Azerbaijan FDI

[caption id="attachment_2349" align="alignright" width="270"] Baku, Azerbaijan[/caption]

Azerbaijan is a country with wide range of investment opportunities and is undoubtedly one of the most attractive destinations for foreign direct investments (FDI) in the region. There are good opportunities for the development in the following sectors:

Agriculture and food processing. Agriculture is one of the most important sectors of the economy in Azerbaijan. Today, the agricultural sector employs over 39% of the active labour force of the country. The fertile lands, abundance of water and climatic diversity create favourable conditions for a strong agricultural sector. Meanwhile, the food-processing sector constitutes an important component of the national economy and accounts for around 14% of national manufacturing output. Furthermore, Azerbaijan trades intensively in agricultural and food products. Existence of 9 climatic zones out of 11 in the world creates favourable conditions for the development of agriculture in Azerbaijan.

Possessing great potential for development, the widest range of investment incentives and high economic profitability, the agriculture and food-processing sectors remain  among the most attractive for investment in the economy of Azerbaijan.  Different financial and non-financial schemes, such as exemption of farmers from taxes (except land tax), state subsidies, discounts and other privileges have been developed in order to promote further development of business in the sector.

Alternative and Renewable Energy. Alternative and renewable energy sector is quite new (except for hydro-energy which is one of the traditional energy sources) promising area of the economy. According to estimations, Azerbaijan has a great potential to raise effectiveness of use of the energy resources of the country by involving the following renewable energy sources:

Hydropower (by using the energy of small rivers); Wind (average annual wind speed in Absheron peninsula is 5.8 – 8.0 m/sec and number of wind gusting days per annum is up to almost 245-280 days); Solar (Azerbaijan has got 2500 hrs - 2800 hrs of sunshine period with 250 sunny days per annum); Thermal waters (with over 400 million cubic meter/day of between 35-100o C total resources of the thermal waters); Biomass (with annual waste emission plays around of 2.0 mln. tons).

Construction. The construction sector is also a huge growth area, as one can witness Baku and regions of Azerbaijan look like a huge construction yard. Major redevelopments are underway to give the country a facelift, and much of the infrastructure is being built from the scratch. Many foreign companies are also fighting for a piece of that pie. Thus, inflow of investments is welcome in Azerbaijan for starting up a construction projects only by forming joint venture with local entities.

Tourism. Tourism is another important sector. We are learning from the experiences of many countries-well-known tourist destinations, such as our close neighbor Turkey. The year of 2011 was designated as the “Year of Tourism” in Azerbaijan. 40 hotel construction projects were ongoing in 2011, six of which were five-star hotels built in Baku city. It is no wonder that world-famous hotel chains are entering the market. All of six new hotels in Baku are the leaders in the global hotel industry (Hilton, Jumeirah, Kempinski, Four Seasons, Marriott, and Fairmont). Of course, we do not only aim at luxury tourism, as most of tourists prefer budgetary spending. Therefore, we dare to attract many more international middle-class and budget hotels companies to heavily invest in this particular field.

One of the ongoing biggest projects - construction of large-scale summer and winter tourism complex in Shahdag Mountain - is in the implementation phase. Construction of this complex stimulates development of the winter sports in the country.

Telecom/ICT. Telecommunications sector is developing and attracting investments as well. Soon Azerbaijan will launch its first satellite. Minister of Communications and Information Technologies made a forecast that during the years of 2020-2025 the revenues from this sector will reach significant sum. There are five major cellular phone carriers in Azerbaijan, two of which are world's telecom giants like TeliaSonera and Vodafone. More than half of the population is registered as internet users. Online payments, registrations, taxation, and other e-services are being widely introduced and the sector is developing. Along with all these Azerbaijan still seems covenant area to invest and benefit.

Petrochemical industry. Throughout the 20th century chemical industry has been vibrant and growing due to oil production. Numbers of petrochemical and chemical facilities were built during soviet era along with city of Sumgait that produced most of the chemicals of the country. After the soviets collapsed many facilities were incapable to run. But, by the end of 2011 a new decree was signed by the president to give rebirth to this field by establishing a brand new and modern Sumgait Chemicals Production Site. It is 37 km away from Baku city and resides nearby the Caspian Sea that makes cargo transport a lot easier and suitable for future trade of goods and offshore carriages. This site will consist of plenty chemical plants that will be open to both local and foreign investors. A number of tax and customs incentives as well as concessional loans are considered to be granted in the Park.

The investment potential of these sectors is broadly presented in all promotional activities of AZPROMO.

Are there particular geographical areas and cities you particularly wish to develop?

To achieve diverse and rapid development, the Azerbaijani government executes  extensive programmes, one of which is the State Program on socio-economic development of regions (2009-2013) This program aims to develop all regions and cities of the country and contains widespread renovation, development and construction of interconnected roadways, bridges, highways, utilities, schools, hospitals, olympic sports centers, industrial buildings and many other diverse infrastructures to enable expansion of the business throughout the country.

Government also pursues strategies to restore the economic activities in the areas traditionally known for specific products manufacturing.

As a proof, the city of Sumgait-as it once carried out a title of chemicals capital of the Soviets-is set to be chemical and industrial superpower of Azerbaijan nowadays. Sumgait Technological and Chemicals Manufacturing Park is currently being established to vitalize country's industrial strength and regain its title as an industrial city.

One of the ongoing audacious urban development works is “Baku White City” project that will be one of the largest modern projects in the world, built entirely on ecologically reclaimed industrial zone. As a lead consultant, the world-renowned global multidisciplinary engineering and architectural design firm Atkins (UK) performed master planning and detailed planning activities for the project. Along with specialists from Azerbaijan, Fosters and Partners (UK), established by legendary architect Norman Foster and American architectural bureau F+A Architects, were also involved.
Baku White City will encompass 244 ha, making it largest development in Caucasus region - 11 times the size of Iceri Shahar (The Old Town) in Baku and more than Monaco inhabitating up to 50 000 residents. When completed BWC will be able to provide 48 000 workplaces, 20 000 residential and commercial units and 40 000 parking spaces. Currently this project is looking for principle investors in all aspects to be financed.

Currently a number of projects are being implemented in the regions of Azerbaijan. Among them are such projects as construction of Aluminum plant in Ganja, construction of Cement Factory in Gazakh region. The establishment of Ganja Industrial Park that will boost development of industrial areas is also on stake. This is important both from regional development perspectives and for opening of new work places. After Baku, construction boom now spread to other big cities of Azerbaijan. Besides that, government pays special attention to reconstruction of infrastructure in the regions of Azerbaijan.

Since acquiring independence in 1991, tremendous efforts were made to develop the infrastructure area and this resulted in Azerbaijan’s lead in infrastructure of the region. Many mega infrastructural projects are underway.

One such project is the Baku-Tbilisi-Kars railroad, which is also called ‘Iron Silkway”. After completion of this project in 2012 Azerbaijan will turn into logistic hub by restoring ancient trade routes which will connect Asia to Europe. We have also managed to establish air connections to major European and Asian cities, and Azerbaijan has never been so well connected. Despite relatively small territory of the country, we have six international airports; latest opened in November 2011 in Gabala. The biggest one is in Baku. The new 53,000m2 terminal of Heydar Aliyev International Airport designed by world-known “Arup” company, with capacity of 3 million passengers a year will promote Baku and Azerbaijan to the wider world. The Baku International Sea Port which will be the largest on the Caspian is also under construction. Being located on the territory of 400 hectares the Port will capacitate 21 mln tons of goods per year or 150 000 containers. It is needless to mention that most of the above infrastructural projects will enable to increase the capacities for moving of persons and goods to and from Azerbaijan and will make Azerbaijan the logistic hub of the region.

One of the ongoing biggest projects - construction of large-scale summer and winter tourism complex in Shahdag Mountain - is in the implementation phase. Construction of this complex stimulates development of the winter sports in the country.

Another ambitious project is construction of “Khazar Islands” which will cover 2 000 hectares and is being developed 23 km away from capital city. Numerous residential buildings, office spaces, educational and medical facilities, business centers and other amenities will be constructed in the city. Leading companies experienced in the construction of cities from UAE, UK, The Netherlands and other countries are engaged in the project.

What are your plans to develop your financial sector, including in banking, your stock brokerages and the domestic stock exchange market?

Financial sector in Azerbaijan has gained its sustainability and market cap during last 10 years by leaping numbers of newly opened commercial banks, insurance companies and financial entities of multi-purpose loans etc. Currently, up to 44 banks, 19 insurance companies and 38 money-lending equity funds are operating in Azerbaijan serving millions of customers. Some of them have international operations in the cities of Tbilisi, Moscow, London, Paris, Frankfurt-Mein, St. Petersburg and New York.

As a result of widespread privatization after gaining independence, the financial sector has also passed through all procedures and state-owned banks’ shares were bid and sold to investors. In the beginning of 2011, total assets of all local commercial banks exceeded $13.6 bln and kept their rating not below BBB- (according to Fitch and S&P indices). One of the Russian major banks, Bank VTB, established its office in Baku in 2009 and expanded business to substantial extent with millions of dollars portfolio.

Hence, audit & financial consulting firms are also doing a successful business in Azerbaijan. Worldwide-spread and recognized as “Big Four”-the audit, tax & legal giants-Deloitte, KPMG, PriceWaterHouse Coopers and Ernst & Young are among these promising companies which run in Azerbaijan as well. They, along with local audit companies, offer diverse services including overall financial analysis, corporate taxation issues of enterprises based on IFRS standards.

Despite major financial downgrade & economic recession, Azerbaijani banks kept their credibility while maintaining their stable portfolio and revenue growth (total profit from banking activity in 2003: $25 mln; in 2010 increased more than 10 times: $300 mln.) These indicators demonstrate the reliable business climate of financial & banking field in Azerbaijan.

Azerbaijan has stakes and is actively engaged with the European Bank for Reconstruction and Development, Asian Development Bank, World Bank, Islamic Development Bank, Black Sea Trade & Development Bank, etc. all of which have running projects portfolios in the country. There are also representative offices of some leading foreign banks in Azerbaijan, such as KfW, Societe Generale, etc. that are actively involved in financing of local companies and mainly infrastructural projects.

As for the domestic stock exchange market, in 2000 Baku Stock Exchange (BSE) was constituted with an aim to create an organized stock market in the country. The trading partners include banks, capital management organizations, financial funds, holdings and industrial companies. BSE carries out trading and settlement (clearing) operations for corporate securities. Trading, depository and clearing operations on primary and secondary markets of public securities (T-bills of Ministry of Finance and Notes of the Central Bank) are carried out solely at BSE. At present, BSE has 19 shareholders including Istanbul Stock Exchange among them.

How do you wish to promote international investments into your domestic companies?

The fact that, Azerbaijan has been receiving the largest amount of foreign investments in the region proves the existence of firm and favourable investment climate in our country. Since 1995, almost 120 billion USD was invested into Azerbaijani economy of which more than a half was made by foreign businesses. The striking results in investment attraction are achieved through the implementation of quite serious economic and legal reforms, liberal economic policy and a policy of ‘open doors’ for foreign investors. Along with favourable legal regime that provides foreign businesses with certain necessary guarantees, there are a number of other key positive factors behind our success in attracting foreign investments. Political stability and sustainable economic development over the last 15 years, reformist business environment, liberal trade regime as well as the presence of abundant resources and a favourable location on the crossroads of Eurasia with the best infrastructure in the region, make our country very attractive investment destination. But all abovementioned certainties are only a glimpse into the advantages of our country.

Azerbaijan has many attractive sides which are really appreciated by the foreign decision makers, but still strongly require publicizing on the international level. From this point of view, one of the major objectives of AZPROMO is promotion of our country as the favourable investment destination by organizing international business events along with matchmaking between local and foreign entrepreneurs, making specific country presentations and publishing brochures on priority investment sectors. Undoubtedly, business forums, investment seminars, road shows and one-to-one business meetings are essential tools for presentation of country’s investment opportunities and specific business projects initiated by local companies directly to the foreign potential investors.

Moreover, in order to increase awareness of foreign investors in the projects to be implemented in Azerbaijan and increase efficiency in finding foreign business partners the “Investment Projects Catalogue” based on local businesses’ proposals has been prepared by our organization which is being continuously updated. To promote the sectors with competitive advantage, AZPROMO publishes brochures and catalogues highlighting the sector potential and business opportunities. All these measures create great scope for expansion of cooperation between local and foreign entrepreneurs and stimulate implementation of joint investment projects in Azerbaijan.

Are you planning to promote PPP (Private Public Partnerships)?

PPP model of cooperation between public and private sector is something new for Azerbaijan. AZPROMO itself being a kind of PPP established by Government closely works with representatives of both private and public institutions.

Currently all PPP relations are governed by Civil Code, law on public procurement and other related legislation.

Today a number of projects offered by public authorities with participation of foreign companies are currently being implemented. Such projects are mainly implemented in infrastructure and include building of and reconstruction of roads, bridges, passages, etc.

As an example of PPP project which is currently being implemented in Azerbaijan, I can specify construction of Waste-to-Energy Plant which is a “turn-key” contract and being carried out with the principle of “Design Build Operate”. So the designing, building and operating are entirely being held by “CNIM” S.A. The designing, construction and 20 year operation of the future Waste-to-Energy plant with 500,000 tons of MSW per year is considered in 20 ha area designated in Balakhany settlement. The amount of electricity obtained as a result of burning of waste will be equal to 231,5 million kWh/year.

The other PPP  projects  are implemented by Azerbaijan Investment Company (AIC) together with foreign partners. The main objective of the AIC is to implement fixed-term equity investments in the private sector and to assist FDI in the non-oil sector of Azerbaijan. One of the biggest PPP projects of AIC is the construction of the modern shipyard and ship repair facility on Caspian Sea which is being implemented together with State Oil Company of the Republic of Azerbaijan (SOCAR) and Keppel Offshore and Marine (Singapore).

In order to further promote PPP projects we plan to include information on projects offered by state authorities to our Catalogue of Investment Projects  to keep foreign companies informed.

How are you looking to cut red tape for industry and commerce?

Well, one of the priorities of the Government is to support development of local business. In order to simplify procedures for doing business, lessen bureaucracy and reduce number of documents, different reforms on registration of legal entities, registering property, customs, payment of taxes and other sphere have been implemented during last years.

These reforms have been observed by international community. Thus, World Bank 2009 report named Azerbaijan top reformer improving its position from 97th place to 33rd out of 181 economies. Azerbaijan improved in seven of 10 indicators, catapulting 64 places in the rankings, the biggest jump ever recorded by the World Bank.

One of the brilliant examples of the reforms was the introduction of “one-stop-shop” system for registration of legal entities, effective from January 2008. This system was designed explicitly to reduce the red tape, costs and paperwork associated with the process of business registration. After this, the number of procedures and number of days to establish a company was reduced to 5 and 3 respectively. Very recently the system was further developed and “online” registration of the company now is a reality.

Besides this, the “E-Government” project is currently under implementation. The aim of the project is to increase the introduction level of ICT in state agencies and using modern ICT to render services to citizens. Implementation of this project will enable to increase the quality of services rendering to population, reduce the time and costs. Azerbaijan is pursuing its goals to ease business conditions and establishing favorable environment for starting business. A new information portal on permits and licenses www.icazeler.gov.az will be launched on March, 16th. . The web-site will give broad information on type of permit required, process of obtaining it, granting authority, state fee and other related information.

From our side, as a part of policy advocacy role of AZPROMO we regularly analyze current legislation and prepare our proposals on improvement of both investment and export related legislation.

How does your government plan to make it easier for small and medium size to grow their businesses?

Considering that small and medium size enterprises are one of the major determinant factors for sustainable economic growth, Azerbaijani government implements significant reforms and provides incentives in order to stimulate SME’s development and increase its share in the whole economy. Simplified tax system and concessional credits for starting and improving business are striking examples of supporting policy pursued by the government to SMEs. In order to ease tax burden for small and medium size businesses the country introduced simplified tax regime, whereby legal entities with total revenue not exceeding 150,000 AZN (approximately 190,000 USD) for the previous 12 months period are charged at the rate of 4% in the capital city of Baku and 2% in other regions of Azerbaijan of the gross revenue. In that case, such enterprises are exempt from VAT, profit and property taxes.

The National Fund for Entrepreneurship Support was established by the government with its primary mission to support the development of SME in Azerbaijan by providing concessional credits of 6-7% annual percentage rate to entrepreneurs in all regions of Azerbaijan (the loan portfolio was approximately 578 million USD as for the 01 August 2011).

Moreover, there are a number of state subsidies for agricultural growers on purchase of seeds, fertilizers, fuel and for covering other costs. In order to support companies in agricultural sector Azerbaijan abolished all taxes, except for land tax. Along with that, no customs duties and VAT are imposed on specified products and equipments which are imported for the purpose of using in agricultural and food production.

Taking into consideration wide opportunities existing domestically, the government of Azerbaijan successfully implements import substitution objectives.. The production is not only focused on meeting the domestic demand but also export oriented.

How do you plan to maintain going forward the impressive strong economic growth you have experienced over the past in light of the global slowdown?

Azerbaijan’s economy has become one of the fastest growing in the world. In 2006 and 2007, Azerbaijan topped the world GDP real growth rate table accounting for 34.5% and 25% respectively. Even in the period of global financial turmoil Azerbaijan managed to keep the high pace of development. Today, share of Azerbaijani economy in the region of South Caucasus accounts for over 73% which shows the economic potential of the country.

Of course, rich oil and gas reserves play important role in the development of Azerbaijani economy and provide great prospects for the country. But it is known that economic development in only one direction might be the reason for negative results in future, considering that oil price trends in international market are unpredictable. Therefore, with embarking on the course of development in the beginning of 21st century, the diversification of economy and the development of non-oil sectors became key strategic goal for our government.

Today, a large amount of funds are allocated both by public and private sectors in our economy for the purpose to promote the development of non-oil related industries such as agriculture, food processing, tourism, alternative energy, ICT, chemical industry and so on. Just as an example, almost 16 billion USD were invested in the non-oil fields of national economy in 2011, which makes over 78% of total investments. As a result of well-considered policy of Azerbaijani government, in 2011, non-oil GDP growth accounted for 9.4% and this is not the limit of our potential at all. All necessary measures serve one single purpose which is transformation of the country from single-sector economic growth into a diversified and stable economy.

What role will the “green and clean” technology and the renewable energy sector play in your country in the future?

Alternative energy is set to be a future emerging sector, especially after the announcement of 2010 as a year of ecology. Many projects were launched over the course of that year by a State Agency for Alternative and Renewable Energy Sources within the Ministry of Industry and Energy established in 2009.

Solar energy will be promising business in the coming years, as Azerbaijan begins its own solar panels production. The first in Azerbaijan solar production plant with capacity of 30 MW or 120 000 units per year has already started its activity. Another project is launching of the first in the world 5 MW hybrid Experimental Polygon and Training Center in Gobustan which covers solar, biogas, wind and thermal energy sources.

Caspian coast is also a perfect source for wind energy, and pilot projects are being developed with participation of foreign investors. The number of wind farms will be increased, tariffs are being restructurized by the Government and I am sure the subsidies will be provided, as showcased in many European countries.

The declaring 2010 the Year of Ecology gave a start to the implementation of numerous environmental projects. More than that, in December 2011 the President signed a decree on drafting of State Strategy on usage of alternative and renewable energy sources for the years of 2012-2020, which considers implementation of measures to further stimulate the development of sector.

Besides that, in order to improve ecological situation in Baku and surrounding areas “Tamiz Shahar” JSC was established to carry out the works through placement and disposal of the solid household wastes in accordance with the modern standards.

“Tamiz Shahar” JSC was entrusted with the function of management, placement and disposal of household wastes in accordance with modern standards, carrying out this process in an organized manner, as well as improvement of environmental situation of the city and development of this field based on the principles of market economy.

Azerbaijan Export and Investment Promotion Foundation (AZPROMO) being the single organization in Azerbaijan that serves as a “one-stop-shop” for international investors has good knowledge of investment opportunities and market features of the country and provides newcomers to the Azerbaijani market with all kinds of support and information. Foreign investors enjoy AZPROMO advices relevant to doing business in Azerbaijan.

AZPROMO was established in 2003 with the purpose of attracting foreign investment in Azerbaijan. In 2005, AZPROMO’S activities expanded to include the promotion of Azerbaijani exports overseas and the brand “Made in Azerbaijan”. The main aim of AZPROMO is to increase non-oil FDI inflow in Azerbaijan as well as to stimulate strengthening and expansion of the country’s non-oil export capacities. Our main task is working with foreign investors who wish to start business activities in Azerbaijan. AZPROMO provides a range of support services for interested foreign businesses free of charge, including consultancy and logistic services. AZPROMO also works closely with Azerbaijani entrepreneurs, helping them to discover new markets and find partners overseas. Our core function is to build bridges between the private and public sectors of the economy. AZPROMO has representative offices in Georgia, and also in Austria, we are an active member of the World Association of Investment Promotion Agencies (WAIPA), and are on the board of directors of WAIPA covering the South Caucuses and Central Asia.

AZPROMO also serves as a mediator in handling concerns of investors helping to address them and advising the Government of Azerbaijan on improving the business climate. Aftercare services for existing foreign investors who are interested to retain investment, expand it and re-invest are also provided by AZPROMO.


Christine Riordan: Leading Rapid Change

[caption id="attachment_2359" align="alignright" width="210"] By Christine M. Riordan, Ph.D.[/caption]

In today’s accelerated business environment, the ability to anticipate and actively lead change on a daily basis is essential for leaders.

John Kotter is a well-known expert on how to lead change. He lays out six important areas for effecting change: creating a sense of urgency, creating a compelling vision, forming a guiding coalition, communicating widely to gain alignment, gaining short-term wins and momentum, and integrating the changes into the culture. His advice is invaluable for understanding the process and leadership of change.

However, to successfully direct change, you must go beyond Kotter’s six areas and manage yourself. As a leader, you must also understand your own personal reactions to transitions and adaptations, because your own actions are viewed as symbolic and inspire emotion and action in others. Managing yourself through change is essential to leading others through change, and leading change should be a top priority in your own activities. Making it so will help others foresee and embrace the coming changes that will help your organization thrive in an accelerated environment.

"Leaders must constantly engage in new activities and thinking as part of change."

To make leading change one of your leadership priorities, try doing the following four things:

Put leading change on your to-do list. Many change initiatives fail because leaders treat them as events rather than as processes. You must manage change continuously. Leading change should be a category on your to-do list. Write out the daily actions you will take toward change, and update the list every week.

In a research study on change, ninety-six percent of participants suggested that there is a need for a continuous message of change—with change readiness becoming a daily part of the organizational culture.

Kevin Reddy, the chief executive officer of Noodles & Company, leads change every day. Noodles & Company is one of the fastest-growing restaurant chains in the United States. Reddy and his team keep disciplined growth, innovation, and execution at the top of their to-do-lists. Reddy notes, “It takes an incredible amount of effort to keep all of your talent moving in the same direction with change efforts, and it is important for leaders to make this a priority.” He would know. Since he took the helm in 2007, the chain has grown from 100 stores to 290, with continuous positive sales trends in all units. That hasn’t happened by accident. It is a progressive expansion that Reddy aggressively manages.

Check your own reaction to change. Leaders must constantly engage in new activities and thinking as part of change. This often requires them to break habits, change behaviors, and adjust attitudes themselves.

People’s responses to change vary. Identify your own. Are you a proponent? Are you an advocate? Are you a passive resister, not leading change as you should? Leading others is difficult if you don’t embrace change yourself.

Recent research found that leaders who don’t love change increase their employees’ resistance to it, and leaders, who focus on creating a positive vision, lower their employees’ resistance to it. When a leader does not buy into the change, it is hard to get others to buy in as well.   If you are feeling particularly negative about a change, learn how to positively reframe it in your own mind.

You must tell a compelling story and share what is changing, what is not, why change is urgent, and why employees should change. And as a leader, you must show that you believe in that change. Shaping a compelling picture of the future shows organizational members that there is a better place to go and that as a leader you are confident in the future.

"Leading others is difficult if you don’t embrace change yourself."

Recognize that the pace is fast. Rapid change is the new normal. All leaders must keep track of trends that affect both their industries and business in general. As those trends accelerate, so does the pace of change.

To adapt quickly, you must constantly look ahead. You need to ask what’s new and what’s next. Don’t hunker down with a day-to-day mentality. Rapid change can be overwhelming, but actively look around the corner to spot trends. Think about the future and what it might hold. The need to anticipate and react quickly to change has become an essential component of leaders’ roles.

Pradeep Bobba, general manager of Le Meridian Hotel in San Francisco, says that much of his job now involves examining data on fast-paced trends that may alter hotel use. He notes, “There are a lot of data and information coming at you quickly. The key to success is to not get buried in the fast pace but to rise above it and detect trends to help your business change and thrive.”

Create a network of change enablers. Leading change is not the exclusive responsibility of an organization’s top people, so change occurs easily only when the organization has a strong network of change enablers. Leaders should recognize that informal followers and advocates of change are quite powerful. Listen to what they have to say, and let them help drive the change.

Launa Inman, the new CEO of the surf-wear company Billabong, uses this technique. The company is currently suffering from a drop in profit and flat sales. Inman, formerly with Target Australia, has long advocated asking people within the company for ideas that may solve problems and lead to success. She listens to everyone—senior leaders, middle managers, sales staff, customers, operations partners—and everyone has a chance to weigh in and help lead the change. Inman is counting on this network of leadership to revitalize Billabong. Research supports this approach, documenting the fact that front-line opinion leaders help create positive change within organizations.

Make leading change a top priority for yourself and put it on your daily to-do-list. Facing the ever increasing pace of change and overcoming obstacles to successfully lead change is important to the development of all leaders.  As Niccolo Machiavelli points out, “There is nothing more difficult to take in hand, more perilous to conduct, or more uncertain in its success, than to take the lead in the introduction of a new order of things.”

About the Author

Christine M. Riordan, PhD, is the dean and a professor of management at the Daniels College of Business, University of Denver, an internationally ranked business school. Dr. Riordan runs an $86 million operation and leads a global network of more than 36,000 faculty, staff, students and alumni. Connect with her on FaceBook and LinkedIn.


Pier Carlo Padoan, OECD: A New Era for the Euro Area

[caption id="attachment_2383" align="alignright" width="234"] Pier Carlo Padoan, Deputy Secretary-General and Chief Economist of the OECD[/caption]

The euro area is entering a new era. The importance of [approval by the German constitutional court of the European Stability Mechanism (ESM)] and the European Central Bank’s (ECB) new Outright Monetary Transactions (OMT) programme set out recently cannot be overstated. These should help create the conditions for stabilisation of the euro area crisis in the near-term. This would allow time for the imbalances of the past decade to be resolved. In the future, these instruments can be building blocks in a more stable monetary union.

Imbalances in the First Decade of the Euro Ended in Crisis

The first decade of monetary union since 1999 was an era that began with great stability and strong growth in many countries, but ended in a debt crisis and severe recession. The prevailing assumption was that countries had done enough in the years running up to monetary union to live with the discipline of a single currency. In fact, fiscal discipline was patchy and poor structural policies were holding back productivity and employment growth. At the same time, EU capital markets were liberalised, creating a new dynamic in capital flows.

By the start of the crisis, there had been a large build-up of excessive financial, fiscal and economic imbalances in the euro area. There were big and sustained current account deficits and surpluses. Countries such as Greece, Ireland, Portugal and Spain became heavily indebted, Growth in Germany was unbalanced between a strong export sector and feeble domestic demand.

[caption id="attachment_2389" align="aligncenter" width="560"] Some euro countries are heavily in debt[/caption]

The global financial crisis in 2008 triggered the end of the good times. Banks reassessed the risks of the peripheral economies and cut back their lending. This led to banking crises and rising borrowing costs for governments. Housing bubbles burst, leaving a large overhang of debt. These economies need to shift from relying on housing and government demand to exports while domestic balance sheets are being repaired.

Resolving the imbalances built up over the past decade will take time. This will be require fiscal consolidation over many years, the cleaning up of banking systems and deep reforms to make peripheral economies competitive in European and world markets.

The Euro Area Has Faced a Negative Spiral

Strong pressure from financial markets has called into question whether euro countries will have the time they need to adjust. Three powerful negative feedback loops have pulled euro area countries into a “bad equilibrium” where financial fears and weakening growth feed off each other.

First, fears of government default led to rising state borrowing costs. These are self-reinforcing because rising interest costs makes it harder to rebuild the public finances. At the same time, market pressure forced the pace of fiscal consolidation, increasing the downward pressures on growth.

Second, rising yields reduced the value of bank’s sovereign debt holdings, adding financial stability risks. In turn, this increased fears of further government bail outs of the banking system, thereby pushing borrowing costs up further.

"Strong pressure from financial markets has called into question whether euro countries will have the time they need to adjust."

Third, some market participants began to call into question whether countries would stay inside the euro, raising the borrowing costs that then make it more costly to stay in the monetary union.

Strong policy measures by EU leaders and countries failed to restore market confidence. This includes the massive fiscal consolidation efforts underway. The EU fiscal rules were strengthened through the “six pack” reforms to the Stability and Growth Pact and a new treaty, the “Fiscal Compact”, which commits countries to put strong budgetary rules into national law. Many countries are undertaking deep structural reforms to labour markets and liberalising their product markets.

The New Era – Monetary Union With a Backstop

What was missing was a credible “backstop” for euro area governments. Bond markets, nervous about developments, could not see how governments could finance themselves during the fiscal consolidation and to support their banking systems.

The architecture of the euro area did not allow for this problem – the monetary union had no accompanying fiscal union. This contrast with the United States, where the federal government transfers resources across states and provides the backstop for the banks. Furthermore, there were no “rescue mechanisms” for countries that are solvent but unable to access market funding.

During recent years, the euro area has been surviving through a temporary backstop. This started with the loans provided to Greece in 2010. A new body - the European Financial Stability Fund (EFSF) - was set up and financed joint programmes with the IMF in Ireland and Portugal. At the same time, the ECB has provided large scale funding to banks through its expanded monetary operations and set up a Securities Market Programme for government debt.

"This was enough to help smaller countries but would have been stretched by assistance to Spain and Italy."

The problem with these temporary backstops is that they were too small and limited in scope. EFSF resources amounted to only €440 billion (4.5% of euro area GDP), even after various safeguards in the original scheme were removed. This was enough to help smaller countries but would have been stretched by assistance to Spain and Italy. An attempt to “leverage” these funds failed and by 2012. The ECB Securities Market Programme (SMP) only reached just over €200 billion and lacked a clear commitment to extensive intervention.

The new framework is much stronger. The first pillar is the European Stability Mechanism (ESM) that will replace the EFSF. It has €500 billion in funds with paid in capital of €80 billion. This strengthens its ability to raise funds in the markets. The second pillar is the ECB Outright Monetary Transactions (OMT) programme that will replace the SMP. Subject to conditionality being met, this makes an unlimited commitment to intervene to purchase sovereign bonds to ensure the effective functioning of monetary transmission and to dispel euro “break-up” premia.

The back stop mechanisms have not developed in isolation: they are only possible because of European commitments to undertaking necessary economic adjustment and to long-term changes to the architecture of the monetary union. The reforms of the Stability and Growth Pact and the “Fiscal Compact” reduce the risk of moral hazard that the ESM could otherwise create. Equally, direct ESM intervention in the banks in the future will be supported by the proposed “banking union” and a common supervisor.

The New Era – the Euro Area With a Backstop

The euro area is now beginning a new era. The European Stability Mechanism and the willingness of the ECB to intervene through the OMT create a necessary backstop for euro area governments. This should allow time to resolve the imbalances and crisis coming from the imbalances that built up during the first era of the monetary union. This puts the euro area on a more stable footing. But, there is much unfinished business to resolve the short-term problems, including completing fiscal consolidation and restoring the banks to health. A major effort will be needed to create an effective “banking union”. Europe still faces huge challenge to make the structural reforms needed to create strong sustainable growth.

About the Author

Mr. Pier Carlo Padoan took up his functions as Deputy Secretary-General of the OECD on 1 June 2007.  As of 1 December 2009 he was also appointed Chief Economist while retaining his role as Deputy Secretary-General. In addition to heading the Economics Department, Mr. Padoan is the G20 Finance Deputy for the OECD and also leads the Strategic Response, the Green Growth and Innovation initiatives of the Organisation and helps build the necessary synergies between the work of the Economics Department and that of other Directorates.

Mr. Padoan is an Italian national and prior to joining the OECD was Professor of Economics at the University La Sapienza of Rome, and Director of the Fondazione Italianieuropei, a policy think-tank focusing on economic and social issues.

From 2001 to 2005, Mr. Padoan was the Italian Executive Director at the International Monetary Fund, with responsibility for Greece, Portugal, San Marino, Albania and Timor Leste.  He served as a member of the Board and chaired a number of Board Committees.  During his mandate at the IMF he was also in charge of European Co-ordination.

From 1998 to 2001, Mr. Padoan served as Economic Adviser to the Italian Prime Ministers, Massimo D’Alema and Giuliano Amato, in charge of international economic policies.  He was responsible for co ordinating the Italian position in the Agenda 2000 negotiations for the EU budget, Lisbon Agenda, European Council, bilateral meetings, and G8 Summits.

He has been a consultant to the World Bank, European Commission, European Central Bank.

Mr. Padoan has a degree in Economics from the University of Rome and has held various academic positions in Italian and foreign universities, including at the University of Rome, College of Europe (Bruges and Warsaw), Université Libre de Bruxelles, University of Urbino, Universidad de la Plata, and University of Tokyo. He has published widely in international academic journals and is the author and editor of several books.


Praying for Our Hero, Malala Yousafzai

On Wednesday 10th October this year, surgeons in Pakistan removed a Taliban bullet from the head of our youngest hero - fourteen year old Malala Yousafzai. She was attacked in this way because of her brave response to the atrocities of the Tehreek Taliban Pakistan (TTP) in the otherwise peaceful Swat Valley, known as the Switzerland of Pakistan.

The Taliban had imposed their will with monstrous force against all men and women who didn’t conform completely to their outrageous world view. People considered obstacles to this backwardness were slaughtered, women were banned from going out shopping and more than 400 schools were closed down.

Malaya pointed out in her blog: ‘Some people are afraid of ghosts; some people are afraid of spiders. In Swat we are afraid of humans. But not humans like us – these were barbarians.’

The diaries of Malala Yousafzai are as important to us as those of Anne Frank. They describe everything that happened during the Taliban occupation when girls had to hide books under their shawls and ran the risk of having acid thrown in their faces.

"I was scared enough to see the pictures of bodies hanging in Swat but the decision to ban girls from going to school was choking me and I decided to stand against the forces of backwardness."

Once the Taliban had been driven from Swat, her campaign gathered momentum and became more and more ambitious. Campaigning for peace and education, Malala won a host of national and international awards including Pakistan’s highest commendation for civilians. And she went back to school saying, ‘I will carry on my work for the girls and I will speak out for their rights.’

This was too much for the barbarian who boarded her school bus, identified Malala , shot her in the head and neck and injured another girl. The other Taliban barbarians have threatened a further attack should she survive. Her father has said that nothing would stop either of them from continuing their work. ‘The Taliban must not think for a moment that they have won.’

At CFI.co we believe that Malala is going to be the winner. She has brought together people of all faiths who are determined to defy the barbarian agenda and replace it with freedom, education, peace and prosperity for all. We pray not only for her full recovery but for the continuation of her important work into adulthood.

If you would like to send a card, gift, donation or message to Malala Yousafzai, please visit Birmingham Hospital Charity Fund's Website


Keeping It Simple

[caption id="attachment_2427" align="alignright" width="200"] Juan Diego Calle[/caption]

For more than two decades DOT COM has been the de facto standard top level domain name for business. One hundred million domain names later the choice of new names is at best limited or at worst involves options that are prohibitively expensive. There are several possible solutions including the new customised domain extensions to be introduced in 2013, but we think one stands out from the field.

Kelly Johnson was one of the world’s most influential engineers. He led the Lockheed team at Area 51 and helped design over 40 aircraft types during four decades with the company (including some of the world’s most iconic aircraft namely the SR71 Blackbird and the U2 Spy Plane). He coined the phrase Keep It Simple Stupid (KISS). The quote was not to suggest that anyone was stupid; it was a design ethos. Some of his aircraft would need to be maintained in the field and if frontline engineers were to be able to keep aircraft serviceable, maintenance needed to be a straightforward as possible.

When it comes to domain names, exactly the same logic applies. The best domains are generally the simplest. There is now a new alternative to DOT COM and that is DOT CO, which meets Kelly Johnson’s criteria: how simple this is! With options for new DOT COM domain names severely limited, DOT CO provides businesses with a clear and simple alternative either using words in full or as acronyms. This gives new options to start-ups and allows established organisations to simplify their existing domain names. Some of the best established internet domains have taken advantage and early adopters have include Google and Twitter with g.co and t.co respectively. With over 1.3 million domains now registered, DOT CO has sufficient momentum to be recognised as a new global standard.

"With over 1.3 million domains now registered, DOT CO has sufficient momentum to be recognised as a new global standard."

The company running the DOT CO top level domain is .CO Internet SAS which is a strategic partnership with Neustar Inc (NYSE:NSR), the U.S.-based global provider of managed DNS services and registry solutions who has provided domain name solutions for extensions such as DOT US and DOT BIZ. The partnership was formed to promote and manage the DOT CO extension.

The DOT CO top-level-domain was assigned to the Republic of Colombia by ICANN. ICANN is responsible for allocating domain extensions around the world. The DOT CO domain - common with several other international country code extensions such as .TV for Tuvalu - has obvious global appeal. The Colombian government decided that it would facilitate the sharing of the DOT CO resources by adapting the registration policies for DOT CO to international industry standards and engaging DOT CO Internet SAS to manage both the operational aspects and marketing needs of the new domain extension.

Juan Diego Calle is the man behind .CO Internet. Juan is a serial entrepreneur with several start-ups to his credit. It was not long before he had attracted $5 million in seed capital and brands such as Amazon, Twitter and Google were soon to go .CO.

Again, the plan - just like the domain name itself - has kept it simple. The advantages of a DOT CO domain speak for themselves. What .CO Internet has done is take a strategic approach to the marketing and use of the domain. They have effectively prevented domains being parked by speculators thereby ensuring that start-ups and existing businesses can find a name that best suits their needs. Uptake has been global with registrations in over 200 counties. Of course, there are hotspots such as Silicon Valley where .CO is very much seen as the preferred extension for new start-ups. There is every chance the next Facebook or Google will be built on a DOT CO, but for any company that needs a punchy and effective web address DOT CO is the simplest, SEO-friendly and available solution. That was why we decided to adopt a DOT CO web address ourselves: CFI.co. In the words of Kelly Johnson, we have kept it simple stupid and fully expect millions of others to do exactly the same. When the dust settles on the availability of new top level domains you can expect DOT CO to carry on where DOT COM left off.


Dr. Nawal El Saadawi - An Honourable Life

Like so many of our other heroes, Dr Saadawi has seen the inside of a prison cell because of her views. She was incarcerated in 1981 after helping to publish the feminist magazine Confrontation. The opinions expressed conflicted with those of the late President Anwar Sadat, her views were considered dangerous and Dr Saadawi was not released until shortly after the President’s death.

Her books have been banned in Egypt and she has been exiled more than once for her calls for equality and the recognition of women’s rights.

A qualified medical practitioner, Dr Saadawi was fired from her position as Egypt’s Director General for Public Health after her book ‘Woman and Sex’ appeared in 1972. The Egyptian branch of her ‘Arab Women’s Solidarity association’ was declared illegal in 1991.

“Now I had learnt that honour required large sums of money to protect it, but that large sums of money could not be obtained without losing one's honour.  This was an infernal circle whirling round and round, dragging me up and down with it.”

Because of the power of her writing and the discomfort caused to those with closed minds, she has found her name on death lists, been forced to flee the country and there have been calls for her to lose her Egyptian nationality.

Dr. Saadawi’s work has been published in more than 30 languages and she has been hailed as ‘One of the Greatest Minds of the 20th Century’.

Her example shows clearly that if the voices and talents of women are ignored the capacity and output of a country is reduced by more than half.

The value of the body of work produced by Dr. Saadawi means that she is an inspiration to people not only in the Middle East but in all communities of the world. We have much to learn from her including an understanding of the connection between oppressive cultural practices and some physical and psychological problems experienced by women.


Usain Bolt: Nothing Left to Prove?

He has nothing left to prove? Perhaps so, but we identify in Bolt a hunger for continuous improvement. He wants to go on winning and beating his own records. We feel sure that the world will be hearing much more from Usain Bolt during the coming years. Does he have a future humanitarian or political role to play?

Our hope is that the charismatic Bolt will continue to be an inspiration for people all over the world. He is a towering figure on the sporting scene and surely the greatest athlete of his generation.

“It’s what I came here to do. I’m now a legend. I’m also the greatest athlete to live. I’ve got nothing left to prove.”

Running an incredibly fast 100 metres is not a trivial feat but requires long preparation and superb execution on the day. Sport is important and brings people together. Bolt is bringing masses of people together in his own very special way.


Rwanda’s Largest Bank Strengthens Its Position

Global Credit Rating Co Upgrades Bank of Kigali’s Long Term Rating of A+ to AA- and reaffirms the Short Term Rating of A1.

On October 25th, Bank of Kigali, the largest bank in Rwanda by market share of total assets, loans, deposits and shareholders’ funds and the only rated company in Rwanda, announced that its long term rating has been upgraded to AA- while its short term rating has been maintained at A1 with a stable outlook by Global Credit Rating Co., the leading South African rating agency.

This is an important endorsement for the Bank and for the Rwandan economy. Bank of Kigali is providing key support to business and is helping Rwanda maintain its recent excellent growth record.

The AA- long term rating, upgraded from A+, reflects the Bank’s high credit quality and is based on the Bank’s strong capital base as well as diversified and quality earnings while the A1 short term rating is a result of excellent liquidity factors supported by good fundamental protection factors showing that the Bank’s likelihood of timely payment is certain. “We are pleased with the rating upgrade from GCR. This confidence in the Bank against a backdrop of a sluggish global economy is commendable for the Bank, its investors and our customers”, commented Chief Executive Officer, James Gatera.


IMF | Gulf Cooperation Council: Economic Prospects and Policy Challenges for the GCC Countries

Executive Summary

[caption id="attachment_2485" align="alignright" width="245"] Riyadh, Saudi Arabia[/caption]

The already sluggish global recovery has suffered new setbacks and uncertainty weighs heavily on prospects. The euro area crisis intensified in the first half of 2012 and growth has slowed across the globe, reflecting financial market tensions, extensive fiscal tightening in many countries, and high uncertainty about medium-term prospects. Activity is forecast to remain tepid and bumpy, with a further escalation of the euro-area crisis or a failure to avoid the “fiscal cliff” in the United States entailing significant downside risk.

In the MENA region, many countries are going through difficult transitions. Changes of government in Egypt, Libya, Tunisia and Yemen were accompanied by varying degrees of social unrest and associated disruptions to economic activity, and the conflict in Syria has continued to intensify. Social instability and political uncertainties—although in several cases having receded in recent months—remain substantial, and the near-term growth outlook for the countries in transition is generally subdued. The medium-term reform agenda necessary to lay the basis for inclusive private sector led growth has yet to be tackled. The IMF is engaging closely with these countries—including through financing programs in Yemen, Jordan and Morocco—but additional financing needs remain large. Stronger cooperation with GCC countries who are major financiers for these countries could be of great benefit.

The GCC economies are enjoying high growth. The combination of historically high oil prices, expanded oil production, expansionary fiscal policies, and low interest rates is supporting buoyant economic activity. Fiscal and external surpluses are large, inflation is moderate, and prospects for growth remain positive. At the same time, however, the economies remain dependent on hydrocarbon extraction and rising government spending has raised breakeven oil prices, implying heightened vulnerabilities.

Risks to the GCC stemming from exposure to Europe are limited, but the impact via oil demand and prices could be substantial. A rapid deterioration in the global economy could bring about developments similar to what the region experienced in 2009, including a sharp fall in oil prices and disruptions to capital flows. Although most GCC countries have sufficient savings to cushion even a sizeable shock, a prolonged drop in oil prices could test available buffers. The strong baseline outlook for the GCC economies implies diminishing need for near-term policy stimulus. Most GCC countries can plan to reduce the growth rate in government spending in the period ahead, which would help prevent any prospect of overheating and also improve longterm fiscal positions. With low inflation, the accommodative monetary stance as implied by the region’s currency pegs remains appropriate.

Given the uncertain global outlook, however, continued emphasis on reducing vulnerabilities will be important alongside greater focus on strengthening the foundations for longer-term growth and diversification. This includes: (i) reducing fiscal risks and improving the fiscal outlook by containing increases in spending on entitlements that are hard to reverse and instead prioritizing growth-enhancing investments in infrastructure; (ii) strengthening fiscal frameworks and institutions; (iii) bolstering the financial sector, including through continuing to enhance supervision and macropudential policy frameworks and by deepening domestic debt markets; and (iv) advancing private sector job creation for nationals.

International Context

Economic activity showed widespread weakness over the past year. The downturn has been most pronounced in the euro area periphery where most countries are now in recession. The slowdown has been observed in all regions, however, reflecting financial market tensions, extensive fiscal tightening in many countries, and cross-country spillovers. As demand for durables flagged, global manufacturing was particularly hard hit and global trade stagnated.

[caption id="attachment_2465" align="aligncenter" width="429"] Sources: DataStream; Haver; and IMF staff estimates.[/caption]

The euro area crisis deepened in the first half of the year but financial tensions have recently moderated. The euro area periphery has been at the center of several bouts of intense financial market stress, triggered by political and financial uncertainty in Greece, banking sector problems in Spain, and doubts about governments’ ability to deliver on fiscal adjustment and the extent of partner countries’ willingness to help. As the crisis intensified, periphery bond yields rose, stocks fell—in particular those of banks and peripheral economies—and the euro depreciated. This culminated in Spanish spreads reaching a euroera
record in late July. Since then, a new bond-buying program announced by the European Central Bank and further monetary easing by U.S. Federal Reserve have led to a marked improvement in market sentiment.

[caption id="attachment_2466" align="aligncenter" width="429"] Sources: DataStream; Haver; and IMF staff estimates.[/caption]

Growth in advanced economies has slowed noticeably. In Europe, as the downturn in the euro area periphery deepened, growth also slowed considerably in the core, and real GDP contracted in the United Kingdom. In the United States, employment and output growth was lower than expected even as the housing market is showing tentative signs of improvement. In Japan, growth fell sharply as the boost from reconstruction activity following last year’s earthquake and tsunami started to wane.

[caption id="attachment_2467" align="aligncenter" width="429"] Sources: DataStream; Haver; and IMF staff estimates.[/caption]

Emerging markets—especially those in Asia—continue to outperform advanced economies but they too have seen the momentum fade. Although still strong at an annual rate of almost 8 percent in the second quarter, the pace of real GDP growth in China has continued to decline following earlier policy tightening aimed at reducing price pressures and as a result of weak external demand. A partial reversal of this earlier policy tightening has yet to gain traction, and slowing growth in China has affected activity throughout the region. The pace of expansion in India’s economy has also moderated significantly, with weaker business sentiment weighing in. Along with slower growth, many emerging markets have been hit by investor risk aversion, which have led to equity price declines and in some cases capital outflows and currency depreciation.

Developments in the Middle East and North Africa (MENA) Region

Overall real economic growth for MENA fell from 5 percent in 2010 to 3.3 percent in 2011 and is projected to pick up to 5.3 percent in 2012. Much of this movement in region-wide growth has, however, been driven by the 2011 collapse and 2012 rebound of Libya’s oil production.

Several MENA economies have been severely affected by ongoing political transitions and associated disruptions to economic activity. Changes of governments in Egypt, Libya, Tunisia, and Yemen were accompanied by varying degrees of social unrest, and the political transition continues. Moreover, the conflict in Syria continues to intensify and is affecting its neighbors. The countries in transition have all seen interruptions to production, and unrest also led to wider declines in tourism and foreign direct investment, which have not been able to rebound strongly due to weak conditions in Europe and elsewhere in the world. Management of popular expectations will remain a challenge.

Developments in GCC Countries

The GCC economies are growing at a strong pace. Output growth has in most countries been steadily increasing since hitting a low in 2009 in the wake of the global financial crisis (Figure 4). In 2011, overall real GDP growth for the GCC reached 7.5 percent—the highest since 2003. This occurred as oil production rose by over 10 percent and as non-hydrocarbon growth increased in all countries, except Bahrain where social unrest has taken a toll.

Fiscal policies have provided significant stimulus. In 2011, as governments responded to social pressures and took advantage of surging oil revenues, overall spending grew by some 20 percent in U.S. dollar terms, about double the pace of the previous two years. Much of the higher spending was in current expenditure, including from larger wage bills (all countries) and introduction of new benefits for job-seekers (Oman and Saudi Arabia). Capital expenditure also increased sharply in Saudi Arabia.

[caption id="attachment_2471" align="aligncenter" width="430"] Sources: DataStream; Haver; and IMF staff estimates.[/caption]

Fiscal and external surpluses remain large, but higher government spending has raised breakeven oil prices. Driven by the surge in oil revenue, the GCC’s fiscal surplus is estimated to have reached about 13 percent of GDP in 2011 and the external current account about 24 percent of GDP. Both these balances are projected to remain broadly stable in 2012 as oil prices have leveled off. Along with rising government spending, however, the underlying breakeven oil prices have continued to increase. Although mostly remaining well below actual oil prices, breakeven oil prices are at a historical high, implying heightened vulnerabilities.

[caption id="attachment_2472" align="aligncenter" width="443"] Sources: DataStream; Haver; and IMF staff estimates.[/caption]

Excerpts of report from Annual Meeting of Ministers of Finance and Central Bank Governors, October 5–6, 2012, Saudi Arabia.

Prepared by May Khamis, Tobias Rasmussen, and Niklas Westelius.*

* The views expressed herein are those of the authors and should not be reported as or attributed to the International Monetary Fund, its Executive Board, or the governments of any of its member countries.


Dr. Jackson Urges an Holistic Perpective

Few would deny that parts of the capitalist system – in particular its banking and financial services - are in need of urgent attention.  We should also be alert to the effects of our continuously increasing demands on the world’s limited natural resources.

Once again – although we are optimistic – these are concerns that are relevant to the CFI.co agenda and so we strongly applaud this hero.

Ross Jackson and his wife Hildur (under the Gaia movement) are pioneers of green energy and eco-villages - some of which are to be found in the emerging markets.

Dr Jackson, whose achievements in business - including hedge fund management - are considerable, offers in-depth solutions to our current problems and rejects the option of maintaining the status quo. His book Occupy World Street deserves a wide readership. He has an extraordinarily powerful intellect and favours a holistic perspective.

"Therefore, I will go on record again with the pretty much the same statement that I made over ten years ago. The current global financial system is systemically unstable and flawed and continues to be an accident waiting to happen."

We recommend our readers to consider for themselves the proposals Jackson makes for the rehabilitation of those flawed systems of trade and finance that threaten economic and social progress and cause damage to the environment to the detriment of future generations.


What has the Internet Done for the Economy?

The puzzling spread of the commercial Internet could explain wage inequalities.

By Virginia Hughes. Based on the research of Christopher Forman, Avi Goldfarb and Shane Greenstein.

It is hard to overstate how much the business world relies on the Internet. Powerhouse retailers like Target and Wal-Mart can simultaneously manage their changing inventories, warehouses, distribution routes, and sales. FedEx and UPS can code every shipment online so that customers can find out exactly where their packages are and what time they will arrive at their doors. Buying a wedding gift? Just pull up the couple’s online registry and browse the items that have not been purchased yet. Shopping for insurance? You can get quotes quickly via secure online chats with company representatives.

None of that was possible before 1995, when the large, government-controlled networks somewhat begrudgingly opened their lines for commercial use. Advanced Internet technologies spread rapidly in businesses across the country—in small cities, sprawling suburbs, and dense urban hubs. Although this sparked wage and employment spurts everywhere, the gains were far more striking in regions that were already well off, according to a study to appear in the American Economic Review.

“The tide was rising, with everyone’s boats going up, but the boats went up more in a small number of cities,” says Shane Greenstein, professor of management and strategy at the Kellogg School of Management and lead investigator of the new work. The explanation for this surprising pattern is still being worked out, but Greenstein suspects it was because more prosperous cities were home to sophisticated companies that knew how to best take advantage of the new technology. “It was enhancing the stuff they were already doing, and they got a very dramatic improvement,” he says.

Greenstein and collaborators Chris Forman, an associate professor at the Georgia Institute of Technology, and Avi Goldfarb, an associate professor at the University of Toronto, have been studying the economics of the Internet for a decade. In their early work, they analyzed how the early Internet spread through U.S. businesses. Some of their findings were wholly unexpected. For example, in the late 1990s businesses everywhere adopted basic Internet services, such as email and web browsing. This was surprising because home use of these technologies showed fairly stark urban-rural divides.

Adoption patterns were more predictable for advanced technologies, such as inventory management systems and online database sharing. Such technologies were more likely to crop up in larger cities than smaller ones, and in data-heavy industries, such as finance and wholesale distribution, than in manufacturing, mining, and social service industries. “It makes sense—you just don’t find advanced Internet at nursing homes,” Greenstein says, laughing.

About three years ago, the trio began researching how this intriguing distribution of the Internet affected the economy. There is widespread optimism among media commentators and policy makers that the Internet erases geographic and socioeconomic boundaries. The Death of Distance and The World Is Flat, two books that espouse that rosy view, were bestsellers. But in the early days of the Internet, the income gap between the upper and middle classes actually began to grow. “We thought it was just a very natural question to ask: is the Internet responsible?” Greenstein says.

“The tide was rising, with everyone’s boats going up, but the boats went up more in a small number of cities.”

Misplaced Optimism
The researchers studied trends from 1995 to 2000 in several large sets of data, including the Quarterly Census of Employment and Wages—which gives county-level information on average weekly wages and employment—and the Harte Hanks Market Intelligence Computer Intelligence Technology Database, which holds survey information about how firms use the Internet. In total, the researchers included relevant data for nearly 87,000 private companies with more than 100 employees each. Based on their older work, they focused only on advanced Internet technologies.

Out of about 3,000 counties in the U.S., in only 163 did business adoption of Internet technologies correlate with wage and employment growth, the study found. All of these counties had populations above 150,000 and were in the top quarter of income and education levels before 1995. Between 1995 and 2000, they showed a 28 percent average increase in wages, compared with a 20 percent increase in other counties (Figure 1).

[caption id="attachment_2499" align="aligncenter" width="612"] Figure 1. Advanced Internet investment and wage growth by county type.[/caption]

Why did the Internet make such big waves in these few areas? Greenstein believes the reason was that these areas already had sophisticated companies and the communications infrastructure needed to seize on the Internet’s opportunities. But there are other possibilities. The impact could have been due to a well-known phenomenon called “biased technical change,” which means that new technologies can thrive only in places with skilled workers who know how to use them. Or it could have been because cities brought certain advantages—denser labor markets, better communication, tougher competition—than more remote areas.

“Each one of those explanations is plausible in our data, and probably explains a piece of it. But none of them by themselves can explain the whole story,” Greenstein says. “It’s really a puzzle.”

Regardless of why the pattern crops up, it has important implications for public policy. Many lawmakers have argued for government to subsidize the expansion of the Internet into poor and isolated regions. In fact, the 2009 economic stimulus package allocated over $7 billion for broadband expansion. “In policy conversations, there’s a very common presumption that technology is good, that it will raise wages and income,” Greenstein says. “But since doing this work, I’ve become much more of a skeptic about the economic side of that argument.”

He says that these efforts could be justified for other reasons—such as strengthening education, increasing civic engagement, and promoting health and safety. And over 20 to 30 years, expanding the Internet could lead to economic gains. But in the short term, he says, “I am no longer confident it will make a big economic improvement.”

He hopes this research inspires others to analyze similar data from more recent years. It is possible that the patterns from the late 1990s will not hold up. Today almost all medium and large-size establishments use broadband and targeted Internet advertising, and the U.S. economy depends more on outsourcing and has a less robust manufacturing industry. And the last two years, of course, have seen an economic collapse that has hit the country unevenly, for reasons that are not entirely understood. “It’s just a very different economy now,” Greenstein says. “As a consequence of that, I’m really not sure what we’ll find.”

Reproduced with permission of the Kellogg School of Management and Kellogg Insight, http://insight.kellogg.northwestern.edu. © Kellogg School of Management at Northwestern University.


Balancing Act in Tunisia

[caption id="attachment_2537" align="alignright" width="226"] Mr. Moncef Marzouki, Tunisian President[/caption]

In 2011, popular protests in Tunisia rid the country of Zine al-Abidine Ben Ali and towards year end Moucef Marzouki was installed as president of his country. These events provided clear inspiration for the Arab Spring.

Mr Marzouki had been a powerful focus of opposition to former president Ben Ali and, perhaps unsurprisingly, found himself in a jail cell soon after making an election challenge.

The Islamic Ennahda party became the dominant force in Tunisia after the election last year and President Marzouki is seen as bringing balance to the political system.  The election of Marzouki occurred as a result of a power-sharing agreement between Ennahda and two smaller secular parties.

Mr. Marzouki has pointed out that the Arab revolutions remain fundamentally about social justice and democracy – not about religion or establishing Shariah law.

He has also said that extremists advocating violence are a very small minority in Tunisia and are extremely unpopular among the religious as well as the secular. He believes that the strength and importance of extremists groups have been exaggerated by the media:

"The democratisation of Tunisia, Egypt and other countries has allowed a number of extremists free riders into the political system.  But it has also definitively refuted the myth that democracy and Islam are incompatible."

‘But that image is a distorted fantasy; it does not represent any sociological or political reality. Arguing that the groups who have recently staged violent demonstrations represent the entire Arab population is as absurd as claiming that white supremacist groups represent the American people or that the Norwegian right-wing mass murderer Anders Behring Breivik is representative of Europeans.’

What matters most to his people, according to their president, is ‘building new democratic institutions; creating jobs and halting the exodus of Tunisian boat people seeking a better life in Europe.’

The President has brought great hope to the hearts of his people and is working hard to stabilise the institutions in his country. He has refused to accept the view that Muslims cannot be allowed a democratic voice and truly free enterprise.


UN Security Council Urges Wider Role for Women’s Groups in Peace Efforts

The Security Council has called on the international community to give women’s civil society organizations a prominent role in the negotiation, planning and implementation of peace processes and post-conflict development programmes.

[caption id="attachment_2543" align="aligncenter" width="545"] The Security Council. UN Photo/JC McIlwaine[/caption]

“The Security Council takes note of the important role that civil society, including women’s organizations, can play in the prevention and resolution of armed conflict, peacebuilding and post-conflict situations,” Ambassador Gert Rosenthal of Guatemala, which held the rotating Council presidency for October, said in a statement read out on behalf of the 15-member body on Wednesday.

The statement was prepared for an open debate on the subject of women and peace and security scheduled for Monday, 29 October, which was expected to include briefings from the head of the United Nations Entity for Gender Equality and the Empowerment of Women (UN-Women), Michelle Bachelet, and the head of the UN Department of Peacekeeping Operations, Hervé Ladsous.

Monday’s meeting, as were all meetings at UN Headquarters in New York, was cancelled because of the extreme weather that developed in the wake of Hurricane Sandy, which prompted the closure of the world body’s office for an unprecedented three straight days.

Meeting briefly on Wednesday in the wake of the storm, the Council endorsed the Secretary-General’s call for a stronger commitment to address challenges to women’s participation in all levels of peacemaking, and encouraged international and regional organizations, Member States and UN envoys to promote the active engagement of women’s organizations in all stages of peacemaking and peacebuilding.

It also underlined the primary role of national governments in empowering women in conflict situations, and welcomed the role of UN-Women in coordinating programmes for women and girls throughout the UN system.

In addition, it welcomed the role of gender advisers in assisting the capacity-building activities of civil society organizations and governments and providing training and awareness-raising on gender issues for peacekeepers.

The Council reiterated its call to deploy women protection advisers in peacekeeping missions, stressing the need to ensure that gains made in women’s protection and empowerment must be sustained during mission draw-downs and transitions.

It was in 2000 that the Council first gave prominence to this topic, adopting resolution 1325, in which it called for action to reverse the egregious and inhumane treatment of women and girls during conflicts, the denial of their human rights and their exclusion from decision-making in situations of armed conflict, in peacemaking and peacebuilding.

Source: UN, Novembr 2, 2012


France and the Changing Face of Economic Power

The recent statement by France’s minister for industrial Recovery is not going to help France to continue to attract investment from the growth economies. Minister Arnaud Montebourg told French business daily Les Echos that, "We no longer want Arcelor Mittal because they do not respect France."

"We no longer want Arcelor Mittal because they do not respect France."

Mittal had announced plans to close two blast furnaces at its steel plant in Florange, breaking a promise made by CEO Lakshmi Mittal when Mittal Steel took over Arcelor in 2006 at a cost of 26.9 billion Euros. However, much has happened to the world since then and the industrial landscape is still changing rapidly.

Are such outbursts really going to help attract much needed investment into France? The Mittal Group currently employ over 20,000 people there and certainly many other European countries that would welcome Mittal Group’s presence.


Hitting the Middle Classes by Taxing the Rich

The Paradox of Taxation

The latest tax figures from Britain make interesting reading. Her Majesty’s Revenue and Customs reported a 60% fall in the number of taxpayers declaring an income of over £1 million a year during the 2010-2011 tax year as compared to the previous year. Ten thousand individuals simply left the UK or found ways to sidestep Gordon Brown new 50% income-tax rate.

The net effect was that the contribution to the UK’s government coffers from millionaires fell by almost 50% (they contributed less than 5% of the total versus 9% in the previous year). Far from increasing the tax burden on the wealthy, the new rate has effectively increased pressure on the UK’s middle classes.

"The net effect was that the contribution to the UK’s government coffers from millionaires fell by almost 50%"

As some Western Governments -  including the US -  try to address their deficits by hitting their wealthiest 1%, maybe politicians should remember that this course of action may simply increase the burden on low and middle income earners. Governments need to find the correct balance: when the top 1% feel that they are being unfairly burdened, they are mobile, professionally advised and thus in a position to dramatically reduce their tax liabilities. David Cameron’s Government has tried to find the balance by dropping the rate to 45% and time will tell if this is good enough. We have yet to see the results of the new French Government's dramatic 75% rate but if Britain’s example is anything to go by the results could well be disastrous. It would appear that in the case of taxing the top 1% less may well be more.


Janamitra Devan: The Innovation Imperative

Overcoming the Myths and Recognizing the Realities of Innovation, Job Creation and Prosperity

By Janamitra Devan

Innovation drives competitiveness, and maximizing competitiveness is indispensable to achieving sustainable job creation. Any economy with a weak innovation capacity will see its competitiveness erode, and will thus be doomed to weak job creation. Those are simply basic laws of economics, shaping the destiny of countries at every stage of development.

Business leaders and policymakers are wisely eyeing the innovation imperative – a focus on continuously strengthening every economy’s capacity to create new products, processes and techniques – at the center of their economic agenda. Focusing on innovation is a necessity rather than a luxury: It is the only way to prosper in the relentlessly competitive global economy, in which every country is buffeted by forces that economist Joseph Schumpeter called perpetual “gales of creative destruction.”

"Any economy with a weak innovation capacity will see its competitiveness erode, and will thus be doomed to weak job creation."

As World Economic Forum participants will learn as they explore this year’s Davos theme of “resilient dynamism,” empirical evidence suggests that as much as half of the difference among countries’ long-term growth rates is driven by increases in productivity due to innovation and technology enhancements. Innovation is therefore a pivotal factor in ensuring the success of every economy, large or small: The most productive firms, industrial sectors and countries are destined to reap the greatest rewards – and any laggard in innovative capacity is likely to stagnate in low value addition.

The good news, however, is that the world’s knowledge-base about building economies’ innovation capacity has been steadily growing. Innovation occurs locally, but knowledge is transferable globally: Promising pro-growth approaches can be adapted to fit countries’ specific circumstances, even if there is no “one size fits all” strategy that can guarantee stronger innovation and competitiveness.

[caption id="attachment_2597" align="alignleft" width="240"] Davos[/caption]

Focusing on developing countries, the development community and the World Bank – along with its private-sector arm, the International Finance Corporation – have recently intensified their efforts to help client countries build their innovative capacity. The lessons learned about promoting innovation and strengthening competitiveness are now spurring many countries’ performance. The World Bank is helping countries encourage entrepreneurship; promote technology adoption; make R&D more targeted, effective and relevant to what the real economy needs; enhance collaboration among universities and industry; channel investment toward innovative industries; and incubate new technologies.

Myths and misperceptions, however, continue to cloud some policymakers’ thinking about innovation. Six dangerous misperceptions must be dispelled, if economies are to maximize the upside of innovation.

Myth # 1: Innovation – especially game-changing “disruptive” innovation – kills jobs through increased productivity, which reduces the need for human labor. Displacements may occur in the short run, but job losses do not necessarily persist over the long run. Granted, the creation of Automatic Teller Machines has eliminated the jobs of many bank tellers, and the ability to book your own airplane tickets online has reduced the need for travel agents. Yet technological improvements liberate human capital from routine tasks and allow workers to move into higher-value jobs – with the help of job-retraining programs and safety-net safeguards that help the displaced prepare for the higher-skilled jobs of the future.

Myth #2: The quest for stronger productivity growth requires every economy to focus on creating glitzy new high-tech inventions. Pursuing prosperity does not require every country to try to leapfrog the Apple iPad or the Samsung smartphone, or to come up with a game that’s even more addictive than “Angry Birds.” Innovation can involve better processes as well as higher-technology products. Higher-yielding soybean production has helped Brazil and Argentina win a stronger share of new export markets. Higher-quality wine production has helped Chile and New Zealand increase their share of a high-value category. Decades of agricultural research, quality upgrading and training of small-scale farmers in advanced farming practices have led Colombia to develop a world-leading coffee industry. Consistent investment in the agriculture value chain, in the transportation infrastructure and in efficient distribution networks has helped Ethiopia expand its exports from the flower industry to a broader range of higher-value agricultural products. Higher-technology mining techniques have helped Australia and South Africa prosper by building their minerals and mining sector – and have allowed them to export their know-how to other nations that need more efficient mining.

"Pursuing prosperity does not require every country to try to leapfrog the Apple iPad or the Samsung smartphone..."

Myth #3: Innovation is a one-off effort. Once a company or a country has achieved success in a chosen sector, it will easily dominate that sector for years or decades to come. Getting the start-up process right is important, but the constant upgrading of industries and entire innovation ecosystems is essential. For business leaders as well as policymakers, the challenge requires keeping your eye on the ball – all the time, not just every now and then – to ensure continuous adaptation. Is an industry (say, in shoes or in apparel) investing to make sure its designs are moving with the times? When should an industry (for example, in advanced technologies) upgrade its systems, reinvent itself and thus “creatively destroy” its current products? Are an industry’s skills (for instance, in food processing) adapting to ever-higher levels of technology? History is filled with examples of former market leaders – from America’s Oldsmobiles to Canada’s BlackBerries to France’s Minitel computers – that faltered when they decided to rest on their laurels. Complacency or hubris can doom any firm, sector or country that fails to continuously adapt.

Myth #4: Every country needs to create its own version of Silicon Valley in order to achieve success. Continuous innovation is essential for economic survival – yet not every country can or should attempt to recreate the conditions that gave rise to Silicon Valley. In fact, simply imitating the economic growth models that have succeeded in other innovative economies – without taking account of each region’s unique conditions – is a recipe for disappointment. Many countries have dreamed of achieving the high-tech successes of Israel and California, or the financial-services prosperity of Singapore and Hong Kong, but have found that other nations’ blueprints cannot be simply “taken off the shelf” and duplicated.

Instead, any country that aspires to long-term wealth should envision building a local economic ecosystem that builds on its particular local areas of strength. That calls for business and government leaders to shape a holistic approach, making a candid assessment of each local economy’s ability to support innovation and entrepreneurship. It requires each country to adopt modern legal frameworks; to strengthen institutions that help ideas thrive and allow “spillover effects” to spread; and to create supportive environments that promote technology transfer, spur networking among entrepreneurs and encourage the mentoring of innovators. It also requires each country to identify opportunities, and create agile financial mechanisms, that allow private investment to flow efficiently to small and medium-sized enterprises (SMEs) whose growth will create the jobs of the future.

Myth #5: Government should simply stay out of the way, leaving growth strategies to be designed by the private sector alone. Sure, the private sector drives economic growth and job creation, yet public policy has a vital and constructive role to play in helping shape stronger innovation ecosystems. The public sector can stimulate investment in R&D and is indispensable in providing such public goods as education, knowledge- and technology-building institutions and hard infrastructure. When the private sector is unwilling or unable to invest – because, for example, a market still seems too risky to justify a large investment (for instance, in alternative energy technologies) – governments can step in and accelerate the process. Time and again, history has shown that wisely targeted government intervention – if it is effectively managed to avoid regulatory capture and rent-seeking – is an important tool that can help ignite innovation, transform faltering industries and develop new industrial sectors.

If aspiring countries seek role models, two nations offer instructive examples of how investing in innovation ecosystems can produce strong results. Consider Finland, which has long committed exceptionally strong resources to investment in human capital through its world-leading education system. In addition, through TEKES – the National Technology Agency, founded in the 1980s – Finland has guided “applied R&D” investment toward commercial applications, emphasizing collaboration between academic researchers and private firms. With a highly integrated innovation ecosystem, Finland invests Europe’s highest percentage of GDP in R&D. Consider, also, the Republic of Korea. Since emerging from a war that left its economy in ruins, the Korean government has devoted enormous resources to building a “knowledge economy.” Education, advanced job-skills training and innovation-focused R&D have helped Korea climb from postwar poverty to wealthy-country status. One critical element has been the country’s commitment to a robust information infrastructure linked to industry. In both of these success stories, targeted public-sector interventions have been critical in driving private-sector innovation.

Governments must also strike the right balance at the macro level. In addition to maintaining a sound fiscal and monetary policy and a strong education system, wise public policy must create an investment climate conducive to the needs of the specific industries in which a country has (or can achieve) a comparative advantage; promote workforce skills that are well-matched with the needs of those specific industries; ensure access to finance for the SMEs within its industrial ecology; maintain a strong infrastructure matched to the needs of the players in the industrial ecosystem; and encourage the creators of innovative technologies.

"Time and again, history has shown that wisely targeted government intervention ... is an important tool that can help ignite innovation, transform faltering industries and develop new industrial sectors."

Recognizing that innovation is critical in improving competitiveness and growth, the development community and the World Bank are increasingly helping clients focus on their innovative capacity. Facilitating early-stage investment in innovative firms in Lebanon is helping encourage start-up industries (notably, in such sectors as IT and design) and promote a more entrepreneurial, risk-taking culture. A promising innovation program is getting under way in the Western Balkans, bringing together seven countries to explore sharing R&D capabilities and university research facilities, aiming to make the most of regional synergies.

Myth #6: Innovation inevitably favors those who are already wealthy, overlooking the needs of the excluded or the interests of the environment. This is indeed a short-sighted and destructive myth. “Green innovation” and “inclusive innovation” are significant trends that will shape the world we live in.

In the “green innovation” field, technological enhancements are developing rapidly. The World Bank recently worked with our development partners to locate our first “climate innovation center” in Kenya, and six other countries are poised to welcome additional centers – which will seek solutions that may, in turn, trigger entirely new industries in such sectors as energy and agribusiness. Efforts for green solutions are also under way in Indonesia, where the World Bank is piloting a new approach to spark innovation in clean energy technologies. As it explores exciting approaches to open innovation and human-centered design, that program is developing commercially viable clean-energy solutions that are tailored to the needs of low-income rural communities.

In the “inclusive innovation” realm, innovators are pursuing ways to create a more broadly shared prosperity – a priority that is inspiring a new mindset about inclusion. The World Bank’s goal of eradicating poverty is not only about increasing incomes: It is also about providing equal opportunities. Innovative thinking is imagining new ways to help increase the number of people at “the base of the pyramid” who can gain affordable access to basic services.

Development institutions and NGOs – along with more and more for-profit corporations – are focused on serving lower-income people who, collectively, represent a vast and untapped market. Investments in innovative micro-irrigation systems in rural India are helping save water, produce stronger crop yields and build a diversifying manufacturing industry. Supporting the manufacture of low-cost limb prostheses in India is helping aid the injured, strengthen a specialized medical-device industry and develop advanced medical knowledge. Support for mobile money-transfer systems in Kenya is revolutionizing the financial-services industry while broadening financial inclusion.

The movement for inclusive innovation as a driver of sustainable growth is poised to take a strong step forward in April 2013 at a Global Inclusive Innovation Summit at Harvard University. The World Bank is now collaborating with Harvard, the Omidyar Network and Growth Dialogue on the summit, which will convene leaders from poor and emerging countries – along with policymakers, entrepreneurs, foundations executives and NGO leaders – to shape the direction of innovation-led growth and the inclusion agenda.

The challenges involved in strengthening economies’ innovative capacity and competitiveness are certainly daunting. If we dispel the misconceptions that now mar the debate, then cooperative efforts by business leaders, policymakers and entrepreneurs will promote stronger innovation ecosystems and broader social inclusion. This month’s Davos discussion on the economy’s “resilient dynamism” – and this spring’s Harvard conference on inclusive innovation – will reinforce the World Bank in our commitment to tailoring pro-growth programs that meet the specific needs of our client countries. By surmounting the myths and misconceptions about innovation, more vibrant private-sector growth will strengthen competitiveness and lead the way toward broadly shared prosperity.

Janamitra Devan is a Vice President of the World Bank and International Finance Corporation, leading its network on Financial and Private Sector Development.

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