Diane Francis in Davos

Saturday, January 28, 2006

Bill Gates

DAVOS - One of the highlights of the World Economic Forum every year is access to Bill Gates who is the world's richest entrepreneur and philanthropist.

He's optimistic as ever.

“The world is getting wealthier and wealth is being shared. The greatest surprise in terms of poverty reduction is China and now India where they have created the type of virtuous cycle of wealth creation the United States created,” said Gates to an audience of 150 CEOs.

By “virtuous cycle”, Gates refers to the process by which a nation provides some form of healthcare, where education is widespread, the economy is a meritocracy and governments promote entrepreneurship through policies. The “cycle” works this way: education creates technologies and entrepreneurs to exploit them who, in turn, pay taxes which government spends on more education and research to create more technologies.

“It's a wonderful bootstrap,” he said. “Now the question is who's outside that virtuous cycle and how do we drawn them in?”

Extending opportunities is the modus operandi behind Gates' philanthropy. The William and Melinda Gates Foundation has given away billions to health, education and other projects he has pledged to give away virtually all of his estimated US$80 billion wealth derived from Microsoft Corp.

The Foundation is funding research on diseases such as aids, TB and malaria which afflict the developing world. He has personally pledged more in these battles than any single country in Europe.

“We are five to seven years away from a pill which will replace the need for condoms to protect people from the aids epidemic. And we are 15 years away from a vaccine and that's only if we can attract the best scientific minds to the task,” he said.

Gates has also made education around the world, and in the United States, another preoccupation. Basic education, especially for females, in poor countries is a focus and in the U.S. he has financed dozens of high schools that provide more enriched and rigorous curricula to students,

“The U.S. has had the biotech, computer technologies and aerospace areas to itself, with small contributions from Europe. Now the most popular university major in the U.S. is phys ed,” he said. “But people from India and China are in science, math and engineering, making the U.S. and Europe a minority.”

The U.S. graduates 75,000 engineers a year and India, 325,000 annually.
Last year, Gates told a conference of U.S. educators that their system was “obsolete”.

“America's competitive advantage has been, and will continue to be, the top 25% of U.S. students who go to its best universities which are the envy of the world,” he said. “It will take China and India 40 years to replicate these great institutions.”

But Gates estimated that half of the other 75% of U.S. students face problems because they don't finish high school or do poorly, resulting in fewer opportunities.

“This means greater income disparities and the middle class will break down if we don't revitalize the education system,” he said.

So far, his Foundation and others have created 1,500 high schools, roughly 6% of the total, to address this issue. They are mostly located in New York City and California.

“Our schools are smaller, offer specialized curricula and more rigorous. We're big on small,” he said. “The only downside is we don't have good football teams but in some cases we've combined four of our schools to make one team.”

Despite the educational shortfall in the U.S. (a phenomena which exists in Canada but not to the same extent and is mostly in Atlantic Canada and Quebec), America will retain its economic pre-eminence in the future, he believes.

“Ten years from now Microsoft's major research and development will be in the U.S.,” he said,. “But we must have immigration policies that attract the geniuses to come here and pay taxes.”

“Universities are also very important and the concentration of talent is connected to the best universities. For instance, Silicon Valley's there because of Stanford and the University of California (Berkeley).”

The U.S. must continue to support its greatest universities.

“Every country should ask itself whether it is a great attractor of talent?” he suggested. “There are reasons why Silicon Valley exists near Stanford and the University of California.”

The issue of piracy has dogged Gates said Microsoft but it continues to expand operations, and sell software, in China which is the biggest culprit.

“As innovation happens there by homegrown software companies and entrepreneurs, there will be demands for intellectual property rights,” he said. “This will happen in 10 years or so.”

He also anticipates the eventual democratization of China in the same way as South Korea and Taiwan began as autocracies then morphed into democracies.

“China's creating a middle class which will want and get more and more freedoms,” he said,. “The Chinese government is thinking about how this can take place.”

He also mentioned the area of energy, of vital importance to Canada as one of the world's five biggest energy exporters.

“We need energy and we sucked out most of the oil in the stable places because that we easy,” he said. “It's easy to underestimate the scientific research taking place in the energy space, in nuclear, coal, oil, oil sands. But it's happening.”

Thursday, January 26, 2006

India Rising

DAVOS - The "India Everywhere" advertising campaign and the attendance of an Indian "dream team" has grabbed the attention of the World Economic Forum's influential participants.

This year's delegation of 100 is the largest from any country and includes India's Ministers of Finance, Commerce and Industry plus other high-ranking officials and dozens of prominent Indian business leaders.

Ironically, one of the largest players in India is not part of the delegation - Canada's Tom Bata whose corporation employs thousands manning its large manufacturing facilities and thousands of retail outlets. "Bata" is a huge brand name in the country and Tom and Sonja Bata have stuck by the country for 60 years despite its setbacks.

"We are extremely happy with our investments in India," said Tom in an interview. "We have always believed in India."

The advertising campaign is plastered everywhere from village buses to periodicals and all the billboards in Zurich Airport where delegates arrived from all over the world.

India has also sought, and caught, the attention of U.S. policymakers who see the world's largest democracy as a natural ally and counterbalance to China's growth and influence in Asia. This is why President George Bush is visiting India in March.
The aggressive ad campaigns and diplomacy emphasize India's strengths such as democracy, rule of law, political stability, economic reforms and 7% growth in 2005.

"People who arrive in Mumbai may think it's a lot of hype when they see the state of our cities and infrastructure," said Anand Mahindra, Vice Chair and Managing Director of Mumbai-based conglomerate Mahindra & Mahindra. The publicly listed outfit employs 24,000 workers and posted revenues this year of US$3.3 billion in auto parts, auto assembly, real estate, infrastructure and financial services operations.

"What's different is that India has thrown off its colonial mentality and its people live in a country where they are free to aspire and innovate," he said.

Similarly, R. Seshasayee has found confidence flourishing. He is managing director of Ashok Leyland of India which makes buses and employs thousands.

"Indian entrepreneurs have always been very aggressive. Two centuries' ago India's trade was twice the size of Europe's," he said. "Now we see a level of entrepreneurship which is unusual compared to the recent past and there is a degree of innovation on the shop floor that is creating higher levels of productivity."

Contrary to popular belief, he said there is no difference in manufacturing costs between India and China.

"The two countries are not at odds and I believe the story that is emerging is convergence of China and India," said Mr. Mahindra. "I just bought a tractor factory in China and put 15 expats in charge there. They said Chinese workers are faster than Indian workers on simple tasks but find change, innovation or decision-making difficult."

Harvard Business Professor Krishna Pelapu said in a recent interview in Cambridge that the two will combine efforts to the benefit of both. He cited the case of a Taiwanese investor who found that to be profitable he had to outsource engineering, research and management to India even though his microchip plant in China was cost-competitive.

In order to encourage more manufacturing - needed to employ the less educated Indians - the country is on a tear to try and increase its Foreign Direct Investment. India last year received US$5 billion in FDI compared to China's, US$50 billion.

"We hope to get US$10 billion a year," said Mr. Mahindra, a double Harvard alumnus, both undergrad and MBA.

His company is like many in India which began as modest family businesses two generations ago but now has joint ventures with companies all over the world. But recent political shifts in Japan and Pakistan offer India even greater opportunities than before, he said.

"The protests last year in China emotionally affected the Japanese because they saw protesters tearing down Sony billboards in Beijing. Shortly after that the head of a Japanese company called me and said he had decided to pour money into India instead of China," he said.

Last year, Toyota chose India over China for a gigantic assembly plant which will eventually produce 250,000 units per year.

"They calculated that labor costs in China were lower but overall costs such as engineering, equipment design and maintenance made it much cheaper," he said.

Another development is the economic growth, reforms and entrepreneurship which is starting to blossom in arch-rival, Pakistan.

"Pakistan's economy grew by 8% compared to our 7% last year," he said. "There was a war dividend, in the form of U.S. aid regarding Afghanistan, but they have proceeded with their economic reforms faster than India. This will drive growth in India. We hate losing to them in cricket and that will translate into competition economically."

Wednesday, January 25, 2006

DAVOS STUFF

DAVOS - China's economy overtook France's last year, said Min Zhu yesterday, executive assistant to the president of the Bank of China.

"We have just readjusted our GDP figures to US$2.2 trillion which makes China the fifth largest economy in the world," he said during a lively panel discussion at the World Economic Forum. "Previous figures did not include service companies with fewer than 60 workers or less than 5 million yuan [roughly US$700,000] in revenues."

China's phenomenal growth was center stage, as usual, during the kick-off panel discussion at the World Economic Forum into the state of the world's economy.

But every year, the panelists mostly incorrect and last year was no exception. The majority view back then was that the U.S. would come unstuck in 2005 due to overspending and the dollar would plummet.

Instead, the U.S. dollar went up in value and its economy grew nicely.
The only exception to last year's bearishness was Jacob Frenkel, vice chairman of insurance giant AIG and former head of Israel's central bank.

"The dire predictions didn't materialize which is a reflection of the robustness of the U.S. economy," he said. "It's capable of absorbing enormous shocks."

U.S. trade deficits are happily financed by Japanese, Chinese and other Asian countries with trade surpluses and they are not about to pull the plug.

"The U.S. overspends and Asia over-saves," he said. "The U.S. dollar is not going to collapse. Where else will investors go? Japan holds US$1 trillion of U.S. debt and China US$500 billion. The more you are invested in an asset like this, the more vulnerable you are to collapses so you are reluctant to let that happen."

The Chinese banker added that the U.S. remains the best investment bet.

"We believe there will be a dollar depreciation of 3 to 5% gradually at current interest rates," said Mr. Min. "But the Euro and Yen are not strong currencies."

What's more worrisome to the world's economy is not Asia's surpluses, which encourage U.S. consumption for the benefit of the entire world, but the fact that the petrodollars being earned as a result of high oil prices are not being recycled into the larger world economy as before. And these surpluses will only grow as oil prices remain high.

"In 2005, the U.S. had an US$800 billion current account deficit. Asia and Japan had total surpluses of US$350 and OPEC's 11 countries plus Russia had surpluses of US$300 billion," said Mr. Frenkel.

An explosion of spending in OPEC countries, plus dramatic increases in their stock markets, are the result of keeping many of those petro-dollars at home, he said. "Where will that money go in future?"

The good news is that the world's engine of growth - the U.S. economy is expected grow by 3% in 2006, Japan by 2% and China/India by 9%.

Much political noise is made about this difference in growth rates, but 3% of America's US$11.7 trillion GDP is still more than 2% of Japan's US$4.67 trillion economy plus 9% of China's US$1.65 trillion economy.

Trade figures aside, what was truly unsettling about this year's panel consensus - given its track record as incorrect - was that most believe that 2006 will be a "goldlilocks year" economically.

Exception to this view was the perennial "Cassandra" Stephen Roach, Chief Economist with Morgan Stanley in New York. He has been a doom-and-gloomer for five years now and remains steadily so.

All of which means that if the exception turns out to the rule, as it has in panels past, the Americans will experience a meltdown, a la Stephen Roach.

Here's his take: "The dollar rose last year after falling for three years which was an act of desperation on the part of the asian central bankers who hold U.S. T-bills and are convinced things can go on this way."

"There is a dangerous degree of complacency out there and the weakest link in 2006 is the American consumer and there was no increase in consumption in the last quarter in the U.S. Zero."

Other commentators have suggested that the slight consumption slowdown means there is "rust but not bust" lurking around the U.S. economy.

But Roach says this could be "the end of the great American spending binge."

He added another negative in 2006 which is the departure of Alan Greenspan as Chair of the Federal Reserve Bank.

"He has inspired 18.5 years of confidence and is leaving the building in six days," said Roach. "Just months after Greenspan took over in 1987, the stock market crashed. Just months after Paul Volcker took over in 1979, the bond market crashed."

But the Bank of China's Mr. Min said there may be volatility in the past following such handovers, but China and others have confidence in the Federal Reserve and US$ because in 18 years it has managed to grow the U.S. GDP by 258% and the U.S. stock market by 500%.