- Email: [email protected]
BOOKS ON THE HORIZON
Business Horizons (2011) 54, 383—388
www.elsevier.com/locate/bushor
BOOKS ON THE HORIZON Mimi Dollinger
China and the Credit Crisis: The Emergence of a New World Order, by Giles Chance (Singapore: Wiley, 2010, 228 pp.) Two topics seem to dominate business book lists today: the Credit Crisis, and China. This lucid and enlightening volume explores both those subjects by explaining how that financial crisis shifted the locus of power away from the United States and the West towards China and Asia, by describing how China contributed to the crisis, and by outlining how China has been forever changed by it. This author should be in a position to know. The British-born Giles Chance was educated at Eton College and the University of St. Andrews, before earning an MBA from Dartmouth’s Tuck School. During a stint at the World Bank in Washington, DC, he met and married one of the first Mainland Chinese economists to work at the World Bank. Chance has worked in China since 1989, first at a consulting business he and his wife created to facilitate the sale of Western technology–—ranging from aircraft black boxes to auto parts machinery–—to firms in China, and since 2003 at a China-focused investment bank that Chance founded. He is also a visiting professor at the Guanghau Business School, Peking University. While Chance maintains that central banks, regulators, and politicians in the West are responsible for the credit crisis of 2008, he points out that the crisis was significantly worsened by two Chinese maneuvers or ‘shocks.’ First, after joining the World Trade Organization in 1999, China was able to export massive quantities of everyday items to the West at a fraction of the cost of competing items manufactured in the E-mail address: [email protected]
United States and Europe. This had the effect of improving the standard of living of many Western consumers, but also placed downward pressure on wages and sparked unemployment. Western economists responded to these domestic trends by suggesting economic stimuli, including low interest rates, which had the effect of making real estate a much more attractive investment than bank deposits or even stocks. The lure of real estate as an alternative investment forced property values to rise, and made speculative projects and methods more appealing. China’s second punch occurred when the country used profits from its increased exports to become the second-largest buyer of United States debt, after the U.S. government. This bountiful supply of Chinese capital lowered the yields of U.S. government bonds, along with corporate bonds, which in turn encouraged some investors to make reckless investments elsewhere in their search for higher yields. Had Western officials recognized how much China changed the U.S. and global economies, notes Chance, they probably would have responded differently. Chance also explains how the world financial crisis has transformed China. It made China’s leaders understand that they could no longer continue to rely upon exports to Western markets for future growth, and that they needed to develop markets in Asia, Africa, and Latin America, as well as try to stimulate domestic consumption. Encouraging the populace to spend, rather than save, has not been easy for the Chinese government; in a country that has been plagued by political uncertainty, where most citizens are not covered by pensions or retirement programs, and where a one-child policy limited the progeny that might support parents as they age, saving has a tremendous cultural appeal. China now also invests as much as 13% of its GNP in infrastructure
0007-6813/$ — see front matter # 2011 Kelley School of Business, Indiana University. All rights reserved. doi:10.1016/j.bushor.2011.04.001
384 improvements; construction seems to be going on everywhere. According to Chance, China welcomes the opportunity to become a global economic leader. Coupled with its need for external markets, China has a vast appetite for raw materials and natural resources that may be best secured by making alliances with developing countries. While tensions between China and Taiwan have decreased significantly, the PRC also values diplomatic alliances that favor the mainland country over its island rival. At one point, Chance shares a personal anecdote that demonstrates how China approaches diplomacy with developing countries. When Chance was serving as the director of an international aid organization in the Sudan in the late 1980s, the Chinese government was building a railway between Khartoum and the Red Sea. Chinese engineers working on the nearby project invited Chance and his colleagues to have dinner with them one night every week. Because the Chinese had their own chickens and goats, they were able to serve their guests meat, often hard to come by in the African desert. Because the Chinese irrigated their garden with wastewater, they also had a good supply of equally scarce fresh vegetables. After providing a delicious meal, the Chinese invited their guests to play basketball, which the hosts invariably lost with good humor. Chance reports that the cheerfulness and resourcefulness of the Chinese ‘ambassadors’ impressed both the Westerners and the Sudanese. In comparison, he notes that American aid is often delivered to developing countries contingent upon requirements regarding human rights, the environment, and other topics. China, based on its own human rights and environmental records, unsurprisingly attaches no such conditions to its aid. In the closing pages of this eminently readable book, Chance suggests that China doesn’t have its sights set on becoming the preeminent world leader, but instead seeks a partnership with the United States and the West that allows for cooperation of mutual interests while still giving China the freedom to associate with third-world countries not aligned with the West. ‘‘China’s goal is not world domination or to go to war with America,’’ this sagacious commentator advises, ‘‘but to develop China to its full extent.’’ Fault Lines: How Hidden Fractures Still Threaten the World Economy, by Raghuram G. Rajan (Princeton, NJ: Princeton University Press, 2010, 272 pp.) Sometimes a fresh metaphor can readily describe a difficult problem. The selection committee for the Financial Times and Goldman Sachs Business Book of
BOOKS ON THE HORIZON the Year seems to agree, because they picked this book as the most compelling and enjoyable title of 2010. The official award announcement called its author ‘‘one of the few economists to see the financial crisis coming,’’ and went on to describe Fault Lines as a ‘‘serious and sober book for a time when sobriety is a virtue.’’ Raghuram Rajan uses the concept of fault lines–— geological parlance for breaks in the earth’s surface where tectonic plates come into contact, or collide–— to characterize the schisms that have occurred recently in the global economy. Rapid shifting of active fault lines spurs most earthquakes, making the term an appropriate analogy for what has happened in the global economy during the past few years. Prior to 2008, Rajan–—a professor of Finance at the University of Chicago Booth School of Business, and chief economist for the International Monetary Fund (IMF) from 2003 to 2006–—was a somewhat controversial figure. In 2005, while he was at the IMF, Rajan presented a paper at the annual Jackson Hole Conference sponsored by the Federal Reserve Bank of Kansas City. While other conference papers celebrated the term of Alan Greenspan, the shortly-retiring Fed Chairman, Rajan’s work suggested that banks had become exposed to more risk, that incentives for bankers were misguided, and that deregulation and securitization had increased competition. Most bankers and economists in the audience interpreted the paper as an attack on Greenspan, and vehemently criticized Rajan’s remarks. History, of course, proved that Rajan was right, and he returned to the Jackson Hole Conference as a featured speaker in 2008. In this book, Rajan identifies three sets of fault lines. The first fault lines develop from domestic political stresses, primarily in the United States, like the pressure on the Federal Reserve to keep shortterm interest rates low in hopes of stimulating the economy and fighting unemployment, or the pressure on Congress to maintain the Homeowners Income Tax reduction. A second group of fault lines arise from the trade imbalances that result between countries stemming from prior patterns of growth. An example of this is China’s excessive reliance on the export of manufactured goods to the West. The third and final group of fault lines occurs when the financial systems of one country, or group of countries, come into contact with the wholly-different financial systems of other parts of the world; for example, when a country with large foreign capital reserves like China invests those reserves in the public or private debt of a country like the United States or the United Kingdom. After thoroughly discussing examples of each of these fault lines in the first half of his book, Rajan goes on to outline a host of recommended changes.
BOOKS ON THE HORIZON As he notes, the ‘‘real issue confronting us. . .is how to harness the benefits from financial development while limiting its instability.’’ Overall, he cautions against government intervention or overregulation, but instead suggests that ‘‘our goal should be to make decision makers internalize the full consequences of their decisions, rather than prevent them from making decisions altogether.’’ Many of his solutions focus on increasing transparency. He warns that his solutions will not be easy, but makes a good case for demonstrating that they are necessary. Rajan’s suggested financial reforms include: reducing incentive and price distortions, ending government subsidies and bailouts of financial institutions, enacting cycle-proof regulation, restructuring incentives and bonus payouts for financial managers and requiring more financial service expertise from their board members, instituting increased interest rates for increased risk, reducing government intervention, and keeping institutions on their toes via increased public disclosure. He notes that we should boost government financial health through a moderate combination of tax hikes and expenditure cuts to pay down government debt, and phase out deposit insurance. He also recommends that, moving forward, the government recruit financial officials from places other than Wall Street. One of Rajan’s keys to enacting financial reform entails addressing inequalities in compensation, in the United States and globally, by improving access to ‘human capital opportunities’–—meaning education. Other keys include improving access to healthcare and reducing healthcare costs, partly by funding outcomes instead of treatments and encouraging U.S. citizens to save more. Like many economists, Rajan foresees a period of slow growth ahead for the United States. As a veteran of the IMF, he also calls on multilateral institutions like the International Monetary Fund and the World Bank to expand their efforts petitioning for financial change, and to address an audience beyond top world leaders. But the author ends his book on a positive note, expressing faith that both governments and markets can find their appropriate roles in today’s global economy, and trusting that technological progress and economic reforms will help countries harness ‘‘the power of global markets and finance while obtaining economic freedom.’’ Left Behind: Latin America and the False Promise of Populism, by Sebastian Edwards (Chicago: University of Chicago Press, 2010, 296 pp.) Latin America–—the 22 countries that stretch from Mexico to Chile–—is North America’s closest neighbor, and the only continent with a common land
385 border. But according to this author, Latin America is also a ‘forgotten continent’ for most North Americans; unfortunate, because this book makes it clear that the future of Latin America has important implications for both North America and the World. Sebastian Edwards is a Chilean-born economist who earned his M.A. and Ph.D. from the University of Chicago, and who has published more than 200 scientific articles and 9 books. He is currently the Henry Ford II Professor of International Economics at the Anderson Graduate School of Management, UCLA. In this book, he presents an extremely lucid review of Latin America’s recent political and economic history, and some very insightful predictions about its future. As Edwards observes, ‘‘for decades Latin America has been known for its economic and political travails and a long history of authoritarian politicians and tyrants, successive coups d’e ´tat, galloping inflation, financial crises, entrenched poverty, and unequal distribution of income.’’ He argues throughout this book that their challenge now is to overcome the inertia and weak institutional structure that has plagued Latin American countries in recent years, and to ‘‘adopt new institutions that encourage efficiency improvements, investment in machinery and equipment, and a quality educational system that will allow the region to move toward prosperity and improved social conditions.’’ Specifically, Edwards writes that South American economies are among the most distorted, regulated, and protectionist economies in the world. Taken as a whole, South American countries are comparatively weaker in protection of property rights, the enforceability of contracts, the rule of law, and the degree of independence of judiciary. The result is that it’s difficult to start or operate a business in Latin America, and foreign multinationals are reluctant to invest there. Moreover, an ineffective system of governmental checks and balances means that South American politicians like Venezuela’s Hugo Cha ´vez operate ‘above institutions,’ and that lower-ranking officials are unable to prevent populist executives from implementing irresponsible policies. Latin America has a colorful history of charismatic populist leaders who had or have ‘‘a fiery rhetoric that centers on the causes and solutions to [their country’s social] inequality,’’ and who like to point the finger of blame at ‘‘corporations, financial capital, the business sector, and foreign companies.’’ Many of these populists replaced meaningful economic reform with shortcuts like pegging their currency to the U.S. dollar at artificially high levels, or privatizing public utilities without instituting
386 regulation. According to Edwards, these populist policies end up producing inflation or hyperinflation, higher unemployment, and lower wages instead of defeating the poverty, hunger, and social inequality they promised to combat. There are, of course, a few countries that bucked this trend. The brightest star is Chile. Since returning to democratic rule in 1990, Edwards notes that Chile has adopted a market orientation that has produced the highest economic growth in Latin America, virtually eliminated inflation, significantly reduced poverty, and helped establish a growing middle class. According to the World Bank, the number of Chileans living in poverty has dropped from 24% in 1989 to 5% in 2003. On the opposite end of the spectrum, under Hugo Cha ´vez, Venezuela has experienced increasingly rapid inflation and dire food shortages. Cha ´vez has produced the economic growth he promised, but only thanks to oil price increases since 2000; still, Venezuela’s 3.5% growth during the period spanning 1999-2007 was below the growth rate of its three non-oil producing neighbors: Chile, Costa Rica, and Peru. Edwards contrasts the presidency of Hugo Cha ´vez with that of Luiz Ina ´cio Lula da Silva, the recentlyretired president of Brazil. Lula, as he is popularly known, made control of inflation one of the cornerstones of his presidency; this caused consumer credit to soar, and gave even poor Brazilians access to appliances, automobiles, and–—most importantly–— home mortgages. Lula focused on eradicating hunger by extending the Bolsa Familia program started by his predecessor, which provides cash transfers to poor families through the use of debit cards, distributes those funds directly to the mother or adult female in the family, and requires that all children in the family be enrolled in school and not miss more than 2 days of classes each month. The World Bank says this program ‘‘reaches a significant portion of Brazilian society that has never [before] benefited from social programs.’’ Edwards claims the difference between Lula and Cha ´vez is that Lula realized the fall of the Berlin Wall meant leftist politicians had to change; that Brazil experienced political order and modest economic growth in the 1990s and 2000s while Venezuela experienced demonstrations, riots, and a bad economy during the same period; and that Brazil has a strong institutional government system of checks and balances while Venezuela does not. Moving forward, Edwards sees Latin American countries falling into one of three groups. He predicts that a small faction–—including Chile, Colombia, Peru, and Costa Rica–—will continue to focus on an ‘‘innovative, productivity-based path to
BOOKS ON THE HORIZON development and prosperity.’’ He thinks that Brazil and Mexico have the potential to join this group if they don’t let themselves become mired in what he identifies as the second group: countries that don’t have the courage or political ability to take the steps necessary to transition to a higher level of economic growth. Argentina is a member of this group, as it is not making sufficient investments in machinery and equipment, or educational systems. The last group of countries represents those that continue to cling to populism, including Venezuela, Ecuador, Bolivia, and Nicaragua. According to Edwards, membership in this group is merely a function of time; every populist regime has eventually been defeated. The production and distribution of illicit drugs is a specter that looms over this discussion of Latin America. Anyone can see what drugs have done to Mexico, a country Edwards describes as a nation that was once ‘‘on the verge of entering the first world.’’ Edwards notes that thanks to the trafficking of drugs, ‘‘a vicious circle evolves, in which a culture of crime and corruption impedes economic progress, and economic failure feeds into crime and lawlessness.’’ The solution, he suggests, lies not only in Latin America, but also in the United States and Europe because they are the destinations for those drugs. The impact of drug trafficking is just one of the reasons why Latin America matters to North Americans. Sluggish economies in Latin American countries dramatically increase the number of illegal immigrants who are willing to scale fences or do whatever it takes to move to the United States or Europe. Unstable economies and political regimes make it harder for multinational companies, including those based in the United States, to do business in Latin America. Political turmoil and increased friction often translates into less support from our historic allies at the United Nations and other international venues. But Edwards’ excellent book also makes it clear that there is a fifth, often unvoiced reason why Latin America should matter to North Americans: many Latin American countries are struggling to fight hunger and poverty, and increased interest from the United States could be the first step toward making that happen. A Full Cup: Sir Thomas Lipton’s Extraordinary Life and His Quest for the America’s Cup, by Michael D’Antonio (New York: Riverhead Books, 2010, 368 pp.) There is no shortage of modern entrepreneurs who aggressively pursue self-promotion for the benefit of their global businesses: Donald Trump, Richard Branson, and Larry Ellison may be among the best
BOOKS ON THE HORIZON examples. But media manipulation by celebrity businessmen didn’t begin in the 20th century. In fact, the first master of mass communications–— including daily newspapers, the telegraph, photography, and even radio–—was a 19th century Scottish entrepreneur best remembered today as a purveyor of tea. Thomas Lipton’s parents were residents of Northern Ireland who immigrated to Scotland in 1847. Thomas was born there in 1848, during a cholera epidemic. Lipton’s father worked in a box factory until he opened a tiny basement grocery store to sell eggs, butter, and ham to his neighbors. As a child, Lipton delighted in building model boats out of wood scraps and string. He sailed his boats in the pond of a local Glasgow park, and even organized a group of boys he called the Crown Street Yacht Club. This love of boats, along with his familiarity with the grocery business, would play a big role in Lipton’s future life. Lipton dropped out of school at the age of 15 and got a job working on a real boat, serving as a cabin boy on a ferry running between Scotland and Ireland. He stayed in the job long enough to earn what he needed for passage to the United States. Lipton landed in New York City but couldn’t find a job there, so he worked as a farmhand in a series of southern states, performing tasks previously done by slaves before the Civil War. When he returned to New York in 1869, he was able to secure a job as a clerk in the food department of a big department store. According to legend, while working there, Lipton learned a phrase that guided him for the rest of his life: ‘‘The man who on his trade relies, must either bust or advertise.’’ In 1871, Lipton returned to Glasgow and opened his own grocery store in location close to a big factory. Lipton’s Market showcased all the retailing principles its owner had learned in America: a fresh and gleaming store, better lit than most groceries of the time, with an ample supply of foodstuffs featuring reliable quality and low prices, staffed by a proprietor dressed in a spotless white apron and a friendly smile. Lipton paid cash for his store fixtures and his inventory, and demanded cash for the food that he sold. From the beginning, Lipton pursued what this author calls ‘‘a strategy of nearly constant promotion and advertising.’’ As his chain of stores expanded throughout Scotland and into Ireland and England, Lipton delighted in big, showy events that brought both customers and reporters to his locations. He is perhaps most famous for his enormous cheese wheels, weighing up to 3500 pounds and sometimes studded with gold coins, which he rolled through the streets to his stores and then sliced for
387 customers. Lipton is also credited with popularizing the secular celebration of the Easter holiday, which was a smart move for a merchant whose stock featured eggs and ham. In the United States, Lipton is best known for selling tea. He became involved in the tea business just as he had previously vertically integrated his business to become a meat packer and cheese producer to supply his grocery stores. In the beginning, Lipton traveled to India to visit tea plantations, but then centered his business in Ceylon (now known as Sri Lanka) where he planted tea on former coffee plantations that had been decimated by a fungus that did not affect tea plants. The successful grocer brought his nowrecognizable Lipton hallmarks to his new business: a product with reliable quality, produced in a sanitary setting, with the same uniform crisp, tangy taste and bright orange colors tea drinkers know today, at a price well below the competition. Lipton’s yellow tea boxes featured a beautiful Sinhalese woman dressed in jewels, and assured shoppers that the crop was hand-picked from Lipton’s ‘tea gardens.’ Upon marketing this product in the United States and elsewhere, Lipton Tea became one of the first global brands. Business success and generous philanthropy gave Lipton access to a new social set, including the future King Edward VII of England. His wealthy new companions, coupled with his now-numerous trips to the United States, inspired Lipton to become involved in the America’s Cup yacht races. Between 1899 and 1929, Lipton sponsored five different yachts named Shamrock, which each traveled to New York to compete against American yachts. Despite spending tens of millions of dollars on each attempt, Lipton never won; in fact, his boats only managed to win two heats in a series of five races. However, the American public, and media on both sides of the Atlantic, loved the ‘‘gallant man who cheerfully accepted defeat after spending huge amounts of money on his racers,’’ and they lavished ‘‘more loving attention [on him] than [on] the men who had won.’’ In 1930, American humorist Will Rogers asked readers of his syndicated newspaper column to contribute to a fund to make Lipton a loving cup trophy ‘‘bigger than the one he would have got if he had won.’’ Thousands of people responded, including Franklin D. Roosevelt, who was then Governor of the state of New York. Miners in Utah donated 50 pounds of silver. When the cup was presented to Lipton, he lost his composure–—for the first reported time in his life–—and was unable to read the speech he had prepared. Lipton took his cup back to England, where he died in 1931.
388 Author Michael D’Antonio was one of a team of reporters who won a Pulitzer Prize when he worked at Newsday, and he has since written a number of books on subjects including Milton Hershey, baseball team owner Walter O’Malley, and the PGA tour. He notes that Lipton’s celebrity was an important part of his success, writing: ‘‘When you bought his wares you bought a bit of his story, and that included escapades with famous friends, adventures around the globe, and fabulously expensive and gallant
BOOKS ON THE HORIZON campaigns for the most coveted trophy in the world.’’ The public loved Lipton’s rags-to-riches story (which he never seemed to tire of recounting), and admired him as a symbol of ‘‘their own belief in a world that rewarded talent, effort, and fair play.’’ This book devotes almost as many pages to Lipton the modern sportsman as it does to Lipton the spirited entrepreneur, and is sure to entertain readers–—and tea drinkers–—no matter which Lipton persona they prefer.
www.elsevier.com/locate/bushor
BOOKS ON THE HORIZON Mimi Dollinger
China and the Credit Crisis: The Emergence of a New World Order, by Giles Chance (Singapore: Wiley, 2010, 228 pp.) Two topics seem to dominate business book lists today: the Credit Crisis, and China. This lucid and enlightening volume explores both those subjects by explaining how that financial crisis shifted the locus of power away from the United States and the West towards China and Asia, by describing how China contributed to the crisis, and by outlining how China has been forever changed by it. This author should be in a position to know. The British-born Giles Chance was educated at Eton College and the University of St. Andrews, before earning an MBA from Dartmouth’s Tuck School. During a stint at the World Bank in Washington, DC, he met and married one of the first Mainland Chinese economists to work at the World Bank. Chance has worked in China since 1989, first at a consulting business he and his wife created to facilitate the sale of Western technology–—ranging from aircraft black boxes to auto parts machinery–—to firms in China, and since 2003 at a China-focused investment bank that Chance founded. He is also a visiting professor at the Guanghau Business School, Peking University. While Chance maintains that central banks, regulators, and politicians in the West are responsible for the credit crisis of 2008, he points out that the crisis was significantly worsened by two Chinese maneuvers or ‘shocks.’ First, after joining the World Trade Organization in 1999, China was able to export massive quantities of everyday items to the West at a fraction of the cost of competing items manufactured in the E-mail address: [email protected]
United States and Europe. This had the effect of improving the standard of living of many Western consumers, but also placed downward pressure on wages and sparked unemployment. Western economists responded to these domestic trends by suggesting economic stimuli, including low interest rates, which had the effect of making real estate a much more attractive investment than bank deposits or even stocks. The lure of real estate as an alternative investment forced property values to rise, and made speculative projects and methods more appealing. China’s second punch occurred when the country used profits from its increased exports to become the second-largest buyer of United States debt, after the U.S. government. This bountiful supply of Chinese capital lowered the yields of U.S. government bonds, along with corporate bonds, which in turn encouraged some investors to make reckless investments elsewhere in their search for higher yields. Had Western officials recognized how much China changed the U.S. and global economies, notes Chance, they probably would have responded differently. Chance also explains how the world financial crisis has transformed China. It made China’s leaders understand that they could no longer continue to rely upon exports to Western markets for future growth, and that they needed to develop markets in Asia, Africa, and Latin America, as well as try to stimulate domestic consumption. Encouraging the populace to spend, rather than save, has not been easy for the Chinese government; in a country that has been plagued by political uncertainty, where most citizens are not covered by pensions or retirement programs, and where a one-child policy limited the progeny that might support parents as they age, saving has a tremendous cultural appeal. China now also invests as much as 13% of its GNP in infrastructure
0007-6813/$ — see front matter # 2011 Kelley School of Business, Indiana University. All rights reserved. doi:10.1016/j.bushor.2011.04.001
384 improvements; construction seems to be going on everywhere. According to Chance, China welcomes the opportunity to become a global economic leader. Coupled with its need for external markets, China has a vast appetite for raw materials and natural resources that may be best secured by making alliances with developing countries. While tensions between China and Taiwan have decreased significantly, the PRC also values diplomatic alliances that favor the mainland country over its island rival. At one point, Chance shares a personal anecdote that demonstrates how China approaches diplomacy with developing countries. When Chance was serving as the director of an international aid organization in the Sudan in the late 1980s, the Chinese government was building a railway between Khartoum and the Red Sea. Chinese engineers working on the nearby project invited Chance and his colleagues to have dinner with them one night every week. Because the Chinese had their own chickens and goats, they were able to serve their guests meat, often hard to come by in the African desert. Because the Chinese irrigated their garden with wastewater, they also had a good supply of equally scarce fresh vegetables. After providing a delicious meal, the Chinese invited their guests to play basketball, which the hosts invariably lost with good humor. Chance reports that the cheerfulness and resourcefulness of the Chinese ‘ambassadors’ impressed both the Westerners and the Sudanese. In comparison, he notes that American aid is often delivered to developing countries contingent upon requirements regarding human rights, the environment, and other topics. China, based on its own human rights and environmental records, unsurprisingly attaches no such conditions to its aid. In the closing pages of this eminently readable book, Chance suggests that China doesn’t have its sights set on becoming the preeminent world leader, but instead seeks a partnership with the United States and the West that allows for cooperation of mutual interests while still giving China the freedom to associate with third-world countries not aligned with the West. ‘‘China’s goal is not world domination or to go to war with America,’’ this sagacious commentator advises, ‘‘but to develop China to its full extent.’’ Fault Lines: How Hidden Fractures Still Threaten the World Economy, by Raghuram G. Rajan (Princeton, NJ: Princeton University Press, 2010, 272 pp.) Sometimes a fresh metaphor can readily describe a difficult problem. The selection committee for the Financial Times and Goldman Sachs Business Book of
BOOKS ON THE HORIZON the Year seems to agree, because they picked this book as the most compelling and enjoyable title of 2010. The official award announcement called its author ‘‘one of the few economists to see the financial crisis coming,’’ and went on to describe Fault Lines as a ‘‘serious and sober book for a time when sobriety is a virtue.’’ Raghuram Rajan uses the concept of fault lines–— geological parlance for breaks in the earth’s surface where tectonic plates come into contact, or collide–— to characterize the schisms that have occurred recently in the global economy. Rapid shifting of active fault lines spurs most earthquakes, making the term an appropriate analogy for what has happened in the global economy during the past few years. Prior to 2008, Rajan–—a professor of Finance at the University of Chicago Booth School of Business, and chief economist for the International Monetary Fund (IMF) from 2003 to 2006–—was a somewhat controversial figure. In 2005, while he was at the IMF, Rajan presented a paper at the annual Jackson Hole Conference sponsored by the Federal Reserve Bank of Kansas City. While other conference papers celebrated the term of Alan Greenspan, the shortly-retiring Fed Chairman, Rajan’s work suggested that banks had become exposed to more risk, that incentives for bankers were misguided, and that deregulation and securitization had increased competition. Most bankers and economists in the audience interpreted the paper as an attack on Greenspan, and vehemently criticized Rajan’s remarks. History, of course, proved that Rajan was right, and he returned to the Jackson Hole Conference as a featured speaker in 2008. In this book, Rajan identifies three sets of fault lines. The first fault lines develop from domestic political stresses, primarily in the United States, like the pressure on the Federal Reserve to keep shortterm interest rates low in hopes of stimulating the economy and fighting unemployment, or the pressure on Congress to maintain the Homeowners Income Tax reduction. A second group of fault lines arise from the trade imbalances that result between countries stemming from prior patterns of growth. An example of this is China’s excessive reliance on the export of manufactured goods to the West. The third and final group of fault lines occurs when the financial systems of one country, or group of countries, come into contact with the wholly-different financial systems of other parts of the world; for example, when a country with large foreign capital reserves like China invests those reserves in the public or private debt of a country like the United States or the United Kingdom. After thoroughly discussing examples of each of these fault lines in the first half of his book, Rajan goes on to outline a host of recommended changes.
BOOKS ON THE HORIZON As he notes, the ‘‘real issue confronting us. . .is how to harness the benefits from financial development while limiting its instability.’’ Overall, he cautions against government intervention or overregulation, but instead suggests that ‘‘our goal should be to make decision makers internalize the full consequences of their decisions, rather than prevent them from making decisions altogether.’’ Many of his solutions focus on increasing transparency. He warns that his solutions will not be easy, but makes a good case for demonstrating that they are necessary. Rajan’s suggested financial reforms include: reducing incentive and price distortions, ending government subsidies and bailouts of financial institutions, enacting cycle-proof regulation, restructuring incentives and bonus payouts for financial managers and requiring more financial service expertise from their board members, instituting increased interest rates for increased risk, reducing government intervention, and keeping institutions on their toes via increased public disclosure. He notes that we should boost government financial health through a moderate combination of tax hikes and expenditure cuts to pay down government debt, and phase out deposit insurance. He also recommends that, moving forward, the government recruit financial officials from places other than Wall Street. One of Rajan’s keys to enacting financial reform entails addressing inequalities in compensation, in the United States and globally, by improving access to ‘human capital opportunities’–—meaning education. Other keys include improving access to healthcare and reducing healthcare costs, partly by funding outcomes instead of treatments and encouraging U.S. citizens to save more. Like many economists, Rajan foresees a period of slow growth ahead for the United States. As a veteran of the IMF, he also calls on multilateral institutions like the International Monetary Fund and the World Bank to expand their efforts petitioning for financial change, and to address an audience beyond top world leaders. But the author ends his book on a positive note, expressing faith that both governments and markets can find their appropriate roles in today’s global economy, and trusting that technological progress and economic reforms will help countries harness ‘‘the power of global markets and finance while obtaining economic freedom.’’ Left Behind: Latin America and the False Promise of Populism, by Sebastian Edwards (Chicago: University of Chicago Press, 2010, 296 pp.) Latin America–—the 22 countries that stretch from Mexico to Chile–—is North America’s closest neighbor, and the only continent with a common land
385 border. But according to this author, Latin America is also a ‘forgotten continent’ for most North Americans; unfortunate, because this book makes it clear that the future of Latin America has important implications for both North America and the World. Sebastian Edwards is a Chilean-born economist who earned his M.A. and Ph.D. from the University of Chicago, and who has published more than 200 scientific articles and 9 books. He is currently the Henry Ford II Professor of International Economics at the Anderson Graduate School of Management, UCLA. In this book, he presents an extremely lucid review of Latin America’s recent political and economic history, and some very insightful predictions about its future. As Edwards observes, ‘‘for decades Latin America has been known for its economic and political travails and a long history of authoritarian politicians and tyrants, successive coups d’e ´tat, galloping inflation, financial crises, entrenched poverty, and unequal distribution of income.’’ He argues throughout this book that their challenge now is to overcome the inertia and weak institutional structure that has plagued Latin American countries in recent years, and to ‘‘adopt new institutions that encourage efficiency improvements, investment in machinery and equipment, and a quality educational system that will allow the region to move toward prosperity and improved social conditions.’’ Specifically, Edwards writes that South American economies are among the most distorted, regulated, and protectionist economies in the world. Taken as a whole, South American countries are comparatively weaker in protection of property rights, the enforceability of contracts, the rule of law, and the degree of independence of judiciary. The result is that it’s difficult to start or operate a business in Latin America, and foreign multinationals are reluctant to invest there. Moreover, an ineffective system of governmental checks and balances means that South American politicians like Venezuela’s Hugo Cha ´vez operate ‘above institutions,’ and that lower-ranking officials are unable to prevent populist executives from implementing irresponsible policies. Latin America has a colorful history of charismatic populist leaders who had or have ‘‘a fiery rhetoric that centers on the causes and solutions to [their country’s social] inequality,’’ and who like to point the finger of blame at ‘‘corporations, financial capital, the business sector, and foreign companies.’’ Many of these populists replaced meaningful economic reform with shortcuts like pegging their currency to the U.S. dollar at artificially high levels, or privatizing public utilities without instituting
386 regulation. According to Edwards, these populist policies end up producing inflation or hyperinflation, higher unemployment, and lower wages instead of defeating the poverty, hunger, and social inequality they promised to combat. There are, of course, a few countries that bucked this trend. The brightest star is Chile. Since returning to democratic rule in 1990, Edwards notes that Chile has adopted a market orientation that has produced the highest economic growth in Latin America, virtually eliminated inflation, significantly reduced poverty, and helped establish a growing middle class. According to the World Bank, the number of Chileans living in poverty has dropped from 24% in 1989 to 5% in 2003. On the opposite end of the spectrum, under Hugo Cha ´vez, Venezuela has experienced increasingly rapid inflation and dire food shortages. Cha ´vez has produced the economic growth he promised, but only thanks to oil price increases since 2000; still, Venezuela’s 3.5% growth during the period spanning 1999-2007 was below the growth rate of its three non-oil producing neighbors: Chile, Costa Rica, and Peru. Edwards contrasts the presidency of Hugo Cha ´vez with that of Luiz Ina ´cio Lula da Silva, the recentlyretired president of Brazil. Lula, as he is popularly known, made control of inflation one of the cornerstones of his presidency; this caused consumer credit to soar, and gave even poor Brazilians access to appliances, automobiles, and–—most importantly–— home mortgages. Lula focused on eradicating hunger by extending the Bolsa Familia program started by his predecessor, which provides cash transfers to poor families through the use of debit cards, distributes those funds directly to the mother or adult female in the family, and requires that all children in the family be enrolled in school and not miss more than 2 days of classes each month. The World Bank says this program ‘‘reaches a significant portion of Brazilian society that has never [before] benefited from social programs.’’ Edwards claims the difference between Lula and Cha ´vez is that Lula realized the fall of the Berlin Wall meant leftist politicians had to change; that Brazil experienced political order and modest economic growth in the 1990s and 2000s while Venezuela experienced demonstrations, riots, and a bad economy during the same period; and that Brazil has a strong institutional government system of checks and balances while Venezuela does not. Moving forward, Edwards sees Latin American countries falling into one of three groups. He predicts that a small faction–—including Chile, Colombia, Peru, and Costa Rica–—will continue to focus on an ‘‘innovative, productivity-based path to
BOOKS ON THE HORIZON development and prosperity.’’ He thinks that Brazil and Mexico have the potential to join this group if they don’t let themselves become mired in what he identifies as the second group: countries that don’t have the courage or political ability to take the steps necessary to transition to a higher level of economic growth. Argentina is a member of this group, as it is not making sufficient investments in machinery and equipment, or educational systems. The last group of countries represents those that continue to cling to populism, including Venezuela, Ecuador, Bolivia, and Nicaragua. According to Edwards, membership in this group is merely a function of time; every populist regime has eventually been defeated. The production and distribution of illicit drugs is a specter that looms over this discussion of Latin America. Anyone can see what drugs have done to Mexico, a country Edwards describes as a nation that was once ‘‘on the verge of entering the first world.’’ Edwards notes that thanks to the trafficking of drugs, ‘‘a vicious circle evolves, in which a culture of crime and corruption impedes economic progress, and economic failure feeds into crime and lawlessness.’’ The solution, he suggests, lies not only in Latin America, but also in the United States and Europe because they are the destinations for those drugs. The impact of drug trafficking is just one of the reasons why Latin America matters to North Americans. Sluggish economies in Latin American countries dramatically increase the number of illegal immigrants who are willing to scale fences or do whatever it takes to move to the United States or Europe. Unstable economies and political regimes make it harder for multinational companies, including those based in the United States, to do business in Latin America. Political turmoil and increased friction often translates into less support from our historic allies at the United Nations and other international venues. But Edwards’ excellent book also makes it clear that there is a fifth, often unvoiced reason why Latin America should matter to North Americans: many Latin American countries are struggling to fight hunger and poverty, and increased interest from the United States could be the first step toward making that happen. A Full Cup: Sir Thomas Lipton’s Extraordinary Life and His Quest for the America’s Cup, by Michael D’Antonio (New York: Riverhead Books, 2010, 368 pp.) There is no shortage of modern entrepreneurs who aggressively pursue self-promotion for the benefit of their global businesses: Donald Trump, Richard Branson, and Larry Ellison may be among the best
BOOKS ON THE HORIZON examples. But media manipulation by celebrity businessmen didn’t begin in the 20th century. In fact, the first master of mass communications–— including daily newspapers, the telegraph, photography, and even radio–—was a 19th century Scottish entrepreneur best remembered today as a purveyor of tea. Thomas Lipton’s parents were residents of Northern Ireland who immigrated to Scotland in 1847. Thomas was born there in 1848, during a cholera epidemic. Lipton’s father worked in a box factory until he opened a tiny basement grocery store to sell eggs, butter, and ham to his neighbors. As a child, Lipton delighted in building model boats out of wood scraps and string. He sailed his boats in the pond of a local Glasgow park, and even organized a group of boys he called the Crown Street Yacht Club. This love of boats, along with his familiarity with the grocery business, would play a big role in Lipton’s future life. Lipton dropped out of school at the age of 15 and got a job working on a real boat, serving as a cabin boy on a ferry running between Scotland and Ireland. He stayed in the job long enough to earn what he needed for passage to the United States. Lipton landed in New York City but couldn’t find a job there, so he worked as a farmhand in a series of southern states, performing tasks previously done by slaves before the Civil War. When he returned to New York in 1869, he was able to secure a job as a clerk in the food department of a big department store. According to legend, while working there, Lipton learned a phrase that guided him for the rest of his life: ‘‘The man who on his trade relies, must either bust or advertise.’’ In 1871, Lipton returned to Glasgow and opened his own grocery store in location close to a big factory. Lipton’s Market showcased all the retailing principles its owner had learned in America: a fresh and gleaming store, better lit than most groceries of the time, with an ample supply of foodstuffs featuring reliable quality and low prices, staffed by a proprietor dressed in a spotless white apron and a friendly smile. Lipton paid cash for his store fixtures and his inventory, and demanded cash for the food that he sold. From the beginning, Lipton pursued what this author calls ‘‘a strategy of nearly constant promotion and advertising.’’ As his chain of stores expanded throughout Scotland and into Ireland and England, Lipton delighted in big, showy events that brought both customers and reporters to his locations. He is perhaps most famous for his enormous cheese wheels, weighing up to 3500 pounds and sometimes studded with gold coins, which he rolled through the streets to his stores and then sliced for
387 customers. Lipton is also credited with popularizing the secular celebration of the Easter holiday, which was a smart move for a merchant whose stock featured eggs and ham. In the United States, Lipton is best known for selling tea. He became involved in the tea business just as he had previously vertically integrated his business to become a meat packer and cheese producer to supply his grocery stores. In the beginning, Lipton traveled to India to visit tea plantations, but then centered his business in Ceylon (now known as Sri Lanka) where he planted tea on former coffee plantations that had been decimated by a fungus that did not affect tea plants. The successful grocer brought his nowrecognizable Lipton hallmarks to his new business: a product with reliable quality, produced in a sanitary setting, with the same uniform crisp, tangy taste and bright orange colors tea drinkers know today, at a price well below the competition. Lipton’s yellow tea boxes featured a beautiful Sinhalese woman dressed in jewels, and assured shoppers that the crop was hand-picked from Lipton’s ‘tea gardens.’ Upon marketing this product in the United States and elsewhere, Lipton Tea became one of the first global brands. Business success and generous philanthropy gave Lipton access to a new social set, including the future King Edward VII of England. His wealthy new companions, coupled with his now-numerous trips to the United States, inspired Lipton to become involved in the America’s Cup yacht races. Between 1899 and 1929, Lipton sponsored five different yachts named Shamrock, which each traveled to New York to compete against American yachts. Despite spending tens of millions of dollars on each attempt, Lipton never won; in fact, his boats only managed to win two heats in a series of five races. However, the American public, and media on both sides of the Atlantic, loved the ‘‘gallant man who cheerfully accepted defeat after spending huge amounts of money on his racers,’’ and they lavished ‘‘more loving attention [on him] than [on] the men who had won.’’ In 1930, American humorist Will Rogers asked readers of his syndicated newspaper column to contribute to a fund to make Lipton a loving cup trophy ‘‘bigger than the one he would have got if he had won.’’ Thousands of people responded, including Franklin D. Roosevelt, who was then Governor of the state of New York. Miners in Utah donated 50 pounds of silver. When the cup was presented to Lipton, he lost his composure–—for the first reported time in his life–—and was unable to read the speech he had prepared. Lipton took his cup back to England, where he died in 1931.
388 Author Michael D’Antonio was one of a team of reporters who won a Pulitzer Prize when he worked at Newsday, and he has since written a number of books on subjects including Milton Hershey, baseball team owner Walter O’Malley, and the PGA tour. He notes that Lipton’s celebrity was an important part of his success, writing: ‘‘When you bought his wares you bought a bit of his story, and that included escapades with famous friends, adventures around the globe, and fabulously expensive and gallant
BOOKS ON THE HORIZON campaigns for the most coveted trophy in the world.’’ The public loved Lipton’s rags-to-riches story (which he never seemed to tire of recounting), and admired him as a symbol of ‘‘their own belief in a world that rewarded talent, effort, and fair play.’’ This book devotes almost as many pages to Lipton the modern sportsman as it does to Lipton the spirited entrepreneur, and is sure to entertain readers–—and tea drinkers–—no matter which Lipton persona they prefer.