The Coming Energy Wars - Newsweek

Summary:
Rana Foroohar on what the effect will be of $200 oil on the global economy. No industry will be unaffected. Long-term demand will continue to grow while supply threats aren't going to go away rightaway. $200 in 6 to 24 months (Goldman Sachs estimate) is to fast for economies to cope. China and India have kept inflation down with cheap goods, but will be exporters of inflation once energy subsidies are reduced or stopped: end of cheap goods. Shift toward regional trade (regionalism), even major reversal of globalization itself, due to rising transport costs. Increase in corporate failures, and a lot of M&A; emerging-market firms swooping up ailing Western firms on the cheap. Effects will be worse for poor people in developing economies. Number of oil states rising as prices climb, ill-equiped to cope with corruption that oil-wealth brings. Shift in balance of world power, conflicts increasing. (Published: 31/05/08)

Notes:

• $4/gallon oil has already made an impact on American lifestyle
  
• driving less, using mass transit more, buying fewer gas guzzlers, shopping less wantonly
• energy revolution
  
• however: more and bigger changes in store
• Asian developing countries: currently protected from spiking price of oil buy subsidies
• if oil continues to rise and Asian energy subsidy dam eventually breaks, energy revolution will spread
• $200/barrel oil would have enormous global consequences
• year ago, no one was talking about $200/barrel oil, now everyone in the market is
• oil prices climbed from $10 in 1999 to $95 without slowing the surging world economy
• in large part because markets believed spike was at core driven by rising demand
• particularly from China and Inda
• feeds growth
• there was concern over supply, but nothing like in 1970s
• not until recent months
• with futures reaching $135, consensus began shifting to a new, more gloomy view:
• long-term demand, led by China and Inda, will continue to grow
• supply threats aren't going to go away any time soon
  
• increasing conflict, falling investment, industry bottlenecks and downward estimates of big field reserves in major oil fields
• Goldman Sachs: $200 barrier could be hit within next 6 to 24 months
• way too fast for comfort
• even for those who welcome hight gas prices as a way to induce energy conservation and fight global warming
• already causing real pain for ordinary people, threatening global growth and reviving spectre of inflation
• price pressure now particularly acute in emerging markets like China and India
• China and India
• have dampened global inflation by exporting cheap goods and services
• now they threaten to become exporters of inflation
• particularly if energy price controls give way
• Americans now making up for their losses at the pump by flocking to Wal-Mart for cheap Chinese goods
• will be out of luck
• oil drives so much of the global economy it's almost difficult to fully imagine the world of $200 oil
• will force nations to greener much faster than now
• conserving energy and developing and adopting new non-fossil fuels
• but: none of this can happen full stop in 6 to 24 months
• some analysts: shift toward regional trade, even major reversal of globalization itself
• rising transport costs will make it too expensive to ship many of goods long distances
• major acceleration in transfer of wealth from oil consumers to producers would alter the world balance of power
• Morgan Stanley: at $200/barrel, the proven oil reserves of the 6 Gulf nations would rise in value to $95 trillion
• twice the size of public equity markets
• corrupting curse of oil wealth
• Michael L Ross (UCLA): percentage of the world's wars that take place in oil states is growing
• number of oil states rising (Cambodia, East Timor, ...) with more likely to follow as prices climb
• many of these newcomers are small and ill-equipped to cope with the corruption that often wastes the windfall
• no industry will be unaffected by $200 oil
• death of at least one of the Big Three in Detroit
• airlines vulnerable
• Jean-Cyril Spinetta (Air France-KLM, CEO): $200 oil would represent a far bigger shock than 9/11 or SARS (2003); it's more than a change, it's a revolution, a new industry in fact; lot of bankruptcies very rapidly in Europe, US and Asia; restructuring of networks, cutting routes, cutting capacities
• as food and energy go up, spending on everything else will go down
• big-box stores like Wal-Mart are already having record quarters while middle-market chains are suffering
• trends will hit Europe too
• the more Europeans spend on gas, the less they will spend on furniture, clothing and white goods; sales in all those categories are already down
• Richard Reid (Citibank): expect an increase in corporate failures, and a lot of M&A; might well see flush emerging-market firms (e.g. Tata) swooping up ailing Western firms on the cheap
• American automakers
• were moving slowly to smaller cars before the spike
• but: sales of SUVs and pickups are now falling so fast that they appear to have been caught flat-footed
• Philip Verleger: at $200, GM tanks; they just don't have time to fix their fleet
• Alan Mullaly (Ford CEO), 2 weeks ago: no longer expects a return to profitability in 2009; believes gas-price shift is permanent
• Nissan: unveiled a $115m new plant designed to build lithium-ion/fuel cells
• Richard Berner (Morgan Stanley): "If you think things won't be pleasant for industrial nations, think about developing economies, where people spend 50% of their income on food and fuel"
• concern that as higher oil prices force many Asian economies to reduce or even cut their generous fuel subsidies, growth will slow sharply, and there could be social unrest as the world's poorest become more desparate
• political ramifications of this (moving away from free-trade), combined with ever-rising cost of doing business as usual, could force a retrenchment from globalization
• Jeff Rubin (CIBC World Markets): "It's a harbinger of the reversal of globalization; at $200 a barrel, you'll see transport costs rise so much that they will effectively reverse the trade liberalization of the last 30 years"
• regionalism: world will realign itself regionally
• Japan may continue to ship in goods from China, but the US will increasingly import from Latin America
• same thing happened from 1973 to 1979
• regionalism won't stop at trade
• Sovereign Wealth Funds will continue to buy big chunks of Western banks and blue-chip companies
• possibility of worse conflicts
• Scott Nyquist (McKinsey): "As areas like the Mideast and Africa, Russia and Venezuela continue to rise, you're going to see increasing energy greed, aggressive behaviours and neocolonial actions on the part of various countries."
• Western ideas about civil society, the environment and women's rights could be displaced with new sets of values
• lack of any spare capacity in the global pipeline makes it difficult to solve such situation with sanctions
• taking any oil off the market would at this point merely ignite an already explosive situation
• megatrends fueling the global supply shortage tend to feed on one another
• higher prices fuel the growing tendency of oil states like Russia and Venezuela to re-nationalize fields
• often leads to lower output due to the inefficiency of most state oil companies
• publicly traded companies have to go where they can
• fields in peaceful places tapped out
• hunt for new oil has moved into conflict zones (Nigeria, Angola) and geologically extreme territory (Siberia, deep sea)
• policy makers need to
• stop grilling big oil companies about why prices are so high
• they now control only a small percent of known reserves, out of their hands
• support smarter green initiatives
• wind and solar credits rather than ethanol boondoggles
• stop pandering to voters with subsidies and gas-tax cuts
• ignores the new reality: oil is a finite resource, more people want more of it, and the profligacy with which we've used it is going to change
  

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Global CEO Study, 2008 - IBM

Summary:
IBM study on thoughts and views on the future of business (the "Enterprise of the Future"). Concludes that the Enterprise of the Future hungry for change, innovative beyond customer imagination, globally integrated, disruptive by nature and genuine, not just generous. CEOs are most concerned about the impact of three external forces: market factors, people skills and technology. Organisation should act like VCs to establishe processes and structures that promote innovation and transformation. Informed and collaborative customers are viewed as chance to differentiate. Views of globalization are shifting from labor arbitrage and riding the wave of economic growth in China and India to global integration. Majority sees M&A as part of their global integration strategies. Business model innovation more important because it is increasingly difficult to differentiate based on products and services alone. CSR increasingly important, impacting on both top and bottom lines. (Published: 30/05/08)

Notes:

Change

• In our 2006 Global CEO Study, we were surprised when two-thirds of the CEO s said their organizations were facing substantial or very substantial change over the next three years. But in 2008, even more CEOs — eight out of ten — are expecting such change.
  
• CEOs find themselves — as one CEO from Canada put it — in a “white-water world.”
• CEOs are most concerned about the impact of three external forces: market factors, people skills and technology.
  
• Market factors: Customer expectation shifts, competitive threats and industry consolidation continue to weigh on their minds.
  
• “ The market is so dynamic. Visibility is very low.”
  
• People skills: CEOs are also searching for industry, technical and particularly management skills to support geographic expansion and replace aging baby boomers who are exiting the workforce.
  
• They rated insufficient talent as the top barrier to global integration — even higher than regulatory and budgetary hurdles.
  
• “ We’re making acquisitions for the people, not the assets.”
  
• Technology: CEOs also described how technological advances are reshaping value chains, influencing products and services and changing how their companies interact with customers.
• “ Technology is driving huge changes in our industry landscape.”
• Change management
• In a 2008 study of change management practices, 75 percent of the companies surveyed said their approach to change management was usually informal, ad hoc or improvised.
• In contrast, the Enterprise of the Future defines and manages change as robust programs, structured around and driven to deliver defined business outcomes.
  
• It tracks the business benefits of change and change management effectiveness.
  
• Strong change management is a core competence at all levels and nurtured as a professional discipline, not an “art.”
  
• Operating like a venture capitalist
• The Enterprise of the Future establishes processes and structures that promote innovation and transformation.
  
• It actively manages a portfolio of investments, protecting and supporting the fledgling ideas, while systematically weeding out the weak ones.
• "Do you have robust processes in place to incubate new product, service and business model concepts — and redirect investment when required?"

Innovation

• investment in new markets
• In both developed and rapidly developing economies, rising prosperity is creating growth opportunities for many companies
  
• In rapidly developing economies worldwide, the middle class is growing and becoming progressively more prosperous. Greater disposable income brings new demand for more sophisticated, higher-value products and services.
• e.g. “In India, 400 million consumers will demand new housing in the next 20 years — that’s more real estate than the United States has built since the Second World War.”
• In established economies, significant wealth accumulation among aging baby boomers and a corresponding increase in young, affluent inheritors are boosting prosperity in what some might otherwise consider flat-growth markets.
• but: tapping into these new geographic and demographic segments will require a deeper understanding of these customers and a more tailored approach.
• informed and collaborative customers: chance to differentiate
• rising expectations from increasingly informed and collaborative customers
• in increasing numbers of industries, customers are swapping passive roles for much deeper involvement.
  
• “Consumers” are becoming “producers,” creating entertainment and advertising content for their peers and even generating their own electricity.
• serving the informed and collaborative customer as an opportunity to distinguish their organizations
  
• a chance to justify premium positioning and price.
• understanding timing and network effects
• Exceeding expectations: there is a fine line between “beyond” and “too far.”
  
• The Enterprise of the Future understands the need to introduce innovation that the market is ready to accept and works to perfect its market-entry
  timing.
  
• It exploits the network effects of early adoption to take a commanding early lead.
• Market insights are critical to the Enterprise of the Future.
  
• It recognizes the value of the information it collects through its many channels and actively mines it for insights.
  
• It uses emerging technologies to gain insights in new ways.
  
• e.g. virtual worlds
• It also puts systems in place that allow very fast feedback cycles.
  
• When customer preferences and demand start to shift, it knows before the competition.

Global integration

• Traditional views of globalization: labor arbitrage and riding the wave of economic growth in China and India
  
• replaced by a new focus: global integration
• i.e. new business designs that facilitate faster and more extensive collaboration on a worldwide scale and rapid reconfiguration when new opportunities appear
• more than half of CEOs plan to deeply change their organizations’ capabilities, knowledge and assets.
  
• New customer expectations are driving some of these shifts.
  
• “We need to move away from an operational focus to a client interface focus. This requires new skills and a new skill mix for the corporation.”
• found that outperformers are 20 percent more likely to partner extensively than underperformers
• reinforces what we discovered in our last CEO Study: extensive collaborators outperform their competitive peers
• Sixty-six percent of CEOs plan to use mergers and acquisitions (M&A) as part of their global integration strategies
• described M&A as a key way to rapidly expand global reach
  
• integrating new capabilities, knowledge and assets and gaining access to new customers.
• outperformers are 55 percent more likely to use M&A than underperformers
• challenging the preconception that M&A is a risky and often unsuccessful strategy.
• Prior research suggests that frequent acquirers often become extremely effective at M&A and can use it more successfully
• CEOs’ approaches to global integration and optimization are carefully tailored to their businesses
• e.g. global brands and products must have local relevance
• Social networking and realtime collaboration tools improve communication and close the distance between people in different locations.
  
• Good ideas develop and spread quicker, and problems are solved faster.

Disruptiveness

• outperformers are pursuing more disruptive business model innovations than their underperforming peers
• CEOs told us they are changing their business models because it is increasingly difficult to differentiate based on products and services alone
• also stressed another reason: they simply have more options now
• e.g. With the Internet, businesses can now find niche markets for rare, surplus or highly specialized goods
• a virtual “garage sale,” as it’s often called.
• Business processes, as well as some products and services, are becoming more virtual.
  
• New delivery channels and electronic methods of distribution are overturning traditional industry conventions.
  
• these advances are not just changing the way individual companies work: they’re creating entirely new industries.
• Types of business model innovation:
• Enterprise model innovation
  
• Specializing and reconfiguring the business to deliver greater value by rethinking what is done in-house and through collaboration
  
• as Cisco has done by focusing on brand and design while relying on partners for manufacturing, distribution and more.
• Revenue model innovation
  
• Changing how revenue is generated through new value propositions and new pricing models
  
• as Gillette did by switching the primary revenue stream from razors to blades
• Industry model innovation
  
• Redefining an existing industry, moving into a new industry, or creating an entirely new one
  
• think music industry and the Apple iPod and iTunes
• Among CEOs making extensive changes to their business models, enterprise model innovation is the dominant choice
• “For us, enterprise model innovation is primarily about having the right business model to enter other markets and secure new capabilities.”
  
• main message heard from proponents of enterprise model innovation is that going solo is increasingly difficult.
  
• “We’re very vertically challenged,” one electronics CEO said when describing the difficulty of owning the entire value chain.
• “We have to collaborate to survive; there are fewer things that will be cost effective to do on our own. We will continue to do less inside the organization and more with partners and even competitors.”
• pursuing industry model innovation: tough to do
• pharmaceutical CEO:
  
• “Our industry has an ‘innovation paradox.’ We are constantly driving for innovation on the one hand, while being risk averse on the other. Pharma companies still hope for the ‘blockbuster party,’ and they’re trapped in that model. The company that breaks through this will be the winner, and others will follow.”
• outperformers are very interested in enterprise model innovation.
  
• But they are also planning 40 percent more industry model innovation than underperformers.
• the question is:
  
• Are these outperformers pursuing more industry model innovation because they have the clout to do so?
  
• Or are they outperformers because of their insight and inclination to continuously question industry norms?
  
• it’s actually both: a reinforcing cycle.
  
• Innovation successes can provide the financial means and industry position to attempt bolder moves, which, in turn, can improve business performance
• thinking like an outsider
• The Enterprise of the Future does blue-sky, green-field thinking.
  
• Its goal is to spark innovation by thinking about “starting over from scratch.”
  
• It finds ways to work with people and organizations that are not part of the industry status quo to develop new models.
• It challenges every assumption of its business model
  
• just as an outsider would
• drawing breakthrough ideas from other industries
• The Enterprise of the Future is a student of other industries because it realizes that game-changing plays spread like wildfire.
  
• It scours customer and technology trends that are transforming other sectors and segments of the market and considers how they could beapplied to its own industry and business model.
• experimenting creatively in the market, not just in the lab
• The Enterprise of the Future often pilots models in the marketplace, obtaining realtime feedback and making iterative adjustments.
  

Corporate Social Responsibility

• “I see corporate responsibility going through three phases. People start to consider issues like the environment because they are compelled to do so. Then they realize that it actually makes business sense. Eventually they move beyond compulsion and selfish motives to become passionate becauseit is the right thing to do.” (Vinod Mittal)
  
• customer expectations of corporate social responsibility (CSR) are increasing
• environment is one obvious touchstone:
  
• climate change has become an urgent call to action for citizens and companies around the world.
  
• has sensitized both citizens and corporations to the wide array of environmental and social issues that they can do something about.
• from child labor to recycling to product safety
• only three external forces have consistently ranked higher than CSR in consecutive surveys:
  
• socioeconomic factors, environmental issues and people skills
• but: all three are linked to CSR.
• With talent in short supply, employers’ CSR reputations are an important tool to attract and retain employees.
  
• Companies are also recognizing that they are being held mutually accountable, along with the public sector, for the socioeconomic well-being of theregions in which they operate.
• Regulatory compliance is not CEOs’ chief concern
• “Environmental legislation is less of a problem. It is reasonably easy to be ISO 14000 certified. It is much harder to face media and political pressure from socially active environmental NGOs.”
• CSR is impacting top and bottom lines
• “Our organization is responding aggressively to green issues in the marketplace, which have become the focus of several of our key customer segments. We are introducing newgreen-based insurance products into the market.”
• “Consumers will increasingly make choices based on the sources of the products they buy, even the ingredients and processes used in making these products.”

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Preserving the open economy at times of stress - FT.com

Summary:
Martin Wolf on benefits and perils for the West of rising global prosperity. Major disadvantage is competition for scarce resources. However, it is a trend that is unstoppable, and West needs to embrace it rather than oppose it. The question is: how much openness to trade and movement of capital and labour should there be? Large minority of people in US believe free-trade policies are not in their interest. US needs to shift provision of security from employers to the state: corporate welfare states are unsustainable in a dynamic and open economy. Solution according to Wolf is raise taxation of the rich so as to distribute the spoils of globalisation more evenly. Wolf does not agree with Summers' argument for international action against tax competition and increased international agreement on regulation. Globalisation being used as an excuse for low taxes. (Published: 20/05/08)

Notes:

• Larry Summers recent two columns on globalisation
• international economic policies of the US need to be coupled more closely to the interest of its works
• interests of citizens of high-income countries more important than those of others?
• on the contrary; morally compelling view that increases in incomes of the poor offset equivalent losses for the rich
• however: politics is national
• unless/until a global political community emerges, politics will respond to perceptions of national interest
• But to say deny that the rising prosperity of China, India etc may not be in the interests of today's high-income countries is equally absurd.
• spread of prosperity
  
• big advantages:
• wider distribution of innovation
• bigger opportunities for profitable exchange
• cfr. rise of US and benefits thereof brought to the UK
• greater political stability in previously impoverished countries
  
• big disadvantage:
• greater competition for scarce resources
• e.g. power: if country A has more, country B has less
• if commodity prices rise, the terms of trade (relative prices of exports and imports) of net importers will deteriorate
• countries have to sell more exports to obtain given imports
• US terms of trade have deteriorated by 1/8th as commodity prices have soared and the currency devalued
• has turned an 18% increase in real gross domestic product between Q4 2001 and Q4 2008 into a 16.4% increase in real national income
• Willem Buiter: nothing rational can be done to halt the diffusion of knowledge, skills, technology, management systems, etc.
  
• US launching an unprovoked blockade or even war against China and India?
• to mention such ideas is to reveal their strategic and moral bankruptcy
  
• halting flow of ideas?
• UK tried to halt spread of technology to the US in early 19th century and failed
• Chinese empire once made it a capital crime to export silkworms and failed
• protectionism against the emerging countries?
• might slow their growth but would not halt it
• would guarantee a breakdown in international relations that threatened hopes of a peaceful future
• what cannot be helped must be accepted!
• given the rise of the emerging world, should the developed world limit the globalisation of its own economies?
• so long as high-income countries depend on imports of commodities, trade will be essential
• self-sufficiency is a mirage
• Question is: how much openness to trade and movement of capital and labour should there be?
• well known that
  
• free trade is in the interest in the country adopting the policy, unless it has monopoly power
• the benefits and costs are likely to be unevenly distributed
• particularly likely for trade between rich and poor countries
• free movement of of capital and labour may also harm important interest groups within a country even if it raises aggregate income
• the freer movement becomes, the harder it may also be to impose taxes and regulations on those able to move
• Summers notes that it is hard for a democracy to proceed with policies that a large minority believes are against its interests
• if the fall-back position is not to be protectionism, more creative options must be chosen
• US: need to shift provision of security from employers to the state
• corporate welfare states are unsustainable in a dynamic and open economy
• but: means taxes will have to be raised
• Summers: argues for international action against harmful tax competition and greater international agreement on regulation
• may make sense in area of finance
• otherwise unpersuasive
• if Sweden's taxes can be 56% of GDP, it is not tax competition that keeps the US at just 34%
• mobility of capital and people is an excuse, not a justification for low US tax levels
• desperately need an honest debate about these issues
• debate would reach four conclusions:
1. whether or not citizens of high-income countries welcome it, the global spread of economic development is ineluctable
2. protection against imports is a costly and ineffective way of dealing with the consequences
3. parties of the centre-left should argue for redistributing the spoils of globalisation, not sacrificing them
4. a necessary condition is higher taxation of the winners
• chief obstacle there is political will
• globalisation is not a reason for low taxes, but an excuse; should be discarded
• Opening of the world economy is the West's greatest economic policy achievement
• would be tragedy if it were to turn its back on the world when the rest of humanity is at last turning towards it
  

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Quote of the Day

"It is impossible to defeat an ignorant man in argument." - William G. McAdoo

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The Chinese Brand of Democracy - The Globalist

Summary:
Chinese intellectuals question need for democracy in China. Demythologizing democracy and separating it from rule of law. Prosperity and growth not result of democracy, but of rule of law. West can enjoy both because of level of modernity and material wealth. Developing countries need to chose one. Choosing democracy first leads to chaos (e.g. Rwanda, Yugoslavia). Need to chose rule of law above democracy. (Published: 16/05/2008)

Notes:

• 1980s, 1990s: many scholars argued democracy was necessary prerequisite for wider political and economic progress in China
• seen by many as a precondition for growth
• democracy as a route to prosperity and political stability: instrumental view of democracy
  
• link has been increasingly questioned
• Pan Wei, Beijing University:
  
• elections will not fix any of China's most pressing problems
• eg. rise in protests, gap between rich and poor, near bankruptcy of rural economy, lack of domestic consumption, pervasive corruption of the political elite
• democracy would make things worse: the more electorates politicians want to reach, the more money they need; once elected, public officers to serve electors on one hand and money providers on other
• pressing issue is not who should run the government, but how should the government be run
  
• political reform should flow from social problems rather than universal or Western principles
• democracy conjures up three of the most painful images in the Chinese psyche:
• collapse of the former Soviet Union following Gorbachev's political liberalization
• the so-called "people's democracy" of China's own Cultural Revolution
• the risk of an independent Taiwan
• Westerners misunderstand their own political systems: assume our countries are stable and prosperous because of democracy
• we confuse the benefits we get from democracy with those that we get from the rule of law
• democracy and rule of law don't need to go together; in fact are in constant conflict with one another
• democracy is about giving power to the people, rule of law is about putting limits on that power
• democracy creates governments, rule of law regulates them
• democracy is about making laws, rule of law about enforcing them
• power of democracy lies with elected officials, power of rule of law lies with unelected people (civil servants, judges, auditors)
• democracy is about majority, rule of law about meritocracy
• West can enjoy both democracy and rule of law because of level of material wealth and modernity reached
• Developing countries do not have that luxury: have to choose one or the other
• eg Rwanda, Yugoslavia, Lebanon, Angola, ...: have chosen democracy without rule of law
  
• result: chaos; populist regimes exploited ethnic tensions to get hands on power
  
• premature introduction of democracy undermined rule of law and modernization
• forced leaders to pander to popular sentiment rather than making painful reforms for the long term
• Singapore, H2ong Kong: adopted rule of law without democracy
• result: economies have grown steadily, attracted foreign investment, wiped out corruption, developed strong national identities
• demythologizing of democracy and separating it from the rule of law
  
• vision: neutral civil service system strictly and impartially enforcing laws and proposing legislative bills, held in check by judges who would be guardians of the Chinese constitutions
• "a high-tech consultative dictatorship where there are no elections, but decisions are made by a responsive government, bound by law and in touch with its citizen's aspirations"
  

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A strategy to promote healthy globalisation - FT.com

Summary:
Second part of Larry Summers' on rising anti-free trade sentiment and strategies to avoid it. Increasingly succesful and integrated global economy at the expense of US workers? Difference between open and closed economy (reasoning similar to that of Gomory and Baumont). US must compete not retreat. Current emphasis on priority of global corporations. Need to focus on interests of working people, too. Need global co-operation in international tax arena and prevention of harmful de-regulation eroding labour rights. (Published: 14/05/2008)

Notes:

• Doubts that an increasingly successful, integrated global economy benefits US workers
• appears to be weakening link between success of a nation's workers and the success of both its trading partners and its companies
• success of other countries + greater global integration places more competitive pressure on an individual economy
• workers are likely disproportionally to bear the brunt of this pressure
• opposes the argument that workers and companies benefit due to expanding market for exports
• reasons US/EU/Japan workers enjoy higher wages:
• more highly skilled than most workers in developing world
• more productive because their effort is complemented by 'capital' (ie equipment, managerial expertise, infrastructure and capacity for innovation)
• closed versus open economy
  
• in closed economy, anything that promotes investment in productive capital necessarily raises workers wages
• corporations have huge stake in quality of national workforce and infrastructure
• in open economy, investments in innovation, brands, strong corporate culture, equipment, ... can be combined with labour from anywhere in the world
• workers no longer have stake in in productive investment by companies as it becomes easier for companies to combine their capital with lower priced labour overseas
• companies have less stake in quality of the workforce and infrastructure in their home country when they can produce anywhere
• business can use threat of relocating as lever to extract concessions regarding tax policy, regulations and specific subsidies
• cost of these concessions ultimately borne by labour
• public policy response of withdrawing from global economy or reducing pace of integration is untenable
• would generate resentment abroad on dangerous scale
• would hurt economy as other countries retaliate
• would make US less competitive as companies in rival countries continue to integrate their production lines with developing countries
• Bill Clinton: "the United States must compete not retreat"
• strategy to promote 'healthy globalisation'
  
• domestic component: must rely on strengthening efforts to reduce inequality and insecurity
• international component: must focus on interests of working people in all countries
• in addition to the current emphasis on the priority of global corporations
• US should take lead in promoting global co-operation in the international tax arena
• has been race to the bottom in taxation of corporate income as nations lower their rates to entice business to issue more debt and invest in their jurisdications
• problem of tax havens
• "might be inevitable that globalisation leads to increases in inequality, but shouldn't compromise the possibility of progressive taxation"
• international economic diplomacy should focus on prevention of harmful regulatory competition
• also currently race to the bottom, using mantra of needing to be "internationally competitive"
• eg cutting down on financial regulation
• reason why progressive in early part of 20th century sought to have the federal government take over many kinds of regulatory responsibility
• need something like that on a global scale, or global co-operation to raise standards
• labour standards argument has at times been invoked as a cover for protectionism; must be avoided
• but is appropriate that US policymakers seek to ensure that greater global integration does not become an excuse for eroding labour rights
• "To benefit the interest of US citizens and command broad political support, US international economic policy will need to focus on the issues in which the largest number of Americans have the greatest stake; although a decoupling of the interests of businesses and nations may be inevitable, a decoupling of international economic policies and the interests is not"
  

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Quote of the Day

"Some things have to be believed to be seen." - Ralph Hodgson

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Getting the right picture - Pittsburgh Tribune-Review

Summary:

Don Boudreaux on how some may see more imports from abroad and domestic job losses as a sign of trouble, and others see them as a boon, depending on one's perspective. Same facts, different interpretation. Compare with drawing of old woman/beautiful girl. One and the same picture, but depending ond your perspective, you see either the former or the latter. (Published: 14/05/2008)

Notes:

• Drawings that looks like two very different things depending upon how the viewer looks at it
• e.g. craggy face of an old woman suddenly looks like a beautiful woman standing in a sexy pose
• same picture. Same objective reality. Two wholly different sightings.
• Similar with economics:
• same set of facts, same objective reality, two (or more) very different stories depending upon the attitude and knowledge of the observer examining these facts
• more imports from abroad and the losses of specific domestic jobs
• sign of trouble for domestic economy to some
• boon to others: opportunity to get valuable goods and services at lower costs; scarce domestic labor released to produce outputs that would otherwise be too costly to obtain
• overwhelming objection to imports is that the domestic workers whom they displace are unlikely ever again to find employment at wages close to those that they once earned in their now-defunct jobs
• this objection rests on the presumption that these workers were overpaid in their former jobs
• every employer prefers to hire workers at wages as low as possible
• but due to competition between employers, wages are in reality close to the amount that a worker contributes to the employers' bottom line
• every employer willling to pay employee up to that amount
  
• no one to decline an opportunity to get $20 for e.g. $19.50
• as a result, wages in a competitive market economy generally reflect the hourly value of workers to their employers
• employers need workers no less than workers need employers
• skeptics of free trade complain about workers losing their jobs to imports
• craggy-old-lady version of the reality
• free-trade proponents believe that workers who lose jobs today generally have comparable opportunities in other industries
• beautiful-woman version of the same reality
• unlike with any of those static drawings where one perspective is as correct as the other, for the economy there is usually one perspective that is objectively most accurate
• this correct perspective is the one that encompasses not only what's happening today but what will likely happen in the future
• when freer trade eliminates some jobs, it releases labor and capital to produce things that previously were too costly to produce
• consumers eventually get not only the imports, but also the additional domestic production made possible by those imports
• domestic resources become more productively employed because competition shifts them from less-productive to more-productive enterprises and industries

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The oily truth about America’s foreign policy - FT.com

Summary:
Gideon Rachman editorial in the FT. American presidents and candidates have been pledging energy independence from Middle-Eastern oil since Nixon (first oil crisis). In reality dependence has increased. Competition for oil increasing. Biggest challenged posed by globalisation not outsourcing of jobs or influx of cheap goods, but globalisation of Western consumption patterns. If Chinese and Indians eventually drive and eat as Europeans and Americans, current oil and food crisis is just the beginning. New technology and change in lifestyle will be required. (published: 13/05/2008)


Notes:

• Iraq: largely war over oil, despite opposite claims
• has backfired; price of oil gone up, per barrel:
• 2003: $26; 2008: $126; 2008-end: $200 ?
  
• Calls for energy independence in US
• universal: McCain, Obama, Clinton, Bush, Nixon
• US foreign oil imports increasing, rather than decreasing
  
• 1973: 33%; 2008: 60%; 2020: 70%?
• money poored into production of biofuels
• has pushed up food prices
• no leading politician yet prepared to call for change in lifestyle to adapt to world of permanently higher energy prices
• Americans little power over OPEC
• plenty of customers for oil
• over 50% of oil exported to Asia
  
• Competition for oil supplies intensifying
• Chinese oil consumption doubled between 1994 and 2003
  
• will have doubled again by 2010.
• China's foray into Africa largely driven by its search for energy security
• IEA: China world's largest consumer of energy by 2010
• IEA: world will need 50% more energy than today by 2030
  
• At present about 10 cars in China for every 1,000 people;
  
• compare: 480 cars per 1,000 people in the US
• by 2015, China could be the world’s largest market for new cars
• Globalisation of Western consumption patterns is the challenge
• greater challenge than outsourcing of jobs or influx of cheap goods
• current inflation in oil and food prices just the start: Indians and Chinese will eventually drive and eat like Europeans and Americans
  
• Energy security now central to American and European foreign policy
• but also to that of main Asian powers
• no real foreign policy fix for problem
• Only solution is new technologies and change in lifestyle
  

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Why oil is so expensive - De Standaard (in Dutch)

Summary:
Three years ago, when oil reached $50, economist's were already saying that price was too high. Today, oil costs two-and-a-half times as much. An analysis of what has happened. Factors considered are: inflation, dollar exchange rate, institutional investors, supply and demand, OPEC, refining capacity, alternatives. (published: 10/05/2008)


Notes:

• inflation
• after correction for inflation, the price of oil only recently exceeded that of April 1980
• dollar
• oil is paid in dollars
• dollar has dropped 14% against the euro in last 12 months
• price of oil for non-American buyers not as high as for Americans
• institutional investors
• eg pension and insurance funds
• hedging themselves against inflation, declining US interest rates and falling US dollar by investing in commodities, including oil
• a strategy that has been successful in the last couple of decades
• drives up price of oil
• demand side
  
• industry has become far more energy efficient since oil crisis in the seventies
• has slowed down increase in price of oil for a long time
• no longer possible to reduce consumption at the same rate (already near maximum efficiency)
  
• new growth markets: eg China; huge increase in demand for oil
• against expectations, Americans still not changing oil consumption patterns
• political promises to lower tax on oil contributing to this
• supply side
  
• difference between supply and demand too small
  
• supply still greater than demand, but difference is becoming smaller
• difference now so small that least disruption is driving prices up rapidly
• most known oil reserves depleted or past maximum capacity
  
• no significant new discoveries
  
• despite oil firms trying hard to discover new reserves in order to keep total oil production constan
• new wells increasingly difficult to exploit
• eg. oil from desert: $10/barrel; oil from North Sea: $25/barrel (up from $15, 3 years ago)
• increased demand for oil platform and personnel also driving prices up
• OPEC
• Secretary-general of OPEC (Abdalla Salem El-Badri) thinks current level of production is high enough
• Iraq: trying to pump up production again, but plagued by attacks
• Iran: not a reliable producer in eyes of West; oil as political weapon
• Nigeria: 8th largest producer; supply has dropped by 564,000 barrels a day since February due to attacks on installations
  
• refining capacity
• one thing to dig up oil, another to refine it to petrol, heating oil, diesel, kerosine, etc.
• underinvestment in refining capacity in the US
• solution: oil refined in Europe, then shipped to US
• very expensive solution for Americans
• labour more expensive than in US
  
• exacerbated by very weak dollar
  
• alternatives
• no alternatives in the near future
  

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Battling Bad Bugs - Drug Discovery & Development

Summary:
Microbes are evolving resistance faster than the pharmaceutical industry can bring new products to market. Microbes have been persistently clever in evolving resistance to antibiotics soon after introduction. Emergence of "Bad Bugs, No Drugs" situation; high economic burden and will gradually worsen. Call to action from the infectious disease community (IDSA). A new type of product specialization is required (relying on rapid molecular diagnostic tests), but this runs counter to the blockbuster model of large pharmaceutical companies. Opportunity for smaller companies. US government under pressure to create incentives for the large pharmaceutical companies to remain in antibiotic discovery. Some incentives in the FDAAA act, but disincentives remain. (Published: 08/05/08)

Notes:

• early 1940s: streptomycin and penicillin
• treatment of staphylococcus, streptococcus and Mybacterium tuberculosis infections
• today: more thatn 130 antibiotic products available
• problem: despite/because of number of antibiotic products, microbes are getting upper hand
• evolving resistance faster than the pharmaceutical industry can bring new products to market
• number of patients infected with resistant microbes small
  
• but economic burden high
• number of resistant bugs expected to increase
  
• Infectious Disease Society of America (IDSA)
• documented the microbial infections that are especially troublesome in a "Bad Bugs, No Drugs" policy statement
• provided a call to action from the infectious disease community
• MRSA among the "Bad Bugs" that has received appropriate notoriety
• S. aureus
• normal skin flora
• becomes a problem when the skin is broken
• from abrasions, traumas, surgeries and placements of in-dwelling devices
• staphylococcal infections can quickly become deadly
• those infected rely on antibiotics to eliminate the infection
  
• MRSA infection has been health problem in hospitals for more than a decade
• more than 60% of US hospital-acquired S. aureus infections are now MRSA
• new MRSA strain has become prevalent in community-acquired infections
• total number of infections due to MRSA increased 119% between '99 and '05
• large economic cost
• estimated in the billions in the US
• due to longer hospital stays and increased expenses of treatment
• until very recently, antibiotic treatment for hospital-acquired MRSA limited to vancomycin
• first developed in US in 1958
• new antibiotic therapies approved for treatment of hospital-acquired MRSA include Zyvox (Pfizer), Cubicin (Cubist) and Synercid (King Pharamceuticals)
• resistance to these products already posing challenges
• microbes have been persistently clever in evolving resistance to antibiotics soon after introduction
• even vancomycin proved vulnerable
• initially purported to be "resistance-proof" because its target is a necessary component of th ebacterial cell wall, not an evolvable protein
• wide range of molecular mechanisms of resistance have emerged
  
• e.g. broad spectrum efflux pumps
• eliminate most antibiotics from the bacterial cell possessing these pumps
• e.g. expanded spectrum beta-lactamases (EBSLs)
• inactivate the newest generation of beta-lactam products
• these resistance mechanisms make the discovery of effective new antibiotics even more difficult
• create market opportunities for new products
• emergence of "specific spectrum" agents
• aimed at specific species and resistance targets
  
• e.g. Affinium Pharmaceuticals antibiotic in Phase 1: targets Stahpylococcus, including MRSA, but is relatively inactive against other bacterial species
  
• utiliy will rely on the recent emergence of new FDA approved molecular diagnostics for MRSA
  
• can assess the infectious agents in hours, rather than days
• e.g. BD GeneOhm StaphSR Assay
• this type of product specialization runs counter to the blockbuster model of large pharmaceutical companies
• maturation of the antibiotics market over the past decade has resulted in a large number of marketed antibiotics products
• each with relatively low annual sales revenues
• 2001: six antibiotics products had blockbuster status
• today: only Augmentin and the Levaquin/Floxin franchise have billion-dollar annual revenues
• recent introductions have failed to reach blockbuster status
  
• patents expirations, generic competition, and the withdrawal due to safety challenges or limited use have fragmented the market
• loss of profitability of antibiotics has caused the departure of many pharmaceutical companies from investing in the discovery of new antibiotic products
  
• smaller companies have seen opportunity and some generic companies have expanded into proprietary products
  
• Forest Laboratories invested significantly in new antibiotic products
• several large pharmaceutical companies spun out their antibiotic and development efforts into new companies, or licensed their later-stage products to biotechnology companies
• new entrants into antibiotic development face cash constraints that often limit the size and complexity of clinical trials
• US government
• has been under pressure to create incentives for the large pharmaceutical companies to remain in antibiotic discovery
• has largely been resisted
• however: Food and Drug Administration Amendment Act (FDAAA) of 2007
• includes creative incentives for the development of new treatments for tropical diseases, including tuberculosis, malaria and other specifically named diseases
  
• as well as "any other infectious disease for which there is no significant market in developed nations, and that disproportionally affects poor and marginalized populations, designated by the Secretary."
• priority review vouchers are awarded for the succesful approval of new products to treat these "tropical diseases"
• can be transferred or sold to the sponsor of any new drug application
• falls short of pharmaceutical industry's desire for patent extension
• but may have sufficient value to influence the discovery and development of new agents for treatment of these diseases
• additionally, FDAAA provides a mechanism in which new drugs for the treatment of antibiotic-resistant infections may qualify for Orphan Drug status
• incentives associated with Orphan Drugs, e.g. access to government funding of clinical trials
• disincentives remain
• IDSA: documented the uncertainty of antibiotic clinical trial designs and the lack of guidance documents for antibiotic development

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Going Green: A Wealth of Job Openings - FT.com

Summary:
Environment has become a strategic issue for oil and gas companies in recent years, not just PR. Looking for sustainability experts. Fast growth of the alternative energy sector (investment in 2007 up 60% over 2006) means shortages, not just components and equipment, but also human capital. Strain on the availability of senior managers with sector experience (CTOs, CEOs and senior project managers). Need technical skills, commercial awareness and understanding of business, and communications skills. For senior managers with positions reporting to the board, the rewards can be high. (Published: 06/05/08)

Notes:

• Anita Hoffmann (Heidrick & Struggles, headhunters)
• oil and gas companies looking for chief sustainability officers
• people who will drive the corporate strategic agenda
• oil and gas companies coming under increasing pressure to improve their environmental performance
• in Europe, sector covered by EU's emissions trading scheme
• means limits are placed on the amount of CO2 such companies can produce
• companies can trade their quota with one another if they need to produce more
• constraints of this system have opened up new roles in emissions trading and jobs for engineers skilled in monitoring emissions, as well as opportunities for companies to cut their costs by employing energy efficiency experts to help reduce their emissions
• environmental roles at the top of companies
• changed markedly in recent years
• Hoffmann: "It was very different a few years ago, when these positions were all about public affairs."
• environment was seen as an aspect of CSR, falling within the PR department's function
• today: "It's clearly a strategic issue"
• has been taken into the company's core operations
• alternative energy sector growing fast
• leading to a shortage of staff
• investment in clean energy worldwide in 2007: $148.4bn
• up 60% on previous year
• leading to wealth of job openings
• in survey of 75 business leaders in the sector, the companies found 37% of respondents viewed the chanllenge of recruiting qualified staff as "very serious"
• further 59% describing it as "moderately serious"
• hardest posts to fill: chief technical officer, chief executive and senior project managers
• Michael Liebreich (New Energy Finance):
• "Very rapid growth in investment in clean energy is putting a strain on the availability of senior managers with sector experience. There is a strong momentum behind the growth of clean energy worldwide, with new investment up nearly fivefold between 2004 and 2007, but this is creating shortages not just of components such as silicon and transport infrastructure such as crane ships for offshore wind turbines, but also of human capital."
• Hoffmann:
• "scale of shortage threatens to hamper the growth of this important industry"
• but: skills shortage only half the story
• also many recruits trying to break into the alternative energy sector, and into green jobs in the oil and gas sectors
• Claire Skinner (Ruston WHEB, exec search agency specializing in clean technology):
• "huge amount of interest in environmental jobs"
• "for senior managers with positions reporting to the board, the rewards can be high"
• salaries > $300,000 basic
• London: £120,000 - £150,000
• candidates for such posts need three sets of skills
• technical skills: engineer or other hands-on experience of operating assets
• commercial awarenes and ability to understand the whole business
• communications skills, in being able to explain green issues and why they matter to the rest of the business and the outside world

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Quote of the Day

"The crossroads of trade are the meeting place of ideas, the attrition ground of rival customs and beliefs; diversities beget conflict, comparison, thought; superstitions cancel one another, and reason begins." - Will Durant

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Super Drugs for Super Bugs - Drug Discovery & Development

Summary:
Antimicrobial resistance is a monumental health problem, affecting everyone from infected patients and physicians to researchers and drug developers. E.g. evolution from S. aureus to MRSA, hospital acquired versus community acquired. Dangers of SCCmec. Many antimicrobials coming out for resistant Gram-positive bacteria like MRSA, but there is nothing for Gram-negative bacteria. Increased research effort toward understanding mechanisms of resistance, as well as identifying new antimicrobial targets, is greatly needed. Large drug companies are well aware of the problem, but have been fighting an uphill battle to develop antibiotics that exist long enough on the market to profit. Smaller drug companies and academic institutions have taken it upon themselves to develop new antimicrobials. These drug developers require large drug companies to put their discoveries on the market. (Published: 01/05/08)

Notes:

• Alexander Fleming: discovery of penicillin
  
• mold grown on bacterial culture plate
• closer inspection showed that mold has inhibited the growth of bacteria in area around it
• penicillin, produced by Penicillium species of mold
• penicillin was viewed as panacea by microbiologists and clinicians alike
  
• though no more microbiological research needed to be done
• but: due to its widespread use in WWII, bacteria quickly became resistant to penicillin
• rendered the antibiotic useless
• bacteria were producing enzymes that could destroy the structure of penicillin
• drug developers produced semi-synthetic versions of penicillin in 1960
• bacteria became resistant year later
• Staphylococcus aureus
• became penicillin resistant
• due to beta-lactamase (penicillinase) production
• methicillin (derivative of penicillin) introduced in 1959 to overcome problem
  
• S. aureus became resistant in 1961
• methicillin-resistant Staphylococcus aureus (MRSA)
• source of resistance: methicillin-resistant gene (mecA)
  
• carried on a mobile genetic element, staphylococcal cassette chromosome (SCCmec)
• danger of SCCmec
• not only does it carry the methicillin-resistant gene
• also, carries resistance genes for other microbials
• cassette can be transferred to susceptible bacteria found in the same environment as resistant bacteria
• community-acquired MRSA
  
• Kunyan Zhang (prof., MD, Calgary):
  
• "It used to be that MRSA was limited only to the hospital and confined to vulnerable hospital patients. But starting early 1990, MRSA started to be found in the community. This newly emerging, community-associated MRSA is now causing serious community-acquired infections/outbreaks in otherwise healthy children, athletes, and other individuals lacking typical risk factors for nosocomial MRSA acquisition."
• community-associated MRSA appears to be more virulent
• has now gone back to the hospital in a multi-drug resistant form
• Bala Bota (prof., MD, Chicago):
  
• looked at hospital-acquired MRSA
• found that hospital strain was being replaced by a community-acquired strain, called USA300
• has occurred in half of all US hospitals
• another study showed a seven-fold increase in the incidence of community-acquired MRSA over a seven year period
• those who had served jail time or had lived in public housing were the greates sources of community-acquired MRSA
• efforts to reduce the incidence of MRSA are occurring nationwide
• e.g. hospitals in state of Illinois require that, prior to admission, all patients be screened for MRSA colonization
• Hota: "The common site that S. aureus colonizes individuals is in the nose. What hospitals are doing is taking a cotton swab, rubbing it in the nose and then setting that up for culture. That will either show MRSA or not."
  
• Hota interested in better characterizing community-acquired strains of MRSA
• for all of the clinical isolates, first the strain type is identified using pulsed-field electrophoresis; determine by PCR whether or not the strain contains the SCCmec4; and, determine by PCR whether or not the strain carries specific toxins such as Panton-Valentine leukocidin (PVL), which is associated with boils produced by MRSA
• "We are finding that SCCmec4 and PVL are very strongly associated with community-associated MRSA strains"
• the results of these tests are then compared to strains from national outbreaks
• Hota's strains are identical to those found in the national outbreaks
  
• issue of antimicrobial resistance has caused a significant decrease in the number of available antibiotics for treatment
• Margaret Hammerschlag (prof., MD, New York):
  
• "I think, especially in children, we are running out of therapeutic options."
• "There are many antimicrobials coming out for resistant Gram-positive bacteria like MRSA, but there is nothing for Gram-negative bacteria like Klebsiella sp. and Acinetobacter sp."
• facing bugs that are resistant to every antibiotic and for which there is no forseeable antibiotic development
• "We have got a real crisis. We'll be looking down a hole to the pre-antibiotic era and antibiotics might end up as orphan drugs."
• designing novel antimicrobials to combat resistance requires a higher degree of understanding of the biology of superbugs
• Vanessa Sperandio (Texas), Vincent Tam (PharmD): designing antibiotics to combat the resistance problems in Gram-negative bacteria
• Sperandio: studying signalling system between that allows for communication between bacterial cells and between the bacterial cell and the host (human)
• bacteria can sense that it's inside the colon, the right site for infection
• developed a antimicrobial agent that does not inhibit bacterial growth and does not kill the bacteria
• would cause bacteria to release potent toxin that can cause immediate kidney failure, in some cases leading to death
• "The line of thought is that if you're going to try to develop something that is going to prevent pathenogenesis, but is not at the same time going to kill the bacteria, you're engendering less evolutionary pressure for development of resistance."
• "Basically what the inhibitor does is compete with the signals to bind the kinase. So the signal cannot activate in the animal. And if the kinase does not activate, the virulence genes do not activate. And in this way the bacteria just passes through."
• 
  

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