Imaginative people - not geeks - will lead the way

We are now in the early stages of a third Industrial Revolution – the information age. The cheap and easy flow of information around the globe has vastly expanded the scope of tradable services, and there is much more to come.

The old assumption that if you cannot put it in a box, you cannot trade it is hopelessly obsolete. Because packets of digital information play the role that boxes used to play, many more services are now tradable and many more will surely become so.

In the future, and to a great extent already, the key distinction will no longer be between things that can be put in a box and things that cannot. Rather, it will be between services that can be delivered electronically and those that cannot.

Many people blithely assume that the critical labor-market distinction is, and will remain, between highly educated (or highly skilled) people and less-educated (or less skilled) people – doctors versus call-center operators, for example.

The supposed remedy for the rich countries, accordingly, is more education and a general “upskilling” of the workforce. But this view may be mistaken.

The critical divide in the future may instead be between those types of work that are easily deliverable through a wire (or via wireless connections) with little or no diminution in quality and those that are not.

Adam Smith wrote “The Wealth of Nations” in 1776, at the beginning of the first Industrial Revolution. Although Smith’s vision was extraordinary, even he did not imagine what was to come.

It has been estimated that in 1810, 84 percent of the U.S. workforce was engaged in agriculture, compared to a paltry 3 percent in manufacturing.

By 1960, manufacturing’s share had risen to almost 25 percent and agriculture’s had dwindled to just 8 percent. (Today, agriculture’s share is under 2 percent.)

How and where people lived, how they educate their children, the organizations of business, the forms and practices of government, all changed dramatically in order to accommodate this new reality.

Then came the second Industrial Revolution, and jobs shifted once again – this time away from manufacturing and towards services.

This trend is worldwide and continuing.

Between 1967 and 2003, according to the Organization for Economic Cooperation and Development, the service sector’s share of total jobs increased by about 19 percentage points in the United States, 21 percentage points in Japan, and roughly 25 percentage points in France, Italy, and the United Kingdom.

Industrial Revolutions are big deals. And just like the previous two, the third Industrial Revolution will require vast and unsettling adjustments in the way Americans and residents of other developed countries work, live, and educate their children.

The United States and other rich nations will have to transform their educational systems so as to prepare workers for the jobs that will actually exist in their societies. Basically, that requires training more workers for personal services and fewer for many impersonal services and manufacturing.

But what does that mean, concretely, for how children should be educated? Simply providing more education is probably a good thing on balance, especially if a more educated labor force is a more flexible labor force, one that can cope more readily with nonroutine tasks and occupational change.

However, education is far from a panacea, and the examples given earlier show that the rich countries will retain many jobs that require little education. In the future, how children are educated may prove to be more important than how much.

Contrary to what many have come to believe in recent years, people skills may become more valuable than computer skills. The geeks may not inherit the earth after all – at least not the highly paid geeks in the rich countries.

Creativity will be prized. Thomas Friedman has rightly emphasized that it is necessary to steer youth away from tasks that are routine or prone to routinization into work that requires real imagination.

Unfortunately, creativity and imagination are notoriously difficult to teach in schools – although, in this respect, the United States seems to have a leg up on countries such as Germany or Japan. Moreover, it is hard to imagine that truly creative positions will ever constitute anything close to the majority of jobs. What will everyone else do?

The future retains its mystery. But in any case, offshoring will likely prove to be much more that just business as usual.

Written by Alan S. Blinder, a Gordon S. Rentschler Memorial Professor of Economics at Princeton University. He served on the White House Council of Economic Advisers from 1993 to 1994 and as vice chairman of the Board of Governors of the Federal Reserve from 1994 to 1996.

This article appeared in The Ashahi Shimbun, an English Japanese paper on Tuesday, March 28, 2006.

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INVESTING - The cost of bad news.

The business section of the newspaper has made for pleasant reading the past few years, thanks to consistently growing, well-managed economies and stock markets that keep going up.


The front page is a different matter, and some investment advisers are worried that the bad news will spill over and spoil the good thing.

We are living in a world with “low macroeconomic volatility but high geopolitical volatility,” said David Rosenberg, a Merrill Lynch economist. “Over the past decade core inflation volatility and real rates have returned to levels last seen in the 1950”, he said in a note to the bank’s clients. Profit margins expand in such a climate, and stock prices rise as investors bet that the placid conditions will persist.

But Rosenberg suggested that the environment of “low volatility, low risk premia” is threatened in a way that it was not, half a century ago. He rattled off headlines from one edition of The New York Times: the conflict in Iraq, bird flu in Turkey, Iran’s nuclear program, attacks on oil facilities in Nigeria and Saudi Arabia and on and on. “What do investors pay for in terms of a much more uncertain geopolitical backdrop?” he asked.

In the note, Rosenberg offered no answer to his own question, but in an e-mail exchange later he suggested that whatever investors are paying to take account of political risk, it is not enough.

People focus on “where the second decimal place is going to be on first-quarter GDP growth and whether the Fed is done at 5 percent or 5.25 percent,” he said.

It is “very rare,” he said, “to see investors turn a blind eye when faced with so much uncertainty. But if they start to price political risk, which markets will feel it first and most?”
Global investment managers say that emerging markets actually may be least affected. The long history of strife in those markets, they say, compels investors to ignore the progress and depress valuations in anticipation of further difficulties, which acts as a shock absorber.

“You’re talking to someone who has gone through the Mexico crises, the Brazil crises and the Turley crises,” said Francis Claro, the world-weary co-manager of the Evergreen Global Opportunities Fund. “Politics has always been an investment consideration within emerging markets.”

One reason that emerging markets have done so well and attracted so much foreign investment is that the political instability priced in in many countries, including Brazil, Mexico, Russia and much of Asia, has not materialized.

These arguments do not persuade Rosenberg that emerging markets are immune; the crises that Claro mentioned were, after all, crises. But Claro and others nevertheless make a persuasive case that investors may face greater risk in the developed world because stability is supposed to be the norm and any threat to it is less likely to be factored into stock prices.

The consolidation of European economic and monetary union is driving some politically inspired economic imprudence in Europe, Claro said: “You have the many governments that have in a sense surrendered monetary policies” to the European Central Bank, he said, “but they are still very active on the fiscal front.”

Hyperactive in the case of Italy, one of the markets where Jerome Booth, research director at Ashmore Group, believes political tribulation is not priced in. The country’s finances have worsened in recent years and appear particularly fragile in advance of the election next month in which Prime Minister Silvio Berlusconi is hoping to keep Romano Prodi from taking his job.
“Should Berlusconi win, or should Prodi win and then see his government fall apart six months later when he fails to address the fiscal crises, the country is likely to be downgraded,” Booth said. Italy may suffer the supreme embarrassment of being judged less creditworthy than some emerging markets. “ The possibility of Mexico and maybe Russia trading through Italy is very real,” he said.

Booth also finds danger in Japan, where he thinks the political will to execute economic reforms has long been lacking. With national debt equal to 150 percent of annual output, “what happens if interest rates go to 4 percent?” he asked.

“The reality is that there’s risk everywhere, in every country,” Booth said. “We’re now in a world where you’ve got two types of countries: emerging markets, where political risk is priced in, and a whole bunch where it isn’t priced in at all.”

This article was written by Conrad de Aenlle and published in the Saturday-Sunday, March 25-26, 2006 addition of International Herald Tribune.

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China's taste for high-end property forces a rethink on house-builders.

When the Millionaire Fair, an exhibition of luxurious products, came to Shanghai last month, one local property developer put the city’s most expensive house up for sale – a $31.2m (€24.7m, ₤16.9m) mansion by a lake with a private island in the south-west suburbs.

In the construction boom that has been electrifying many of China’s cities, developers have given priority to luxury housing over the rest. Of the Rmb189bn ($24bn, €19bn, ₤13bn) that was invested in residential housing, only Rmb6.2bn went to low-income housing.

Combined with the mass relocations of residents to make way for new buildings and dramatic rises in prices in a handful of cities, housing has become one of the most sensitive manifestations of growing inequality in incomes in China.

The top leaders in Beijing claim to be more aware of the fate of ordinary citizens than its predecessors and earlier this month decided to take action. As well as reissuing a ban on the construction of new “villas” – large, detached houses – the government introduced tough measures to force the construction of more low-cost houses.

In what has been nicknamed the “double 70 per cent rule”, local governments were ordered to allocate 70 per cent of new residential land to low and middle-income housing, while developers were told that 70 per cent of all new residential construction projects had to consist of apartments of 90 square metres of less.

But since the new rules were announced they have come in for unusually public criticism from developers and other property professionals, who argue that the government is using heavy-handed planning edicts to try solve a complex problem in need of public money. According to Ren Zhiqiang, president to Beijing Hua Yuan, a property developer: “The Chinese government is trying to put social responsibilities on the head of domestic property developers.”

Mr Ren believes that the new policy is impractical. Take the case of families relocated to make way for new construction, he says. Some Chinese cities have promised about 35 sq m or above to each reallocated resident, so, for a typical family with four members, government would need to provide apartments of about 150 sq m. “ Under the new policy, they would have to put one family into two apartments.” Architects warn that they will be forced to design apartments with peculiar and impractical shapes just to fit within the new guideline.

The complaints by developers should come as no surprise, since they make substantially more profit on luxury housing, which has roughly the same land and construction costs a low priced housing. But if developers begin to shift away from residential property the new rules could become counterproductive. Mr Ren says the guidelines have forced some developers to try to return land they had bought and to get out of paying architects for work already done.

Fan Wei, the chief executive of Shanghai Forte Land, one of China’s largest residential real estate developers, said the group had already been looking at moving into other types of property before the new policy was announced.
Whether the authorities can implement such rules has also been questioned. The ministry of land and resources conceded last week that 60 per cent of land acquisitions for construction in China were illegal because they had not gone through the formal planning approval process. In some cities the figure was as high as 90 per cent.

The figures are the latest indicating that local planning officials often collude with property developers to ignore rules about land use, especially in the construction of luxury housing and showcase projects such as convention centres.

The government has suffered the same experience with efforts to slow down the building of “villas”. It issued a ban on using land for villa construction three years ago, but developers got round the rules by calling the houses by other names, while officials turned a blind eye.

If Beijing really wants to encourage a new round of low-cost housing, economists say, it will have to pay in one way or the other. “Either government-owned developers build cheap housing on the basis of a clear policy mandate, or a subsidy is needed for private developers,” says Stephen Green, an economist at Standard Chartered in Shanghai.

This article, written by Geoff Dyer, was published in the Financial Times of Wednesday June 14, 2006.

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Terror TV

On any given night of the week, between 10 and 15 million Arabic speakers in Europe, North Africa and the Middle East tune into Al-Manar (the Beacon), the television channel produced in Beirut by the terrorist group Hezbollah.

The station’s purpose, an Al-Manar official told researcher Avi Jorisch of the Washington Institute for Near East Policy, is to “help people on the way to committing what you call in the West a suicide mission.”

Watch some of its programming (revealing clips can be seen at www.stopterroristmedia.org), and you’ll understand how well-suited the medium is to the message.

That’s why it’s good news that last month the U.S Treasury Department named Al-Mamar as a Special Designated Global Terrorist entity. The designation prohibits financial transactions with Al-Manar and its parent company, the Lebanese Media Group, and enables the government to level penalties against U.S. financial institutions (or foreign institutions that transact business in the U.S.) doing business with them.

This is no trivial blow: Hezbollah has used Al-Manar for fund-raising by televising bank account numbers to which viewers can wire contributions for jihad. Al-Manar has also sold several million dollars worth of advertising to Western companies. This, too, is now at an end.

Today, only Saudi Arabia’s Arabsat and Egypt’s Nilesat carry the station, and both governments have rebuffed U.S. entreaties to take it off the air. That may change if either company turns out to be liable to designated-terror penalties. The Bush Administration might also consider a wider range of sanctions, such as barring Arabsat and Nilesat executives from entering the U.S. until Al-Manar is taken off the air.

Al-Manar is hardly the only Arab channel that routinely broadcast murderous anti-Semitic or anti-American shows. Nor is it likely that simply putting Al-Manar out of business will end terrorist media: The Iranian chapter of Hezbollah has announced its intention to set up a new channel, Khaiber TV. But by taking action against Al-Manar, the Bush Administration has set the right precedent against the worst offender. Let’s hope it can enforce it.

This article appeared in the Friday – Sunday, April 7 – 9, 2006 addition of The Wall Street Journal – Asia, in the Editorial & Opinion column.

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