Need for new economic growth model

The economists have betrayed us by perpetuating economic progress theories that claim increasing consumption is the way to prosperity. Yes – we do have classic examples of countries like US where quality of life drastically improved with increase in consumption. But this economic model is not sustainable infinitely for number of reasons:

• You cannot increase consumption beyond a point.
• Over consumption puts strain on natural resources, which is evident from the spiraling price rise in every resource as seen recently.
• This growth model cannot be cloned or copied in other countries as that has the risk of consumption malaise to spread.

I think time is ripe to look for some alternative to consumption fueled economic development. As we are stretching the world’s natural resources to the brink of breakdown and still slumping into recession, we need to think of some alternative levers to fuel the economic growth.

World at the brink of crisis - III

A few weeks ago US president Bush took a snide at Indian middle class for consuming too much food causing food scarcity across the world. Though this comment in isolation can be misconstrued to be in bad taste, his full speech does present a stark truth that is in front of the world today in terms of food crisis. Like water, there can be no life without food and if this basic human need is not fulfilled, it can lead to deep social and political unrest. This is evident from the food riots that broke out in Haiti recently and the PM Jacques Édouard Alexis was forced to resign. The Haitian experience has been playing out around the world - food protests and riots have erupted in more than 30 countries, bringing unrest in places as diverse as Bolivia, Burma, Cameroon, Egypt, Indonesia, Malaysia, Mauritania, Mexico, Morocco, Pakistan and Senegal. The unrest can spread to other parts of the world if root causes of food scarcity are left unaddressed as food prices are spiraling up in almost all the countries. Sample this - purchase cost for rice in Bangkok was $ 460 per metric ton on March 3, 08. Five weeks later, it rose to $ 780. On an average, the food prices worldwide have gone up by 40% in 1^st qtr of 2008.

One may wonder as to what is the cause of this sudden breakdown? It’s a result of decades of mismanagement and abundance of food in most of the developed and developing world has kept the malice hidden for long. Now the hunger monster is out of the closet and we need to fight it to survive. This is a combination of following independent factors:

• Per hectare yield of almost all food grains has been going down in most of the all food grains has been going down in most of the biggest cultivation areas.
• The area under cultivation has been shrinking in most of the developing world, thanks to mindless expansion of cities turning green fields into concrete jungles.
• Water scarcity in a lot of places forcing people to abandon cultivation and move to other more reliable and profitable occupations.
• Unmindful wastage of food in most of the developed world (for example, the US wastes almost 25% of food every year.)
• The rise of middle class in most populous countries in Asia like India and China, which allowed people to move up the food value chain and result is the rise in demand for varied diet (especially meat) putting pressure on supply side.
• Antiquated trade restrictions and protectionism from supplier countries causing hoarding of food in some countries while starving others.
• High oil prices heightened the costs of fertilizers, food transport, and industrial agriculture increasing input costs for food production.
• Increasing use of biofuels in developed countries, which causes significant amounts of food grains like corn to be diverted to fuel conversion. Also, significant portions of cultivable land are being used for producing biofuel crops causing food grain cultivation area to shrink.

Among the many negative consequences of the recent explosion in food prices is that more than 40 countries have taken steps to discourage grain exports or to stop them altogether. For hard-pressed governments in the developing world, this is politically tempting and, indeed, understandable approach - one's own hungry citizens come first. But it is fatally shortsighted. Over time, the curtailment in trade simply encourages hoarding and discourages production. The result - shrinking supplies and higher prices.

What can be done? A lot of small things:

• Free up trade – It’s not that there is not enough in the world for all the people to eat, just that there are way too many restrictions on free movement of food stock and the distribution of food is uneven. If the world forums like UN can work towards removing trade barriers, a lot of current issues can be resolved.

• Reduce subsidies – Subsidies hamper natural price discovery, reduce incentives to create efficiencies, raise artificial trade barriers by creating price differentials and give rise to regional imbalances. Subsidies for compensating farmers who lost their crops due to natural calamities are fine as they are not perennial but direct subsidies as a mechanism to keep the prices down for a very long period of time for everyone can be detrimental to the financial and social health of the countries.

• Encourage eco-friendly cultivation methods – So that reproductive power of mother earth can be restored.

• Increase areas under cultivation, esp. in land rich countries like US, Canada and Australia – These are some of the countries that have almost 10% fertile area not under cultivation. This should be used as a hedge against crop production going down due to natural reasons in other areas.

• Make agricultural trade more rewarding so as to incentivise people to stick to it or adopt it – Cultivation as a profession should be made more rewarding, especially for marginal farmers so that there is good incentive for them to continue in this profession and if this calls for providing true value for their produce (and resultant price rise), so be it. Also, a social security must be in place to protect marginal farmers at the time of crisis (crop failure.)

• Stop food wastage – US alone wastes 25% of the food, which can fill the empty stomachs of a few African countries. And same might be the case with a lot of other rich countries. As humans, if we all can resolve not to waste the food, this single action may go a long way in softening food demand and stabilizing prices.

• Go vegetarian at least few days a week! Well, 1 kg beef requires over 10kg grain equivalent to produce and it’s the same case with other eatable livestock.

World at the brink of crisis - II

After centuries of water mismanagement, we are at a point when the nectar of life is either not available or contaminated to the degree of being unusable. Water is a renewable resource but human and industrial contamination has reduced even mightiest of clean water carrying rivers to a trickle. The fact that only 2% of all the available water is suitable for human consumption makes it a very scarce resource that needs to be used with an utmost caution. We all have been wasting water since time immemorial as if there is an endless reservoir of it and this uncontrolled wastage of water has now put us in a position when we are thinking if water will last longer or oil? In India, the biggest of the rivers have started shrinking – Delhi is no longer on the banks of Yamuna, mighty Brahmaputra does not wreak havoc in Assam anymore, the sacred Ganges became a trickle, Allahabad is not ‘sangam’ anymore and Kaveri just flows in the year when it rains! Civilizations have been built on the banks of rivers across the world and perished when rivers changed course or dried up. Though the economies have lesser dependence on agriculture today than a few hundreds of years ago but people still eat and eating more than ever before – more on this later – the takeaway is that drying rivers will become harbinger of disaster unmatched to anything known to mankind. The doomsayers have been warning that 3rd world war will be for control of water and will be the last one. The process of decay that has been going on for centuries has picked up a visible acceleration in last 7-10 years and the rate of acceleration is going up faster every year.

But the good news is that all is not lost yet and the changes are not irreversible as off today and we can still control our destiny. If we can stop the Wall Streetization of the world, that is, focusing on short term gains at the cost of future (ours as well as our children’s) and stop the unbridled exploitation of natural resources, we can still turn the tide around. But for this, we have to start thinking about ‘One Earth’ and rise above the issues of individual countries and work with a common agenda to save the planet. Let's not wait for government's of the world to wake up and do anything to save the planet, what it will need a people's movement to get the ball rolling. The environment can be the common cause binding diverse people of the world together and a lasting movement can born out of this dire need.

World at the brink of crisis - I

I recently came across a great video on environmental crisis that’s staring us all at the start of new century (visit www.storyofstuff.com). Our uncontrolled plundering of finite and non-repleneshable natural resources has created a multitude of crisis for mankind (and in turn opportunities!) Fuel crisis (fast depleting sources, demand at the highest level ever and the result is crude at $135 per barrel & growing), water crisis (70% of earth is water and there is crisis of drinking water in half of the world), food crisis (food prices are up 40% in last one year across the world, so much as to attract attention of war addicted US president.) All these are man made problems & we collectively have to find solutions for them. In next few posts, I will try to deconstruct some of these problems (or scratch the surface, to be precise.)

I was reading ‘Straight from the Gut’ by Jack Welch recently and in one of the chapters he talks about how GE in late 70’s was trying to come up with strategies to counter crude price rise to $30 a barrel! Feels like a dream, isn’t it? The great economies of the world have been built on uncontrolled plundering this precious non- repleneshable natural resource. Any forever sustainable growth cannot be dependent on a depleting resource and we have to find alternative energy sources that are viable, cost effective and longer lasting than oil. The world politics has been greatly influenced by control over this growth driver but those days of chasing oil may be over sooner than we think as there will be no oil left to chase. And we have to speed up our efforts to tame other sources of energy that are as or more efficient and mobile than oil. But this time it may not be a war for domination but for survival in which everyone has equal stake and may benefit equally if such source is globally available (solar energy, for example.)

Back to top

US Slowdown/Recession and its Repercussions

Is it a slowdown or a recession? Is it a slowdown leaping towards recession? Is it a recession deepening to become a depression? Is it just a natural cycle of slowing down economic activity? Well, there are way too many opinions and economic pundits worldwide are divided in their degree of pessimism. No matter what it turns out to be, it’s definitely an opportunity for doomsayers to earn some money. Since 2000, US slowdown never went out of fashion anyways and there have been noises all through the decade announcing it’s round the corner. Irrespective of the brouhaha, there were three troublesome spots on the horizon:

• Large and growing current account deficit (hovering well above 5% of GDP.) This simply means that the country is borrowing from abroad to finance the gap between imports and exports of goods and services. Further, the quality of this deficit has been worsening - the money borrowed was increasingly being used to finance imports for consumption vs. being deployed for growth.




• The real estate bubble. The real estate prices in some parts of the country spiraled up without any good rhyme or reason. There was not enough economic activity impetus to justify very high prices. This led to unnatural property valuations (and subsequently, large mortgage loans, which became ‘sub-prime’ when property prices crashed.)




• Spurt in sub-prime loans. Financial institutions distributed loans like never before to anyone and everyone creating a largely credit driven spending. This created a mess when people started defaulting on these loans. Some investigation needs to be done to find out why banks went on an overdrive to give a loan.

So a correction to rebalance the economic equation was overdue. However, whether it will result in a full blown recession or depression is yet to be seen. Also, since economies of world are so tightly integrated now that any change in one parts creates immediate ripples across the world, this may act either as a shock absorber or as a single ignition point of to detonate the large part of world economy. Earlier recessions had a regional flavor but this time that does not seems to be the case.

Another important point to note is that since US is a largely consumption driven economy, most of the slowdown is very negative sentiment driven. This phenomenon has troubled the economists no end and none of the fiscal or monetary measures taken by Fed chief Ben Bernanke or his predecessor Alan Greenspan have succeeded in stimulating higher consumption in US. The phenomena definitely created space for some Nobel laureates though but so far no one knows how to induce higher consumption by American people. Maybe consumption levels have saturated and can not go up any further. Economists need to find other levers to stimulate the American economy.

I sometime wonder if recession is really an economic phenomenon - it seems more econo-psychological - you talk more about a possible recession and it will arrive. That’s what seems to have happened this time - for over a year, everyone who is anyone in financial market has been talking about a possible recession in US and it seems to have arrived. The reason is simple - as US is a very consumption driven economy and if people stop, slow down or postpone spending, it creates a vicious negative feedback loop for economy (less spending >> high inventories >> price crash & output reduction >> layoffs >> defaults on loans >> strain on banking system >> less spending >> and the cycle continues!) If I am a consumer convinced by innumerable financial wizards that US is going into recession and people will loose their jobs, my basic instinct will be to cut down on spending and save every penny I can for that possible rainy day. And I have started a downward spiral - the less I spend, the more economic activity slows down, the more the doomsayers talk and I cut down on my spending even more. Gentlemen, you have created recession out of the blue!

But not everything is lost here - the economic indicators are inconclusive on whether the US is in a recession or not (indicators like unemployment claims, unsold inventory levels, quarterly corporate results, price stability, inflation, etc. are mostly a mix bag not showing any special favor.) Further, US has many structural features to make a recovery faster and there is no political paralysis to put spanner in the recovery engine.

Let’s all talk about recession being over and it will run away!

Back to top

Internet Industry Trends in Year 2008

The year 2007 went in a flash with not much to write about except iPod economy extending to iPhone, Facebook becoming darling of developers & speculators, sub-prime crisis and a failed summit in Bali to tackle almost irreversible climate changes. However, this should not desist me from thinking about what might happen in the New Year, and the optimist I am, here are some of the internet industry trends that I think will gain momentum in 2008.

• Ad $$ will start moving towards social networking as well

Social networking sites like www.facebook.com, www.orkut.com, www.myspace.com, etc have seen outrageous traffic jump in last couple of years but their business model has always been suspect. However, it will change this year and we will see them attracting a significant pie of online advertising dollars. Whether this will be additional money flowing in or money moving away from other destinations (traditional media, search advertising, other favorite online destinations, etc.) needs to be watched carefully.

• Ad Networks will gain momentum

Advertisers will take a harder look at the ROI from online advertising and the cost of placing these ads on various destinations and ad networks will establish themselves as a better alternative for running ad campaigns. The advertisers will continue looking for much better targeting and conversion.

• Web will become more ‘semantic’

Aren’t we all tired of just poking our friends or leaving scrapes on their wall? I think the web is a few steps away from becoming much more ‘semantic’ where it will be possible to do much more meaningful interaction than poking and it can make that leap of faith in this year. What kind of application or applications will do that and what will be the nature of that ‘meaningful’ interaction is not very clear to me yet but that inflection point seems to be in sight. And this trend is not limited to social networking only!

• Emerging markets will continue to attract attention

Footprint of internet economy will keep expanding in the emerging economies with more and more local services getting delivered or initiated on the internet. However, this growth will not be like the Internet’s growth in US as there are some inherent structural rigidities and limitations in most of the emerging economies. But a decent growth is plausible.

• Internet & traditional media convergence will gain momentum

Maybe someone will find a good and clean way to make money out of video on the Internet! The convergence of traditional media (TV, Newspapers, Radio, etc) and Internet will continue and Internet will carry more and more of traditional media content. The efforts will be on to find and define a ‘universal media’ but they may not see much result this year. But coming years will see it not only being defined but created as well – both for audience and advertisers.

• Mobile will overtake PC as choice of Internet endpoint

The small screen mobile will take over large screen PC as an endpoint of choice to access and interact with Internet. With phones becoming powerful and feature packed day by day and some of the biggest web applications like search and mail getting available easily on the mobile phone, it’s a natural phenomena waiting to happen.

However, serious business transactions will continue to be delivered from PC for some more time to go.

• New user growth rate will slow down in developed world across the board

The new user growth rate on all the popular destinations will go down across the board in the developed world as Internet penetration in those countries (esp. US) seems to have already peaked out.

• I will earn my first $ from this Blog

Well, the point is not about me really. The bigger point is that advertising $$ will start chasing focused audience that, by virtue of their online hyper activity, leaves a rich trail of data usable for behavioral targeting. And viral through referral advertising will gain momentum.

What’s in store for us in near future is not an easy question to answer and anyone else’s guess is as good as mine. I will watch these trends in the Internet Economy closely this year and may be some of my guesses will be termed as ‘predictions’ later!

Challenges for Internet in India

Low per capita availability of high speed net access is still the ground reality and the ready availability of [relatively] high speed internet is only a big city phenomenon in India so far. And in semi urban and rural India, which account for over 90% of the population, internet is either a novelty or an unknown world. What needs to be built is a positive feedback loop by connecting this large population to the internet so that their aspirations can get molded by the infection of knowledge and they can, in turn, drive the growth of internet as a medium of communication as well as a business. Internet is still seen as a luxury so far and not as an enabler to move up the social and economic value chain. Unless this notion is corrected, it will be hard to make internet access a commodity as it is in the west. The skeptics might say that first solve the problems of water, food and electricity availability in the country and then talk about internet availability but this argument is flawed as information and knowledge has emerged as the biggest enablers and if we can build this ‘soft’ infrastructure, there will be much larger number of brains and hands to solve the problems of basic infrastructure. In 60 years of independence, the successive so called governments in India have not been able to provide basic necessities to all the people and, given the quality of people in Indian politics, future governments will never be able to solve these problems (can we have genetically modified politicians please!) We have to empower the people to solve their own local problems and internet can be one of the mediums to do so. Of course, we have to address some of the structural rigidities to make it happen. Here are some basic thoughts on what tools and ideas can be useful to make it happen:

• Cellular networks have the promise to bridge the connectivity gap as India now has very good wireless network connectivity all across the country. The number of Indians accessing internet through their mobile phones is now over three times those using the PC to connect to the Web. India has 9.27 million internet subscribers as against 31.30 million users who access internet through their mobile handsets—GSM or CDMA—to read and reply to mails, download content and for online transactions, according to latest figures released by telecom regulator Trai. Trai’s figures for the quarter ended March 2007 imply that one out of every five mobile users (there are 165.1 million subscribers to mobile services) in the country connects to the internet through the handset. Technologies like Wi-Fi, Bluetooth and WiMAX can be very effective to make this happen. One other possibility is power line internet
  

• Power is another issue as it's not regularly available and can be the biggest impediment in the way of better internet penetration. Low power/battery operated computers hold a much greater promise to bridge this gap.

• The cost of owning and maintaining an end user computing devices (aka computer) is still very high for low income group. One novel concept in this direction that I get to know recently is the idea of NetPC from Novatium, which is a low cost terminal placed at user’s place and connected to central computer to provide internet access. The idea is to provide an internet enabled terminal to users in less than $100 with very low per month subscription cost (less than $5 per month.)
  

• For emerging economies, it might be a good idea to think of applications that do not take connectivity for granted (applications that do not stop working if connectivity is not available and sync the information as and when the connection is available - taking a cue from Adam Bosworth’s old blog) This can be a powerful enabler, especially for educational applications.
  

• Wired networks in India were not built for success - they started cracking as soon as usage starts going up exponentially and required large additional infrastructural investments. If this can be calibrated better going forward, it will be a boon for the country and will give rise to other usages to achieve optimum utilization of network bandwidth.

I am sure some of these ideas can be generalized to some extent for most of the emerging markets and, to use an old cliché, third world countries.