A POSSIBLE 2020 PORTFOLIOARABLE LAND
WASTE TO ENERGY UTILITIES IN CITIES
REAL ESTATE (as always)
INFRASTRUCTURE (smart grids, water management)
One way to start thinking about the 2020 global economy is to ask what you would want in the portfolio. Moving forward from today, let’s look at some case studies of the current global economy:
New sources of value: DAEWOO INVESTS IN MADAGASCAR. The Madagascar coup of earlier this year was one of the most important underreported events of 2009. At a time when Canadian mining companies are investing billions of dollars in extractive industries, vanadium and rare earths, Madagascar became the template for a 21st Century crisis that also highlighted the emergence of the Indian Ocean zone. For Daewoo, this was a commercial play on arable land, like Chinese land purchases in Sudan and Abu Dhabi’s investment in Kyrgyzstan. The valuation of the deal produced such skepticism that it created a power struggle within the emerging Madagascar business elites.
The new regulation: Norway to monitor Asia Investments The Financial Times report by Lamont and Ward shows how the Norwegian sovereign wealth fund is trying to monitor corruption and correlate investing with social responsibility. Norwegians are deliberately trying to develop best practices for the management of sovereign wealth funds and to help other countries develop the ability to turn revenues from resource extraction into productive capital. In addition, they are assuming a leadership role in global social responsibility.
New patterns of investment CHINESE-AUSTRALIAN-CANADIAN RARE EARTH MARKETS Chinese investors and the Chinese sovereign wealth fund have become significant players in the global economy. Rick Carew and Tom Wright excellently review this in the September 24th, 2009 Wall Street Journal article “China Sovereign Fund Bets Big on Resources“. The case study of China and the global rare earths market is particularly interesting about new patterns of global extractive resource strategies. Keith Bradsher’s reporting in the New York Times in the September 25th New York Times shows the intricacy of the Chinese mutual dependence on western markets as well as any other single case.
New “stimulus” packages THE $36 TRILLION GLOBAL INFRASTRUCTURE MARKET - WHO PAYS? The Booz Allen report in Strategy and Business in 2007 raised some fundamental questions about how governments “stimulate” economies in a post-Keynesian world even before this global economic realignment. The development of financial mechanisms for infrastructural redesign remains a fundamental driver of the new global economy, in the U.S. stimulus package, in the Chinese domestic investment strategy and as a global pull the building of infrastructure in emerging markets. Infrastructure remains a key driver to the global economy, creating wealth through enhanced real estate valuations and opening up markets (canals, ports, railroads). How this is financed in a world of structural deficits remains a key investment banking challenge.
The constant challenge of valuation – where is the new “value” in the post-internet mobile global economy or put differently TWITTER IS WORTH HOW MUCH? The global economy is being driven by social media and new sources of value unimaginable even a few years ago. The obvious answer is we don’t know how much Twitter is worth, but smart investors think there is a value proposition which makes it worth a speculative investment. It is a bet on a business model and a management team and this becomes a cornerstone of the restructured global economy, trying to link productive capital with emerging entrepreneurial opportunities.
New players KHAZANAH HAS A ROLE NOW, HOW IMPORTANT ARE SOVEREIGN WEALTH FUNDS AND IS THE INDIAN OCEAN A NEW ZONE OF GROWTH? There are some discussions about sovereign wealth funds and SWF strategies generally. They constitute a significant new market driver in the global economy. Khazanah, the Malaysian sovereign wealth fund, is an important case study. Its involvement with Saudi Arabian financial investments and Malaysian involvement in Gulf Arab investors highlights the rise of the Indian Ocean zone (once described as the new Dubai-Singapore network, now seen as more broad than that as Chinese investment enters the Indian Ocean). There are interesting observations on this by Ben Simpfendorfer, a China analyst with the Royal bank of Scotland.
New sources of entrepreneurially created wealth. From Microcredits to new economic players, the emerging markets, there is a process of wealth creation branded as the bottom of the Pyramid by C.K. Prahalad. While some exaggerate the impact of these new sources of wealth-creation, the reality is that entrepreneurially led growth (e.g. Silicon Valley, the U.S. automotive industry in the 1920s, the economic geography of southern China, the mittelstand companies of Germany) has created demand in previous eras of economic restructuring. One can only imagine the impact of thousands of entrepreneurs from Sao Paolo and Hyderabad will create new patterns of growth in the global economy.
In the first class, I briefly talked about driverless subways in Dubai and tea markets in Mombasa. "Driverless subways" is a case study of new infrastructure investment and fundamental innovation in the global economy. . "Mombasa tea markets" is a case study of the rise of new financial innovations in the “South”. If we navigate through these seven current themes, we can try to define the vectors of the new global economy.
We are dealing with a global economic realignment right now. In trying to figure out the financial events of the last year and the contours of the global restructuring which this black swan has brought us, we need to put out a few markers. Much of the discussion is driven by either focus on regulatory failure or concerns about short-term financial market performance:
(a) The first analytical framework perceives a regulatory failure that brought about the crash of the global economy (“the patient was healthy before the accident”). While I think there is an exceptionally important discussion about regulatory failures, I often think that this debate serves to create an illusion of control in the United States in particular. If only “we” had regulated more efficiently, we wouldn’t be in this mess. The regulatory issues are real and compounded the crisis, but the underlying problem was the failure to recognize the shifting of tectonic plates in the global economy.
(b) The second analytical framework focuses on current stock market performances, whether or not recovery looks like a “w” curve or looks like a traditional recession. This too is obviously very important, because we all live in the short term and are trying to calculate portfolio strategies, availability of expansion capital in capital markets and domestic economic confidence. However, this discussion all too often takes place within the same economic paradigm which failed to predict or understand the events of last year, economic modeling of recessions and market corrections. The realization of this is the reason so much economic analysis sounds tentative at this time.
What we need to do is understand that there is a very different process of value-creation in the world coming from this global economic realignment (GER). The point is not to understand it, but to design it. So the purpose of this lecture is to (a) provide a relief map of the realigned global economy and (b) look at the role of B-Schools in designing new models of wealth creation within this relief map and (c) briefly address some of the questions of global governance within this realigned global economy.
First, let us look at some of markers in the new global economy. We should have known, and some did, look at the hedge fund managers who shorted U.S. banks between December 2007 and the collapse of Lehman brothers in September 2008, that the combination of U.S. indebtedness to China as a result of the mismanagement of the U.S. economy during the tax-free prosecution of the Afghan and Iraqi wars and the development of significant new pools of capital as a result of Globalization 2.0 (1997-2008) had led us into a number of high risk activities. When Bob Rubin successfully negotiated in December 2007 the $7.5 billion Abu Dhabi Investment Authority investment in a restructured Citigroup, we should have known.
Second, the global economic realignment does require new rules of governance. That is what the Pittsburgh summit was all about. The challenges ahead for it are how to finance infrastructural changes globally (driverless subways) and coordinate the new economic realities (Mombasa tea markets) with international rule of law? I think that if you hold these two challenges in mind, the next few years look more comprehensible and the agency required to create the preconditions for a different form of global prosperity seem more attainable. (In writing this lecture, I reviewed Brad Setser’s blog from his days at the Council of Foreign Relations before becoming joining President Obama’s National Economic Council. It remains helpful background reading).
New sources of wealth are created by designing new forms of digital media, by commercializing our medical histories, by improving the productivity of agricultural lands. The tectonic plates that have started to shift in the last year show the need for new financial architecture to reflect new patterns of growth. This architecture will evolve in ways we are just starting to understand. Some of it will fit into categories that are familiar to us: harmonization of securities law, compliance with tax-enforcement. Some of them will be completely new: the validation of entrepreneurs through some form of social media like Kiva. It is possible to imagine a model of entrepreneurial growth where microcredits are allocated via mobile telephony and validated by a social media network attached to a Twitter like business model. There will be new businesses around rare earth mining (scandium, vanadium are not household words, but they transform our concept of usable materials). In other words, innovation will take place as it always has once we decided on the new sources of value.
The geopolitics of this will challenge us as we realign capital markets with new political realities. By simply Googling “China String of Pearls Map”, I came up with an interesting blog from a PhD student at Durham in the U.K. The focus on the Indian Ocean zone is obvious to anyone looking at global politics today. From Somalia to Indonesia, Indian, Chinese, European and American interests are being redefined and the new players in the zone create a very different global capital market, because this is where much of the new global wealth is being created and traded .Bob Rubin could have asked for $7.2 billon from the Chinese, but they would have had a very complicated decision-making process on whether they would have been interested. If the Citigroup restructuring had been done that way, we would have been more quickly aware of this shift of power to the emerging markets, the BRIC countries and more (Malaysia, Indonesia).
ASIAN HEALTH CARE AND BRAZILIAN DIGITAL INFRASTRUCTURE
Growth in the Global Economy in 2011