Last weekend’s Financial Times contained two interesting articles that highlighted the possibilities and dangers of advancing globalization. Occasionally, as Tom Barnett and I discuss our vision of the future, we are accused of being naive optimists. I agree that we are optimists. We believe strongly in the human spirit and prefer to focus on positive outcomes rather than becoming Cassandras of doom. The latter approach apparently sells books and makes good made-for-TV movies, but in the long run pessimism does little to advance the quality of life for those living in poverty. While admitting to being optimistic, I reject being labeled naive. I wouldn’t be very successful in business (and certainly couldn’t attract investors) if I were naive about the realities of life. The reason that I continually stress standards, rule sets, and best practices is that optimism can only be sustained by performance.
The first Financial Times article (“IPOs and soaring share prices tempt China investors” by Geoff Dyer) discusses the resumption of initial public offerings in China and the resulting rise in share prices. Sounds eerily similar to the 1990s tech bubble experienced in the US doesn’t it? Investors are hoping that this is the beginning of sustained growth, not a bubble created by what Alan Greenspan called “irrational exuberance.” One indication that investors hopes may be correct is that they are emerging from a slump that began in 2001 (the Chinese stock market lost half its value during this period). Having been burned once, investors are likely to be more cautious this time around. There are lessons, however, that the Chinese should learn from the US tech crash. Regulations need to be enacted and enforced. Disclosure needs to be accurate and transparent. And sound business plans, supported by good business practices, need to be in place. IPOs were halted in China last year so that the government could introduce reforms. But those reforms are not enough. The article ends on this ominous note:
Foreign investment banks fear the rebound in investor confidence will reduce pressure on regulators to reform the market.
Enterra Solutions, of course, is keenly interested in regulatary compliance. One of the reasons I established Enterra was to help companies be compliant in a more efficient and effective way. The Chinese undoubtedly fear that over-regulation could dampen economic growth, but without regulations, corruption will cause the economy to collapse because it was built upon a rotting foundation. I’m optimistic about China’s future, IF it continues to enact proper regulations.
The second Financial Times article (“Middle-class house boom transforms ramshackle Soweto” by John Reed) discusses how the rise of a black middle-class in South Africa has transformed neighborhoods once “associated with burning tyres and protests” into “Johannesburg’s hottest property market.” This is a great example of how a virtuous circle of development can be started that lifts people out of poverty. Create a middle-class, create consumers — create consumers, create jobs — create jobs, create more middle-class, etc. The article reports that “there are seven buyers for every property put on the market in Johannesburg’s black townships.” The ratio is even higher in Cape Town. The upward spiral took off when Soweto finally started attracting commercial investment, not just government assistance. The article notes:
Soweto has seen two large shopping malls open in the past 18 months, and third one is due to open later this year. … “We’ve seen a real explosion of retail in Soweto,” says Lael Bethlehem, chief executive of the Johannesburg Development Agency. “Investors have come and seen and said, ‘There’s money here.'”
That’s the optimistic picture. The realist caveat is that high demand generates higher prices, causes speculation, and can generate a real estate bubble like US has witnessed over the past decade. In a rush to make loans, banks can assume enormous bad debt, which, when those loans default, can flood the market with foreclosed homes. The collapse of the housing market can cause the upward spiral to collapse. In fact, the article reports, South Africa went through a similar cycle a decade ago.
This time around banks have tailored their lending practices criteria to serve customers with a chequered credit history, or none at all. … [Among the standards banks now use are] history of repayment of small consumer loan[s].
Other groups have demonstrated that given access to resources the poor can be trustworthy borrowers. One such group, Women’s World Banking, helps local boards establish self-sufficient micro-financing industries (MFI). It uses a standards-based approach to improve chances of success. As the WWB web site notes, it has helped create performance standards for MFI practitioners and for the donor community. WWB has helped develop the agreed architecture on how to shape financial systems that work for the majority. This architecture was developed in global policy forums in 1995 and 2000, which resulted in the publication of a report and scorecard on how to build a successful MFI system. Although this standards-based approach works for either men or women, WWB has focused on women because in less developed countries women have much less access to capital than men.
Over and over again, standards-based approaches have demonstrated that optimism and realism go hand-in-hand. I’m further convinced that where there are standards there is a way to generate and automate rule sets, which can then be packaged and used elsewhere to jumpstart development and economic prosperity.