Thursday, May 31, 2012

Petrodollars: How to Spend it

The most effective policy tool to reduce oil exporters’ current-account surpluses is public spending, and investment in particular because of its high import content. Increased public spending could also help these economies diversify away from oil. That would support their future economic development and create more private-sector jobs for young, growing populations. To maintain social stability, many of these governments need to spend more on education, health care, housing and welfare benefits. Some oil producers, such as Russia and Nigeria, are running fairly balanced budgets, but the governments of the Gulf states are awash with cash. Since 2005 Saudi Arabia, Kuwait and the UAE have increased public spending by 7-8 percentage points of GDP. Even so, the three countries are expected to run an average budget surplus of over 15% this year. That leaves plenty of room to be a little more spendthrift.

I am not sure I get the logic here. Unnfortunately the kind of spending that is taking place (on public sector wages) is unsustainable in the future.

Saturday, April 28, 2012

Hit and Flop

Still, the surest way to guarantee failure in the long term is to be so paralysed by the fear of it that you don’t try anything new. The line that separates a hit from a flop is thin. Companies sometimes have to slaughter sacred cows to escape obsolescence: IBM only recovered from its death spiral when it abandoned its focus on building hardware. Some of the most successful products are the result of mixing oil and water—most obviously, phones with computers and entertainment systems.

Keep experimenting!



Saturday, April 21, 2012

Bezos on Risk-Taking

This may explain why Mr Bezos is so keen to ensure that Amazon preserves its own appetite for risk-taking. As companies grow, there is a danger that novel ideas get snuffed out by managers’ desire to conform and play it safe. “You get social cohesion at the expense of truth,” he says. He believes that the best way to guard against this is for leaders to encourage their staff to work on big new ideas. “It’s like exercising muscles,” he adds. “Either you use them or you lose them.”

Words of wisdom from the founder.

Trade in Middle East

More trade would have familiar benefits: larger markets should enable firms to reap greater economies of scale, increase returns to investment and adopt more new technology. Just as important in the Middle Eastern context, more open trade would begin the process of dismantling over-centralised states and create a constituency for further economic change. Of course, trade liberalisation is no substitute for privatisation, financial reform and other domestic measures. But it has a political advantage over those reforms. Because the steps required are relatively small ones (reductions in red tape, for instance) they should provoke less resistance from insiders; and because regional trade can be presented as a pan-Arab goal, it does not have the same taint of “Westernisation” that discredited earlier reform efforts. Regional trade would be only a start. But the main thing is to start somewhere.

The case for inter Arab trade as pathway for larger economic reform.

Saturday, April 14, 2012

Growth Not Size

Rather than focusing on size, policymakers should look at growth. One of the reasons why everyone loves small firms is that they create more jobs than big ones. But many small businesses stay small indefinitely. The link between small firms and jobs growth relies entirely on new start-ups, which are usually small, and which by definition create new jobs (as they did not previously exist). A recent study of American businesses found that the link between company size and jobs growth disappears once the age of firms is controlled for.

Rather than spooning out subsidies and regulatory favours to small firms, governments should concentrate on removing barriers to expansion. In parts of Europe, for example, small firms are exempted from the most burdensome social regulations. This gives them an incentive to stay small. Far better to repeal burdensome rules for all firms. The same goes for differential tax rates, such as Britain’s, and the separate bureaucracy America maintains to deal with small businesses. In a healthy economy, entrepreneurs with ideas can easily start companies, the best of which grow fast and the worst of which are quickly swept aside. Size doesn’t matter. Growth does.

The good thing about Kuwait is equality when it comes to size of business. Both big and small are not saved from bureaucracy and red tape.

Friday, March 30, 2012

The Curse of Oil

Economists have long talked of the “resource curse” that can affect economies with lots of energy and minerals. The curse comes in two main forms. First, high revenues from resource development allow governing politicians to be “rent-seekers”, seizing control of the assets and using the income to buy off opposition to their rule. Mobutu Sese Seko, a former dictator of what was then Zaire, is the most glaring example of this tendency. The result is that more stable forms of government fail to develop.

The second form of the curse is dubbed “Dutch disease”, a term coined by The Economist to describe the problems of the manufacturing sector in the Netherlands in the 1970s. Dutch ownership of natural-gas resources pushed up the country’s real exchange rate, making manufacturing less competitive. Although the problem of poor governance has particularly affected developing countries, Dutch disease is more of a problem for the developed world. Another example was sterling’s brief heyday as a “petrocurrency” in the early 1980s, which coincided with a slump in Britain’s manufacturing industry.

The curse was highlighted in 1995 in a paper by Jeffrey Sachs and Andrew Warner, then of Harvard University, which found that countries with a higher proportion of resource exports had experienced a slower rate of economic growth. But more recent work by Christa Brunnschweiler and Erwin Bulte, two Swiss-based economists, draws a very different conclusion.

The Swiss-based academics make a crucial distinction between abundance (having lots of resources) and dependence (having a high proportion of exports in resource-related industries). They found that greater resource abundance leads to better political institutions and more rapid growth, and suggest that the Sachs-Warner paper, which focused on dependence, got the causation the wrong way round. Countries with poor political institutions (like Zaire) are unlikely to develop other sectors of the economy to reduce their dependence on natural resources. But countries with good institutions are able to do so.

I hope we move from dependence to abundance in Kuwait. 

Thursday, March 29, 2012

Starting up in a Bust

THE list of famous companies founded during economic downturns is long and varied. It includes General Motors, AT&T, Disney and MTV, all founded during recessions. A 2009 study found that over half of Fortune 500 companies got their start during a downturn or a bear market.

The article continues why starting up in a bust can lead to positive results:

Why should this be? One plausible explanation is that recessions affect the way people take decisions. Management styles are surely in part the result of the kinds of problems a person has had to grapple with. Even a risk-lover may end up taking more conservative financial decisions in a weak economy. If these decisions serve him well in lean times, then he may conclude that fiscal prudence is a stance worth sticking with in years of plenty.

Wednesday, February 08, 2012

Haj at British Musuem

Visitors are taken on a journey to the city Muslims call Makka al-Mukarrama (Mecca, the Blessed), just as pilgrims have done for hundreds of years and as Prince Charles will when he formally opens the exhibition later this month. A large black cuboid, hung with intricately woven Islamic textiles, rises at the heart of the show in the centre of the BM’s circular reading room. It represents the ka’ba (pictured above), the black stone that the prophet Abraham is said to have built and which pilgrims circle seven times as part of the haj ritual.

The haj: Journey of faith | The Economist

An interesting and first of a kind exhibit at the British Museum. Worth a visit!

Friday, January 27, 2012

Singapore Politics

IT IS a proud boast of Singapore that this very small but immensely wealthy city-state is the least corrupt and best place to do business in the world. And a chief reason for that, at least according to the politicians, is that they themselves are by some way the highest-paid elected officials in the world. Why would a minister bother with corruption, so the argument goes, when he can take home S$1.6m ($1.3m) a year for just keeping on the straight and narrow?

Singapore politics: Falling on their wallets | The Economist

It pays to be a politician in Singapore. Compare this with the US President $400,000 salary. After some public anger the salaries of government official in Singapore were lowered, but still higher than most places. Is this the secret recipe for low corruption? That is the debate.