Crossroads

At the intersection of technology, finance and the Pacific Rim.

Thursday, August 31, 2006

My Way

So sang Frank Sinatra. And the importance of each individual and country doing it their way has never been more important. There was an article on the International Herald Tribune on the turnaround of Japanese corporations, who for the most part are doing it in a way that remains consistent with their core values as follows:


Fujio Mitarai, the president and chief executive at Canon, who recently succeeded Okuda as the head of Keidanren, is noted for drawing a distinction between the global and local aspects of corporate management. The new-look Japanese company, according to Mitarai and other executives, accepts world standards in terms of balance sheet and cash flow management, transparency and cost controls while preserving Japanese practices in areas like employment and close ties to suppliers.

No executive in Japan argues that Japanese companies were obliged to maintain unrealistic employment levels as a matter of social responsibility. But many assert that they limited the suffering among employees, at home if not always abroad, and persevered in circumstances in which many American companies would simply have closed.

Almost all job cuts during the recession years, for instance, came through attrition or early retirement plans, not layoffs. Equally, while large companies were unquestionably rigorous during the recession in passing on new competitive pressures to suppliers within what is known as the keiretsu system, long- term ties were by and large undamaged

This is not to say that the "Japanese way" is superior--though the writer may imply so (now that the pain of the last 15 years has receded). I only mean to say that each country, company and individual needs to find their own path, in line with their values, skill sets and aspirations. The US way (cut cost sharply, deploy capital elsewhere) is far quicker as a route to recovery--but fast is only one part of the social equation.

And many of you know my opinion that Japan's difficulties were tied as much to demographics as to anything else. Malcolm Gladwell, who wrote a highly influential book called the Tipping Point, which is on my recommended reading list, had an interesting perspective on demographics and economic growth; he (using the research of a couple of Harvard economists) cites the importance of the dependency ratio--the number of working age vs. the "too young or old to work" age-- as a key driver of growth:

Demographers estimate that declines in dependency ratios are responsible for about a third of the East Asian economic miracle of the postwar era; this is a part of the world that, in the course of twenty-five years, saw its dependency ratio decline thirty-five per cent. Dependency ratios may also help answer the much-debated question of whether India or China has a brighter economic future. Right now, China is in the midst of what Joseph Chamie, the former director of the United Nations’ population division, calls the “sweet spot.” In the nineteen-sixties, China brought down its birth rate dramatically; those children are now grown up and in the workforce, and there is no similarly sized class of dependents behind them. India, on the other hand, reduced its birth rate much more slowly and has yet to hit the sweet spot. Its best years are ahead.
The logic of dependency ratios, of course, works equally powerfully in reverse. If your economy benefits by having a big bulge of working-age people, then your economy will have a harder time of it when that bulge generation retires, and there are relatively few workers to take their place. For China, the next few decades will be more difficult. “China will peak with a 1-to-2.6 dependency ratio between 2010 and 2015,” Bloom says. “But then it’s back to a little over 1-to-1.5 by 2050. That’s a pretty dramatic change. Thirty per cent of the Chinese population will be over sixty by 2050. That’s four hundred and thirty-two million people.” Demographers sometimes say that China is in a race to get rich before it gets old.

Economists have long paid attention to population growth, making the argument that the number of people in a country is either a good thing (spurring innovation) or a bad thing (depleting scarce resources). But an analysis of dependency ratios tells us that what’s critical is not just the growth of a population but its structure. “The introduction of demographics has reduced the need for the argument that there was something exceptional about East Asia or idiosyncratic to Africa,” Bloom and Canning write, in their study of the Irish economic miracle. “Once age-structure dynamics are introduced into an economic growth model, these regions are much closer to obeying common principles of economic growth.”
This is an important point. People have talked endlessly of Africa’s political and social and economic shortcomings and simultaneously of some magical cultural ingredient possessed by South Korea and Japan and Taiwan that has brought them success. But the truth is that sub-Saharan Africa has been mired in a debilitating 1-to-1 ratio for decades, and that proportion of dependency would frustrate and complicate economic development anywhere. Asia, meanwhile, has seen its demographic load lighten overwhelmingly in the past thirty years. Getting to a 1-to-2.5 ratio doesn’t make economic success inevitable. But, given a reasonably functional economic and political infrastructure, it certainly makes it a lot easier.

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