Jan 2019 - Sept 2020
I usually ponder over the question of why some countries are doing well, and some are failing… Why some countries are interesting for global businesses and some are not at all. What are the intentions, rules, and institutionalized practices that shape the long-term success of a nation? During the last decade with several questions in my head, I have spent some of my weekends alone on a quayside of the Caspian Sea, walking and proudly observing modern Baku…
Do natural resources matter? Some countries, even with natural resources, are living in poverty, like Venezuela. Does democracy matter? Some countries, even without democracy, are prosperous, like China. Does population growth matter? Think about India… Hmm, it differs from country to country… Does education matter? Yes, education is important, but how it is linked to other factors? What about health and other social issues? How about entrepreneurship? Infrastructure, stability, conflicts, globalization… many, many questions… so what is the formula of success for countries?
Answer: go to India for the third module of Oxford EMBA to study The Global Rules of the Game.
When I have started to go through materials for the next module “The Global Rules of the Game,” I feel that I am reading all of them quickly and smoothly, like an interesting love story… Supplying me with essential information, I went to amazing country – India for this module. India has been chosen as an example of an emerging market with huge potential and of course challenging issues. Sessions, team work, case studies, city tours in beautiful Delhi, and company visits enlightened me a lot about global rules of the game, emerging market strategies, and created a systematic approach to the questions on my mind.
Here are my key takeaways. There is no single formula… it is too complicated and complex… However, top factors can be defined as shaping the success of countries.
Entrepreneurship – I like this word so much! Of course, not because I am an entrepreneur, but because entrepreneurship is a substantial factor in job creation, high income, rapid growth, and low poverty! Entrepreneurs continuously think about how to efficiently allocate resources, develop creativity and innovation, disrupt systems, think out of the box, promote products, and manage effective teams. Entrepreneurs think about their businesses all day long; they stay in the middle of factories and observe what is going on… They give their soul to their business. Entrepreneurs are the only ones who can efficiently transfer the workforce from low productive sectors (agriculture) to high productive ones (industry, tech and services). Countries with growth dreams need to improve the business environment for entrepreneurship – taxes, certifications, access to finance and resources, property rights, and investment incentives. For example, South Asia has low levels of entrepreneurship because of one of the worst business environments in the world.
Physical infrastructure is a must for rapid growth. Firstly, could you imagine entrepreneurs building factories to produce plastic pipes, with all equipment working with electricity or gas, when unscheduled power cuts can cause huge damages to equipment and raw material, delay orders, damage the reputation of the producer, and increase production and maintenance costs? Access and affordability of electricity, gas, water, and drainage systems is a must in industrial development. Secondly, rapid growth usually causes urbanization growth, so urban infrastructure with power and water supply, and residential and office houses are required. Thirdly, communication, road, port, railway and airport infrastructure is a key factor for any business. Just in time or non-stop delivery of goods internally or for exports is the necessary prerequisite. Fourthly, oil-gas countries also need to invest or encourage FDI for mega pipeline projects to transfer resources to the international markets and gain international experience.
Peace and security are primary factors to access markets and opportunities and encourage investments. Firstly, internal stability helps to implement reforms, sign international contracts, attract foreign investments, avoid sanctions, and develop all parts of the economy. Could you imagine entrepreneurs investing in an unstable country where rebels appropriate the production line? Political stability with long-term reform agendas increase countries’ reputations for doing business. Secondly, external stability peace with neighbors and regional powers affect growth rate; any conflict again creates risk for business. Those conflicts that require long-term militarization from country budget influence country economic power. However, usually it is impossible to stop conflicts for a long time and come to decisions among parties, so countries need to invest in militarization. Thus, avoiding internal conflicts, gaining political stability, and managing external conflicts is a key element of governments’ agendas.
Economic growth, education and health quality, home-ownership, formal-sector jobs, economic security, and technology application are the cause and consequences of increasing middle class. The rising middle class is investing in education, entrepreneurship and innovation, and demand better services, products, and governance. The middle class is the main driving force for transformation, change and innovation. People in the upper class, currently benefit from conservative profits channels, rents, big factories, huge farming areas, and long-term service companies. In some countries, the upper class also grows with governmental officials benefiting from corruption. The upper class already has its sustainable income flows, so they have no incentives for innovation, as innovation would result in disruption of their benefit channels. In the case of the lower class, maybe they are willing to innovate, but resources, education, financials and other opportunities are very limited to deliver innovation. It is obvious that the middle class is the driving force of innovation. They have initial resources and mindset to start entrepreneurial projects that can disrupt current systems.
Growth takes place through structural transformation, as resources move from low productivity to high productivity sectors, and from traditional to modern sectors. Policies should be in place to create incentives for a rapid shift in the workforce out of rural traditional sectors into modern ones (high-tech, manufacturing, and services). Of course, it is not easy, it can create rapid urbanization issues, and so urban infrastructure should be able to serve the growing population. Besides that, new skills are required for the work force, so appropriate changes to education and training plans are necessary. Young entrepreneurs are the main drivers for productive resource allocation for rapid growth; it helps allocate resources efficiently, supports innovation, and promotes trade. Again, entrepreneurship supports transition to more productive sectors. Sometimes it is questioned, how to produce if the raw material is not available within the country? To get experience as a country in productive sectors, you need to start anyway. Bring different parts, start with assembling, then encourage entrepreneurs to produce small parts within the country. Gradually the workforce will be more qualified, continue product development for middle parts, so after maybe a decade, transition from assembling to full production will be achieved.
In some countries, even despite the rapid growth, informal businesses are remaining. Women dominate in the informal sector. It is not easy to control informal traps, as they emerge in many shapes and forms. People engaged in trade, self-employed entrepreneurs, unpaid family members, individual education services, small manufacturing shops, agricultural workers, transport and storage services labor and temporary construction workers are just some examples of informal businesses. What is wrong with it? Poverty is strongly correlated with informality. Children are exploited at a lower rate or without any payment. Informal jobs cause unfair competition among companies, as they are not paying for labor, property or others’ taxes, and are not responsible for health, safety, and environment. The informal employment is not accountable for the quality of products, which create significant difficulties for corporate companies. As a result, informalities can kill incentive for companies to create formal jobs. The informal business also slows down the economy, as informal workers are not able to use different financial services like mortgages or credit for goods. Policies are needed to encourage formal business and reduce informal jobs and to encourage business integration to the global world.
Policymakers need to ensure rapid and stable growth. Policies and their application should be dynamic, avoiding all bureaucratic obstacles. In developing countries, policy and structural reforms are required to enable land, labor, and capital reallocation from low productivity sectors into high productivity modern sectors. Policies should create incentives for entrepreneurship and mainly encourage innovative entrepreneurship. To attract foreign or local investments, institutional voids need to be maintained. To implement successful reforms packages institutions strength should be increased, and government scope reduced. Institutional voids also in product and capital markets need to be closed. Data management, customs services, raw material, supplier, quality standards, logistics and transportation, employee education, labor contracts, labor tax, insurance, stock market, accounting standards, and access to financing instruments are among policies which directly influence investments.
Education and training play a significant role in the transformation of working-age people from low to highly productive jobs. The economic value of activities depends on the professional skills of the workforce. When a country primarily with a simple agricultural economy, aims to transfer to industry and service businesses, educated and skilled labor becomes very necessary. Growth of high value-added industries will create demand for educated workers. Even for economies that do not rely on cutting-edge technologies, a well-educated workforce is the key to supporting a wide range of industry and services. Besides that, skilled young people can also integrate world-class jobs in other developing countries. World sustainability issues like green energy, food security, clean water, gender balance, environment, and others depend on mindset, which is also correlated with education level. Educated consumers can assimilate technology, understand quality, and change the behavior and work culture that is required for developing the market of new generation products in the countries, hence education directly affects consumer power.
Health is another essential factor for successful reforms and transition of countries to becoming more developed economies. A healthy population could be more productive, willing to be educated and innovative. Nobody can imagine people having health problems interested in innovations or adding value in the workplace. Healthy people live longer, and they are willing to invest in education; as a return of these investments they can enjoy life in the later stages by benefiting from high salaries. Health also influences mindset, happiness, and willingness for social impact. Many research results show that health plays an economic engine role for countries. It is obvious that health supports economic growth through micro and macroeconomic parameters. Even the poorest developing countries should invest in public health, as it is key to development and demographic dividends. In countries with neglected health care, industrialization is slowing down. In short, health has a significant effect on economic development.
Technological development increased the globalization of the world. Globalization creates opportunities for countries and individuals. Open economies improve trade channels and provoke aggressive competition among companies and countries. Nations with well-developed industries and services can export their products to other countries. Globalization creates demand on labor migration to developed countries, opportunities for companies to build facilities in emerging markets, outsource some function for cost reduction…it also integrates experiences and sharing-learning processes. In our days, service companies like finance, tax, education, health, media, and others can provide services through the internet without comprising quality. Furthermore, the price of the same online services in the other parts of the world is very different and this creates more opportunities for people. Any professional individual can create its own consulting and education programs and provide services online. To get benefits from globalization, cost-effective and high-quality products, reasonable service market, technology development, and education is important.
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