Overpromise and Under-Deliver: Growth in Mexico

Over the past three decades, and despite great hopes to the contrary, Mexico’s economy has under-performed. In the early 1908s, Mexico introduced aggressive political and economic reforms in an attempt to gain footing among the world’s strongest economies. These reforms embraced global markets and decreased the state’s role in the economy. An independent central bank was introduced along with more developed financial markets, as the country faced a tough macroeconomic stabilization period. Additionally, the country liberalized foreign trade and investment by privatizing nearly 1,000 state-owned enterprises. By 1994, Mexico joined the OECD, a sign that the country was on the right track. Despite these efforts, Mexico has  seen capita income grow by an anemic 1.1%  per annum over the past 25 years. Compared to other countries with similar economies (see below), Mexico’s relative stagnation seems all the more acute..

 In 2012, Enrique Peña Nieto took office as Mexico’s 57^th President, eager to tackle the country’s growth challenge. So far, President Nieto seems to be heading in the right direction promoting an ambitious reform agenda that seeks to not spur economic growth, but also develop and enforce anti-monopoly regulation. The President’s agenda highlights two main reforms: energy and education. His education reforms target the quality of working educators by introducing a series of rigorous tests that may cost teachers their jobs if they fail. The energy reforms aim to reduce the market share of Pemex , which will go along way in strengthening the energy sector through increased competition.

President Peña Nieto intends to have all reforms approved by the end of 2014, but this is just half the battle. The most challenging part of these reforms will be enforcing all the regulations once implemented and winning over the general population.

Early last year, Elba Esther Gordillo, the powerful leader of Mexico’s teacher’s union, was arrested on massive charges of embezzlement of over 2 Billion Pesos (159 Million USD). The arrest came the day after President Nieto signed the education reforms into law. Shortly after, thousands of teachers stormed the streets to protest the education reform package. This forceful disapproval of the president’s reform agenda is a much-needed reminder that optimism for growth in Mexico is far from reality, and that Peña Nieto still has much to accomplish.

According to researchers at the Wilson Center’s Mexico Institute, the principal cause of Mexico’s stagnant growth is misguided education reform and dismal worker productivity. Worker productivity in Mexico has failed to increase over the past three decades despite the steady increase in school enrollment over the past five decades (see figure below). Educational facilities in Mexico focus on teaching cognitive skills rather than the technical skills that employers demand. The lack of technical skill-focused education in Mexico has lead to disappointing levels of worker productivity. This will continue unless the government seeks further reform focused on increasing the quality of educators and the type of education, not just the amount of people who receive an education.

In the past, the government’s answer to dismal growth has been disjointed. The Mexican Government has managed isolated efforts with no comprehensive strategy to patch up the economy. This erratic policymaking has led to many conflicting reforms, hindering growth in an economy that has been dreaming of development for decades. President Peña Nieto’s aggressive reform agenda brings newfound optimism for growth in Mexico. In his four remaining years in office, Peña Nieto is expected to accomplish what many have failed to do. Is it finally Mexico’s time to shine?

 

 

 

Into the Twilight

An aging population can pose many challenges to both families and developing nations. In China where the dominance of traditional filial pieties have dictated social norms, manly elders fear having no warrant for filial support after retirement due to changing norms. At this juncture, a brilliant trend-spotter, Starcastle offers a promising alternative. Starcastle is a Shanghai-based joint venture company between a large Chinese conglomerate, Fosun Group, and an American hedge-fund giant, Fortress Investment Group, that caters to hospitable senior living communities for retired elders. A stereotypical life of quiet retirement is unheard of at Starcastle. Instead, classy, up-to-date activities like tai chi, calligraphy, dances, social media messaging, and gaming in open-air cafés invigorate the facility and the lives of its residents.

The vibrant scenes playing out in this “castle” reflect a prominent trend in China’s social service market. Attracted by the country’s aging population, major U.S. firms including Emeritus Corp., Life Care Services LLC, and John C. Erikson have broken into the Chinese market in a tight consultation with Chinese firms, developers, and government officials. Small-scale government sponsorship like tax incentives and direct financial support for private nursing institutions dates back to as early as the 1950s. The number of institutions established, however, was not even close to being enough to care for the country’s elderly population, and poor infrastructure, service quality, and prices never appealed to the Chinese people. Reflecting on its past failure to build up the senior services market, the Chinese government made some effort itself to increase participation by allocating a huge block of land in Beijing for senior housing, overtly relying on the private sector in developing senior care.

Services for the aging population in China do in fact need a serious overhaul. In 2000, China’s 60-year-and-older population reached approximately 10% of the total population. Chinese government officials project that one third of China’s population will be over retirement age by 2050. Many blame the demographic fallout on the 1979 One-Child Policy, which dramatically shifted population balance. Increasing life expectancy has also contributed to the problem. In 1980, life expectancy for both sexes was 64 years. In 2001, it rose to 78.1 years. When these numbers are tied together with the average retirement age – 55 for female and 60 for male – it turns out that the elderly have a significant portion of their lives left after retirement.

 

The developing senior care sector is also in response to another noteworthy demographic trend – the rise of the urban middle class. The increase in China’s middle class population has been extraordinary. By 2022, more than 45% of the population is expected to be categorized as middle income earners. Right now, the mass middle class accounts for more than half of that number, but many expect the upper middle class, who can pay a premium for quality products and discretionary services, to become the new mainstream. Senior care does not come cheap. Starcastle primarily targets wealthy business owners in Shanghai who are capable of paying high costs for independent-living apartments, nurse care, housekeeping, and healthy meals. Rising labor and service costs, prices for land-use rights, and costs involved in the overall process inevitably drive the industry to target the rich for profitability. Senior care communities are attainable only for the powerful middle class, at least for now.

Of course, current efforts by foreign firms and domestic developers are not enough to entirely fend off the burden of caring for the aging population. There is still a large chunk of the population, mostly in rural areas, who cannot take part in this upmarket industry. China’s remarkable economic growth may also stall, dragging down middle-class ambitions with it. Chinese government’s ambiguous guidelines on its censorship and regulations on private, especially foreign, firms may put a halt to the deluge of development efforts in elderly care, as well.

In most developed countries, social benefit programs along with the long-lived culture of planning for post-retirement have been a cornerstone for caring for the elderly. China’s unique social, economic, and cultural environments  requires a new or revised development model that suits China’s characteristics. Amidst many uncertainties, one thing seems to be clear though; greater government participation and subsidies beyond allowing foreigners to participate is needed, so that all can comfortably live out the twilight of their lives.

The Beginning of a Beautiful Partnership?

The growing importance of the private sector is becoming a widely acknowledged fact in the development community. Now the problem for the development community is deciding how to properly incorporate the private sector into a public sector dominated field. Public-private partnerships seemed to be the solution, but effective and lasting partnerships are few and far between. To address the issue, The Partnering Initiative has released a paper titled “Unleashing the Power of Business: A practical roadmap to systematically scale up the engagement of business as a partner in development”. The paper provides recommendations for how the development community can promote public-private partnerships and ultimately take advantage of the advantages the private sectors provides to development work.

In order for public-private partnerships to be successful, the paper describes the need for what they call an “eco-system of support”. According to the authors, this eco-system is necessary for the successful fostering of public-private partnerships. The requirements include:

• Funding organizations – partnerships must have financial support
• Intermediary organizations – Organizations initiating partnerships
• Training organizations and universities – necessary for capacity building
• Consultancies – further support for partnership development
• Research institutes – measures success of partnerships

Without the above five criteria, it becomes very difficult to foster strong partnerships.

The authors then provide a course of action within the specified ecosystem that will successfully develop public-private partnerships. The authors based the course of action on the perceived barriers including: lack of trust, timelines, communication difficulties, power dynamics, and differing priorities. The five critical steps include:

1. Developing trust between sectors – Done through increased communication and prioritization of a common interest
2. Collaboration and aligning of development priorities – Streamline development process by creating joint development programs centered around combined development goals and resource partnerships
3. Develop local platforms for partnership – Committees that create collaborative environment and reduce overall risk posed to private companies
4. Measure partnership results and effectiveness – Evaluation of whether partnerships are having the desired impact
5. Develop institutional capacity to maintain partnerships – Create support structure and training program to improve organization preparedness for partnerships

With such an extensive action plan, the question of ownership is crucial. Who is responsible for developing and evaluating partnerships? The authors argue that ownership must come from a cross-sectoral group, either created solely for this purpose or already in existence. Public-private partnerships involve a variety of development groups: local, international, public, private. A cross-sectoral group is the most appropriate owner because it will have representatives from the many parties involved in public-private partnerships.

A major concern with the course of action, however, is the bureaucratic nature of developing partnerships. Creating a cross-sectoral group to oversee partnerships, build institutional capacity, and evaluate performance is only going to contribute to the already bureaucratic nature of development work. The authors address this issue in the paper and claim the solution is to prioritize specific action. But this is not a realistic solution. Anyone working in development will say that having a common goal is not enough to overcome the constraints of bureaucracy. This course of action could just add more red tape for development organizations to get through.

A course of action to foster public-private partnerships is absolutely necessary. The public sector needs to embrace the growing importance of the private sector and make room for it in the development sector. But is this approach truly the best way? The added bureaucracy alone seems daunting but the realism of achieving these goals must also be a consideration. The action plan sounds like a fine proposal but does not seem to be strongly grounded in the actual nature of development. The first point alone, improving trust between organizations, is a lofty goal. Those in the public sector do not trust each other after working together for decades. It does not seem realistic to assume private and public actors would suddenly trust one another after simply an increase in communication. Can we also expect these companies to directly align their goals?

Realistic or not, The Partnering Initiative has made a large contribution to the growing field of public-private partnerships by identifying key barriers and possible courses of action. It explores a topic with minimal research and opens the door for future studies on enhancing public-private partnerships.

India’s Corporate Social Responsibility Revolution

Last year, India passed the Companies Act, a revision of outdated business practices that resulted in a stronger commitment to corporate social responsibility (CSR). The Act mandates companies worth more than $92.5 million, or with yearly profits exceeding $78 million to:

The Companies Act strives to eliminate corruption and increase public trust in the business community

• Spend at least 2% of their profits on CSR
• Establish a CSR committee overseen by a minimum of three directors
• Noncompliance with the mandate can result in government sanctions and jail time

The government heralds the law as a huge step forward for the Indian business community, with Sachin Pilot, the Minister of State for Corporate Affairs, proudly describing India as the “first country to mandate corporate social responsibility through statutory provisions.”

Supporters of the law are encouraged by the potential for business development, claiming it creates an opening for smaller businesses to grow. The Companies Act discourages one-time monetary donations as a form of CSR and encourages the formation of long-term projects and relationships between large corporations and social sector businesses. The law has created a niche for CSR consulting firms to help corporations develop long-term CSR projects. Consulting firms can increase business while also advertising the projects of small social enterprises. This business development is especially critical in light of India’s recent stagnating financial growth.

Increased corporate social responsibility also has the potential to transform India’s philanthropic culture. According to the World Giving Index, India ranked 134 out of 153 nations based on monetary donations, volunteerism, and willingness to help strangers.

World Giving Index 2010

But the Center for Global Prosperity showed in the Index of Global Philanthropy and Remittances that 80 percent of Indian citizens donated money annually. India does not lack generosity. What is missing is a long-term commitment to philanthropy at the corporate level. The government hopes to improve corporate involvement in philanthropy through this law.

Some argue the Companies Act does not prioritize sustainable development

Yet, the Companies Act has been met with more resistance than anticipated. Much of the criticism originates from the government mandating businesses participate in CSR. Mark Hodge, from the Institute for Human Rights and Business, argues that government involvement only reduces government accountability for providing social services. He believes increased CSR is the improper approach to sustainable development because it not only reduces government accountability but also counteract harmful business practices. He instead believes the government should direct its attention towards reforming business practices in a way that encourages sustainable development. This connects to Michael Porter and Mark Kramer’s concept of shared value, where the economic development of a company is strongly tied to the social development of its surrounding community. By eliminating harmful business practices, Indian companies could increase their profits while also improving the community’s quality of life

Other detractors criticize the mandated aspect of the law. Do governments have a right to mandate social responsibility from corporations? Pilot describes the goal of the Companies Act as “encouraging firms to undertake social welfare voluntarily.” But is it really voluntary when the consequences for not complying include sanctions and incarceration? According to Arun Maira, a member of the planning commission, the voluntary nature of CSR has the ability to earn companies public trust and loyalty, which is especially important in the Indian culture where general distrust of businesses is still high. Mandating CSR, however, might discredit the altruistic nature of public service and might create even more distrust of large corporations.

It remains to be seen whether the increase in CSR will promote business development and corporate philanthropy in India or whether it will create distrust and outsource the government’s social service responsibilities. If successful, would India’s corporate philanthropy translate into increased international philanthropy? If unsuccessful, however, this could be a set back for India’s future philanthropic development and general trust in the business community.

Corporate Philanthropy: Sham, Responsibility, or Opportunity?

Many motives exist for corporations to engage in philanthropic activity, just as individual motivations for giving can vary from human needs, to tax benefits, to improving one’s standing in the community. Corporate philanthropy can “help companies reduce business risk, open up new markets, engage employees, build the brand, reduce costs, advance technology, and deliver competitive returns.” And it is effective: according to the CSR Branding Survey 2010, 75% of those who have read about a company’s social responsibility agenda on its website say it made them more likely to purchase products or services from the company in the future.

A cartoon from Puck Magazine in 1903 depicting Andrew Carnegie’s philanthropy. Carnegie bequeathed $7 billion dollars (adjusted for inflation) to various causes and attested to the responsibility of philanthropy of the American nouveau riche.

Former CEO of Campbell’s Soup Company Doug Conant is a committed corporate philanthropist: “I observed that the more we leveraged our business resources to deliver social value to the communities around us, the more engaged our employees became and the better we performed in the marketplace.” Philanthropy allows companies to make thoughtful investments in sectors where the return profile is typically more speculative, mirroring the purposes of conventional R&D. Moreover, corporate philanthropy’s counterpart, shared value ventures, goes beyond simply writing checks to actually decreasing market entry costs for firms. Cisco’s Networking Academy teaches thousands of students worldwide the skills needed to build, design, and maintain networks, which improves their career prospects while ultimately satisfying the firm’s demand for networking professionals.

But critics of corporate philanthropy abound with a variety of counterclaims. After all, philanthropy is about giving because you care about a cause, not tapping into another revenue stream. Targeting communities to find a match for a product is marketing, not philanthropy. This blurs the line between traditional grants or volunteering and strategic programs that are critical to a corporation’s bottom line in hopes of diverting attention away from otherwise rapacious behavior that is detrimental to society. Milton Friedman once called social responsibility programs “hypocritical window-dressing” and declared that the single social responsibility of business is “to use its resources and engage in activities designed to increase its profits.

Corporate social responsibility viewed through the most denunciatory of lenses (Friedman most certainly wore these glasses) can be seen as stealing the money of shareholders without a clear business purpose or even as a way to bypass government regulation and increase corporate domination of our lives. Critics of corporate philanthropy assert that “solving problems” is itself a skewed and biased framework for philanthropy that privileges expert analytical solutions over the accumulated and idiosyncratic knowledge in local communities.

Besides, even if they may be well-intended, corporate charitable donations can often be small gestures at the margin of what firms are really trying to do: make money. Even though the absolute levels of corporate donations to charities have increased substantially over the past 30 years, giving as a percentage of profits—the best measure of relative generosity—has fallen precipitously from a high of 2.1% at its peak in 1986 to just around 0.8% in 2012 and is subject to volatility as contribution percentages tend to rise in periods of poor corporate earnings. Are these findings valid indicia of unimpressive corporate giving or does it signal corporations becoming more savvy and efficient with philanthropic endeavors?

“I observed that the more we leveraged our business resources to deliver social value to the communities around us, the more engaged our employees became and the better we performed in the marketplace.”

-former Campbell’s Soup Company CEO and current chairman of the CECP Doug Conant

Furthermore, the poster children of American corporatism are not good standard bearers for corporate philanthropy.  Do any philanthropic endeavors of Apple and Steve Jobs come to mind? Probably not as there is no eponymous hospital wing or academic building donated by the longtime Apple co-founder and CEO. Despite an estimated net worth of $8.3 billion and Apple earning profits close to $42 million in 2012, Jobs was not a member of Warren Buffet’s Giving Pledge. The lauded technological advances Apple has rolled out with numerous savvy presentations still do not permit charitable donations to be made through iPhone applications. Apple’s defenders will argue that the company’s greatest contribution to society is providing tools that spark creative innovation and creating $350 billion dollars in shareholder value out of tinkering with a computer in a garage.

If you turn on an NFL game in October, you will see players sporting bright pink cleats, armbands, and towels via the league’s “A Crucial Catch” breast cancer awareness and cancer research fundraising campaign. But in actuality, a miniscule 8.01% of actual funds spent by the league and its fans on pink merchandise goes towards cancer research with many other worthy causes getting drowned out by the NFL’s pink fury that clearly has little noise. Similarly, on the Sunday before Veteran’s Day last year, the NFL announced it would donate funds to military groups for each point scored. Amidst all the praise the league received, the donation amounted to just $444,000, a parsimonious charade for a $9 billion dollar operation that enjoys non-profit status.

For many CEOs, making money and producing social value do not have to be mutually exclusive. The essential question is whether these sorts of business growth strategies can and should be reconciled with promoting general well-being with the answer appearing to be in the affirmative. Aren’t corporations that bring good business insight and discipline to the development process better than asymmetric government-to-government aid that is increasingly composing fewer of the financial flows to developing countries? What’s wrong with investing in projects that turn a profit and benefit society? If you take on the shared value perspective, there’s nothing wrong with that.

Sustainable Urban Development: A Global Challenge Requiring Innovative Solutions

The global human population is increasing rapidly, especially in urban areas.  With 180,000 people moving to cities every day around the world, it is predicted that the number of people living in urban areas will double by 2030.  By 2050, 70% of the global population will live in urban areas.

Urbanization in Asia

This rapid urbanization presents major development challenges for the international community.  As more and more people move to urban areas, governments around the world are confronted with the problem of providing adequate housing, transportation, and services for these growing communities.  For example, China’s urban population grew from 200 million to 700 million in just the past 30 years, and China plans to have 60% of its population living in urban areas by 2020.  Jim Young Kim, President of the World Bank, recently urged China to give more attention to the development of these urban areas, saying: “China now needs to find new ways to make cities more energy efficient, promote clean energy, and reduce traffic congestion and air pollution.”

Is the Partnership for Growth Going to Grow?

In 2010, the Obama administration emphasized the fundamental importance of the private sector in international development in the Presidential Policy Directive on Global Development. From this directive came the Partnership for Growth (PfG), an interagency initiative that selected four countries to develop deep partnerships with the U.S. government to help them “accelerate and sustain broad-based economic growth.” U.S. agencies including the U.S. Agency for International Development (USAID) and the Millennium Challenge Corporation (MCC) are now working with the governments of El Salvador, Ghana, the Philippines, and Tanzania to analyze constraints on their growth and create development plans that leverage private investment.

In PfG partner countries, the U.S. government’s development efforts aim to create an “enabling environment for economic growth” which will attract private capital. The government is engaging with private sector partners to determine what specific factors are keeping them from investing in the PfG countries, in order to focus its resources towards addressing those issues. The PfG aims to “spur new investment by lowering the risks and costs of investment with developmental impact,” increasing non-aid flows into developing countries and creating more sustainable development. By deliberately promoting economic growth through private investment and economic growth, U.S. agencies are positioning themselves as “catalytic minority shareholders in development” helping to unleash growth with more than official aid money.

On Friday, September 13, the Center for Strategic and International Studies held an event to promote Jeri Jensen’s new paper evaluating the successes and failures of PfG, “Toward a New Paradigm of Sustainable Development: Lessons from the Partnership for Growth.” Gayle Smith, Special Assistant to the President and Senior Director of the National Security Council, keynoted the event.

Japan Sprints to Myanmar’s Aid

Until recently Myanmar – also known as Burma – was considered a pariah state, virtually inaccessible to the outside world, and ruled by a repressive military junta with an appalling human rights record. The U.S. and E.U. placed sanctions on the country during the 1980s, but since the establishment of a new nominally-civilian government in 2010, Myanmar has passed sweeping reforms in hopes of opening and developing the country.

The rest of the world has not hesitated to use this opening: foreign governments and multi-lateral institutions, are boosting their aid and development packages after decades of absence that left the country of 60 million people one of the poorest in Asia. Private firms, too, are vying for access to the “next economic frontier” and perhaps one of the last major untapped markets.

While the U.S., E.U., World Bank, and Asian Development Bank have each committed hundreds of millions in development aid, so far Japan has been one of the most eager donors.

Could It Be that Both Parties Agree on Foreign Aid?

At the 2012 Clinton Global Initiative held in New York City, Secretary Hillary Clinton pointed out the changes in the developing world and the rise of private financial flows. Similarly, the next day at the same venue, Republican presidential nominee Governor Mitt Romney laid out his vision for foreign assistance. Among his comments, he too pointed out how the developing world has changed and applauded the involvement of the private sector through partnerships– “public and private, for-profit and nonprofit, charitable and commercial.” The Center for Global Prosperity (CGP) was pleased to notice that both speakers used figures published in the Index of Global Philanthropy and Remittances to make their points, with portions of their speeches sounding uncannily similar.

Banking on Islamic Banks

Islamic finance is an ancient concept, but it has only recently developed into a modern day institution.  Adhering  to the Muslim religious law of Sharia, it has prohibitions against charging interest and investing in morally dubious industries, such as alcohol, gambling, and pornography; furthermore all lending is based on profit-sharing.

Under Shariah, hoarding is frowned upon, so savings earn no return unless put to productive use. Rasheed Mohammed al-Maraj, governor of the central bank in Bahrain explains that “money cannot generate money – money should be used for creating better value in the country or the economy.” For some Muslims, conventional mortgages are regarded as sinful; under Shariah both the lender and the borrower share the risk of the investment.  The Islamic home mortgage functions by adding what would have been the monthly interest into the purchase price of a home. Most commonly, the bank actually buys the house at a qualified customer’s direction, and then sells it to that customer through monthly installments modeled on the payments of a 30-year mortgage. If the borrower loses his job and defaults on the payments, under Sharia it is very difficult for the family to be thrown out of their home, as that would be seen as a creditor exploiting a debtor. For any transaction, borrowers must possess underlying assets, an idea primarily driven by the rationale in Islamic law that borrowers do not over-borrow.  Under Islamic finance, the lender is also an investor, so he remains an active participant through the life of the transaction and is in a position to rectify mistakes before any situation occurs.