”.
The liberal public already started to realise that it found itself in an opposition to the majority of the society, or, at least, to the lower classes. But it does not realise that it is in a conflict with the objective logic of the economic development and with the course of history.
This moment gave a chance for the revival of the left movement in the developed industrial countries. A sudden ascendance of the politicians and organisations which yesterday appeared to be too radical for the majority of the society speaks for itself: Jeremy Corbyn becomes a leader of the Labor Party in Great Britain, Alexis Tsipras, the head of a radical left party SYRIZA becomes a prime-minister of Greece, while in the United States a little known provincial senator, a self-proclaimed socialist, Bernie Sanders becomes a serious contender for the White House.
However, this success of the Left was short lived, and it was their fault. None of the leaders who have risen to the top, thanks to the sudden wave of public unrest, had courage to break away from the liberal establishment. The burden of these ties drowned them. Tsipras capitulated in the face of the demands of the EU and European Central bank leadership, and imposed on Greek people a much more harsh and dishonourable agreement than anything ever signed by the right-wing governments. Jeremy Corbyn made concessions to the right-wing of his own party, and refused to support the demand for the seceding of Britain from the EU, supported by the majority of the British people. Finally, Bernie Sanders, refused to fight for the presidential nomination despite the fact that many of his supporters were convinced that the primaries were unfair and rigged by the party establishment who favoured Hillary Clinton. He refused to run as an independent as well, arguing that such a move would benefit Trump.
These actions made Trump’s victory inevitable.
And it’s not just about the number of votes. Trump turned out to be the only candidate who went against the establishment, the only one who represented the objective and urgent need to get out of the framework of crumbling system. When Sanders left the stage he created a situation in which there was no alternative to Trump. Not because Trump is good, but because all other political forces are stubbornly unwilling to accept the idea that the old world, the old way of life, and the old rules of the game are gone, and that the attempts to preserve them will inevitably result in political losses.
Trump turned out to be the only candidate who went against the establishment, the only one who represented the objective and urgent need to get out of the framework of crumbling system.
In the meantime, a new anti-liberal majority is forming in America and Europe. It is based on corporate solidarity, not class solidarity. On one hand, the workers and the lower classes are quite ready to unite with the real sector entrepreneurs to confront not only financial oligarchy, but also cultural and political establishment. On the other hand the politics of breaking society into competing minorities does not work anymore, because liberal policies carried out in the last quarter century has led to the stratification inside ethnic, religious, cultural and other minorities where small privileged groups receiving various benefits, are more and more clearly in an opposition to the rest who are suffering from the economic policies, and are indifferent to the issues of political correctness, affirmative action and positive discrimination. The role of loyal sub-elites, integrated into the establishment is to ensure support of the current economic system by the corresponding communities. but they are losing control little by little. Social contradictions within the communities not only have become more important than the opposition to the mythical “white males”, but also are being realised by the masses of people. Solidarity begins to transcend communal barriers.
It seems that the eight years of an African American president in the Oval Office became a turning point: they showed that the success of a black politician from Illinois did not help millions of black workers and unemployed all over the United States. Moreover, while his success was celebrated, African American middle class suffered a setback.
People have come to realise, little by little, that the economic and social interests of the majority of African Americans as well as “white males” are quite the same: they need jobs, security and confidence in the future. Of course, the political machine of the Democratic Party insured support for Clinton by the majority of African Americans and Latinos, still Trump received a record number of votes from these groups when compared to other Republicans who ran for presidency in the recent years. It was this shift that predetermined Trump’s success in the swing states.
Finally, a considerable share of the vote came from Sanders’ voters, who were angry with the apparatus of the Democratic Party who actually stole the victory from their candidate. Bernie himself, as well as the rest of the left political elite capitulated and called on their supporters to vote for Clinton. But this capitulation only demonstrated how limited the capabilities of the intellectuals are: the majority of left rank-and-file did not follow them. They stayed at home, voted for Trump, or gave their vote to the Green candidate Jill Stein.
A new anti-liberal majority is a political fact in the United States and Western Europe. Aggressive campaign against Trump launched by the liberal circles in the US only works to consolidate this majority. Even if Trump’s policies won’t work, he will just strengthen his position in this situation, since his confrontation with the establishment and the efforts of his opponents to block his agenda are too obvious. How this majority will evolve is still an open question. Liberal propaganda, which makes every effort to present this huge mass of people who oppose the current order as uneducated and vicious racists, eventually plays in the hands of the right, leaving them to be the sole force that offers ideological forms, which allow the expression of the accumulated discontent.
The lamentable experience of the Clinton campaign has shown the consequences of cooperation of the Left with the liberals. Despite the diligent refusal of Bernie Sanders and intellectuals around him to mount an independent political struggle after the end of the primaries, despite their desperate calls to support the former first lady, it all ended in failure. Clinton’s campaign drowned, pulling all those who joined her down to the bottom. And as long as this lesson is not learned, it will be repeated again and again.
If the Left really wants to stop sliding of the US and Western Europe to the right they should not support the liberal regime as a “lesser evil”, but, on the contrary, they should take an active part in its dismantling. They should start a dialogue with the disaffected protesting masses, support their legitimate demands and work to form a new culture of solidarity, overcoming the barriers of political correctness and multiculturalism.
Unfortunately, what we currently see in reality is the triumph of the opposite tendencies. The Left turned itself into pawns of the liberal-conservative establishment. More over, in the global strategy of the elite they received a role of a strike force which has to be mobilised to destabilise Trump’s administration. However, the more successful these efforts will be, the faster they will lead to a direct confrontation between the liberal middle class and the working class.
The Left should not play the game offered by the establishment and make every effort to block the attempts of Trump to get the society out of the impasse. Instead, they should demand more reasonable, and more socially oriented policies, which the new president and his team are not likely to deliver. Bernie Sanders partially demonstrated a correct approach when he announced that he was ready to collaborate with the new president on certain conditions for the goal of improving the lives of working families. However, he was not consistent, did not make logical conclusions, and did not formulate an integral political strategy. The main goal should not be the defence of the minority rights, but overcoming of fragmentation of the society. When the society is completely integrated, and minorities become an organic part of the majority, when the principles of equality are carried out consistently and rigorously, then any discrimination, including positive discrimination, becomes impossible.
The main goal should not be the defence of the minority rights, but overcoming of fragmentation of the society.
To make this a reality, instead of counteracting Trump, the Left should demand that he fulfils his own promises, push him toward more radical, deep and extensive change based on a new historical perspective of development.
Will the Trump administration be able to fulfil these demands? It is unlikely. But this will create preconditions for the transition to a new stage of change, when all outstanding issues and unmet needs will be put on the agenda understood by society. The work on the dismantling of neoliberal order which will inevitably start during the term of the 45th president of the United States is necessary in order to pull the society out of impasse. Trump himself will be unable to accomplish it due to his class, cultural and ideological limitations. He is just preparing conditions for more serious changes, which are inevitable in the unfolding situation of confrontation. Only the new social forces which will take shape in the nearest few years will be able to complete this process.
This is a second chance for the Left. After their indecisiveness and readiness to support the “lesser evil” led to the interception of initiative by the right populists, they might be able to return to the political arena. But a complete, open, and demonstrative beak up with the liberal establishment is the necessary precondition. Ideologues and leaders of the contemporary Left in the US and Western Europe, with a rare exception, are unlikely to be able to do it. They are too integrated into the current political order. But this is the only possible platform for the consolidation of the left movement.
All of this is relevant not only for the United States, but also for the majority of the European countries, including Russia. The growing discontent everywhere takes form of populist movements, which have a potential to be led by the right and left alike, but in both cases they are aimed at the dismantling of liberal institutions and politics in the form they have developed in the last three decades. The changes in the United States open unprecedented opportunities for change in other countries: the more US is busy solving its own problems, the less they interfere in the affairs of other countries, the more opportunities for the people of the world to solve their problems independently. It was the liberal America with its hypocritical interventionism who served as the global conservative force blocking the natural needs of social evolution in other countries. This was the politics, which paralysed the grass-roots growth of social movements and democratic initiatives, and bore the radical Islamism and other movements which substitute social mobilisation by violent reprisals against those who are perceived as the culprit of current troubles and problems. Rejection of interventionism by US will not put an end to conflicts and wars, but these problems will be solved by local forces, based on the balance of local and regional interests.
As for Russia, Trump’s victory does not bring good news for her ruling circles. The attitude of Donald Trump towards Vladimir Putin does not matter, the protectionist agenda of the new leadership in Washington nullifies the economic strategy of Kremlin, which continues to believe that the flow of cheap money from the US and the flow of Chinese goods to the US market will help to maintain the price of oil at the level which allows them to avoid any internal political reforms. Alas, this time is over. US sanctions and aggressive hysteria of Obama and Clinton helped to stabilise current Kremlin regime, maybe even prolonging its existence for a few years. But this is coming to an end, too.
The victory of Trump in the US presidential elections marks the point of no return for the history of the world. Saving the old order becomes impossible. And, most likely, even the American president is not aware of how large-scale the transformation process will be, the process he has started by the very fact of his arrival into the White House. But very soon everyone will feel it. Not only in America but also in Western Europe, in China and in Russia.
About the Author
Boris Kagarlitsky is a sociologist living and working in Moscow. He served as an adviser to the chair of Federation of Independent Trade Unions of Russia in 1992-1994 and later worked for Russian Academy of Sciences at the Institute for Comparative Political Studies and is currently the director of the Institute for Globalization and Social Movements (IGSO) and a professor at Moscow School for Social and Economic Sciences. His recent books in English are Empire of the periphery: Russia and the World-System (Pluto, 2008) and From Empires to Imperialism: States and the Rise of Bourgeois Civilization (Routledge, 2014).
Demonetisation: A Few Disturbing Questions
By Pratip Kumar Datta and Saumya Chakrabarti
In this article, the authors discuss the recent demonitisation policy introduced by the Indian government in November 2016, and what it means for the Indian economoy now, and in the future.
Demonetisation policy, announced by the honourable prime minister of India and executed on and from midnight on the 8th of November 2016, has provoked a lot of political, social and economic debates across the country and abroad. Social media too didn’t lag behind. Leaving aside debates, in the aftermath of its execution, we have been facing a lot of uncomfortable, unwanted situations. The crunch came when we were either made to wait for hours together in long, serpentine queues in front of a bank to get our legitimate savings (in the form of Rs 500 & Rs 1000 currency notes) exchanged and in the process waste precious working hours or to hunt all over to find an ATM equipped with sufficient cash to cope with the mounting demand. While parents who have fixed their sons’ or daughters’ marriages have been subjected to untold woes for want of cash, people engaged in the informal sector and small businesses have been experiencing a unique “cashless peace”. In the euphoria of demonetisation what seems to have been forgotten is that everything in our daily life boils down to cash in the end.
The over optimistic among us dream that all the big fish of the black market will be hanged on a roadside light post. But the little logical fallacy that bugs them the most is that the “big fish” live next door – a doctor / professor / teacher / lawyer! They attribute the cause of their distress to the neighbours who enjoy extravagant lifestyles. “I cannot buy a car but Dr. X has more than one car”; maybe, “the daktarsaab (medical practitioner) has huge ‘parallel income’”. “I don’t have a job but Mr. Y has just secured one – Oh! It’s obvious, he has enough political connections”, and so on and so forth. Our government exploits this very mindset quite adroitly while introducing an unwise policy measure like demonetisation.
Let us consider the two cogent arguments put forward by our government in support of demonetisation – (a) it would arrest the fake currency, circulating in our economy and, (b) black money would be unearthed and eventually, underground parallel economy would be abolished.
On the face of it, the first argument appears to be more convincing than the second one. But, unless the exact amount of fake currency notes circulating in the economy is proved to be considerable, welcoming such policy may prove to be suicidal for us in near future. It is because, those middle, lower middle and poorer sections of our population, who have preferred to stand in the queue, sacrificing their one or several days’ income, are huge in number and so, loss of their income opportunity as a whole will be colossal.
The government propaganda says, the huge money stock kept inside a pillow cover is black! Judging by what this propaganda suggests, even a street-side goods vendor, a vegetable or fish seller is also a black money holder!
Recent studies of the Indian Statistical Institute have shown that there are only 250 fake currency notes out of every 10 lakh (1 million) in circulation. In other words, fake notes worth Rs. 400 crore (1 crore = 10 million and current exchange rate is 1 USD = Rs. 68) are in circulation at any point of time within our economy (http://indianexpress.com, dated: 08.06.2016). In sharp contrast, there were, as per the figures of 2012, almost 3 crore workers in India (including highly skilled, semi-skilled and unskilled ones) and the average minimum wage rate in India was about Rs. 400 only (www.tradingeconomics.com). Given such a situation, if one worker stands in a queue for just a day, then in a macro sense, the economy would lose the opportunity of earning worth Rs. 120 crore per day! Recent report of CMIE (Centre for Monitoring Indian Economy) estimated a total GDP loss of 1.28 lakh crore as a result of demonetisation. Although they said that the estimation is only partial keeping in mind the fifty days deadline of the honourable prime minister. What a big loss to tackle just 400 crore worth of fake currency!!
Let us now come to the second logic of the government machinery. What is black money? In short, it is the money undisclosed to the government. The government propaganda says, the huge money stock kept inside a pillow cover is black! Judging by what this propaganda suggests, even a street-side goods vendor, a vegetable or fish seller is also a black money holder! But, unfortunately, it is unethical propaganda and completely wrong in terms of economic theories.
Yes, there are many doctors, lawyers, teachers, professors who earn black income, by evading income tax. However, most ironically, the major portion of the black money emerged via evasion of corporate tax, excise duty, and customs duty. It emerges from export sector, film industry and from illegal businesses like smuggling, drug peddling, women trafficking, prostitution, crime etc. It has appeared within the economy in the form of bribes and illegal commissions, informal interest earning from informal credit market etc. So, by assuming that cancellation of a few high-value currency notes will restrict all these means of black earnings, it seems like day dreaming (cancellation of 1000 rupee notes would restrict child trafficking – sorry to say, but we cannot be so optimistic!).
Interestingly, government propaganda tries to convey the impression that every white money transaction takes place via cheque and that entire black money is hoarded in the form of liquid money. But the fundamental question is, why can’t the black money be invested further in a black (or even white) business? Why should it be kept inside a pillow cover?
Unfortunately, we don’t have any recent data on black money. According to Prof R Vaidyanathan’s estimate (2007), there were about 70 foreign tax havens, where about Rs 70 lakh crore Indian black money was resting in peace, although, at that time, India’s GDP was only Rs. 43 lakh crore (http://www.iimb.ernet.in). In 2006, Prof. Friedrich Schneider estimated that the amount of internal black money was only 23% to 26% of our GDP (http://ftp.iza.org/dp2315.pdf) and the major portion of it was kept in the form of permanent assets (preferably gold and not cash inside the pillow!). A recent quote in the Huffington Post (dated: 14.1.2016), from the data provided by the Income Tax Department, suggests that only 6% of the total black income is kept in the form of liquid cash.
So, it is plain and clear that demonetisation policy has definitely hit a section of black money holders hard but the big guns, like politicians, owners of legal / illegal business houses who are able to convert their black income into assets or are able to transfer black cash to foreign tax havens, will remain untouched. Therefore, this policy will presumably pick up only a pinch of ice from the tip of the iceberg. Unfortunately, the cost of picking up so little amount of ice is enormous in terms of GDP loss, in terms of growth sacrifice of the economy or in terms of absolute distress of the middle, lower-middle and poorer economic classes.
Simple macroeconomic logic suggests that overnight contraction of 86% of money supply cannot prove to be efficient for an economy. We should keep in mind that 86% shrinkage of liquid money supply came into action at a single point of time but the process of fulfilling the same has a time dimension. Moreover, per day bank withdrawal of a person has an upper limit. This sudden shrinkage of liquid cash will lead to shrinkage in demand of goods and services in the domestic market. As a result, production as well as employment will suffer a jolt. We are already within a world-wide problem of demand shortage and this “big bang” policy will accelerate the pace and gravity of the problem. Petty businessmen, like small road-side vegetable sellers or fish sellers, who sell perishable commodity will face a deflationary problem.
On the other hand, shrinkage of liquid cash effectively reduces the working capital of the petty businessmen and thus they will be induced to reduce their supply to the market. Millions of small firms and farmers are getting suffocated due to scarcity of cash and they are unable to pay their day-labourers. The poor day labourers have already started losing jobs in millions! This will have an obvious snowballing effect on petty agricultural and non-agricultural production, creating painful shortages in the next cycle. Needless to say, the marginal buyers will not be able to purchase their daily livelihood commodities as they are far behind the process of plastic money transaction.
This sudden shrinkage of liquid cash will lead to shrinkage in demand of goods and services in the domestic market. As a result, production as well as employment will suffer a jolt.
Most probably, transport will be the sector where the impact of this policy will be most severe, where almost 80% of transactions occur in terms of liquid cash. As per government rule, one goods carrying vehicle can spend only Rs. 35 thousand as its travelling cost. So, if a transport businessman has ten such vehicles, then the upper limit of his travelling expense would be 3 lakh and 50 thousand – which is well over the upper limit of his withdrawal ceiling from the bank (http://www.businessinsider.in).
The degree of impact of such sudden shrinkage of the economy would depend upon how long our government will take to make the money supply normal. Keeping in mind the enormous number of ATM machines installed in every nook and corner of our country, it seems the task will not be so easy for the government.
A third logic is hovering around us in support of demonetisation policy. This is the argument we have heard, in most of the cases, whenever any new policy has been introduced. It is the logic of future benefit. But how and to what extent will we benefit in future? The answer seems to be not much comprehensible. The famous economist, J. M. Keynes, in his article, The Tract on Monetary Reform, made a remarkable comment: “But this long run is a misleading guide to current affairs. In the long run, we are all dead.” In fact, how many roads we have to walk down before we reach the long run, is unknown to everybody.
Someday, money supply will be normalised, banks will start performing normally; ATM machines will start dispensing money as they did just before the “big bang” announcement of the PM, Mr. Modi; currency notes worth of Rs. 500, Rs. 1000 along with Rs. 2000 will continue flowing within our economy; black incomes will continue flowing from home to foreign countries; scams will continue creating tremors in the tea cup. In a word, nothing amazing will happen in the long run. After all, we are not that interested in fundamental institutional and structural changes; nor are we interested in changing the ethical foundation of our society – where unfortunately, individual money power rules.
An overwhelmingly surprising estimate has been published in India Today (01/12/2016). According to the publication, the policy to unearth black money is going to be insignificantly successful within the fifty days deadline of the Prime Minster. Evaluating the deposit trend of high value currency notes at the bank counters, the article shows that either there is no (or very little) black money in Indian economy or the liquid form of the same has already been transformed into assets or took the flight to any one of the seventy tax havens to enjoy the vacation well before the 8/11 (8th November). Critical minds may say that demonetisation policy is actually framed to submerge black money, not to unearth it.
Lastly, a capitalistic and democratic setup promises to guarantee the right to personal asset. Our bank deposit is secured by the commitment of on demand return of that asset. But our government is executing demonetisation policy with little or no backup plan and thus, creating huge chaos in our economy; making the lives of common people unsecured. The question naturally arises; does any democratically elected government have any right to do all these? Our government probably doesn’t even understand the basics of capitalism.
About the Authors
Saumya Chakrabarti is an Associate Professor of Economics at Visva-Bharati (University),Santiniketan, India. He has also taught at St Xavier’s College, Kolkata; University of Calcutta; and at Presidency University. Dr. Chakrabarti has been a visiting fellow at Brown University, USA. He has published in journals like Cambridge Journal of Economics, Review of Radical Political Economics, International Critical Thought, Economic and Political Weekly, Indian Journal of Labour Economics, among others; and has written books published by Prentice Hall and Oxford University Press.
Pratip Kumar Datta teaches Economics and Mathematics at Rajatpur Indranarayan Vidyapith (H.S.), Bolpur, India. Apart from teaching, he is engaged in serious research work. He had secured his M.Sc. degree in economics from University of Calcutta in the year 1997. He also secured his B.Ed degree from the same university in the year 2006. He has published papers in journals like Merit Research Journals (www.meritresearchjournals.org), Researcher’s Tandem etc. He has presented research papers at different institutes and universities of India like Burdwan University, Rabindra Bharati University, West Bengal State University, Centre for Studies in International Relations and Development etc.
Trump’s Great Game: Playing Russia Against China
Trump has pledged to reset the White House policies on “America First” basis. In Asia, it may mean an effort to balance with Russia against China and the reverse of US China approach in the 1970s.
After inauguration, Donald Trump will move from Trump Plaza in mid-Manhattan to White House in Washington, where he will enjoy extraordinary execution power. Today, Republicans will control the White House, the Senate and the House of Representatives.
Consequently, whatever the administration will decide to do is likely to be bigger and bolder, move ahead faster and have greater consequences.
In Asia, that may translate to a double pivot.
Pivoting Away from China
Through his campaign, Trump voiced strong opposition against Obama-led Trans-Pacific Partnership (TPP), while labelling the North American Free Trade Agreement (NAFTA) a disaster. He has also suggested that he would renegotiate or reject other US international commitments.
In particular, he has threatened to use 35-45% import tariffs (although currently Trump’s team has been floating a 10% tariff) to force some countries, particularly Mexico and China, to change what he calls their “unfair trade practices”. Indeed, he is likely to press talks on trade practices, while forcing Beijing to enforce intellectual property rights.
High-level trade appointments suggest that he is likely to walk the talk. He chose Peter Navarro – the author of The Coming China Wars (2005) and Death by China (2011), and What China’s Militarism Means for the World (2015) – to head the newly-created National Trade Council (NTC), which will oversee industrial policy in the White House. Navarro’s fellow China critic Dan DiMicco, former CEO of Nucor, America’s largest steel company, became Trump’s trade advisor. In turn, the new US Trade Representative will be former Reagan administration official Robert Lighthizer, a staunch critic of China’s trade practices.
US-led free trade plans have been shelved, which has left China an opportunity to redefine trade in Asia Pacific. That effort, however, may have to cope with Trump’s double pivot.
Trump’s trade warriors will work closely with Secretary of Commerce Wilbur Ross, another billionaire investor. Trump’s trade warriors will begin by targeting those countries China, Germany, Japan and Mexico that currently enjoy the heftiest trade surplus with the US. In turn, the demise of NAFTA would hurt not just Mexico, but Canada.
Meanwhile, US-led free trade plans have been shelved, which has left China an opportunity to redefine trade in Asia Pacific. That effort, however, may have to cope with Trump’s double pivot.
Pivoting Toward Russia
If President Obama’s major foreign policy goal was a pivot to Asia, President Trump is likely to pivot toward President Putin and Russia. Indeed, Trump’s efforts to improve relations with Russia led to a last-minute counter-attack by the US intelligence community, based in part on facts but largely on circumstantial and unsubstantiated evidence. To Trump, the intelligence dossiers, including one about him, represent the kind of neoconservative fiction that served as a pretext for the Iraq War.
Unlike Obama, Trump is open to lifting sanctions on Russia and is likely to meet Putin soon after he takes office.
In contrast to Russia, Trump has used China as a scapegoat for US trade deficit, offshoring and manufacturing decline. He has also shown willingness to challenge the basis of US-China ties since 1979, as evidenced by the recent “one China” policy debacle. Ultimately, these efforts go back to neoconservative visions in the 1990s to use imperial “divide and rule” efforts in China’s special administrative regions (Hong Kong and Macao), Taiwan, and certain autonomous regions ((Xinjiang, Tibet), in order to foster dissension within the mainland.
Regionally, these efforts are likely to mean greater assertiveness, most likely in the name of “freedom of navigation” (FON) operations. In his confirmation hearing, secretary of state, Rex Tillerson, former CEO of ExxonMobil, said that he would take a strong stance on China’s claims over the South China Sea adding that US should “send China a clear signal that, first, the island-building stops, and second, your access to those islands also is not going to be allowed.”
In details, Tillerson is said to have misspoken, however. Any forceful effort of the US to circle one or all the islands would result in an open conflict with China, which is not in the US interest. Nonetheless, the new administration is opting for a somewhat new regional stance.
Playing Russia Against China
Indeed, there may be a curious logic underlying Trump’s efforts to foster a pivot toward Russia but away from China. Usually, the two geopolitical moves have been analysed separately. In fact, they are linked.
In the past few weeks, Trump has had several meetings with Henry Kissinger, who remains close to both Moscow and Beijing.
Unlike Obama, Trump is open to lifting sanctions on Russia and is likely to meet Putin soon after he takes office.
In the early 1970s, President Richard Nixon and his security adviser Kissinger sought to undermine Soviet Union’s might by making a historical opening to Beijing. What is less known is that Kissinger then observed that “in 20 years your successor, if he’s as wise as you, will wind up leaning towards the Russians against the Chinese.” He argued that the US needed “to play this balance of power game unemotionally. Right now, the US needed the Chinese to insulate the Soviets. “But in the future, it would be the other way around,” he added.
The Trump administration may presume that, from the US standpoint, such a balancing game would weaken or contain China, while, to Russia, it would ensure closer cooperation with Europe.
Yet, the assumption may prove flawed on three counts. Today, Putin’s economic, political and military ties with China are strategically too critical to endanger. Moreover, after the betrayal of its promise to avoid NATO enlargement in Russia’s regional neighbourhood, US has also implemented several ill-conceived rounds of sanctions against Russia. In the process, Washington has lost all credibility among Russians. Finally, as China has been transformed in the past four decades, Kissinger himself has maintained close ties with both Russia and China.
Nevertheless, Trump’s recent geopolitical moves – non-interventionist rhetoric but neoconservative advisers, the effort to challenge “One China” principles, the stated shift toward greater assertiveness in East and Southeast China and his double pivot vis-à-vis China and Russia – indicate that his longer-term goal may be to include Putin’s Russia in a “Common European Home” from the Atlantic to the Urals that Gorbachev promoted in 1987.
The problem is that the Cold War ended almost three decades ago, however.
About the Author
Dr. Dan Steinbock is the founder of the Difference Group and has served as the research director at the India, China, and America Institute (USA) and a visiting fellow at the Shanghai Institutes for International Studies (China) and the EU Center (Singapore). For more, see http://www.differencegroup.net/
Why America’s Democrats Lost in 2016 and How They Can Recover
In this article the author argues that Obama’s failure to build a strong Democratic Party during his Presidency, and a lack of a coherent theme during Hillary’s campaign were among the reasons that contributed to the Democrats losing. He outlines how he thinks they can recover after Trump’s triumph.
The blame-game among Democrats and pundits began soon after Hillary Clinton’s defeat. Per the new conventional wisdom, Clinton lacked inspirational qualities. She ran a too tightly controlled and defensive campaign. She failed to develop a coherent theme for her candidacy. She committed a major gaffe by calling half of Donald Trump’s supporters “deplorables”. She failed to pay sufficient attention to the states of Wisconsin and Michigan, presuming they would be safe for any Democratic nominee.
This commentary is meaningless after-the-fact rationalisation. Just 24 hours earlier, these same pundits and Democratic operatives had informed the world that Hillary Clinton was poised to complete a historic victory as the first woman to be elected president of the United States. Clinton and her campaign did not suddenly change overnight. It was the same candidate and the same campaign that the commentators previously anointed as sure-fire winners.
The pundits twisted themselves into pretzels to justify why what they assured us would happen – a Clinton victory – had not happened. The Clinton blame game provided an easy substitute for hard thinking about how presidential elections work and how to rebuild the Democratic Party.
Far more blame for the sorry plight of the Democrats must go to Barack Obama than to Hillary Clinton. As president, Obama learned only half the lesson taught by the greatest of Democratic leaders, Franklin Delano Roosevelt.
Using my prediction system, the Keys to the White House, I first predicted a Trump victory in a Washington Post interview on September 23 and then doubled-down on that prediction on October 28, just before the release of the letter from FBI Director James Comey on possibly new relevant Clinton emails (see, https://www.washingtonpost.com/news/the-fix/wp/2016/09/23/trump-is-headed-for-a-win-says-professor-whos-predicted-30-years-of-presidential-outcomes-correctly/ and https://www.washingtonpost.com/video/politics/professor-doubles-down-on-trump-win/2016/10/28/32b618fe-9ca3-11e6-b552-b1f85e484086_video.html).
The Keys uncovered the fundamental problems facing Democrats in their effort to win a third consecutive term in the White House. These included grievous losses in the midterm elections of 2014, a divisive primary contest, the lack of a major domestic policy accomplishment or foreign policy triumph in President Barack Obama’s second term.
This superficial assault on the Clinton candidacy creates the illusion that the Democratic Party can rescue itself from near oblivion by finding its own Donald Trump facsimile: the man on a white horse who will lead their party to victory. After their 2016 triumph, the opposition Republicans control the White House, the US Senate and House, and most state governments. Republicans are likely to control the Supreme Court for the next generation at least. Today, the Democrats are a shattered party and the Obama legacy is on fading life-support.
Far more blame for the sorry plight of the Democrats must go to Barack Obama than to Hillary Clinton. As president, Obama learned only half the lesson taught by the greatest of Democratic leaders, Franklin Delano Roosevelt. Obama learned from FDR the importance of policy innovation, but failed to learned from him the value of party building. FDR knew that his New Deal reforms were not last without a strong Democratic Party.
He inherited a shattered party that had lost three consecutive presidential elections by average margins of more than 20 percentage points and failed to gain control of either chamber of Congress. However, FDR, through his liberal New Deal reforms that gave hope and benefits to ordinary Americans and his building a grassroots base in the burgeoning union movement, completed a realignment that led to Democrats winning all but two presidential elections from 1932 to 1964, and controlling Congress for all but four of these years.
Although in substance an excellent president, Obama has neglected his duties as party builder. Today, the Democrats lack either a compelling message or thriving political organisations. In every election during his tenure except when he headed the ballot in 2012, the Democrats took a beating at all levels of government. Obama’s lack of a strategic political sense was also evident in the campaign. He resorted to conventional political campaigning rather than following the two essential tasks for an incumbent president. First, he should have been selling his domestic and foreign policy initiatives to the American people to overcome his party’s disabilities on these two critical keys to the White House. Second, he should have publicly decried in the most dramatic possible way the unprecedented Russian manipulation of the presidential election. Instead, he says he told Russian president Vladimir Putin to “cut it out”, which surely had Putin just quaking with fear. And he made the consummate political error of assuming that Hillary Clinton would win despite the Russian campaign against her.
A rebuilding Democratic Party cannot play the pundit’s blame game. The party must offer a progressive alternative to the Republicans that speaks directly to the needs of ordinary Americans, irrespective of race. Bernie Sanders provided a blueprint during the primary campaign with a focus on the transformation to a new green economy and on rectifying America’s yawning disparities in wealth and income. However, the Democratic Party cannot follow Sanders down the rat hole of protectionism.
In truth, the future of American jobs lies not in protectionism, but in the transformation from a fossil fuel economy to the new economy of the future, based on clean, renewable sources of energy.
To the great detriment of his party, Senator Sanders has somehow transformed protectionism from an icon of America’s right-wing into a “progressive” panacea. In fact, the Democrats can never beat their opponents on the issue of trade, which favoured Donald Trump in this year’s campaign. Sanders claimed that free trade agreements have cost the jobs of many Americans, because US businesses can’t compete with low-wage operations abroad. Yet there is little or no concrete proof that free trade agreements cost Americans substantial numbers of jobs. But a return to protectionism would mean much higher prices for consumer goods, with working class Americans feeling the most pain.
Although economists rarely agree on anything, the clear majority affirm that on balance free trade is good for the American economy. A 2006 survey of American Ph.D. economists published in The Economist’s Voice, found that, “the overwhelming majority (87.5%) agree that the US should eliminate remaining tariffs and other barriers to trade”.
In truth, the future of American jobs lies not in protectionism, but in the transformation from a fossil fuel economy to the new economy of the future, based on clean, renewable sources of energy. The old smokestack and mining jobs are not coming back to America. Companies scarcely need coal miners anymore; they just blow off the tops of mountains to get at the coal.
The rebuilding of America’s infrastructure offers additional prospects for job creation. Infrastructure repair was a major focus of President Obama’s stimulus package, which many Republicans opposed. Somehow, Democrats have let Donald Trump seize this issue for himself, even though he remarkably proposes to spend vast sums on infrastructure while also cutting taxes, expanding the military, and reducing the deficit. However, Republican opposition to Trump’s program may give Democrats an opportunity to retake the initiative on job-creating infrastructure projects.
As part of its rebuilding, the Democratic Party needs to rededicate itself to grassroots organising. Democrats failed to deliver the kind of turnout they needed at least in part because its ground game emanated from the top down. The widespread anger and protests among its base voters in the wake of Trump’s victory provides an opening for lasting bottom-up organising. But protests will be like smoke going up a chimney unless participants translate their anger into political action.
As FDR’s example demonstrates, The Democratic Party has in the past risen from the ashes. Only another New Deal and the development of a grassroots party base will rescue the Democratic Party from near oblivion. It need not take another Great Depression to initiate a new era of progressive change.
About the Author
Allan J. Lichtman is Distinguished Professor of History at American University in Washington, DC. He has published more than 200 scholarly and popular articles and nine books that have won numerous national awards. Dr. Lichtman has provided commentary for all major US television and radio networks, the Voice of America, and many foreign broadcast companies. He has been an expert witness in more than 80 federal civil rights cases.
The Economy of Dubai
The success of Dubai in using resource rents for economic development and higher welfare, nevertheless, does not rule out the fact that some of the symptoms of the resource curse are present. There are three important weaknesses in the sustainability of Dubai’s development path that the authorities would have to address.
In less than fifty years, Dubai transformed from a small fishing and trading village into an integrated, modern, and vibrant economy. Camel herds were replaced by endless caravans of shiny luxurious 4x4s, tents folded as skyscrapers rose from the sand, and small souks were replaced by the world’s largest malls.
Development in Dubai was sparked by oil richness but, unlike other countries and emirates in the Arabian Gulf, it has successfully diversified away from hydrocarbons with the creation of world-class clusters of financial services, tourism, and trading activities. It is estimated that, as of 2015, oil-related activities would amount to less than 5% of total production in the emirate.
Dubai has also escaped the pervasive “oil curse”, that is the paradoxical case where countries endowed with abundant natural resources suffer from long-standing economic malaises that inhibit their economic and social development. This oil curse operates through varied mechanisms. One mechanism is when the significant inflow of currency brought upon by exporting oil appreciates the currency and reduce the profitability of other economic sectors, thus weakening the productive basis of the economy. Some countries – such as Algeria or Venezuela – literally export only hydrocarbons and nothing else. Economists have labelled this the Dutch Disease, a term coined in 1977 by The Economist to describe the decline of the manufacturing sector in the Netherlands after the discovery of the large Groningen natural gas field in 1959. However, no such effect has been observed in Dubai, largely because the dirham has been successfully pegged to the US dollar since the early 1980s, thus avoiding currency misalignments.
Another channel runs via lowering physical capital accumulation. High resource rents usually fuel consumption booms and tend to depress national saving. In turn, this leads to lower than optimal accumulation of capital, in particular in non-oil sectors or in infrastructure. During the oil rush of the 1970s and 1980s, when most Arab Gulf countries favoured a model based on a welfare state and a large public sector to absorb the national labour force, Dubai, on the contrary, adopted a strategy based on investing oil revenues on infrastructure and diverse industries, resisting the pressure to have a large, overstaffed public sector. According to the World Economic Forum, in 2015 Dubai had better infrastructure levels than Japan, the US and all of the European Union.
A third mechanism operates when significant natural resource rents in conjunction with institutional weaknesses (including ill-defined property rights, imperfect or missing markets and lax legal structures) lead to rent-seeking on the part of producers, thus diverting resources away from socially profitable activities. In extreme cases, civil wars break out for the control of such rents. In less extreme cases, the struggle for resource rents may lead to hoarding of economic and political power in the hands of elites that, once in power, would use the rents to placate their political supporters and thus secure their hold on power. Extensive rent-seeking breeds corruption, distorts the allocation of resources and reduces both economic efficiency and social equity. Again, this is not the case of Dubai: according to Transparency International, in 2015 Dubai ranked among the 25 less corrupt economies in the world, on a pair with France.
The success of Dubai in using resource rents for economic development and higher welfare, nevertheless, does not rule out the fact that some of the symptoms of the resource curse are present. There are three important weaknesses in the sustainability of Dubai’s development path that the authorities would have to address.
Productivity
Economic growth was mainly induced by a significant accumulation of physical capital and massive inflow of foreign workers and not by achieving higher productivity levels.
Employment in Dubai expanded from around 200 thousand in 1985 to 1.75 million in 2015, mostly low-skilled workers from the Indian subcontinent (India, Bangladesh, Sri Lanka, Pakistan, and Nepal). There are also a significant number of very high-skilled expatriates from the UK and continental Europe, usually employed in top management positions. Oil-money as well as ample access to international financial markets have been used to finance both productive investments and extravagant initiatives. And while there are many successful stories – such as the world’s largest man-made port at Jebel Ali or Dubai’s international airport – others attest to the contrary. None more representative than the mega-housing project where hundreds of artificial islands were built in the shape of continents that went bankrupt in 2009 and is slowly being swallowed by the waters of the Arabian Gulf. The bottom line is that massive accumulation of resources is not synonymous with improved efficiency: in fact, total output per worker has remained stagnant for a long period of time, as shown in the figure below.
Certainly, some sectors in Dubai are highly productive (e.g., financial sector, logistics, air transport) and can compete in international markets: air transport and the financial sector clearly stand out. Nevertheless, other sectors such as construction, host-telling, and retail lag significantly behind. These sectors employ thousands of unskilled expatriate workers and tend to have very low labour productivity. Here lies one of the key questions for Dubai’s development and for economic policy: if the emirate has no limitations in terms of access to capital and technology and if it is able to attract the best of human capital from anywhere in the world, why would it choose to organise production so as to be of low productivity and value added?
The answer lies in the peculiar structure of the labour market that characterises not only Dubai but all Gulf countries. Dubai’s workforce is largely shaped by two concurrent phenomena: the sponsorship system (kafala, in Arabic) governing the employment of expatriates and the protection system for nationals embedded in both the Emiratization program and public employment policies. The kafala has been instrumental in bringing in massive amounts of low-skilled expatriate workers that enter the country under the sponsorship of an Emirati national or Emirati-controlled firm. Since workers cannot change sponsor unless they obtain written consent from its current sponsor, employers enjoy market power and collect sizeable economic rents: the incentive to hire more workers than machines is thereby clear. Certainly employers in Dubai pay substantially more than what these workers could earn in their country of origin, but it is still less than the value of their contribution to production. And because extracting rents is easier the less skilled is the worker, production tends to be not only labour-intensive but also of low productivity. Not surprisingly, the above-mentioned most productive sectors operate mainly in free-trade zones where the kafala (and other regulations) is not binding.
Emirati nationals, on the other hand, are not subject to the sponsorship system but are protected by the rules and regulations emanating from the Emiratization program. These shelter them from openly competing with expatriates in the labour market but, at the same time, they also reduce their employability, particularly that of young and inexperienced workers. Since the private sector cannot afford the relatively more expensive national workers, Emirati are mainly employed by the public sector (around 80% are civil servants). Nationals fresh from high schools or universities face much higher unemployment rates, particularly females which are now timidly entering the labour market. The response of the authorities in Dubai – as elsewhere in the Gulf Cooperation Council (GCC) economies – has been to impose labour quotas on the private sector: private firms are mandated to reserve a certain fraction of their manpower for nationals or face a fine and, eventually, closure.
One can safely conclude that the sponsorship system is a factor inhibiting technological change because in keeping wages low it has not given entrepreneurs incentives to acquire more advanced technologies.
The duality of the labour market is an issue that needs addressing. It may be the case that the path chosen by the authorities is not the best. In keeping the sponsorship as a centrepiece of economic policy, the authorities might have considered that a more flexible labour market would increase costs and reduce the profitability of firms, thereby hampering investments in new, more efficient technologies. Yet, historically, it is when labour becomes scarce and wages soar that entrepreneurs implement new technologies to replace workers by more efficient technologies and machines. Dubai’s story also refutes the connection between higher labour costs and lower investment: private sector profits in Dubai grew significantly since the 1990s and employment expanded massively, but this did not lead to investment in better technologies and labour productivity stagnated. One can safely conclude that the sponsorship system is a factor inhibiting technological change because in keeping wages low it has not given entrepreneurs incentives to acquire more advanced technologies. The sponsorship system might have served Dubai in the past, but its time has come to be replaced by a modern labour structure.
Vulnerability
Dubai exhibits significant vulnerability to oil shocks and domestic production is volatile despite its limited dependence on the hydrocarbon sector.
In spite of oil being unimportant to Dubai, its economic activity has been largely affected by oil-price cycles. One could think this as a consequence of being integrated to oil-rich Abu Dhabi and certainly there may be some effects but they are of secondary importance. The true reason, indeed, lies in the absence of automatic stabilisers in the economy and the inability to organise macroeconomic policies to isolate economic activities from cycles in the global economy.
In its early days as an independent country the United Arab Emirates (UAE) authorities decided to peg its currency to the US dollar, thereby relinquishing monetary and exchange rate policies and confining the authorities with fiscal policies as their main policy instrument. But fiscal policy in Dubai is incapable of stabilising the economy since the main automatic stabilisers – income and value-added taxes – are conspicuously absent. These ad-valorem taxes automatically dampen the effects of economic cycles because in the upswing tax collection mechanically increases while in downturns collection decreases. In Dubai, the tax system cannot perform its countercyclical role since it is largely based on fixed fees and rental prices and not on ad-valorem levies. Furthermore, government expenditures tend to be highly pro-cyclical as a result of the lack of modern consolidated, multi-annual budget procedures. The bulk of fiscal adjustments is borne by capital expenditures – always easier to adjust than laying off public servants – thus potentially hampering long-run growth.
This, naturally, raises the key question of why would a country organise fiscal policies in such a way to allow passing oil-induced fluctuations directly to its internal economy thereby hampering long-run growth. In particular, it is difficult to understand why have GCC authorities consistently postponed the implementation of value-added taxes, an issue under discussion for at least a decade.
Whatever the reasons for the current policy design, fiscal reforms in Dubai cannot be postponed. During the heydays of oil prices, the exuberance of economic activity could easily mask fiscal inefficiencies. Nowadays, the prospects are for a long period of depressed oil prices, slower economic activity, and more unstable global markets. Fiscal latitude is largely gone in Dubai and the shadow of its large external debt lurks over.
Accountability
Contrary to its historical reliance on the private sector, to a large extent economic growth in Dubai in the decade leading to the global crisis was driven by massive government investment.
In fact, government investment was in the hands of largely unsupervised government related entities (GREs) operating in real estate and construction. These entities are responsible for a myriad of Dubai’s iconic buildings such as the Burj Khalifa (the tallest building on earth), the Palm Jumeirah (an artificial archipelago created using land reclamation), and the Burj Al Arab (a luxury hotel in the shape of the sail of a ship). But GREs are also responsible for the development of the highly successful industries such as Emirates Airlines, Emirates Aluminium, Dubai Ports, and Jebel Ali Free Zone (JAFZA). There is no doubt of the formidable entrepreneurial capacities of these entities.
Government investment was in the hands of largely unsupervised government related entities (GREs) operating in real estate and construction.
The increasing importance of GREs in key economic sectors, nevertheless, has become a major weakness of Dubai’s economic strategy. On one hand, to maintain the soundness of fiscal policy additional efforts are needed to mitigate the risks arising from both the timing and amounts of the debt repayments and the perception of opaqueness in the performance of most GREs. According to the IMF, the debt of Dubai GREs stood at around 70% of Dubai GDP in 2015 and their debt-servicing capacity is relatively low. Total public debt (including GREs’ debt) is high at 126 percent of Dubai’s GDP, with large maturities due by 2018 (US$51.6 billion of Dubai’s debt will come due in 2016-18).
On the other hand, economic incentives are needed for such GREs to perform efficiently and, most importantly, to avoid the implicit guarantee of government bail-outs every time they run into trouble. GREs, which largely enjoy monopolistic power and privileged access to land, crowd-out the private sector which finds itself unable to compete with firms that have preferential treatment. The development of businesses in Dubai is not only about allowing investors to operate in good conditions but also about setting rules of the game that are clear, transparent and conducive to an environment where only the most productive businesses survive. Producers – both private and public – must be free to fail because what matters for development is not more business, but more productive businesses. Predicting which businesses will be best for Dubai is not a task for the government but it can help in preparing and levelling the ground and it can even facilitate the development of certain sectors: ultimately competition will reveal what works and what don’t.
It has become a cliché to say that a country or a society is “at a turning point”. In Dubai’s case the cliché is certainly appropriate. After a very successful run of fifty years of sustained economic growth, the development strategy needs an overhaul. A substantial one, capable of overturning the dismal productivity record of the economy, that can provide for effective isolation for oil-price fluctuations and instil discipline and accountability to the government’s most formidable arm: its entrepreneurial capacity. There is no time to waste on changing gears: so far, Dubai has enjoyed the benefits of being the first to develop in the Gulf of Arabia, but other emirates and Gulf economies – such as Qatar, Bahrein, and Kuwait – are not far behind.
Featured image courtesy: Info About Industries of World
About the Author
Raimundo Soto is Associate Professor of economics at Pontificia Universidad Católica de Chile. He received his PhD in economics from Georgetown University. Professor Soto served as president of the Chilean Economic Association and, between 2010 and 2012, he was Director of International Development at the Dubai Economic Council. His most recent publication is The Economy of Dubai published by Oxford University Press in 2016.
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