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  • How Leaders in Latin American Companies Are Preparing for the World Cup

    The World Cup kicks off tomorrow in Brazil. Well, the game is in Brazil, but it kicks off just about everywhere. So smart office managers are getting prepared for distracted workers. Mercer gathered some intel on how managers in four of the most football/futbol/soccer crazed nations are planning on handling game time, and here is a glimpse of the findings: See the full-size infographic here .
  • Ideas@davos: 'Scenarios of the International Monetary System'

    The global economy is tied together by the international monetary system. It is quite a dynamic system, but one that has been through a lot of changes in the last decade. And the all knowing voice in this World Economic Forum video says "the existing system has reached a breaking point." Whether you agree with that conclusion or not, the video makes a compelling argument at least about strains on the system:
  • Dani Rodrik on 'Premature Deindustrialization' in Developing Economies

    At Project Syndicate , Dani Rodrik tries to make sense of "an unexpectedly large gap in productivity between large firms and small firms," in Mexico and other developing economies. This isn't what is supposed to happen. At least it doesn't follow the industrialization model of the last century and a half. "When economies develop the productivity gap between the traditional and modern parts of the economy shrinks, and dualism gradually diminishes, Rodrik writes. Today, the picture is very different. Even in countries that are doing well, industrialization is running out of steam much faster than it did in previous episodes of catch-up growth – a phenomenon that I have called premature deindustrialization. Though young people are still flocking to the cities from the countryside, they end up not in factories but mostly in informal, low-productivity services. Indeed, structural change has become increasingly perverse: from manufacturing to services (prematurely), tradable to non-tradable activities, organized sectors to informality, modern to traditional firms, and medium-size and large firms to small firms. Quantitative studies show that such patterns of structural change are exerting a substantial drag on economic growth in Latin America, Africa, and in many Asian countries. There are two ways to close the gap between leading and lagging parts of the economy. One is to enable small and microenterprises to grow, enter the formal economy, and become more productive, all of which requires removing many barriers. The informal and traditional parts of the economy are typically not well served by government services and infrastructure, for example, and they are cut off from global markets, have little access to finance, and are filled by workers and managers with low skills and education. Even though many governments exert considerable effort to empower their small enterprises, successful cases are rare. Support for small enterprises often serves social-policy goals – sustaining the incomes of the economy’s poorest and most excluded workers – instead of stimulating output and productivity growth. The second strategy is to enlarge opportunities for modern, well-established firms so that they can expand and employ the workers that would otherwise end up in less productive parts of the economy. This may well be the more effective path. Read The Growing Divide Within Developing Economies here .
  • Kemal Derviş Sees 'Vulnerability' in Emerging Market Private Sector Balance Sheets

    There has been a fair bit of pessimism about the fate of emerging market economies this year. At Project Syndicate , Kermal Derviş writes that, with the Federal Reserve expected to begin tapering off its quantitative easing programs, "the emergent market bears are ascendant once again." In gauging whether countries like Brazil, India, Indonesia, South Africa, and Turkey are in trouble, Davis urges us to pay a little less attention to public deficits and look more at private sector balance sheets. To be sure, the weakest-looking emerging countries have large current-account deficits and low net central-bank reserves after deducting short-term debt from gross reserves. But one could argue that if there is a capital-flow reversal, the exchange rate would depreciate, causing exports of goods and services to increase and imports to decline; the resulting current-account adjustment would quickly reduce the need for capital inflows. Given fiscal space and solid banks, a new equilibrium would quickly be established. Unfortunately, the real vulnerability of some countries is rooted in private-sector balance sheets, with high leverage accumulating in both the household sector and among non-financial firms. Moreover, in many cases, the corporate sector, having grown accustomed to taking advantage of cheap funds from abroad to finance domestic activities, has significant foreign-currency exposure. Where that is the case, steep currency depreciation would bring with it serious balance-sheet problems, which, if large enough, would undermine the banking sector, despite strong capital cushions. Banking-sector problems would, in turn, require state intervention, causing the public-debt burden to rise. In an extreme case, a “Spanish” scenario could unfold (though without the constraint of a fixed exchange rate, as in the eurozone). It is this danger that sets a practical and political limit to flexible exchange rates. Some depreciation can be managed by most of the deficit countries; but a vicious circle could be triggered if the domestic currency loses too much value too quickly. Private-sector balance-sheet problems would weaken the financial sector, and the resulting pressure on public finances would compel austerity, thereby constraining consumer demand – and causing further damage to firms’ balance sheets. To prevent such a crisis, therefore, the exchange rate has to be managed – and in a manner that depends on a country’s specific circumstances. Large net central-bank reserves can help ease the process. Otherwise, a significant rise in interest rates must be used to retain short-term capital and allow more gradual real-sector adjustment. Higher interest rates will of course lead to slower growth and lower employment, but such costs are likely to be smaller than those of a full-blown crisis. Read Tailspin or Turbulence? here .
  • The Rise and Fall of Eike Batista, Brazil's Richest Man

    Eike Batista likes to play the role of the star. But he may be less than thrilled at what got him onto the cover of the latest issue of Businessweek . Batista built a bit of an oil and mineral empire to become the wealthiest man in Brazil. And then he lost it. Or at least a lot of it. And when "it," amounts to $34.5 billion, the loss is historic. Juan Pablo Spinetto , Peter Millard , and Ken Wells take us through the story of Batista's rise and fall. It’s a cloudy April afternoon in 2012, but Batista is full of blue skies and endless vistas. To date he’s founded five publicly traded companies and is soon to launch a sixth. His personal wealth is estimated at $34.5 billion; most of his enterprises are managed under the umbrella of a holding company bearing his initials, the EBX Group. At 55, he’s Brazil’s richest man—and the eighth-wealthiest man on earth. With him onstage is a roster of Brazil’s political and business elite: President Dilma Rousseff, Rio Governor Sérgio Cabral, and Mines and Energy Minister Edison Lobão. The audience of 400 includes foreign corporate luminaries such as Kim Jung Rae, co-chief executive officer of Hyundai Corp. Batista has gathered them to show off Açu, which he predicts will be the largest port in the Americas. He also wants to share some good news. His oil company, OGX Petróleo e Gás, has begun production on what he describes as a “new frontier” of petroleum 37 miles off the Brazilian coast. “This is an historical moment,” says Batista. “It’s the first time an independent Brazilian company has produced offshore oil.” That Batista, new to the oil business, had brought in wells gushing with crude was the sort of announcement investors had come to expect of him. At that moment, Batista embodied Brazil’s decade-long economic expansion, and for international investors wanting a piece of the new Brazil, he could do no wrong. Many of those investors were American. BlackRock (BLK), the world’s largest money manager, had bought millions of OGX shares. Pimco (ALV:GR), manager of the world’s largest bond fund, owned $576 million in OGX bonds. General Electric (GE) took a 0.8 percent share in EBX valued at $300 million. Brazilians “should be very proud” of what Batista and OGX had achieved, said Rousseff, sporting her own orange OGX jacket onstage at the Açu port. “OGX has a big contribution to make in the offshore oil production of Brazil.” Batista, in an interview a few days later with investment conference host Michael Milken in Beverly Hills, declared Rousseff’s appearance at his port not simply a feather in his cap but also “a major event for Brazil.” To say Batista overreached would be to seriously undersell what has happened in the 18 months since that self-regarding presstravaganza of hubris and magical thinking. In what is shaping up to be one of the largest personal and financial collapses in history—if not the largest—Batista may be nearing bankruptcy. On Oct. 1, OGX missed a $45 million interest payment on bond debt it had racked up during its rise. Batista has sold his planes and his helicopter, and creditors are arguing over the remains of his companies. He’s no longer on the Bloomberg Billionaires Index and has become the butt of jokes in Brazil. One suggests that Pope Francis plans to return to Brazil soon and will again be visiting the poor, including Batista. Read How Brazil's Richest Man Lost $34.5 Billion here .
  • Two Takes on Emerging Market Growth Projections

    Earlier this month, the IMF 's Olivier Blanchard expressed concern over increasing risks in emerging markets: Stephen Grenville isn't sure where this "wave of gloom" is coming from. The picture he sees isn't quite so bleak. From the interpreter: Let's spell this out. In terms of growth rates, the emerging economies had their best period in the four years leading up to the 2008 crisis: they grew at an annual rate of around 8%, accounting for just over half of global growth. When growth collapsed in most advanced countries in 2008, the emerging economies slowed but still recorded rapid growth: they averaged 5.5% during 2008-2011. In a limp world, this kept global expansion going: the emerging economies accounted for three quarters of world growth. Since then, they have slowed a touch more, to around 5%. China is growing at 7% rather than 10%-plus and Brazil and India have reverted to their traditional lacklustre performance. But in the meantime, the cumulative expansion of these emerging economies means that they have more heft. The emerging countries are two-thirds bigger than they were in 2006: thus 5% growth now adds more to the world economy than 8% did back in 2006. So why all the gloom about their prospects? The current IMF forecast puts their growth rate this year and next at around 5%, the same as during the past few years. Perhaps the IMF feels that it is a bit optimistic about China, but provided China's growth stays somewhere near 7% (which is still the predominant market forecast), there is nothing here to justify the gloom. As well, the advanced economies could turn out a bit better than current forecasts. While there seems no early prospect of Europe getting its act together, America has done a lot to repair its immediate budget position (at the cost of crimping growth over recent years), opening the possibility of easing the austerity next year if the political bickering could be overcome. Winding back unemployment in the two countries with room to ease austerity (the US and the UK) would, in itself, deliver a substantial growth spurt. Sentiment in Japan is much improved, even if Abenomics has been more talk than substance so far. Thanks to the sustained performance of the emerging economies, the IMF's forecast for global growth during this year and next is around the same pace as was achieved in the first half of the 2000s, which in turn was a bit faster than growth in the previous decade. Why, then, all the breast-beating about emerging economies? The policy message here is to spend less time fretting about the emerging economies and focus instead on sorting out the pathetic economic performance in most of the advanced world. Read Emerging economies: Why so gloomy? here .
  • Jeffrey Frankel: Drama Over Currency Wars More Manipulated Than Currency Values

    At next week's G8 summit in Northern Ireland, leaders from the world's dominant economies will discuss concerns over currency devaluation practices--or what we have come to describe, sensationally, as "currency wars." Jeffrey Frankel sure that leaders should really spend much time in the issue. And he seems pretty sure that the term "currency wars" is not an accurate description of recent monetary behavior. From Project Syndicate : True, in recent years, a wide array of countries has indicated a preference for weaker currencies as a means of improving their trade balances. It is also true, by definition, that not everyone can depreciate or improve their trade balance at the same time. But that does not necessarily mean that depreciators are guilty of violating any agreements or norms, especially if they have merely maintained a pre-existing exchange-rate regime. Uncoordinated monetary expansion does not even necessarily leave the world in a worse equilibrium. Barry Eichengreen and Jeffrey Sachs have persuasively argued this for the 1930’s (the opposite of the conventional wisdom regarding beggar-thy-neighbor competitive devaluations). Although all countries could not improve their trade balances simultaneously, when they devalued against gold, they succeeded in raising the price of gold, thereby increasing the real value of the global money supply – exactly what a world in depression needed. The same applies today. Brazil’s finance minister, Guido Mantega, coined the term “currency wars” in response to American efforts to enlist Brazil and other competitors of China in a campaign for a stronger renminbi. But the accusation against the US is especially misplaced. US monetary expansion contributed to global monetary expansion at a time when, on average, it was needed. US authorities have not intervened in the foreign-exchange market or talked down the dollar, and currency depreciation was not the Fed’s goal when deciding to implement its quantitative-easing policy. Read All Quiet on the Currency Front here .
  • Pacific Alliance and Mercosur: Trade Philosophy Setting Up Divide in Latin America

    Members of the Pacific Alliance opened their annual summit in Colombia yesterday, amid expectations that the Latin American free-trade bloc will soon be inviting more members . The continued growth of the alliance, and its outreach to Asia, may be off the radar a bit in the U.S., but it is a key player in the shaping of the global economy. The Economist points out that Latin America is engaged in an interesting tug of war between two different economic groups and their approach to free trade. The Pacific Alliance is largely made up of the market-led nations along the western edge, while Brazil leads the more regionally focused Mercosur. Here is how it maps out: Read A continental divide here .
  • IMF's Werner: Continued economic improvement in Latin America depends on 'growth enhancing and employment generating policies'

    Brazil is not the only Western Hemisphere nation weathering the current global economic uncertainty relatively well. Much of Latin America seems poised for relatively strong growth in 2013. But while the IMF is predicting a strong year for much of the region, there are some concerns. As in the U.S., employment and economic inequality need to be addressed, according to Alejandro Werner , director of the IMF's Western Hemisphere Department. Werner spoke about Latin America's prospects, and needed reforms, in this interview with Karla Chaman :
  • Breaking Down the BRICs

    What's in an acronym? Would the BRIC nations, by any other acronym smell as sweet [as places to do business]? In this Big Think video, Daniel Altman discusses some key distinctions between Brazil, Russia, India, and China (and Korea and South Africa). There are good reasons to invest in each country. And there good reasons to be skeptical about business prospects in each.
  • Wharton's Guillen: Pressure is Still on Emerging Markets to Carry Global Growth

    Key emerging economies like China, India, and Brazil are still growing at rates developed economies would love to see on their own shores, but they aren't growing at the rate they were a couple of years back. And that is the key problem for global growth, says Mauro Guillen , professor of International Management at Wharton. Even if Europe halts its economic slide, the pressure is still on emerging economies to fire the global economy. Guillen gives his outlook for global markets over the coming year in this Knowledge@Wharton interview:
  • Quantitative Easing and Charges of Currency Wars

    Brazil's finance minister, Guido Mantega , has been sharply critical of the Federal Reserve's latest round of quantitative easing, calling it "protectionist" and warning that it could spark a currency war . José Antonio Ocampo , former United Nations Under-Secretary-General for Economic and Social Affairs and former Finance Minister of Colombia, is reluctant to pick a side. Writing at Project Syndicate , Ocampo argues that "both sides are right": In particular, expansionary monetary policies in the US (indeed, in all advanced countries) are generating high risks for emerging economies. Because interest rates must remain very low in developed countries at least for the next several years, there are now strong incentives to export capital to higher-yielding emerging economies. But such capital inflows threaten exchange-rate overvaluation, rising current-account deficits, and asset-price bubbles, all of which have in the past led to crises in these economies. In short, the medium-term benefits that emerging economies could receive from faster growth in the US are now being swamped by short-term risks generated by the “capital tsunami,” as Brazilian President Dilma Rousseff has called it. The basic problem is the lack of a broader agenda that would make the Fed’s position consistent with that of Mantega and other emerging-country officials. That agenda must include two issues of global monetary reform that remain unaddressed: coordinated global regulation of capital flows in the short term, and a long-term shift toward a new international monetary system based on a true global reserve currency (possibly based on the International Monetary Fund’s Special Drawing Rights). The US could benefit from such policies, as capital-account regulation would force investors to find opportunities at home, while a true global reserve currency would free the US from concerns – and harsh rebukes – about the implications of its monetary policy on the global economy. At the same time, emerging markets would gain the full benefits of expansionary monetary policy in the US, to the extent that it boosts demand for their exports. Read The Federal Reserve and the Currency Wars here .
  • McKinsey Quarterly: Word-of-Mouth and Reaching the Rising Consumer Class in Emerging Markets

    As global companies work to connect with consumers in emerging economies, they have to be more cognizant of different buyer behavior in countries like India and Brazil. At McKinsey Quarterly , Yuval Atsmon , Jean-Frederic Kuentz , and Jeongmin Seong point to a few areas where these companies may need to shift their approach. The emerging consumer classes in the BRIC nations, for example, are influenced much more widely, the author's argue, by word of mouth: An important explanation for word of mouth’s outsized role is that in a land of consumer “firsts”—more than 60 percent of Chinese auto purchasers are buying their first car, and the comparable figure for laptops is 30 to 40 percent—few brands have been around long enough to ensure loyalty. Seeing a friend use a product is reassuring. Indeed, the less a consumer knows about a product and the more conspicuous the choice, the more the consumer is likely to care about the opinions of others. “The more people I know who are using a product,” consumers reason, “the more confident I can be that it will not fall apart, malfunction, or otherwise embarrass me.” The presence (or absence) of that confidence shapes the group of brands that consumers choose to evaluate. It is particularly influenced by the postpurchase experience of friends and family, along with their loyalty to a brand. Often, word of mouth is a local phenomenon in emerging markets, partly because of the simple reality that emerging-market consumers generally live close to friends and family. In addition, word of mouth’s digital forms, which transcend geography and are growing rapidly in emerging markets, still have more limited reach and credibility there than in developed ones. According to our annual survey of Chinese consumers, just 53 percent found online recommendations credible—a far cry from the 93 percent who trusted recommendations from friends and family. That same survey showed that only 23 percent of Chinese consumers acquired information from the Internet about products they bought. For food, beverage, and consumer electronics consumers in the United States and the United Kingdom, that figure is around 60 percent. Word of mouth’s relatively local nature means that companies in emerging markets are likely to reap higher returns if they pursue a strategy of geographic focus than if they spread marketing resources around thinly (targeting all big cities nationwide, for example). By attaining substantial market share in a cluster of cities in close proximity, a company can unleash a virtuous cycle: once a brand reaches a tipping point—usually at least a 10 to 15 percent market share—word of mouth from additional users quickly boosts its reputation, helping it to win yet more market share, without necessarily requiring higher marketing expenditures. The authors go on to outline two other key factors in emerging market consumers' behavior. Here is a look at how they interact: Read Building brands in emerging markets here .
  • Nissan's Carlos Ghosn on the Bumpy Road Ahead for Automakers

    We may need to be prepared to see a decrease in production from automakers, and the economic impact on the economy from those cutbacks. In the following interview with The Wall Street Journal's Chester Dawson , Nissan and Renault CEO Carlos Ghosn says that the ongoing struggles in the EU are forcing Nissan and its competitors to reconsider their output. Ghosn also discusses other key factors for Nissan's economic outlook--such as growth in China. And while he is focused on his own company, there are lessons in his outlook for all global companies:
  • McKinsey Quarterly: The Consuming Class in Emerging Markets to Reach 4.2 Billion People by 2025

    McKinsey analysts are calling it the $30 trillion decathlon. That is their projection for the total annual consumption in emerging markets by 2025. And they say the key for global business leaders this century is to figure out how to connect with the burgeoning new consumer class in these markets--and soon. Here's a look at the figures: From McKinsey Quarterly: For centuries, less than 1 percent of the world’s population enjoyed sufficient income to spend it on anything beyond basic daily needs. As recently as 1990, the number of people earning more than $10 a day,1 the level at which households can contemplate discretionary purchases of products such as refrigerators or televisions, was around one billion, out of a total world population of roughly five billion. The vast majority of those consumers were based in developed countries in North America, Western Europe, or Japan. But over the past two decades, the urbanization of emerging markets—supported by long-term trends such as the integration of peripheral nations into the global economy, the removal of trade barriers, and the spread of market-oriented economic policies—has powered growth in emerging economies and more than doubled the ranks of the consuming class, to 2.4 billion people. By 2025, MGI research suggests, that number will nearly double again, to 4.2 billion consumers out of a global population of 7.9 billion people.2 For the first time in world history, the number of people in the consuming class will exceed the number still struggling to meet their most basic needs. By 2025, MGI estimates, annual consumption in emerging markets will rise to $30 trillion, up from $12 trillion in 2010, and account for nearly 50 percent of the world’s total, up from 32 percent in 2010 (Exhibit 2).3 As a result, emerging-market consumers will become the dominant force in the global economy. In 15 years’ time, almost 60 percent of the roughly one billion households with earnings greater than $20,000 a year4 will live in the developing world. In many product categories, such as white goods and electronics, emerging-market consumers will account for the overwhelming majority of global demand. China already has overtaken the United States as the world’s largest market for auto sales. Even under the most pessimistic scenarios for global growth, emerging markets are likely to outperform developed economies significantly for decades. Read Winning the $30 trillion decathlon: Going for gold in emerging markets here .