FW: INCOME INEQUALITY RE: MAJOR PROBLEM

 

“I believe this [income inequality] is the defining challenge of our time.”
Barack Obama (2013)

 

“One of the leading economic stories of our time is rising income inequality, and the dark shadow it casts across the global economy.”
Christine Lagarde (2015)

 

There is a clear recognition of the risks, dangers and the pain which income inequality imposes on society. Despite the recognition, it is a problem which seems to constantly be forwarded on to successive generations to resolve rather than finding a decisive set of solutions.

We will all do well to pay heed to the US Senator John Sherman who in 1890 when he introduced his landmark Sherman Antitrust Act said that he sought to “put an end to great aggregations of capital because of the helplessness of the individual before them” and also because he fundamentally believed that amongst all of the nation’s problems, “none is more threatening that the inequality of condition, of wealth and opportunity.”

So why does inequality matter? Why is it important that we all strive towards resolving it? Societies that are hugely imbalanced and unequal ultimately become fractured which in turn lead to painful social and economic consequences that affect everyone. Neither the rich nor the poor will be able to avoid the huge social costs of a fractured society.

The stark facts

  • 62 of the richest people in the world own what the bottom 50% of the world’s population own.

  • 1915: The richest 1% of Americans earned 18% of the national income.
    1930s to 1970s: The share plummeted and remained below 10%
    From the 1970s: The share has increased to almost 30%

  • 1980: The top 0.1% wealthiest Americans controlled about 9% of all household wealth
    2015: The top 0.1% own 22% of all household wealth.

  • USA: The top 1% of America control 40% of America’s wealth

  • Germany: Poverty has risen by half since 2000.

  • 1965: CEO pay at the largest 350 U.S companies was 20 times as high as the pay of the average workers
    1989: The figure is 58 times as high
    2012: The figure is now an astounding 273 times as high.
    (It is worth bearing in mind that Peter Drucker argued that the pay ratio between the top executive and the humblest worker should be no greater than 20 to 1.)

  • OECD: The gap between the rich and poor is now at its highest level in OECD economies in 30 years according to a report produced in 2014. The overall increase in income inequality has been driven by the richest 1%.
  • 2008: The United Nations University (UNU) and the World Institute for Development Economic Research (WIDER) estimate that the global Gini coefficient (a measurement of inequality between 0 – representing complete equality and 1 – representing complete inequality) was 89.

    An alternative way to interpret this is that in a population of 10 people, if one person had $1000, the other nine have only $1 each.

  • 2014: The Credit Suisse Global Wealth report estimates that that the richest 0.7% (who hold over US$1 million in wealth) held 44% of the global net worth.

Some context

The economic success stories of many countries hides a dangerous truth – that a significant majority of economic gains are going to those at the very top of the income distribution whereas those lower down have seen real incomes stagnate or diminish.

This has in turn perpetuated further inequality as those in a position of privilege often use their wealth and influence to shape policies that further increase their concentration of power. These policies have not necessarily been in the interests of those lower down the income ladder.

A research conducted by Martin Gilens, a political scientist at Princeton, lends credence to the notion that the US government responds more positive to the most affluent ten percent of Americans whilst “the preferences of a vast majority of Americans appear to have essentially no impact on which policies the government does or doesn’t adopt.” (A video of Gilen’s lecture can also be viewed here.)

The erosion of the social compact

This wasn’t always the case though. Whilst there has always been inequality, it has never been to this extent or been as pervasive. There was also more concerted effort to reduce the level of inequality and dampen its deleterious impact on society.

The experience of the First World War revolutionised American attitudes towards taxation and redistribution of income. When the War Revenue Act of 1917 was passed, there was talk of “conscription of income” and “conscription of wealth” at a time when young men were enlisting en masse. “Let their dollars die for their country too,” one congressman said. The call for fiscal patriotism helped legitimate the progressive income tax in the United States, and by 1944 the top marginal rate had risen as high as 94 percent.

Across Europe, a fear that the lack of reform could lead to social and political turmoil and the horrors of two World Wars meant that policies such as social insurance, minimum wage, a strong welfare state and progressive income tax were implemented leading to more egalitarian societies and economies.

inequality 2The experiences of global ears produced visions of a social bond holding countries together and nurtured the notion that every single person owed a debt to the welfare of the broader community and society.

However since the 70s, the disappearance of these conditions has meant that the support for egalitarian public policies has also diminished.

We now live in a world where even high skilled jobs are being commoditised so that even highly educated workers are not making sufficient progress as gains in economic growth are limited to a very elite group of financiers, entrepreneurs and managers. In the past only unskilled workers lost jobs to automation, now even highly skilled occupations are at risk with the advancement of artificial intelligence, robotics and automation.

The social structure of Silicon Valley provides us with an instructive view of the future: One where expert systems have replaced the majority of people and a tiny but well-remunerated minority direct the economy whilst the majority exist to serve them alone.

The conflict is no longer just between the working class and the middle and upper classes – it is now between a tiny elite and the great majority of citizens. As the majority develop a sense of common interest, or what Marx may have termed ‘class consciousness’, the need to resolve inequality will become more acute as the resentment of it intensifies.

 

What happens when income inequality starts to become entrenched?

  • Health: Societies that are more unequal tend to have lower life expectancies, higher infant mortality, higher levels of infant mortality and high levels of diseases and conditions such as HIV/AIDS.
  • Human capital development: As inequality rises, scores on the UNICEF index of child well-being become significantly worse. Literacy rates are also lower and youth unemployment also becomes a major issue. A higher level of equality also leads to a greater level of innovation as a result of greater access to opportunity.
  • Social mobility: Inequality restricts social mobility – equality of opportunity is enhanced by greater income equality. Reduced social mobility further exacerbates income inequality and this becomes a vicious spiral from which an effective functioning economy becomes more and more difficult.

    inequality1 2
    (C) Walt Handelsman
  • Economic progress and stability: An IMF report highlights that by reducing inequality and bolstering longer term economic growth are “two sides of the same coin.” In both rich and poor countries, inequality is strongly correlated with shorter spells of economic expansion and growth over time. Unequal economies are also more susceptible to severe boom-and-bust cycles leading to greater volatility and crisis. Extreme levels of income inequality depress economic growth. An OECD report estimates that inequality has had a cumulated loss of GDP across OECD economies of 8.5% over twenty-five years.
  • Social challenges and issues: Inequality breeds corruption. Unequal societies also lead to greater economic instability. If one considers the root causes of the Arab Spring, the lack of economic opportunity or equality is one of the main drivers leading to revolt.

A blueprint for change and resolution

The solution and change required for income inequality is not a zero-sum game. There will be those who are impacted more than others, but it is essential in calibrating the world in a more equal way.

It is very easy to be dangerously complacent and ignore equality, but chronic economic inequality hurts everyone, both the rich and the poor.

Resolution of a problem like inequality requires a revolutionary approach. We need to accept a fiscal revolution or risk a social one.

I’ve highlighted below briefly some key practical steps that need to be considered as we seek an urgent resolution to the problem of income inequality.

  1. Tax reforms – Income taxes need to be more progressive (the way they were previously in times of greater equality). There needs to be a reform in the way the transfer of wealth is also taxed. The OECD has suggested that attempts to reduce inequality tax and transfer policies will not harm growth as long as the chosen policies are well designed and implemented. The OECD further argues that redistribution efforts should focus on families with children, on the youth and the improvement in human capital investment through the promotion of skills learning and development.
  1. Continued focus on economic growth and employment – Policies targeting economic growth need to continue as growth ensures jobs are created and ensures employment. Employment will support social mobility which is essential to the reduction of inequality.
  1. Ensure emphasis on social mobility – Social mobility is a key driver towards the reduction on inequality. Emphasis on education, skills learning and development is vital to support social mobility.
  1. Support small savers and small businesses – Policies should not be tilted towards just merely taxing the rich but also be aimed at increasing the wealth of small savers and businesses. For instance we should consider the introduction of accounts for small savers and businesses that guarantees positive returns in excess of inflation. It is also a widely observed phenomenon that lower income families borrow more to support their consumption and this in turn creates a systemic risk.
  1. Enhanced social policies – Governments and policy makers should also consider more directed interventions to enhance the social conditions of lower income families. For instance, in the UK, the Child Benefit offers a weekly allowance to parents for every child they raise. The transfer could be better targeted by making the income taxable as personal income, which will reduce the size of the benefit for those in higher tax brackets or who do not have face any other mitigating circumstances. In the UK, child poverty has dropped sharply whilst in the USA; it has risen by a third between 1969 and 2013. A child-benefit programme will help make a major dent in child poverty and also represent a powerful investment in the future. Introducing a child-benefit program in the US will make a major dent in child poverty and represent a powerful investment into the future.
  1. Minimum wage – Governments should also take an active review of the minimum wage policies in their countries and recalibrate them to local conditions. There is always a temptation to keep minimum wage lower because neighbouring countries are keeping theirs lower, but this beggar thy neighbour policy will not benefit anyone in the long run. Countries that make the effort to ensure greater equality will be healthier in the long term.
  1. Automation and technological change – Governments should take an active interest in the direction of technological change. It is mostly governmental grants and labs that are responsible for the underlying research that has led to the progress in automation and technology and they therefore have the right to ensure a clear review is undertaken to mitigate the social impacts of technological change through appropriate fiscal and taxation policies.

It is crucial that we as a collective rise up to face the challenges of income inequality and work closely to create a more equal society. The corrosive impacts of inequality will affect us all and the sooner we can find solutions to achieve an equal society, the better, for all.

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The Singapore Budget 2016 in a nutshell

The Singapore Budget 2016 was announced on the 24th of March 2016 by Finance Minister, Heng Swee Keat.

Below is a simple view of the budget (please click here to download high resolution version):

budget 2016
A summary of the Singapore Budget 2016

Some have claimed that this budget represents a ‘game plan for the next 50 years’ but my view is that this is a very functional budget that sets out a 5-year planning approach.

The budget itself can be split across five areas: support for small and medium sized enterprises (SMEs); Economic Transformation; Social support; Infrastructure Investment; and Individual Taxation.

The main focus of the budget has been primarily around partnership (particularly between government and industry), internationalisation (and support for companies that seek to establish Singapore as a trusted brand) and a transformation of the economy, towards greater efficiency and focus on high value drivers.

Theme of the 2016 Budget: Clarity, Consistency and Compassion

The aims of the government seems to be very much around providing clarity to businesses across a number of areas (from finding relevant grants, to addressing their pressing issues and providing them with the right information to ensure their alignment to the government’s wider aims).

There is also significant consistency with previous policies and measures and little deviation to what has already been established. This includes buttressing of existing policies around SkillsFuture or other social policies.

It is the final theme of compassion that strikes me the most. There is a tacit acknowledgement that social mobility is a critical matter that needs to be addressed urgently. The Deputy Finance Minister in a speech has indicated as much.

Looking at the slew of social-focused policies and support pillars designed to help the underprivileged and support social mobility is important as Singapore enters her 51st year.

Income disparity and social mobility remain the biggest threat to our social systems and to any country’s progress. Putting into place the pillars to enhance mobility is an important investment to ensure the harmonious development of society and nation.

Climate change

One area that could have been addressed in more detail is the impact of climate change and the government’s wider approach to addressing this important area – particularly given the severe consequences this has on Singapore. In time to come, I suspect, governments around the world will start devoting more of the government budget and resources towards addressing this and report on the developments.

The government touched on tax rebates for companies for CSR practices. I hope over time this extends to wider sustainability measures adopted by companies to reduce their carbon footprint.

Big Data and Planning

Another interesting development is the development of the National Trade Platform (NTP) that seeks to integrate all business and finance data of companies. This is going to support the predictive ability of the government in understanding the various levers of economy and also develop more timely and appropriate interventions to support businesses. If done right, the type of data and the insights gained from this initiative could be hugely  influential and something other nations will sit up and take note of in order to have a better handle on their wider economic affairs.

 

Myanmar’s Development Agenda – Opportunities and Challenges

I was fortunate enough to participate at the recent Myanmar Development Summit held in Yangon on the 10th of August 2014. I participated in a panel discussion on the opportunities and challenges for Myanmar’s development agenda.

 

Panel discussion: Myanmar's development agenda - opportunities and challenges
Panel discussion: Myanmar’s development agenda – opportunities and challenges (L-R: Dr Thet Thet Khine, U Aye Chan, U Kyaw Tin, Dr Maung Maung Lay, Reza)

The panel was moderated by U Kyaw Tin, Chairman of the Myanmar Institute of Certified Public Accountants and I shared the panel with Dr Maung Maung Lay, Vice President of the Union of Myanmar Federation of Chambers of Commerce and Industry, UMFCCI, Dr Thet Thet Khine, Secretary General of the UMFCCI and U Aye Chan, CEO of IMA Group.

Developments to date

Over the last few years as Myanmar has opened up economically and politically, there have been some major strides made in a number of areas:

1. Social and political reforms:

Politically we have seen a greater freedom of speech, improved press freedom and broader steps towards national reconciliation. The ongoing dialogue with armed groups in a number of states is also a step in the positive direction.

In the last three years government spending on education has more than trebled (it was increased by 30% in the last year alone) and government spending on healthcare has almost increased five-fold (it grew by 78% in the last 12 months alone).

The government has also implemented a strategy for greater public financial management reforms to enhance efficiency and transparency of government spend.

 

2. Improved monetary policy and central bank independence

The monetary policy has improved starting with the unification of exchange rates (there used to be a time where the official kyat to US dollar rate was 8 kyat to a dollar whilst the market rate was closer to 800 kyat to a dollar!).

The regulations governing central bank independence have also been brought more in line with international best practices, granting the central bank greater independence and autonomy.

 

3. Improved tax collection and reforms

With support from the World Bank, Myanmar is also embarking on a series of ambitious tax  reforms to strengthen revenue administration, which will increase the effectiveness of tax and non-tax revenue mobilization.

This was further supported by the passing of the Union of Myanmar Revenue Law of 2014 and four other tax bills in March this year.

 

4. Improving business, investment and trade climate

Approved FDI has increased to US$4.1 billion in 2013/2014 (almost 300% from 2012/2013 when it was only US$1.4 billion). The investment has also been distributed across a diverse range of sectors from manufacturing (45%), telecommunications (30%) and hospitality hotels (10%). This will prove beneficial in the long term as it will increase employability whereas investment primarily in the resource sector would have not necessarily created sufficient job opportunities. The investment has also come from unlikely trade partners including Ooredoo of Qatar and Telenor of Norway (both in the telecommunications sector).

This improved business climate has come on the back of passing of the Foreign Investment Law (FIL) in late 2012 which provided better clarity for international businesses seeking to do business in Myanmar along with the removal of restrictions and barriers to foreign investment. The highly efficient Directorate of Investment and Company Administration (DICA) have also reduced the time for businesses to establish operations in Myanmar (this is also on the back of my own personal experience as we established our operations in Myanmar).

 

5. Progressive financial sector developments

The government is working very closely with industry stakeholders as Myanmar seeks to establish its first stock exchange in Yangon – the Yangon Stock Exchange (YSE).  This is following the passing of the Securities Exchange Law last year.  Japan’s Tokyo Stock Exchange (TSE) and Daiwa Securities Group, a Japanese investment company will supporting Myanmar in delivering the YSE by October 2015.

A microfinance law was also passed last year to improve access to finance for small and medium sized firms and to increase the level of liquidity in the market.

Banks are also being held to more stringent regulations and are required to improve their capital adequacy ratios to be more in line with international best practices.

 

Some key facts to consider:

  •  GDP growth was 7.5% in 2013 (forecasting 7.8% in 2014).
  • Agriculture provides jobs for over 50% of Myanmar’s workforce.
  • Government budget for 2014 was US$ 19.5 billion (a third of Myanmar’s GDP)
  • Inflation has been creeping up and is expected to increase to 6.6% in 2014 from 5.8% in 2013. This is as a result of the weakening of the kyat vis-à-vis the US dollar, increasing wages (both in the private and public sector), a real estate boom/bubble and increased credit.
  • According to McKinsey, Myanmar has the potential to achieve a GDP od US$200 billion per year by 2030 (it was just under US$60 billion in 2013).
  • The average productivity of a working individual in Myanmar is currently only US$1,500 per annum (which is 70% less than other Asian economies including Thailand, China, Indonesia, India, Vietnam, etc). This low productivity also results in the low GDP per capita.

 

Key areas of focus for sustained development and progress:

Below are seven areas I view as critical for Myanmar’s continued development and progress. The achievements to date remain delicate and can be easily derailed if some of the below trends and developments are not addressed sufficiently.

 

1. A need for harmonious development.

One of the biggest perils faced by rapidly emerging economies is a severely widening income gap. It is vital that Myanmar addresses the issue of income inequality by providing broader employment opportunities and increase the number of middle-class Burmese.

It is also important that Myanmar’s leadership resolves on-going ethnic and sectarian tensions and friction in the country. This can severely destabilise the country and reduce the quality of life for Myanmar’s people. There has to be greater social and religious tolerance. Persistent incidences of communal violence between the Buddhists and Muslims are exacerbating the tensions. The government should support further initiatives by centrist leaders of the Muslim and Buddhist communities and support greater dialogue between the various communities. There needs to be greater efforts to reform education starting with the primary levels, to encourage greater tolerance for the different ethnicities and religions in the country.

The role of the military is still not entirely clear and this ambiguity needs to be resolved for a greater entrenchment of democracy taking root in the country so as to produce the optimal opportunities for further growth.

 

2. Improving access to education and creating educational opportunities for all.

Myanmar’s investment in education has increased significantly over the last three years but it still has one of the lowest averages of schooling the world at just four years. The universities and institutions of higher learning remain chronically underfunded and after four decades of neglect, do not yet have adequate infrastructure. However, this is slowly changing with the likes of Yangon University, Yangon University of Economics and Dagon University striking up partnerships with other top universities and organisation. This will help improve the teaching faculty and also provide greater exposure for the students and staff of these universities which will in turn improve overall performance.

A good national education is also essential for enhanced social mobility. The notion of social mobility is critical in helping people move out from the cycle of poverty and in increasing the middle class segment of a nation. Social mobility can only take effect if the right opportunities and education is provided to the people. As Myanmar continues its growth and development, the educational institutions will need to prepare Burmese youth with the right skills and capabilities so that they can gain meaningful employment and support Myanmar’s development.

 

3. Improving employability, productivity and efficiency

For growth and development to remain inclusive and sustainable, it is important that investment continues in the areas of labour intensive industries and sectors such as manufacturing.

The majority of the population still live in poverty (GDP per capita based on purchasing power parity is about US$3.60 per day)

The government is focusing on an export-led growth supported by productivity gains in agriculture and industrial development. President Thein Sein’s ‘Framework for Economic and Social Reforms’ launched in 2011 emphasised the need for a market-driven economy to support economic growth and to provide jobs and opportunities for Burmese.

There must be greater support provided to farmers and the agricultural sector (which as I’ve stated above provides employment for more than half of Myanmar’s working population) to introduce modern practices and improve productivity. Over time, this ensures greater food security for Myanmar and it also helps to boost the export-driven economy which Myanmar is gearing up towards as food production increases. Myanmar’s agricultural sector is also endowed with the 25th largest arable land in the world and has ten times the per capita water endowment of China and India. This gives the opportunity for Myanmar to be a true powerhouse in agriculture and help feed the world’s growing population.

 

4. Increasing access to finance

As Myanmar’s banking sector continues with reforms, increasing access to finance for smaller and medium sized businesses will help increase further growth, productivity and employment. There isn’t sufficient liquidity in the market and SMEs in Myanmar do not yet have the same impact as SMEs in other ASEAN countries. Part of this is due to a lack of sufficient access to finance which will allow for Myanmar SMEs to compete with their regional counterparts.

On an individual level, more than half of Myanmar’s population have no access to financial services, 30% are using unregulated services and only 20% have access to regulated financial services. The limited access to regulated financial services not only impose significant costs on poor people given interest rates of up to 240%-a-year compared to up to 36%-a-year for regulated services, but informal mechanisms also offer individuals limited protection, less choice and lower returns.

 

5. Sustained commitment to reforms and global standards.

Myanmar has adopted international standards in a number of areas. They adopted the International Financial Reporting Standards (IFRS) along with the International Standards on Auditing (ISA). The government, in an effort to boost transparency and greater fiscal control and management have also adopted the International Public Sector Accounting Standards (IPSAS).

Myanmar is also currently reforming the Companies’ Act which is still loosely based around the 1914 Burma Companies Act! This will ensure greater clarity for enterprises operating in Myanmar and also improve business and investor confidence and sentiment.

Myanmar has also recently become a signatory to the Extractives Industries Transparency Initiative (EITI), a global anti-corruption scheme that requires member governments to disclose payments earned from oil, gas and mineral wealth. Burma’s EITI arrangement could also be expanded to include hydropower and forestry.

Such initiatives will support Myanmar’s reform efforts and development and pave the way towards strong frameworks that support sustainable and inclusive growth.

 

6. Greater transparency, accountability and robust governance

President Thein Sein set up an anti-corruption committee to weed out corrupt public officials. Corruption poses one of the most severe threats to Myanmar’s reforms and development. Crony capitalism exacerbates issues of income inequality and social discontent and the government will need to continue to act to curb corruption.

He also implemented various initiatives to improve administrative reform and cutting red tape.

Though efforts have been made to establish a stronger rule of law, the daily papers recount stories of land grabs, ethnic and sectarian conflicts and corruption and the pervasive conflicts of interests across all levels of government and business. There needs to be grater efforts in the areas of establishing an independent judicial system that will allow for a stronger implementation of rule of law. A clear and robust rule of law improves public confidence, enhances investor sentiments and paves the platform for sustainable growth.

 

7. Capacity building with an eye on sustainability

Myanmar has to undertake sufficient capacity building – both in terms of people capacity as well as physical capacity.

Myanmar’s current physical infrastructure is not adequate to meet future growth demands needs. Massive infrastructure investment in the areas of power, water, rail, road are being planned both locally and with foreign investors’ assistance. However, as Myanmar builds more roads, more railway tracks, better power grids and improved water systems, it will be important that there is effective and well-managed town planning and resourcing. We already are witnessing severe traffic congestion and delays, particularly during peak periods, and it this continues, Yangon’s traffic issues could well rival Jakarta’s or Bangkok’s and this becomes a huge social and business cost. Investment in technological upgrades and telecommunications must also continue as Myanmar’s telecommunications and Internet infrastructure still lags that of the rest of ASEAN.

These infrastructure improvements must also consider the wider impacts on sustainability (including social, human and environmental). Myanmar’s decision to suspend the construction of the Chinese-backed Myitsone Dam in Kachin state due to environmental concerns was a step in the right direction. It is important that Myanmar’s leadership consider the longer term impacts over the possible short-term benefits when making infrastructure plans and decisions.

Physical capacity building must be matched by sufficient human capacity building too. As has been described earlier, there needs to be appropriate educational, training and development opportunities for people to ensure that they have the right skill sets, aptitudes and capabilities necessary to support Myanmar’s development. People and physical infrastructure development go hand in hand and a holistic approach needs to be taken to ensure longer term, viable and sustainable development for Myanmar.

Ultimately, it is vital that the right implementation approach is taken to the policy developments taking place in Myanmar. Policy must translate into action or inclusive growth, economic and social progress and sustainable development will merely remain a pipe dream for Myanmar.

 

References:

  1. Myanmar Economic Update, Asian Development Bank
  2. Myanmar’s Moment, McKinsey
  3. Myanmar:  Between Economic Miracle and Myth, Institute of Southeast Asian Studies (ISEAS)
  4. Sustaining Myanmar’s Transition, Asia Society

 

The catastrophe of bees’ colony collapse globally.

Ad campaign to save bees in the UK - in the London underground
Ad campaign to save bees in the UK – in the London underground

I saw this campaign ad in the London Underground and it raised what I consider to be a very important issue.

Einstein is commonly reported to have predicted that ‘if bees were to disappear from the globe, mankind would only have four years left to live’.

Since the statement above, more than 90% of the world’s bees have disappeared. There is no conclusive evidence to explain why and this is a hugely troubling matter.

One in three mouthfuls of food we eat are crops (fruits, etc) that are dependent entirely on bees.

If the bees are wiped out, our food shortage problems (which are already at crisis levels), will reach catastrophic levels.

Bees’ colony collapse is a problem that will have a huge implication with devastating consequences for people around the world. More urgent effort is needed to better understand the reasons for the decline of bee colonies (this decline will further impact agriculture and crop produce – which in turn will exacerbate the current problem of global food security and supply).

I will strong recommend that we learn more about this very critical issue (which to my mind is almost as important as that of climate change) and act on it.

For further information, please read: http://www.nature.com/scitable/blog/green-science/global_crisis_honeybee_population_on

For those with children, get them to watch Bee Movie!!

Let’s start doing our part, inform and educate and above all act. This is not just for us, but for those who will follow us.

Thank you.

Twenty things I learnt from Coca-Cola

After having read “Inside Coca-Cola: A CEO’s life story of building the world’s most popular brand” by Neville Isdell  (Amazon link), Coca-Cola’s 12th CEO and Chairman,- I wanted to share twenty things I learnt about Coca-Cola which may be useful to you. Coke has always been a fascinating entity which has transcended cultural, political and religious ideologies. An example of this was when Tom Mattia decided to track a case of Coke in Kenya from start to finish. The last transaction in the entire cycle was a goat! As Mattia explains “They traded a baby goat for a case of Coke.”

#1 – Jack Welch turned down the CEO post at Coca Cola

Jack Welch – business titan who raised General Electric’s market capital from US$14 to US$410 in a span of two decades, was offered the top job at CEO. Welch gave it serious thought for three days before declining it. Neville Isdell, long-term Coca Cola man, was offered the job, he accepted, and the rest as they say was history!

#2 – How Coca-Cola’s secret formula is distributed around the world. 

Coca-Cola manufactures the secret formula in a few locations around the world. Even then-CEO, Neville Isdell, did not know the recipe! The formula is then mixed with other ingredients to form a concentrate which is then processed into syrup form and delivered to bottling plants and restaurants around the world.

#3 – Coke’s relationship with independent bottlers and its evolution

In the past, Coca-Cola used to make the bulk of its profit from concentrate sales to independent bottlers. However, in recent times, Coca-Cola purchased a significant proportion of the bottlers and as a result now own 90% of the bottling operations in the United States and Canada.

In the mid-80s, Isdell undertook a campaign to consolidate the 116 bottlers into one single bottler. The idea was that this will improve cost efficiency, more streamlined operational delivery and chart a clearer course towards growth. However, political differences reared their ugly heads and they were unable to do so (mainly as a result of wealthy independent bottlers refusing to give up control) and instead, the bottlers were consolidated to 30 bottlers. However, Isdell revisited this issue when he became CEO and now Germany operates under a single bottler.

Coca-Cola now has significant interests in primary bottlers in the Coca-Cola system, which it calls “anchor bottlers” around the world.

#4 – The terrible condition of South Africa during the apartheid era

An example of the atrocious conditions under apartheid South Africa. During apartheid, black and mixed-race South Africans were able to leave their townships to work in other parts of Johannesburg but had to be back by curfew at nightfall and had to carry a pass. Blacks were also only allowed to drink one alcoholic beverage under apartheid laws. This was the condition under which people were living in during the rule of apartheid.

#5 – Coke’s success in the Philippines 

In 1981, Pepsi had a 2 to 1 lead in the Philippines (Pepsi was outselling Coke 4-1 in some parts of the country, including Manila at the time), the 10th largest soft-drink market in the world. (The Philippines had a per capital annual soft drink consumption of 134 bottles per year, compared to 39 for Thailand and 10 for Indonesia. India’s was only 3!).

Interestingly enough, Mindanao (despite being torn apart as a result of two insurgencies – one religious and the other communist) was the strongest market for Coke in the market.

Pepsi chose to ignore Mindanao which remained Coke’s biggest profit centre in the Philippines and coupled with upgrades at Coke plants in the country, terrific motivational techniques for sales teams (including sales rallies with good music, good food, beer and theatre during weekends), and an increased attention to customers’ needs, Coke ended up leading 2 to 1 over Pepsi in the Philippines.

 #6 – Importance of cultural fit in an organisation (and how Coke dealt with expats in emerging markets)

Another example is how you provide incentives to workforce in the Philippines. Isdell thought that giving the staff a product worth $400 was better than giving them cash of $200 (since they can get the product at cost due to their bulk purchasing power) but that in the Philippines a salesman would rather keep the $200 as ‘play money’ as opposed to the tradition whereby he will give his salary to his wife who will then in turn give him an allowance!

It is vital for any global organisation to understand the culture of the country in which it is operating in. For instance in the Philippines, you need to understand the concept of ‘utang na loob’ or the role of obligation – where you return a favour done to you at some point in the future; or ‘pakikisama’ or the idea of getting along and avoiding confrontation when meeting someone for the first time no matter how divergent your initial views and opinions.

Isdell also made it a point to ensure that expats and locals were truly blended as one team as opposed to Pepsi’s cardinal sin of allowing for expats to live a completely separate life to the locals. This led to a disconnect between the expat management and the society they were supposed to serve and led to alienation all around.

#7 – A unique way of undertaking competitive analysis

Isdell was keen to ensure that Coca-Cola’s senior management looked at their business through the lens of their competitors. In Manila, he took the upper management team to a strategy session in a room decorated with Pepsi posters, where they lived and drank Pepsi and spent a whole day trying to understand and detect the weaknesses of the Coca-Cola system and develop a strategy to retain leadership over Pepsi. It allowed an open and honest space for people to be frank about Coca-Cola’s flaws and strengths and in the process come up with relevant strategies to outdo the competition.

#8 – How Pepsi and Coke undertook bottle stealing!

Back in the 80s, both companies were stealing each other’s bottles in an attempt to drain the competitor’s assets by forcing them to purchase more glass. They had fields of their opponent’s glasses stacked! Isdell put a stop to this ‘poaching’ of bottles and soon Pepsi followed suit too. It just goes to show how competition without a ‘moral’ strand can lead to insanity!

#9 – Importance of rallying the troops/team towards a defined objective

Philippines was a clear example of how if one is unable to motivate the sales team in an organisation, then success is unlikely to come by. Leadership, an unwavering commitment to defined aims and a personal connection with key stakeholders is what leads to success in difficult markets.

Rally the troops and the men and women who work for you and win the war.

#10 – The fiasco that was New Coke!

Coca-Cola came up with a new, sweeter formula called New Coke in 1985 which provoked a furious consumer backlash! Coca-Cola pretended that all was well and kept attempting to push New Coke onto consumers who hated it and wanted no part of it. The lesson here is – don’t push to customers what they hate and always test rigorously and above all, listen to your customers! Failing to do so only leads to painful mistakes like New Coke!

#11 – The value of a good lieutenant and the importance of succession planning.

It is always important to ensure that you have a good understudy or support manager who you groom to take over your reins when the time is right. In Isdell’s case, it was a young regional manager by the name of Mukhtar Kent who took over Isdell’s position when he retired. Kent was instrumental in Coca-Cola’s success across Eastern Europe during the Communist era.

The importance of also having a sound succession plan cannot be understated. The retirement of Goizueta and Keough as CEOs of Coca-Cola after many years of sterling leadership led to a vacuum of effective guidance and direction and the company languished in corporate purgatory for a number of years. In 1999, Coke also laid off over five thousand people (and this in a company where mass layoffs were unheard of and a job almost always meant a job for life) which damaged the organisations’s momentum and morale.

An outgoing CEO’s performance must be strongly hinged to the outcomes and successes of an incoming CEO.

#12 – Never shy away from conflict that is necessary

“a business leader should never be frightened by conflict, and should always find a good, honest solution that is pragmatic, not bullheaded.” – Neville Isdell

#13 – How Coke dealt in Soviet Union – and delivered capitalism in the Communist block (and the economy anomaly that was ‘counter-trade’)

Due to foreign currency restrictions and the prohibitions in bringing currency out of the USSR, a system allowing for foreign companies to operate emerged. This system was known as the ‘counter trade’. What this meant is that Coke will ship concentrate to the USSR and in exchange will receive Soviet-made goods that Coke will then need to sell elsewhere (like in the UK) to obtain hard currency. So for instance, Coke used to sell concentrate, and get Soviet Lada cars which they sold in the UK. Pepsi used to sell their concentrate and in exchange get Stolichnaya vodka!

Coke also invested in Romania even before a foreign investment law had been written and leased land from a Church in Poland because there was no concept of private ownership of land! The ambiguities of operating in emerging markets! Coke even had to help Russia create a land registry on behalf of the privatisation committee in Moscow just so they could own land to manage a bottling factory. Isdell acknowledges that time, effort and resources to do basic business transactions in a number of countries was huge but this was offset by the equally huge opportunity.

One of Coca-Cola’s greatest achievements was to provide an example as to how a successful company works in previously Communist nations and to allow them to learn best practices from them.

#14 – A fantastic example of cultural diversity.

When Coke ended up leasing land from a church in Poland, they were required to attend mass at the historic St Brigid’s Church. When it was time to collect the church offerings, money was first collected from Donald Keough, CEO Coca Cola, an American Catholic, and then Neville Isdell, an Irish Protestant, and then Georg Fleischer,  a German Lutheran, and then Andrew David (a Coke bottler) who was Greek Orthodox, and then on to Mukhtar Kent (future Coke CEO), a Muslim, before finally passing it to Danny Moskovitz (who worked at Coke) and who was Jewish.

What better example of diversity than this!

#15 – Coca-Cola and India – and how they chose not to sponsor Sachin Tendulkar and allowed him to go to Pepsi instead!

Coca-Cola left India because the Indian government at the time demanded that secret formula be revealed to them. Coke walked away from the second most populous country in the world over an important matter of principle and this is an important lesson: always stick to your principles!

However, after Coke came back to India, an individual based in Atlanta decided to block Coke’s local Indian staff’s (Jay Raja) efforts to sign of Sachin Tendulkar saying that it would be a waste of money! Pepsi signed Tenduklar instead!

Another lesson here is – always listen to your local man on the ground.

#16 – Always plan for growth.

Isdell gathered 150 of Coke’s top executives and embarked on the “Manifesto for Growth.”

The manifesto has five core principles around: People; Portfolio; Partners; Planet and Profit. It provided an honest assessment as to where Coke was as a company and where it needed to go. The manifesto allowed for a framework as to who Coke was a company, provided them with a clarity of vision and tactics.

This clarity in direction is critical when you seek to revive an organisation that sometimes loses its way. Go back to basics, find out what made you great, think about what will make you great and work on the differences.

#17 – Corporate loyalty 

In 2004, the Securities and Exchange Commission (SEC) in the US launched an investigation into the practice of channel stuffing (where you artificially push up concentrate sales to bottlers to boost corporate earnings in a quarter). The SEC was targeting the CFO, Gary Fayard, and though Fayard’s lawyers were confident they could win the case, they also highlighted it could take five years. Fayard offered to resign as CFO. Isdell refused the resignation and said, “Gary, you’re innocent and we are going to fight this with you.”

Loyalty tends to be, for the most part, reciprocal. Show loyalty to your team and they will show loyalty to you.

In the end, the SEC investigations were resolved; Coca-Cola’s accounting disclosures were found to be accurate (though the SEC did find that the company failed to disclose the impact of channel stuffing on future earnings and made misleading statements in a public filing) and the CFO was not sanctioned and remains the CFO to this day.

#18 – The perils of arrogance

A quote from Mukhtar Kent: “Coca-Cola in the late 1990s had lost its way. We became arrogant. We lost touch with the details of what makes this business works well. Neville (Isdell) and I were able to bring back the belief that Coca-Cola is great and that we can grow again. When you believe that, when you have a growth model, no one quibbles over trying to split something that is shrinking.”

#19 – Connected Capitalism

The idea that business, government and non-profits should work in a three-way effort to build a better world, towards a cleaner planet, with viable solutions to poverty and disease.

An interesting tale to be shared. When Martin Luther King (MLK) was awarded the Nobel Peace Prize in 1964, a celebratory dinner was planned for him in Atlanta. However, a significant number of the business community had plans to snub MLK. It took the persuasion of Robert Woodruff, ex CEO and Chairman of Coca-Cola to ‘persuade’ the senior members of the business community to attend. This resulted in more than 1000 of the business and civil society leaders of Atlanta attending the dinner where MLK delivered one of his most famous quotes: “If the people of good will of the white South fail to act now, history will have to record that the greatest tragedy of this period of social transition was not the vitriolic words and the violent actions of the bad people but the appalling silence of and indifference of the good people.”

It will also be important to note that through the tripartite relationship between business, nonprofits and governments, each party brings different strengths to the table. Business brings efficiency and profit. An example of how this worked was when CARE, the international relief organisation worked with UPS. UPS used to donate only cash to CARE previously but in 2007, UPS and CARE decided to examine how else they can work closely together and they realised that UPS could improve CARE’s logistics operations and help improve the efficiency and supply chain management and in the process, CARE benefited from the expertise which UPS could share and UPS managed to provide support to CARE in a much more meaningful manner. Both organisations benefited through this significant partnership.

Businesses must learn to operate sustainably in order to last. Profits lead to progress, not just for the company but the wider society in which it operates.

#20 – “In the complex economy of the future, business interest and society’s interests will become more closely aligned. Capitalism will have to be connected or it will not survive.”

 

If you enjoyed this, I would strong suggest you get this book and also Donald Keough’s excellent book, The Ten Commandments for Business Failure.

Economic updates from Myanmar: Brief impressions

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Always good to be back in Yangon. So many developments and changes in such a short span of time. I always enjoy coming to Myanmar. I am always treated to the very best of Burmese hospitality and the resilience and entrepreneurial qualities of the Myanmarese continue leaving a deep impression on me.

A few observations from Myanmar on the economic front:

  • Hotels – When I first used to come to Myanmar – I was paying about US$70 for a good room at well-known hotels like the Traders, Chatrium or Park Royal. Room rates now start at US$200 for any of these hotels! And they are all running at above 95% occupancy rates!

 

  • Traffic – The cost of car ownership has gone down dramatically. In the past, to purchase a car required a permit which cost an exorbitant amount (for instance, it used to cost about US$350,000 to buy a Toyota Land Cruiser). However the permit system has changed and now you can purchase any cars manufactured from 2007 onwards. The cost of a Toyota Land Cruiser is now about US$25,000. This has led to newer cars on the roads, but more pertinently, the number of the cars have increased dramatically with no corresponding increase in the roads and traffic infrastructure, leading to snarling traffic jams which were previously unheard of before.

 

  • Capital market development – It is expected that Myanmar will have a stock exchange by 2015. This development is being supported by the Tokyo Stock Exchange and Daiwa Securities Group. This will lead to significant demand for qualified professionals in the finance sector to support the stock exchange and capital market development. Myanmar previously set up a Myanmar Securities Exchange – back in 1996 but trading volumes were extremely low and there was little or no technical or IT infrastructure available for an efficient and effective functioning capital market. However this new development will be significant given the resource and technical assistance provided by the Japanese. With development and effective governance, we can expect the Myanmar Stock Exchange to rival Malaysia’s BURSA, Indonesia’s IDX and Singapore’s exchange by 2030.

 

  • Currency exchange rate – Up until last year, the Myanmar Central Bank had fixed the exchange rate at 6 kyats to the US Dollar. However, the black market rate at the time was about 700 to 800 kyats to the dollar. The Myanmar Central Bank has now implemented a managed floating system – where the official rate is around 850 kyats to the dollar. This has been a signficant development in helping with the modernisation of the Burmese economy and one that will support further investment into the country.

 

  • Adoption of International Financial Reporting Standards – Myanmar has now formally adopted IFRS and have converted them in their entirety to the Myanmar Financial Reporting Standards. This has been instrumental in providing greater clarity and transparency to financial statements being prepared in the country. This will drive further investment into the country as investors have a better view of the financial positions and performance of the firms they are investing in or keen on acquiring.

 

  • Passing of the Investment Law – Myanmar also passed the Foreign Investment Law in November 2012. Some provisions in the law allow for overseas firms to fully own ventures and offers tax breaks and lengthy land leases, amongst other things. However, the bye-laws and regulations to support the Foreign Investment Law have not yet been passed and are still being deliberated by the Myanmar Parliament. However, under the law, details of bye-laws and regulations should come out within 3 months of the law being passed in Parliament so we should expect further developments by March 2013.

 

  • Tax reforms – The government has also announced a slew of tax law and regulatory changes. There is a plan to widen the tax base but also to make it easier for local residents to calculate the tax. The tax-exempt status will also change for citizens at the lower end of the income spectrum. A progressive tax system is in place and is likely to continue.

 

  • Increased foreign investment and donor funding – Myanmar has also benefited from the increased inward investment into the country from multinational firms. Of the accounting firms, PwC, EY and KPMG all have presence now in Myanmar. Coca-Cola has entered into a JV agreement with a local partner. Other MNCs are also increasing their branding and presence in the country. The Asian Development Bank (ADB) and the World Bank (WB) have also approved loans and grants to support Myanmar’s continued economic and social development.

 

  • ASEAN Economic Community (AEC) – There is also a strong support by the Myanmar government and businesses to support the AEC 2015 vision of greater economic integration by all of the members of ASEAN. This requires further development in terms of capacity and capability – and one that will benefit a broad section of the Myanmarese.

 

Exciting times for Myanmar. However, the key thing to address will be to ensure that the economic progress is one that benefits a broad base of the Myanmar population and not one that only serves to widen the income gap between the top earners and the rest of the country. Ignoring the potential consequences of this will only set back Myanmar’s development down the road. It will also be important to ensure that there is continued focus on education and social development. Environmental sustainability also remains crucial. It is easy to ignore the impact of industrial and economic development on the natural environemnt but doing so will again lead to severe consequences for Myanmar in the long run.

However, that said, I am confident that in the years to come, Myanmar will again take leadership within South East Asia both economically and politically like they did back in the day up to the 1960s!

Myanmar: After the elections – where to next? Some suggestions

After peaceful and fair parliamentary by-elections, the people of Myanmar can look forward to even greater optimism.

Myanmar is a country of immense potential and there is plenty of scope for development and enhancement of the quality of life there. A few interesting facts about Myanmar:

  • It is the 40th largest country in the world, the second largest country in Southeast Asia:
  • and 24th most populous country with over 58.8 million people;
  • Under British administration it was the second wealthiest country in South East Asia;
  • The current capital of Myanmar is now Naypyidaw (“City of Kings” in Burmese) which was chosen as the new capital in 2006. The previous capital used to be Yangon, which is still the commercial hub of the country;
  • It is a hugely vibrant country with a significant level of multi-culturalism and tolerance. Indeed it is not uncommon to see mosques, churches and Hindu temples dotted around the main cities in a largely Buddhist nation.

I have proposed below a number of suggestions as to what Myanmar should consider as the country grows. These thoughts should by no means be viewed as expert opinion but rather as those made by a layman with a deep interest and affection for Myanmar and its people.

Infrastructure improvements

There is an urgent need for Myanmar to improve the following:

Telecommunications & IT infrastructure – Internet access remains expensive and patchy. This is a result of very few operators in the telco space and there should be an active process of inviting regional/international telco partners into the fold and help drive down costs of Internet access. There should also be tie-ups with international partners to allow for an upgrading of the current telecommunication infrastructure. The Myanmar Ministry of Communications, Posts and Telegraphs needs to start working with foreign partners to help support the upgrading efforts.

Roads/railway – With greater economic growth, we will see greater rural-urban migration, which will increase the burden on roads/highways and railways in the cities especially Yangon. Yangon’s traffic network as it stands is just sufficient – but with any further increase in the city’s population, there is a real risk that we will find gridlocked roads that’s commonplace in Jakarta and Bangkok. There must be a realization that there is a severe business and economic cost to poorly managed roads – a point not lost on Jakarta/Bangkok’s city planners. Yangon however – if it chooses to be proactive – can mitigate future problems and issues in a more efficient manner.

Natural disaster early warning systems – The government should also seek aid support (both financially and technically) to help develop and establish early warning systems for cyclones and other natural disasters that afflict Myanmar. This will help minimize casualties and mitigate damages. An early warning system, cyclone shelters, coordinated response systems, integrated medical and emergency protocols, etc will all help with recovery efforts subsequently.

Healthcare – There should be an effort to upgrade medical and healthcare facilities. The current facilities are outdated and with the medical teams normally being overworked and underpaid. The health of the people has to be paramount and there has to be good state hospitals. The easy alternative is to simply let private hospitals operate in the country but this normally tends to create a 2-tier healthcare system – one for those who can afford it (normally a minority) and those who cannot (the majority) and this only exacerbates the problems of social inequality.

Banking sector reforms (including currency exchange)

Banking system

Myanmarese banking systems need to be plugged in with regional partner banks. There should be greater facilitation of international banking norms like Automated Teller Machines (ATMs), international banking transfers, trade financing (such as the use of LCs, DPs, DAs, etc), credit cards, etc.

Credit card acceptance in Myanmar is extremely low – and this hurts locals as well as tourists and businessmen. It also affects the hospitality industry. Plenty of tourists go into Myanmar without realizing that the 99% of the economy is a cash economy which prevents tourists from spending what they would have planned in advance.

Lack of international banking transfers also means that profit repatriation is affected for international investors. This has to be managed as well.

Currency exchange regulations

It is good to note that the Myanmar government has allowed for managed floating of the kyat. However it is important to note that there is still significant dollarization within the economy. Myanmar should avoid the path taken by Vietnam which allowed for the US Dollar to be used as a currency of choice within the country – which effectively meant that the Vietnamese lost all control of their monetary policies as they had no control over the USD. The Myanmar government should restrict the use of the USD extensively within the economy and there should be a push to use kyats by all key sectors of the economy. This will help support the use of the kyat as well as ensure greater monetary policy control subsequently. If the Myanmarese do not control this problem early, it will become too big to solve – see Vietnam experiences.

Education

There should be an extensive review of current tertiary education institutions. There should be greater quality control and better alignment to international best practices. Myanmar’s key universities should invest in (and seek support for investment) their teaching infrastructure and lecturers. There should also be a regional broad-based support of Myanmar’s universities through partnerships with other leading institutions within ASEAN. Exchange programmes, best-practices sharing and scholarships should be implemented with reputable partners. There should also be a review of curriculum (at all levels), textbooks and teaching material (many of which are obsolete), teachers’ competency frameworks and teachers/lecturers’ remuneration.

There should also be additional focus on the development of competencies of Myanmerese youngsters in these areas:

  • Software programming
  • Accountancy & Finance
  • Medicine
  • Engineering
  • Architecture

The above are all areas which Myanmarese have traditionally excelled in and there is a natural gravitation of the talented youngsters towards these subject areas. The government should support the aspiration of the youngsters by ensuring they develop robust and viable capacities and capabilities in these areas.

Public sector / civil service salary review

As the country grows economically and with increasing incomes and greater investments by multinational firms, there remains a real risk that corruption will rear its ugly head. Rampant corruption has been the bane of many a rapidly emerging economy and it becomes a real business cost for the country subsequently. One way of curbing this is to ensure that the members of the civil service have salaries that are consistent with the private sector. Yes, it will be an extremely costly affair, but rather than as a cost, it should be viewed as investment to protecting the country’s future.

A better benchmarked salary will also mean that the civil service and public sector will attract a better quality of individuals with a real commitment to the country’s cause which will help in the country’s development.

This should be a matter which the government addresses sooner rather than later (when it may be too late – the Indian experience is a sorry tale in this regard).

Reinventing the economy

Free-trade zones / Special Economic Zones / Preferred Trading Nations agreements

Myanmar should establish formal country economic partnerships with India, China, the UK and ASEAN. This could be in the form of preferred trading nations agreements, free trade agreements and also in the form of special economic zones whereby the investing nation will get tax breaks and incentives to set up operations in Myanmar. Therefore, we could have an Indian special economic zone (SEZ), a Chinese SEZ, an ASEAN SEZ (where all interested ASEAN member states can invest freely and enjoy liberal benefits). This means that Myanmar also diversifies its economic dependency across a whole host of countries and not remain entirely under the influence of just one major economic partner. This will result in severe risks further down the road.

Professio-nationalisation of key industries and sectors

The country should also consider professionalizing and nationalizing key industries in areas such as mining, energy, infrastructure and transportation. Currently they are either nationalized (but lack professionalism) or have not yet been nationalized at all. Vital industries should be protected by the government. Perhaps one other model is to allow for joint ventures with foreign companies in areas where the government does not have the skill sets. For instance, in Brunei, Shell has a 50-50 venture with the Brunei government (a JV entity known as Brunei Shell Petroleum or BSP) which ensures that Brunei enjoys the technical and managerial expertise of Shell but also ensuring that the returns are shared with the government and ultimately the people.

Supporting small and medium sized enterprises

The government should also provide incentives and support structures for small and medium sized enterprises (SMEs) as they tend to account for the bulk of employment and GDP of any country. Supporting SMEs will also spur greater entrepreneurship, innovation and growth that is led from the bottom-up and which will ensure better distribution of economic resources amongst people.

Conservation & commitment to sustainable growth

In the midst of all these developments, Myanmar however, should not lose sight of the fact that it is a large country with significant environmental beauty and value which must be preserved. Economic progress must not come at all costs and therefore endangering the environment. There must be an overriding commitment to conversation and sustainability. There is no point if the country grows but finds itself polluted and dying from the inside. To this day, I find it absurd that nations spend significant percentages of their GDP of defence spending and yet neglect to look after their environment and allow it to be robbed, pillaged, polluted and destroyed. Effectively, guns are being bought to secure the country from external forces while the country dies from the inside. Myanmar has a real opportunity to ensure this is not the case from a very early stage.